-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PoU8zWr2U2C+mZLaO4IsvEakBpO1monlR/a8FIDHe0GdO7C5e44EezkvbCXKLocB UmziJSRTfz0wTmvGR5nq8A== 0000928385-98-001026.txt : 19980515 0000928385-98-001026.hdr.sgml : 19980515 ACCESSION NUMBER: 0000928385-98-001026 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980514 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 21ST CENTURY TELECOM GROUP INC CENTRAL INDEX KEY: 0001056751 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 364076758 STATE OF INCORPORATION: IL FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-47235 FILM NUMBER: 98619799 BUSINESS ADDRESS: STREET 1: WORLD TRADE CENTER CHICAGO STREET 2: 350 N ORLEANS, STE 600 CITY: CHICAGO STATE: IL ZIP: 60654 BUSINESS PHONE: 3124702100 MAIL ADDRESS: STREET 1: WORLD TRADE CENTER CHICAGO STREET 2: 350 N ORLEANS STE 600 CITY: CHICAGO STATE: IL ZIP: 60054 S-4/A 1 AMENDMENT #4 TO S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998 REGISTRATION NO. 333-47235 ====================================================================================================================================
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________________ AMENDMENT NO.4 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 __________________________ 21ST CENTURY TELECOM GROUP, INC. (EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER) ILLINOIS 36-4076758 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) WORLD TRADE CENTER, 350 NORTH ORLEANS, SUITE 600 CHICAGO, ILLINOIS 60654 (312) 470-2100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF COMPANY'S PRINCIPAL EXECUTIVE OFFICES) GLENN W. MILLIGAN CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS 21ST CENTURY TELECOM GROUP, INC. WORLD TRADE CENTER, 350 NORTH ORLEANS, SUITE 600 CHICAGO, ILLINOIS 60654 (312) 470-2100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR SERVICE, SHOULD BE SENT TO: EDWIN M. MARTIN, JR., ESQ. PIPER & MARBURY, L.L.P. 1200 NINETEENTH STREET, N.W. WASHINGTON, D.C. 20036 (202) 861-6315 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE WITH GENERAL INSTRUCTION G, PLEASE CHECK THE FOLLOWING BOX: [_] IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT TO RULE 462(b) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING: [_] IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(d) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING: [_] IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434, PLEASE CHECK THE FOLLOWING BOX: [_] CALCULATION OF REGISTRATION FEE
======================================================================================================================== TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED SECURITIES TO BE REGISTERED REGISTERED MAXIMUM MAXIMUM AMOUNT OF AGGREGATE AGGREGATE REGISTRATION FEE OFFERING PRICE OFFERING PRICE(2) PER NOTE(1) - ------------------------------------------------------------------------------------------------------------------------ 12 1/4 SENIOR DISCOUNT NOTES DUE 2008 $363,135,000 55% $200,000,000 $ 0 - ------------------------------------------------------------------------------------------------------------------------ 13 3/4 SENIOR CUMULATIVE EXCHANGEABLE $ 50,000,000 100% $ 50,000,000 $ 0 PREFERRED STOCK DUE 2010 ========================================================================================================================
(1) ESTIMATED SOLELY FOR PURPOSES OF CALCULATING THE REGISTRATION FEE. (2) CALCULATED PURSUANT TO RULE 457(o). (3) A registration fee of $59,000 for the 12 1/4% Senior Discount Notes Due 2008 and $ 14,750 for the 13 3/4% of Senior Cumulative Exchangeable Preferred Stock Due 2010 was paid at the time of the initial filing of this registration statement. THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 14, 1998 Preliminary Prospectus LOGO 21ST CENTURY TELECOM GROUP, INC. Offer to Exchange (i) 12 1/4% Senior Discount Notes Due 2008, which have been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 12 1/4% Senior Discount Notes Due 2008 and (ii) 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010, which has been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010 The Exchange Offer will expire at 5:00 p.m., Eastern Standard Time, on June [_], 1998 unless extended. 21st Century Telecom Group, Inc. ("21st Century" or the "Company") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal (each a "Letter of Transmittal," collectively the "Letters of Transmittal" and, together with this Prospectus, the "Exchange Offer"), (i) to exchange its 12 1/4% Senior Discount Notes Due 2008 (the "New Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which this Prospectus is a part, for an equal principal amount of its outstanding 12 1/4% Senior Discount Notes Due 2008 (the "Old Notes" and, together with the New Notes, the "Notes"), of which, as of the date of this Prospectus, there was outstanding $363,135,000 principal amount at maturity and (ii) to exchange shares of its 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010 (the "New Exchangeable Preferred Stock") which have been registered under the Securities Act, pursuant to a Registration Statement of which this Prospectus is a part, for an equal number of shares of its outstanding 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010 (the "Old Exchangeable Preferred Stock" and, together with the New Exchangeable Preferred Stock, the "Exchangeable Preferred Stock"). Shares of the Old Exchangeable Preferred Stock were originally sold on February 9, 1998 (the "Issue Date") as a component of Units (the "Units") consisting of one share of Old Exchangeable Preferred Stock and one Warrant (a "Warrant") to purchase 8.7774 shares of common stock, no par value, of the Company at an exercise price of $.01 per share. An additional 1833.33 shares of Old Exchangeable Preferred Stock will be issued on May 15, 1998 as the first dividend payment on the Old Exchangeable Preferred Stock. The sale of the Old Notes and the Units is referred to herein as the "Private Placement. " The Company will accept for exchange any and all Old Notes or shares of Old Exchangeable Preferred Stock that are validly tendered and not withdrawn on or prior to 5:00 p.m., Eastern Standard Time, on the date the Exchange Offer expires (the "Expiration Date"), which will be June [_], 1998 (30 days following the commencement of the Exchange Offer), unless the Exchange Offer is extended. Tenders of Old Notes or shares of Old Exchangeable Preferred Stock may be withdrawn at any time prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes or minimum number of shares of Old Exchangeable Preferred Stock being tendered for exchange. See "The Exchange Offer." 1 The New Notes will be obligations of the Company evidencing the same indebtedness as the Old Notes and will be entitled to the benefits of the same Indenture (as defined), which governs both the Old Notes and the New Notes. The form and terms of the New Notes and the New Exchangeable Preferred Stock (together, the "New Securities") are substantially identical to the form and terms of the Old Notes and the Old Exchangeable Preferred Stock (together, the "Old Securities" and collectively with the New Securities, the "Securities"), respectively, except that the offer of the New Securities will have been registered under the Securities Act and, therefore, the New Securities will not bear legends restricting the transfer thereof. See "Description of the New Notes" and "Description of New Exchangeable Preferred Stock." The New Notes will be issued at a substantial original issue discount ("OID"), and the holders of the New Notes will be required to include such OID in gross income for U.S. Federal income tax purposes on a constant yield to maturity basis, in advance of the receipt of the cash payments to which such income is attributable. See "Certain United States Federal Income Tax Consequences." The price to investors for the New Notes shown below represents a yield to maturity of 12 1/4% per annum (computed on a semiannual bond equivalent basis). The New Notes will begin to accrue interest at a rate of 12 1/4% per annum commencing February 15, 2003, and interest will be payable thereafter on February 15 and August 15 of each year. The New Notes will not be redeemable at the option of the Company prior to February 15, 2003, except that until February 15, 2001, the Company may redeem, at its option, in the aggregate up to 35% of the Accreted Value of the Notes at the redemption price set forth herein with the net proceeds of one or more Equity Offerings (as defined) following which there is a Public Market (as defined) if at least $236.0 million principal amount at maturity of the Notes remains outstanding after any such redemption. On or after February 15, 2003, the New Notes may be redeemed at the option of the Company, in whole or in part, at the redemption prices set forth herein. Upon a Change of Control, each holder of the New Notes may require the Company to purchase such New Notes at a purchase price equal to 101% of their Accreted Value thereof plus accrued and unpaid interest, if any, to the date of purchase. The New Notes will be senior unsecured indebtedness of the Company and will rank pari passu in right of payment with all unsubordinated, unsecured indebtedness of the Company and will rank senior in right of payment to all subordinated indebtedness of the Company. As of December 31, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the Company would have had outstanding $200.2 million of unsubordinated indebtedness and no subordinated indebtedness. The New Notes will be effectively subordinated to all current and future indebtedness of the Company's subsidiaries, including trade payables and other accrued liabilities. See "Description of the New Notes." Dividends on the New Exchangeable Preferred Stock will accrue from the date of issuance and will be payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, commencing May 15, 1998, at a rate per annum of 13 3/4% of the liquidation preference of $1,000 per share. Dividends will be payable in cash, except that on each dividend payment date occurring on or prior to February 15, 2003, dividends may be paid, at the Company's option, by the issuance of additional shares of New Exchangeable Preferred Stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. It is not anticipated that the Company will pay any dividends in cash for any period ending on or prior to February 15, 2003. The Indenture for the Notes also contains certain covenants that, among other things, limit the payment of dividends and other distributions by the Company and its Restricted Subsidiaries in respect of their capital stock. The New Exchangeable Preferred Stock will not be redeemable prior to February 15, 2003 except that, on or prior to February 15, 2001, the Company may redeem, at its option, in whole but not in part, the outstanding Exchangeable Preferred Stock with the net proceeds of an Equity Offering at a redemption price of 113 3/4% of the liquidation preference thereof, plus accumulated and unpaid dividends to the date of redemption. On or after February 15, 2003, the New Exchangeable Preferred Stock is redeemable at the option of the Company, at the prices set forth herein plus accumulated and unpaid dividends, if any, to the date of redemption. The Company is required to redeem the New Exchangeable Preferred Stock on February 15, 2010, at a redemption price equal to 100% of the liquidation preference thereof plus accumulated and unpaid dividends, if any, to the date of redemption. The New Exchangeable Preferred Stock will rank senior to all other classes of equity securities of the Company outstanding upon consummation of the Exchange Offer, including but not limited to the 1,554,871 shares of 8% cumulative preferred stock issued pursuant to the January 1997 Stock Purchase Agreement. The Company may not authorize any new class of Parity Stock (as defined) or Senior Stock (as defined) without the approval of at least a majority of the shares of Exchangeable Preferred Stock then outstanding, voting or consenting, as the case may be, as one class. On any scheduled dividend payment date, the Company may, at its option, exchange all but not less than all the shares of Exchangeable Preferred Stock then outstanding for the Company's 13 3/4% Subordinated Exchange Debentures Due 2010 (the "Exchange Debentures"). The Exchange Debentures will bear interest at a rate of 13 3/4% per annum, payable semiannually in arrears on February 15 and August 15 of each year, commencing with the first such date to occur after the date of exchange. The Exchange Debentures will be subordinated to all existing and future Senior Indebtedness (as defined), including indebtedness represented by the Notes, of the Company and to all indebtedness and other liabilities (including trade payables) of the Company's subsidiaries. See "Description of the Exchange Debentures--Ranking." 2 The New Securities are being offered hereunder in order to satisfy certain obligations of the Company under the Registration Rights Agreement, dated February 2, 1998, among the Company and the other signatories thereto (the "Registration Rights Agreement"). Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission"), as set forth in no-action letters issued to third parties, the Company believes that the New Securities issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder that is an "affiliate" of the Company as defined under Rule 405 of the Securities Act), provided that such New Securities are acquired in the ordinary course of such holders' business and such holders are not engaged in, and do not intend to engage in, a distribution of such New Securities and have no arrangement with any person to participate in the distribution of such New Securities. However, the staff of the Commission has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. By tendering the Old Securities in exchange for the New Securities, each holder, other than a broker-dealer, will represent to the Company that (i) it is not an affiliate of the Company (as defined under Rule 405 of the Securities Act), (ii) any New Securities to be received by it were acquired in its ordinary business and (iii) it is not engaged in, and does not intend to engage in, a distribution of such New Securities and has no arrangement or understanding to participate in a distribution of the New Securities. Each broker-dealer that receives New Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a Prospectus in connection with any resale of such New Securities. The Letters of Transmittal state that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Securities received in exchange for Old Securities, where such Old Securities were acquired by such broker-dealer as a result of market- making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business 180 days after the Expiration Date, it will make this Prospectus available to any broker- dealer for use in connection with any such resale. Each broker-dealer that acquired Old Securities directly from the Company, and not as a result of market-making or trading activities, must, in the absence of an exemption, comply with the registration and prospectus delivery requirements of the Securities Act in connection with the secondary resale of the New Securities and cannot rely on the position of the staff of the Commission enunciated in no-action letters issued to third parties. In addition, until [ , 1998] (90 days after the date of this Prospectus), all dealers effecting transactions in the New Notes or shares of New Exchangeable Preferred Stock may be required to deliver a prospectus. See "Plan of Distribution." Prior to this Exchange Offer, there has been no public market for the Old Securities or the New Securities. If such a market were to develop, the New Notes and the New Exchangeable Preferred Stock could trade at prices that may be higher or lower than their principal amount or liquidation preference, respectively. The Company does not intend to apply for listing or quotation of the New Notes or New Exchangeable Preferred Stock on any securities exchange or stock market. Therefore, there can be no assurance as to the liquidity of any trading market for the New Notes or New Exchangeable Preferred Stock or that an active public market for the New Notes or New Exchangeable Preferred Stock will develop. See "Risk Factors--Lack of Public Market." Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and BancBoston Securities Inc. (the "Initial Purchasers") have agreed that one or more of them will act as market-makers for the New Securities. However, the Initial Purchasers are not obligated to so act and they may discontinue any such market-making at any time without notice. The Company will not receive any proceeds from the Exchange Offer. The Company will pay all the expenses incident to the Exchange Offer. No underwriter is being used in connection with the Exchange Offer. For a discussion of certain factors that should be considered by holders of Old Securities who tender their Old Securities in the Exchange Offer, see "Risk Factors" beginning on page __ of this Prospectus. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 3 "21st Century" is a trademark of the Company and is registered in certain jurisdictions. This Prospectus also includes trademarks of companies other than the Company. 4 PROSPECTUS SUMMARY The following is a brief summary of the matters covered by this Prospectus and is qualified in its entirety by the more detailed information (including the financial statements and the notes thereto) included elsewhere herein. Unless the context indicates otherwise, "21st Century" or the "Company" means 21st Century Telecom Group, Inc. All information contained in this Prospectus gives effect to the Company's 1,000-for-1 common stock split and an increase in the authorized number of shares of the Company's common stock, which were effected in January 1998. THE COMPANY 21st Century is an integrated, facilities-based communications company which seeks to be the first provider of bundled voice, video and high-speed data services (including cable television, high-speed internet access, and local and long distance telephone service) in selected midwestern markets beginning with Chicago's Area 1, for which the Company has been awarded a non-exclusive 15-year renewable franchise by the City of Chicago. Area 1 stretches more than 16 miles along Chicago's densely populated lakefront skyline and includes the affluent residential neighborhoods of the Gold Coast, Lincoln Park and Dearborn Park and the nation's second largest business and financial district. The Company has developed (and has begun to install and activate) an advanced fiber optic network that employs a distributed ring-star architecture characterized by fiber-richness, two-way interactivity and SONET-based redundancy and self- healing attributes (the "DRS Network"). The DRS Network accommodates not only traditional voice and video applications, but also the rapidly growing demand for high-speed data services. Although it has claimed no intellectual property rights in the DRS Network, the Company believes that the DRS Network provides the Company with significant strategic advantages that will differentiate 21st Century from its competitors, such as improved time-to-market, multiple revenue streams, enhanced service quality and reliability and the ability to provide attractively priced bundled services. The Company has secured a non-exclusive 15-year renewable attachment agreement with the Chicago Transit Authority (the "CTA"), which reduces costly and time- consuming "make-ready" and underground construction for the DRS Network and enables the Company to install and activate the DRS Network rapidly and efficiently by taking advantage of access to the CTA's elevated and underground rail systems. The Company also has secured non-exclusive pole attachment agreements with Commonwealth Edison Company ("Commonwealth Edison") and a subsidiary of Ameritech Corporation ("Ameritech") which provide 21st Century access to scarce pole space within Area 1 to further facilitate deployment of its DRS Network. The decentralized configuration of the DRS Network (which includes distributed hubs and nodes that act "intelligently" to route network traffic efficiently) together with the CTA and the pole attachment agreements, enable network construction to be driven in large part by market demand and revenue potential in contrast to the conventional approach of building a system from the headend outward on a block-by-block basis. To fully exploit this advantage, the Company's sales and marketing strategy is coordinated with ongoing network construction and focused on securing bulk contracts with 125- unit or larger multiple dwelling unit buildings ("MDUs"). The Company believes that this strategy will help to identify the optimal sequence of node activation on the DRS Network and tie capital expenditures more directly to revenue- producing subscribers. 21st Century's DRS Network currently provides video, audio and data services. These services include 110 analog video channels, 59 interactive information channels with local content (e.g., train and airline schedules, restaurant menus, local news and sports scores, stock quotes and expressway traffic updates) and 22 specialty audio channels (e.g., international and foreign language programming, BBC radio broadcasts, reading services for the blind, commercial-free music categories and select distant-market FM stations), with significant capacity for additional broadband and narrowband products and services. The Company's data product is its 4 Mbps cable modem Internet access service, which is delivered at symmetrical speeds more than 125 times faster than the prevalent 28.8 Kbps telephone modem and 25 times faster than an ISDN modem. The Company is also hosting websites for commercial customers. The Company will also provide switched, facilities-based competitive local exchange carrier ("CLEC") services with last mile connectivity and local dial tone to both commercial accounts and selected residential subscribers upon receipt of the necessary regulatory approval and installation of the requisite telephony equipment. The Company currently provides telephony service on a test basis and plans to begin offering in mid-1998 a broad range of competitive telephony services (e.g., local, long distance and enhanced services) to 5 both commercial accounts and selected residential subscribers, most of whom currently have no facilities-based alternative to the service provided over the network of the incumbent local exchange carrier ("ILEC"). The City of Chicago is the third largest urban market in the United States and Area 1 is the densest section of the city, characterized by a high concentration of MDUs and commercial office buildings. Area 1 has several significant and attractive attributes, including a relatively high density of 12,000 housing units per square mile (compared with a density for the entire City of Chicago of 5,000 housing units per square mile); more than 300,000 homes (many of which are located in upscale, demographically attractive lakefront neighborhoods); existing cable penetration that the Company believes is significantly below the national average for urban areas; and approximately 51,000 employers in the City's prominent business and financial districts, which include such businesses and landmarks as the Mercantile Exchange, Sears Tower, Chicago Board of Trade, Chicago Board of Options Exchange, Federal Reserve, Hancock Building, Amoco Tower, major banks and other premier businesses. 21st Century has taken significant steps to implement its business plan and service offerings in Chicago's Area 1. In addition to securing the Area 1 franchise, the CTA attachment agreement and the Commonwealth Edison and Ameritech pole attachment agreements, the Company has (i) constructed and activated its network operations center ("NOC"), which includes a video headend and a data operations center ("DOC"), (ii) completed the northern fiber transport ring of the DRS Network, extending from the downtown business district to the northern portions of the city bordering Evanston, (iii) secured programming content for more than 170 channels of video and interactive information programming, (iv) constructed and activated portions of the outside fiber distribution network to reach selected MDUs, (v) initiated customer installation processes, billing, call center and customer care services, (vi) secured contracts for more than 4,000 residential subscribers (which include more than 2,000 new subscribers under 5-year bulk MDU agreements as well as subscribers acquired in early 1997 from an affiliated company) and (vii) passed with its initial distribution facilities more than 15,800 additional potential subscribers. The Company has completed installation of approximately 5 percent of the fiber optic strand miles that will ultimately make up the DRS Network. The Company has also entered into an agreement with Nortel for the acquisition and installation of the switching and other ancillary equipment necessary for it to provide telephony services. BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES The Company believes that it can exploit its innovative DRS Network, superior product offerings and other strategic assets to compete strongly in Chicago's Area 1 and other selected markets. 21st Century's strategy and competitive advantages include the following key components: DEVELOP HIGH-CAPACITY, FULL-SERVICE DRS NETWORK. 21st Century intends to exploit the advantages of its innovative, internally-developed DRS Network architecture to provide fully integrated voice, video and high-speed data services. Key attributes of the DRS Network include (i) an advanced integrated network design built to the rigorous Bellcore standards, (ii) the distribution of switching and traffic routing mechanics at specific locations out on the DRS Network (rather than being concentrated at one point as in conventional networks), allowing the Company to efficiently and economically route traffic regardless of penetration and usage levels, (iii) a SONET-based redundancy and self-healing architecture with both circuit and route diversity, (iv) multiple layers of power redundancy to ensure network reliability and (v) a large fiber capacity permitting delivery of advanced two-way, fully-interactive broadband services, as well as significant unutilized capacity to allow the Company to upgrade services, add applications and develop new product offerings without service interruption or interference. DEPLOY DRS NETWORK COST-EFFECTIVELY ON A REVENUE-DRIVEN BASIS. The decentralized configuration of the DRS Network, combined with the CTA and pole attachment agreements, allows the Company to rapidly and efficiently deploy the DRS Network to accommodate market demand on a revenue-driven basis. This strategy contrasts sharply with the typical approach of building a conventional coaxial cable system from the headend outward on a block-by-block basis. This DRS Network advantage will also allow the Company to efficiently utilize its capital resources to secure larger MDU bulk video contracts which will be used as the basis for node activation; 6 thus, more significant revenue streams should be realized earlier in the planned 3-4 year construction buildout than would be realized by a conventional coaxial cable system buildout. After a large MDU is activated within a node, the Company will then market its premium cable and pay-per-view video services, as well as its high-speed data and, when available, telephony services, to its cable subscribers in order to leverage MDU subscriber relationships. In addition, 21st Century will market its full range of voice, video and high-speed data services to the other MDUs and homes passed (collectively, "Homes Passed") which are located between the node and the transport ring. For commercial subscribers, the Company will seek initially to deploy the DRS Network in Chicago's dense central downtown area to (i) small to mid-sized commercial accounts and communications- intensive businesses that have an interest in the Company's high-speed data and Internet services and (ii) organizations such as the Building Owners Management Association and other facilities management companies that influence the selection of communications facilities installed at multiple buildings, as well as industry associations which the Company believes will encourage member companies to use the Company's services. PROVIDE SUPERIOR PRODUCT OFFERINGS ON A BUNDLED BASIS. The Company believes that its voice, video and high-speed data product offerings will be superior to competitive products currently available in Area 1 in terms of (i) the breadth and quality of the individual product offerings, (ii) the extent of the enhanced service features offered to the customer and (iii) the ability to bundle such product offerings into a simple, convenient and attractively priced package. The Company's current video offering includes 110 analog video channels, 59 interactive information channels and 22 specialty audio channels, with significant capacity for additional broadband and narrowband products and services. 21st Century's fiber-rich DRS Network is designed with only one to four amplifiers in cascade between its NOC and the subscriber (compared to up to 40 amplifiers used by conventional networks). This reduction in amplifiers significantly reduces signal degradation and results in higher video quality and telephony reliability, a superior audio component and greater data transmission accuracy. The Company's interactive information channels, which provide useful local content and information, are currently not available from any other single source in Area 1. The Company's high-speed data offering includes cable modems that provide access to the Internet at 4 Mbps, which is approximately 125 times faster than the prevalent 28.8 Kbps telephone modem and 25 times faster than an ISDN modem. Beginning in mid-1998, the Company expects to begin marketing a broad range of competitive telephony services (e.g., local, long distance, call waiting, call forwarding, caller ID and three-way calling) to both commercial accounts and selected residential subscribers, most of whom currently have no facilities-based alternative to the service provided over the ILEC's network. The Company's bundled service offering will provide customers with convenient "one-stop shopping," attractive pricing through significant bundled discounts, a single source for installation and service and the ease of a single monthly bill. LEVERAGE STRATEGIC ASSETS. The Company's core strategic assets include (i) the 15-year renewable franchise granted by the City of Chicago, which permits the construction and installation of a network serving the entirety of Chicago's Area 1 and (ii) the attachment agreement negotiated with the CTA and the pole attachment arrangements negotiated with Commonwealth Edison and Ameritech, which facilitate the timely and efficient buildout of the DRS Network through the utilization of scarce pole space and city infrastructure rights-of-way. Each of these assets is a valuable and important component of the Company's facilities- based business strategy and together would be difficult for another entrant to replicate. SECURE FIRST-TO-MARKET ADVANTAGES. The Company seeks to be the first-to- market in offering bundled voice, video and high-speed data services in Chicago's Area 1 and other selected markets. The Company believes that the rapid buildout of the DRS Network will enable it to acquire a significant customer base and will give it a competitive advantage over other prospective bundled and single-service providers. CONTINUE TO ATTRACT EXPERIENCED MANAGEMENT. The Company's management team has extensive and diverse experience in the cable television, Internet, data and telecommunications industries. During the past year, the Company's senior management has demonstrated its expertise by constructing and activating the NOC, completing the northern fiber transport ring of the DRS Network, securing necessary programming content and initiating services. The Company intends to continue to attract qualified senior-level management with demonstrated expertise from the various industries comprising the Company's service offering. 7 FOCUS ON SUPERIOR CUSTOMER CARE. The Company is committed to providing superior customer care to differentiate 21st Century from its competitors. To accomplish this, the Company has (i) contracted with a third party to provide a single billing statement for its voice, video and data services (which will facilitate bundled discounting for multiple services, permit customized billing statements and permit monthly, transactional and metered billing to support the Company's planned product lines) and (ii) established a relationship with a leading call center services provider to staff and operate a 24-hour call center. The Company believes that the quality and reliability of its services will result in fewer in-bound subscriber complaints, service requests and other non-revenue producing calls. In addition, the Company has installed sophisticated status monitoring equipment in the NOC and throughout its DRS Network, which should allow the Company to become aware of and remedy many potential problems before they are detectable by subscribers. EXPAND TO ADDITIONAL MARKETS. The Company intends to expand its operations to selected midwestern markets which have the size, demographics and geographical location suitable for its business strategy. Although the Company may consider stand-alone systems, the Company expects to focus on markets in which it can use its Chicago DRS Network and NOC to achieve synergies and economies of scale. The Company has applied for franchises in a number of cities in suburban Chicago, central, southcentral and southwestern Michigan and northern Indiana. CURRENT INVESTORS In addition to the $1.9 million initial equity investment by the Company's founding common shareholders, the Company obtained a $21.8 million investment in the form of convertible 8% cumulative preferred stock in January 1997 from a group of private equity investors which includes various entities affiliated with Purnendu Chatterjee and Soros Management Fund; various entities affiliated with William Farley, chairman of Fruit of the Loom, Inc.; Chicago-based telecommunications investment specialists JK&B Capital; and Boston Capital Ventures. In September and November 1997, the Company issued an additional $1.15 million of convertible 8% cumulative preferred stock, $1.0 million of which was issued to Consolidated Communications, a wholly owned subsidiary of McLeod, Inc. In January 1998, several common shareholders and certain other persons and entities purchased approximately $1.5 million of convertible 8% cumulative preferred stock. 8 THE EXCHANGE OFFER Registration Agreement The Old Securities were sold by the Company on February 9, 1998 (the "Issue Date"), to Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and BancBoston Securities Inc. (the "Initial Purchasers"), which placed such Old Securities with institutional investors. In addition, 1833.33 shares of Old Exchangeable Preferred Stock will be issued on May 15, 1998 as the first dividend payment on the Old Exchangeable Preferred Stock. In connection therewith, the Company executed and delivered for the benefit of the holders of the Old Securities the Registration Rights Agreement obligating the Company to file with the Commission within 45 days after the date of issuance of the Old Securities, a registration statement under the Securities Act relating to (i) an exchange offer for the Old Notes (the "Notes Exchange Offer") and (ii) an exchange offer for shares of Old Exchangeable Preferred Stock (the "Preferred Stock Exchange Offer" and, together with the Notes Exchange Offer, the "Exchange Offer") and to use its best efforts to cause such registration statement to become effective within 150 days after the Issue Date. The Exchange Offer New Notes are being offered in exchange for an equal principal amount at maturity of Old Notes. As of the date hereof, there was outstanding $363,135,000 principal amount at maturity of Old Notes. New Exchangeable Preferred Stock is being offered in exchange for an equal number of shares of Old Exchangeable Preferred Stock. Because the New Notes and New Exchangeable Preferred Stock will be recorded in the Company's accounting records at the same carrying value as the Old Notes and Old Exchangeable Preferred Stock, respectively, no gain or loss will be recognized by the Company upon the consummation of the Exchange Offer. See "The Exchange Offer--Accounting Treatment." Holders of the Old Notes or Old Exchangeable Preferred Stock do not have appraisal or dissenter's rights in connection with the Exchange Offer under the Illinois Business Corporation Act (the "IBCA"), the governing law of the state of incorporation of the Company. Based on interpretations by the staff of the Commission, as set forth in no-action letters issued to third parties, the Company believes that the New Securities issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder who is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act; provided, however, that such New Securities are acquired in the ordinary course of the holder's business and such holders are not engaged in, and do not intend to engage in, a distribution of such New Securities and have no arrangement with any person to participate in a distribution of such New Securities. The staff of the Commission has not considered the Exchange Offer in the context of a no- action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. Each broker-dealer that receives New Securities for its own account in exchange for Old Securities, where such Old Securities were acquired by such broker-dealer as a result of market-making activities or other 9 trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Securities. See "Plan of Distribution." To comply with the securities laws of certain jurisdictions, it may be necessary to qualify for sale or register the New Notes or New Exchangeable Preferred Stock prior to offering or selling such New Notes or New Exchangeable Preferred Stock. The Company has agreed, pursuant to the Registration Agreement and subject to certain specified limitations therein, to register or qualify the New Notes and New Exchangeable Preferred Stock for offer or sale under the securities or "blue sky" laws of such jurisdictions as may be necessary to permit the holders of New Securities to trade such New Securities without any restrictions or limitations under the securities laws of the several states of the United States. If a holder of Old Securities does not exchange such Old Securities for New Securities pursuant to the Exchange Offer, such Old Securities will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Old Securities may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "Risk Factors-- Consequences of Failure to Exchange." Expiration Date 5:00 p.m. Eastern Standard Time, on June [__], 1998 (30 days following the commencement of the Exchange Offer), unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Conditions to the Exchange Offer The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. See "The Exchange Offer-- Conditions." Except for the requirements of applicable Federal and state securities laws, there are no Federal or state regulatory requirements to be complied with or obtained by the Company in connection with the Exchange Offer. NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT HEREBY. Procedures for Tendering Old Notes Each holder of Old Notes wishing to accept the Notes Exchange Offer must complete, sign and date the appropriate Letter of Transmittal (the "Notes Letter of Transmittal"), or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Notes Letter of Transmittal, or such facsimile together with the Old Notes to be exchanged and any other required documentation to the Notes Exchange Agent (as defined) at the address set forth herein and therein. See "The Exchange Offer-- Procedures for Tendering." Procedures for Tendering Old Exchangeable Preferred Stock Each holder of Old Exchangeable Preferred Stock wishing to accept the Preferred Stock Exchange Offer must complete, sign and date the 10 appropriate Letter of Transmittal (the "Preferred Stock Letter of Transmittal"), or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Preferred Stock Letter of Transmittal, or such facsimile together with the Old Exchangeable Preferred Stock to be exchanged and any other required documentation to the Preferred Stock Exchange Agent (as defined) at the address set forth herein and therein. See "The Exchange Offer-- Procedures for Tendering." Withdrawal Rights Tenders of Old Securities may be withdrawn at any time prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. To withdraw a tender of Old Securities, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent (as defined) at its address set forth below under "Exchange Agent" prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. Acceptance of Old Securities and Delivery of New Securities Subject to certain conditions, the Company will accept for exchange any and all Old Securities which are properly tendered in the Exchange Offer prior to 5:00 p.m., on the Expiration Date. The New Securities issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Exchange Agents State Street Bank and Trust Company is serving as exchange agent (the "Notes Exchange Agent") in connection with the Notes Exchange Offer. Boston EquiServe Trust Company, N.A. is serving as exchange agent (the "Preferred Stock Exchange Agent") in connection with the Preferred Stock Exchange Offer. Each of the Notes Exchange Agent and the Preferred Stock Exchange Agent are also referred to herein as the "Exchange Agent." Use of Proceeds There will be no proceeds to the Company from the Exchange Offer. The net proceeds to the Company from the Private Placement were approximately $240.3 million (after deduction of discounts and estimated offering expenses). The Company will continue using such proceeds for capital expenditures associated with the continued expansion of the DRS Network in Chicago's Area 1 and for additional working capital and other general corporate purposes, including funding operating deficits. 11 SUMMARY OF TERMS OF NEW NOTES AND NEW EXCHANGEABLE PREFERRED STOCK The Exchange Offer relates to the exchange of Old Notes for an equal principal amount at maturity of New Notes and Old Exchangeable Preferred Stock for an equal number of shares of New Exchangeable Preferred Stock. The New Notes will be obligations of the Company evidencing the same indebtedness as the Old Notes and will be entitled to the benefits of the same Indenture (as defined), which governs both the Old Notes and the New Notes. The form and terms of the New Notes and the New Exchangeable Preferred Stock are substantially identical to the form and terms of the Old Notes and the Old Exchangeable Preferred Stock, respectively, except that the offer of the New Securities will have been registered under the Securities Act and, therefore, the New Securities will not bear legends restricting the transfer thereof. COMPARISON WITH OLD NOTES AND OLD EXCHANGEABLE PREFERRED STOCK Freely Transferable Generally, the New Securities will be freely transferable under the Securities Act by holders who are not affiliates of the Company. The New Notes and New Exchangeable Preferred Stock otherwise will be substantially identical in all material respects to the Old Notes and Old Exchangeable Preferred Stock, respectively. See "The Exchange Offer--Terms of the Exchange Offer." Registration Rights The holders of Old Securities currently are entitled to certain registration rights pursuant to a registration rights agreement (the "Registration Rights Agreement") dated as of February 2, 1998, between the Company and the Initial Purchasers. However, upon consummation of the Exchange Offer, subject to certain exceptions, holders of Old Securities who do not exchange their Old Securities for New Securities in the Exchange Offer will no longer be entitled to registration rights and will not be able to offer or sell their Old Securities, unless such Old Securities are subsequently registered under the Securities Act (which, subject to certain limited exceptions, the Company will have no obligation to do), except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "Risk Factors-- Consequences of Failure to Exchange." THE NEW NOTES TERMS OF THE NEW NOTES Maturity February 15, 2008. Yield and Interest The issue price per New Note represents a yield to maturity on the New Notes of 12 1/4% (computed on a semi-annual bond equivalent basis) calculated from the Issue Date. Except as described herein, no cash interest will accrue or be payable on the New Notes prior to February 15, 2003. Thereafter, cash interest will accrue at a rate of 12 1/4% per annum, and cash interest will be payable on February 15 and August 15 of each year, commencing August 15, 2003. 12 Original Issue Discount For U.S. Federal income tax purposes, the New Notes will be issued with OID. Each holder of a New Note must include such OID in gross income for U.S. Federal income tax purposes in advance of the receipt of the cash payments to which such income is attributable. See "Certain United States Federal Income Tax Consequences." Optional Redemption The New Notes will not be redeemable at the option of the Company prior to February 15, 2003, except that until February 15, 2001, the Company may redeem, at its option, in the aggregate up to 35% of the principal amount at maturity of the Notes at the redemption price set forth herein with the net proceeds of one or more Equity Offerings following which there is a Public Market if at least $236.0 million principal amount at maturity of the Notes remains outstanding after any such redemption. On or after February 15, 2003, the New Notes may be redeemed at the option of the Company, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. See "Description of the New Notes--Optional Redemption." Change of Control Upon a Change of Control, each holder of New Notes may require the Company to purchase all or any portion of such holder's New Notes at a purchase price equal to 101% of the Accreted Value thereof plus accrued and unpaid interest, if any, to the date of purchase. There can be no assurance that the Company will be able to raise sufficient funds to meet this purchase obligation should it arise. See "Description of the New Notes--Change of Control." Ranking The New Notes will be unsecured senior obligations of the Company and will rank pari passu in right of payment with all unsubordinated, unsecured indebtedness of the Company and will be senior in right of payment to all subordinated indebtedness of the Company. As of December 31, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the Company would have had outstanding $200.2 million of unsubordinated indebtedness and no subordinated indebtedness. The Notes will be effectively subordinated to all current and future indebtedness of the Company's subsidiaries, including trade payables and other accrued liabilities. Restrictive Covenants The Indenture (as defined) contains certain covenants that, among other things, limit (i) the incurrence of additional Indebtedness by the Company and its Restricted Subsidiaries (as defined), (ii) the payment of dividends and other distributions by the Company and its Restricted Subsidiaries in respect of their capital stock, (iii) investments or other restricted payments by the Company and its Restricted Subsidiaries, (iv) asset sales, (v) certain transactions with affiliates, (vi) the sale or issuance of capital stock of Restricted Subsidiaries, (vii) the incurrence of liens and the entering into of sale/leaseback transactions and (viii) mergers and consolidations. The Indenture also prohibits certain restrictions on distributions from Restricted Subsidiaries. All of these limitations and prohibitions, however, are subject to a number of important qualifications and exceptions. See "Description of the New Notes--Certain Covenants." 13 Use of Proceeds There will be no proceeds to the Company from the Exchange Offer. The net proceeds to the Company from the Private Placement were approximately $240.3 million (after deduction of discounts and estimated offering expenses). The Company will continue using such proceeds for capital expenditures associated with the continued expansion of the DRS Network in Chicago's Area 1 and for additional working capital and other general corporate purposes, including funding operating deficits. THE NEW EXCHANGEABLE PREFERRED STOCK TERMS OF THE NEW EXCHANGEABLE PREFERRED STOCK Liquidation Preference $1,000 per share. Dividends Dividends on the New Exchangeable Preferred Stock will accrue at a rate of 13 3/4% per annum of the liquidation preference thereof and will be payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year commencing May 15, 1998. Dividends will be payable in cash, except that on each dividend payment date occurring on or prior to February 15, 2003, dividends may be paid, at the Company's option, by the issuance of additional shares of New Exchangeable Preferred Stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. It is not anticipated that the Company will pay any dividends in cash for any period ending on or prior to February 15, 2003. Ranking The New Exchangeable Preferred Stock will rank senior to all other classes of equity securities of the Company outstanding upon consummation of the Exchange Offer, including but not limited to the 1,554,871 shares of 8% cumulative preferred stock issued pursuant to the January 1997 Stock Purchase Agreement. The Company may not authorize any new class of Parity Stock or Senior Stock without the approval of at least a majority of the shares of Exchangeable Preferred Stock then outstanding, voting or consenting, as the case may be, as one class. See "Description of the New Exchangeable Preferred Stock--Ranking." Optional Redemption The New Exchangeable Preferred Stock will not be redeemable prior to February 15, 2003, except that, on or prior to February 15, 2001, the Company may redeem in whole but not in part, at its option, the outstanding New Exchangeable Preferred Stock at a redemption price of 113 3/4% of the liquidation preference thereof, plus accumulated and unpaid dividends to the date of redemption, with the net proceeds of an Equity Offering. On or after February 15, 2003, the New Exchangeable Preferred Stock is redeemable at the option of the Company, in whole or in part, at the redemption prices set forth herein plus accumulated and unpaid dividends, if any, to the date of redemption. See "Description of the New Exchangeable Preferred Stock--Optional Redemption." 14 Mandatory Redemption The New Exchangeable Preferred Stock is subject to mandatory redemption at its liquidation preference, plus accumulated and unpaid dividends, if any, on February 15, 2010, out of any funds legally available therefor. Change of Control In the event of a Change of Control (as defined), the Company shall offer to purchase all outstanding shares of New Exchangeable Preferred Stock, in whole or in part, at a purchase price equal to 101% of the aggregate liquidation preference thereof, plus accumulated and unpaid dividends, if any, to the date of purchase. In the event the Company is not permitted by applicable law or by the terms of any indebtedness of the Company to make the offer referred to above or to purchase any shares of New Exchangeable Preferred Stock pursuant to such offer, holders of a majority of the Exchangeable Preferred Stock will designate an Independent Financial Advisor (as defined) to determine the appropriate dividend rate (the "reset rate") that the New Exchangeable Preferred Stock should bear so that, after the dividend rate on the New Exchangeable Preferred Stock is reset to such reset rate, the New Exchangeable Preferred Stock would have a market value of 101% of the liquidation preference. After determination of the reset rate, the New Exchangeable Preferred Stock shall accrue and accumulate dividends at the reset rate from and after the date of occurrence of the Change of Control; provided, however, that the reset rate shall in no event be less than 13 3/4% per annum (the initial dividend rate on the New Exchangeable Preferred Stock) or greater than 15% per annum. See "Description of the New Exchangeable Preferred Stock--Change of Control." Voting Rights Holders of the New Exchangeable Preferred Stock will have limited voting rights, including (i) those required by law and (ii) that holders of the outstanding shares of New Exchangeable Preferred Stock, voting together as a class with the holders of any other series of preferred stock upon which like rights have been conferred and are exercisable, upon the failure of the Company (1) to pay dividends for six or more dividend periods (whether or not consecutive), (2) to satisfy any mandatory redemption obligation with respect to the New Exchangeable Preferred Stock, (3) to comply with the covenants set forth in the Amended Articles (as defined) or (4) to make certain payments on certain Indebtedness, will be entitled to elect the lesser of (x) two members to the Board of Directors of the Company and (y) that number of directors constituting 25% of the members of the Board of Directors of the Company. See "Description of the New Exchangeable Preferred Stock--Voting Rights." Restrictive Covenants The Amended Articles (as defined herein) limit (i) the incurrence of additional Indebtedness by the Company and its Restricted Subsidiaries, (ii) the payment of dividends and other distributions by the Company and its Restricted Subsidiaries in respect of their capital stock, (iii) investments or other restricted payments by the Company and its Restricted Subsidiaries, (iv) asset sales, (v) certain transactions with affiliates, (vi) the sale or issuance of capital stock of Restricted 15 Subsidiaries and (vii) mergers and consolidations. The Amended Articles will also prohibit certain restrictions on distributions from Restricted Subsidiaries. All these limitations and prohibitions, however, are subject to a number of important qualifications. See "Description of the New Exchangeable Preferred Stock--Certain Covenants." Senior Debt Restrictions The Company's debt instruments, including the Indenture for the Notes, contain provisions which restrict, and if a default under any thereof exists prohibit, redemption or repurchase of the New Exchangeable Preferred Stock, including upon a Change of Control or through the issue of Exchange Debentures, and the payment of cash dividends on the New Exchangeable Preferred Stock. See "Risk Factors" and "Description of the New Notes-- Certain Covenants." Exchange Feature On any scheduled dividend payment date, the Company may, at its option, exchange all but not less than all the shares of Exchangeable Preferred Stock then outstanding for Exchange Debentures in a principal amount equal to the liquidation preference of the shares of Exchangeable Preferred Stock held by such holder at the time of such exchange. THE EXCHANGE DEBENTURES Securities Offered 13 3/4% Subordinated Exchange Debentures Due 2010 issuable in exchange for the Exchangeable Preferred Stock in an aggregate principal amount equal to the sum of the liquidation preference of the Exchangeable Preferred Stock, plus accumulated and unpaid dividends to the date of exchange. Maturity February 15, 2010. Interest The Exchange Debentures will bear interest at the rate of 13 3/4% per annum, payable semi- annually in arrears on February 15 and August 15, commencing with the first of such dates to occur after the date of exchange (the "Exchange Date"). On or prior to February 15, 2003, interest may, at the option of the Company, be paid by issuing additional Exchange Debentures with a principal amount equal to such interest. After February 15, 2003, interest on the Exchange Debentures may be paid only in cash. Ranking The Exchange Debentures will be general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness (including the Notes) of the Company and to all indebtedness and other liabilities (including trade payables) of the Company's subsidiaries. As of December 31, 1997 after giving effect to the Private Placement and the application of the proceeds therefrom, the Company would have had $200.2 million of outstanding indebtedness, all of which would have been senior in right of payment to the Exchange Debentures. See "Description of the Exchange Debentures--Ranking." 16 Optional Redemption The Exchange Debentures will not be redeemable prior to February 15, 2003, except that, until February 15, 2001, the Company may redeem in whole but not in part, at its option, the Exchange Debentures at a redemption price of 113 3/4% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption, with the net proceeds of an Equity Offering. On or after February 15, 2003, the Exchange Debentures are redeemable at the option of the Company, in whole or in part, at the redemption prices set forth herein plus accrued and unpaid interest, if any, to the date of redemption. See "Description of the Exchange Debentures-- Optional Redemption." Change of Control In the event of a Change of Control, holders of the Exchange Debentures will have the right to require the Company to purchase their Exchange Debentures, in whole or in part, at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. See "Description of the Exchange Debentures-- Change of Control." Restrictive Covenants The indenture under which the Exchange Debentures will be issued (the "Exchange Indenture") limits (i) the incurrence of additional Indebtedness by the Company and its Restricted Subsidiaries, (ii) the payment of dividends and other distributions by the Company and its Restricted Subsidiaries in respect of their capital stock, (iii) investments or other restricted payments by the Company and its Restricted Subsidiaries, (iv) asset sales, (v) certain transactions with affiliates, (vi) the sale or issuance of capital stock of Restricted Subsidiaries and (vi) mergers and consolidations. The Exchange Indenture also prohibits certain restrictions on distributions from Restricted Subsidiaries. All these limitations and prohibitions, however, are subject to a number of important qualifications. See "Description of the Exchange Debentures--Certain Covenants." RISK FACTORS See "Risk Factors" for certain factors that should be considered by holders of Old Securities before tendering their Old Securities in the Exchange Offer. 17 SUMMARY FINANCIAL AND OPERATING DATA The following table sets forth summary financial and operating data for the Company. The summary financial data as of and for the periods ended March 31, 1995, 1996 and 1997 have been derived from the audited financial statements of the Company. The summary financial and operating data as of and for the nine months ended December 31, 1996 and 1997 have been derived from the unaudited financial statements of the Company and, in the opinion of the Company, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of such information. Operating results for the nine months ended December 31, 1997 are not necessarily indicative of the results that may be expected for the entire year. The summary financial and operating data set forth below should be read in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements included elsewhere in this Prospectus.
NINE MONTHS ENDED Year Ended March 31, ------------------------------ --------------------------------------- DECEMBER 31, ------------------------------ 1995 1996 1997 1996 1997 ----------- ------------ ------------ ------------- --------------- Statement of Operations Data: Subscriber revenues $ -- $ -- $ 27,480 $ -- $ 123,532 Operating expenses -- 9,617 200,911 190,817 413,979 Selling, general and administrative 624,963 694,122 7,276,439 expenses 2,337,534 1,572,936 Depreciation and amortization 38,923 108,182 170,108 114,734 643,427 ---------- ----------- ------------ ----------- ------------ Operating loss (663,886) (811,921) (2,681,073) (1,878,487) (8,210,313) Interest income -- -- 301,624 142,603 484,678 Interest expense (115,428) (214,688) (437,843) (376,828) (119,226) ---------- ----------- ------------ ----------- ------------ Net loss (779,314) (1,026,609) (2,817,292) (2,112,712) (7,844,861) Preferred stock requirements -- -- (478,981) -- (2,287,928) ---------- ----------- ------------ ----------- ------------ Net loss attributable to common shares $ (779,314) $(1,026,609) $ (3,296,273) $(2,112,712) $(10,132,789) ========== =========== ============ =========== ============ Net loss per common share $(.52) $(.64) $(1.66) $(1.11) $(4.26) ========== =========== ============ =========== ============ Weighted average common shares 1,508,000 1,609,129 1,988,365 1,900,527 2,380,926 OTHER DATA: Capital expenditures $ -- $ -- $ 246,863 $ 47,118 $ 15,007,751 Number of subscribers (end of period) -- -- 1,734 -- 3,019 Deficiency in earnings to cover combined fixed charges (3) $ 779,314 $ 1,026,609 $ 3,296,273 $ 2,112,712 $ 10,132,789 Deficiency in earnings to cover interest charges (3) $ 779,314 $ 1,026,609 $ 2,817,292 $ 2,112,712 $ 7,844,861 Deficiency in earnings to cover preferred stock requirements (3) N/A N/A $ 2,840,046 N/A $ 9,865,538 PRO FORMA (2): Net loss $(29,640,225) $ 27,767,075) Preferred stock requirements (8,586,459) (8,274,205) ----------- ----------- Net loss attributable to common shares $(38,226,684) $(36,041,280) =========== =========== Net loss per common share (19.23) (15.14) =========== =========== Deficiency in earnings to cover combined fixed charges (3) $ 38,226,684 $ 36,041,280 =========== =========== Deficiency in earnings to cover interest charges (3) $ 29,640,225 $ 27,767,075 Deficiency in earnings to cover preferred stock requirements (3) $ 10,947,524 $ 15,851,815 =========== =========== December 31, 1997 ---------------------------- Actual AS ADJUSTED(1) ------------ ------------ Balance Sheet Data: Total assets $23,835,488 $265,392,870 Total liabilities 15,874,148 207,874,148 Total Class A Convertible 8% Cumulative Preferred Stock 19,974,325 -- Total Exchangeable Preferred Stock Due 2010 -- 45,455,300 Total shareholders' equity (12,012,985) 12,063,422
(1) Adjusted to give effect to the Private Placement and the application of the net proceeds therefrom, certain revisions made to the Class A Convertible 8% Cumulative Preferred Stock Agreement, the receipt of approximately $1.5 million of proceeds received from the issuance by the Company in January 1998 of 95.4 shares of Class A Convertible 8% Cumulative Preferred Stock and reflects the repayment of $8.0 million outstanding under the Interim Credit Facility. (2) The year ended March 31, 1997 and nine months ended December 31, 1997, net loss, preferred stock requirements, net loss attributable to common shares, net loss per common share, ratio of earnings to combined fixed charges, ratio of earnings to interest charges and ratio of earnings to preferred stock requirements have been adjusted to reflect the impacts of the interest expense, amortization of deferred debt costs, preferred stock dividends and accretion associated with the Private Placement. The year ended March 31, 1997 and nine months ended December 31, 1997 reflect the first twelve and nine months of interest expense, amortized debt costs, preferred stock dividends, and accretion respectively. (3) The Company has a deficiency of earnings necessary to cover its combined fixed charges, interest payments and preferred dividend requirements, historically and on a pro forma basis. (4) The pro forma net income for the year ended March 31, 1997 includes twelve months of pro forma interest expense totaling $27,260,776 which includes $437,843 of historical interest expense as well as $25,276,002 of accretion related to the original issue discount on the senior discount notes and $1,546,931 of amortization of deferred issuance costs related to the senior discount notes. The pro forma net income for the nine months ended December 31, 1997 includes nine months of pro forma interest expense totaling $20,041,440 which includes $119,226 of historical interest expense as well as $18,763,176 of accretion related to the original issue discount on the senior discount notes and $1,159,038 of amortization of deferred issuance costs related to the senior discount notes. The pro forma calculations related to the senior discount notes were performed using the effective interest method based on the following components: (1) the original carrying value of the senior discount notes of $363,135,000 less the original issue discount of $163,135,000 for a net carrying value of $200,000,000 and (2) total issuance costs incurred in relation to the senior discount notes of $7,886,824. (5) The pro forma preferred stock requirements (dividends and accretion) for the year ended March 31, 1997 totals $8,586,459 which includes $478,981 of historical preferred stock requirements as well as twelve months of preferred dividend requirements, $7,237,405, and twelve months of accretion, $870,073, related to the senior exchangeable preferred stock. The pro forma preferred stock requirements for the nine months ended December 31, 1997 totals $8,274,205 which includes $2,287,928 of historical preferred stock requirements as well as nine months of preferred dividend requirements, $5,335,255, and nine months of accretion, $651,022, related to the senior exchangeable preferred stock. The pro forma calculations related to the senior exchangeable preferred stock were performed using the effective interest rate method based on the following components: (1) the redemption value of the redeemable preferred stock of $50,000,000, (2) the portion of the proceeds assigned to the related warrants of $2,605,500, (3) total issuance costs incurred in relation to the senior exchangeable preferred stock of $1,939,200, (4) quarterly compounding of preferred dividends, and (5) dividend rate of 13 3/4%. This results in an initial carrying value of $45,455,300 related to the senior exchangeable preferred stock. 18 RISK FACTORS Holders of Old Securities should carefully consider the following risk factors, as well as other information set forth in this Prospectus, before tendering the Old Securities in the Exchange Offer. The risk factors below (other than "Consequences of Failure to Exchange") are generally applicable to the Old Securities as well as the New Securities. This Prospectus contains certain forward-looking statements regarding the Company's operations, economic performance and financial condition, in particular, statements made as to plans to develop and construct the DRS Network, add and upgrade facilities and offer services, the Company's intention to connect certain subscribers to the DRS Network, the development of the Company's businesses, the markets for the Company's services and products, the Company's anticipated capital expenditures, the Company's anticipated sources of capital and effects of regulatory reform and competitive and technological developments. Such forward-looking statements are subject to known and unknown risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those identified in this Section and elsewhere in this Prospectus. Such risks include, but are not limited to, the Company's ability to successfully market its services to new subscribers, access markets, finance network developments, and obtain rights-of- way, building access rights and any required governmental authorizations, franchises and permits, all in a timely manner, at a reasonable cost and on satisfactory terms and conditions, as well as regulatory, legislative, judicial, competitive and technological developments that could cause actual results to vary materially from the future results indicated, expressed or implied, in such forward-looking statements. Certain of these and other risk factors are more completely described below. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Securities who do not exchange their Old Securities for New Securities pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Securities as set forth in the legend thereon as a consequence of the issuance of the Old Securities pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Securities may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Securities under the Securities Act. Based on interpretations by the staff of the Commission, as set forth in no-action letters to third parties, the Company believes that the New Securities issued pursuant to the Exchange Offer in exchange for Old Securities may be offered for resale, resold or otherwise transferred by the holders thereof (other than any such holder that is an "affiliate" of the issuer within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Securities are acquired in the ordinary course of such holders' business and such holders are not engaged in, and do not intend to engage in, a distribution of such New Securities and have no arrangement or understanding with any person to participate in the distribution of such New Securities. The staff of the Commission has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. Each broker-dealer that receives New Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Securities. The Letters of Transmittal state that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning or the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Securities received in exchange for Old Securities where such Old Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of one year after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. Each broker-dealer that acquired Old Securities directly from the Company, and not as a result of market-making or trading activities, must, in the absence of an exemption, comply with the registration and prospectus delivery requirements of the Securities Act in connection with the secondary resale of the New Securities and cannot rely on the position of the staff of the Commission enunciated in no-action letters issued to third parties. See "Plan of Distribution." However, to comply with the securities laws of certain jurisdictions, if applicable, the New Securities may not be offered or sold unless they have been registered or 19 with. To the extent that Old Securities are tendered and accepted in the Exchange Offer, the trading market for the untendered and the tendered but unaccepted Old Securities could be adversely affected. As indicated in the Company's Summary Financial and Operating Data, footnote (3), the Company has a deficiency of earnings necessary to cover its preferred dividend requirements, historically and on a pro forma basis. HISTORY OF LOSSES; EXPECTATION OF FUTURE LOSSES AND NEGATIVE CASH FLOWS FROM OPERATIONS The Company has had a cumulative net loss attributable to common shares of $15,655,619 from its inception in 1992 through December 31, 1997, and incurred net losses attributable to common shares of $3,296,273 and $10,132,789 for its fiscal year ended March 31, 1997 and the nine months ended December 31, 1997, respectively. At December 31, 1997, the Company had an accumulated deficit of $15,655,619. Taking into consideration nine months and twelve months of interest expense, amortized debt costs, preferred stock dividends and accretion related to the Private Placement, the pro forma net loss attributable to common shares for the nine months ended December 31, 1997 and year-ended March 31, 1997 are $36,041,280 and $38,226,684, respectively. The implementation of the Company's business plan to build out the DRS Network and commence construction of new networks involves significant additional expenditures and substantially increased depreciation and amortization expenses. Revenues currently are minimal and may be slow in growing as services are new and may be subject to start-up and other delays. Accordingly, the Company expects that it will incur net losses and significant negative cash flow (after capital expenditures) during the next several years as it continues to expand its operations. In addition to timely and cost-effective construction efforts, the ability of the Company to achieve profitability and positive cash flow will depend in large part on the successful marketing of the voice, video and high-speed data services offered or to be offered by the Company. There can be no assurance that the Company can successfully compete in obtaining subscribers for its broadband services or that the Company will generate sufficient revenues such that the Company's operations will become profitable or generate positive cash flows in the future. If the Company cannot achieve operating profitability or positive cash flows from operating activities, it may not be able to meet its working capital or debt service requirements, including its obligations under the New Notes, which would cause an event of default under the Indenture and would substantially reduce or eliminate the value of the New Exchangeable Preferred Stock. Moreover, if the Company cannot achieve operating profitability or positive cash flows from operating activities, it may not be able to meet its obligation to manditorily redeem the New Exchangeable Preferred Stock in 2010. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SIGNIFICANT CAPITAL REQUIREMENTS The Company's business requires substantial investment to finance capital expenditures and related expenses to construct the DRS Network in Chicago, to construct additional networks, to fund subscriber equipment, to purchase equipment to initiate telephony services, to fund operating deficits as it builds its subscriber base and to maintain the quality of its networks. The Company estimates that its aggregate capital expenditure requirements related to DRS Network construction will total approximately $270 million, of which between approximately $90 million to $120 million is expected to be spent during calendar year 1998. Actual costs and the timing thereof may vary significantly from these estimates and will depend in part on the number of miles of the DRS Network to be constructed in a particular period, other factors affecting construction costs, the number of subscribers, the mix of services purchased, the cost of subscriber equipment paid for or financed by the Company and other factors. The Company has entered into a commitment letter with BankBoston, N.A. and Bank of America NT&SA for a $50 million bank revolving credit facility to provide supplemental financing. There are currently no amounts outstanding under this facility. Although the Company's management believes that the proceeds from the Private Placement, together with operating cash flow, will provide sufficient funds to complete the DRS Network, the Company may need additional financing to complete the DRS Network, to expand into additional cities, for new business activities or in the event it decides to make acquisitions. Sources of additional capital may include public and private equity and debt financing, and the $50 million bank revolving credit facility referred to above. There can be no assurance that the proposed bank financing or other financing will be available to the Company on acceptable terms or at all. If the Company is not successful in obtaining sufficient funds it may be required to defer or abandon its expansion plans, which could limit the Company's growth and prospects, and reduce some of the economies of scale the Company expects to obtain, including with respect to purchases of equipment programming and advertising, which could have an adverse effect on the Company's results of operations and financial condition. Moreover, if the Company cannot achieve operating profitability or positive cash flows from operating activities, it may not be able to meet its obligation to manditorily redeem the New Exchangeable Preferred Stock in 2010. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." HIGH LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS 20 At December 31, 1997, on a pro forma basis, after giving effect to the Private Placement and the application of the net proceeds therefrom, the Company would have had $200.2 million of indebtedness, $45.5 million of Exchangeable Preferred Stock and $12.1 million of shareholders' equity. The Indenture and the Amended Articles limit, but do not prohibit, the incurrence of additional indebtedness by the Company and its subsidiaries, and the Company may incur substantial additional indebtedness to finance the construction of the DRS Network and purchase related equipment. All additional indebtedness of the Company will rank senior in right of payment to any payment obligations with respect to the New Exchangeable Preferred Stock and the Exchange Debentures (to the extent that such additional indebtedness represents Senior Indebtedness) and may be secured debt, pari passu with or structurally senior to the New Notes. See "--Holding Company Structure; Priority of Secured Debt." The debt service requirements of any additional indebtedness would make it more difficult for the Company to meet its payment obligations with respect to the New Notes, the New Exchangeable Preferred Stock and the Exchange Debentures. The level of the Company's indebtedness could adversely affect the Company in a number of ways, including the following (i) a substantial portion of the Company's cash flow from operations must be dedicated to the payment (after ten years) of the principal of and (after five years), of interest on the Notes and will not be available for other purposes, (ii) the ability of the Company to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes may be limited, (iii) the Company's level of indebtedness could limit its flexibility in planning for, or reacting to, changes in its business, (iv) the Company may be more highly leveraged than some of its competitors, which may place it at a competitive disadvantage and (v) the Company's degree of indebtedness may make it more vulnerable to a downturn in its business or the economy generally. There can be no assurance that the Company will be able to meet its debt service obligations, including its obligations under the New Notes. As indicated in the Company's Summary Financial and Operating Data, footnote (3), the Company has a deficiency of earnings necessary to cover its preferred dividend requirements, historically and on a pro forma basis. In order to meet its debt service obligations, the Company must successfully implement its strategy, including constructing the DRS Network in Chicago, increasing the number of subscribers for video and high-speed data services, initiating and obtaining subscribers for its voice services and generating significant and sustained growth in the Company's cash flow. There can be no assurance that the Company will successfully implement its strategy or that the Company will be able to generate sufficient cash flow from operating activities to meet its debt service obligations and its working capital requirements. In the event the implementation of the Company's strategy is delayed or is unsuccessful or the Company does not generate sufficient cash flow to meet its debt service obligations and its working capital requirements, the Company may need to seek additional financing. There can be no assurance that any such financing could be obtained on terms that are acceptable to the Company, or at all. In the absence of such financing, the Company could be forced to dispose of assets in order to make up for any shortfall in the payments due on its indebtedness under circumstances that might not be favorable to realizing the highest price for such assets. There can be no assurance that the Company's assets could be sold quickly enough or for sufficient amounts to enable the Company to meet its obligations, including its obligations with respect to the Notes. The Indenture and the Amended Articles impose, and future indebtedness may impose, operating and financial restrictions on the Company and its subsidiaries. These restrictions affect, and in certain cases significantly limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens upon assets, apply the proceeds from the disposal of assets, make investments, make dividend payments and other distributions on capital stock and redeem capital stock. The limitations in the Indenture and the Amended Articles are subject to a number of important qualifications and exceptions. If the Company is unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments from new financings or from asset sales, or if the Company otherwise fails to comply with the various covenants in its indebtedness, it would be in default under the terms thereof, which would permit the holders of such indebtedness to accelerate the maturity of such indebtedness and could cause defaults under other indebtedness of the Company. Such defaults could delay or preclude payment of interest or principal on the New Notes or the payment of dividends on the New Exchangeable Preferred Stock. The ability of the Company to meet its obligations 21 will be dependent upon the future performance of the Company, which will be subject to prevailing economic conditions and to financial, business and other factors. See "Description of Certain Indebtedness," "Description of the New Notes--Certain Covenants" and "Description of the New Exchangeable Preferred Stock--Certain Covenants." HOLDING COMPANY STRUCTURE; PRIORITY OF SECURED DEBT The Company is (or shortly after the Exchange Offer will be) a holding company with no direct operations and no significant assets other than the stock of its subsidiaries. The Company currently has three wholly-owned subsidiaries: 21st Century Cable TV of Illinois, Inc.; 21st Century Telecom of Illinois, Inc.; and 21st Century Telecom Group of Michigan, Inc. Moreover, 21st Century Telecom Group of Michigan, Inc. has two wholly-owned subsidiaries: 21st Century Cable TV of Grand Rapids, Inc. and 21st Century Telecom of Michigan, Inc. The Company is (or will be) dependent on the cash flows of its subsidiaries to meet its obligations, including the payment of the principal of and interest on the Notes and the payment of dividends on the Exchangeable Preferred Stock. The Company's subsidiaries are (or will be) separate legal entities that have no obligation to pay any amounts due pursuant to the Notes or the Exchangeable Preferred Stock or to make any funds available therefor, whether by dividends, loans or other payments. The ability of the Company's subsidiaries to make such dividends and other payments to the Company will be subject to, among other things, the availability of funds, the terms of such subsidiaries' indebtedness and applicable state laws. Because the Company's subsidiaries will not guarantee the payment of the principal of or interest on the Notes or the payment of dividends on the Exchangeable Preferred Stock, any right of the Company to receive the assets of any of its subsidiaries upon its liquidation or reorganization (and the consequent right of holders of the Notes or the Exchangeable Preferred Stock to participate in the distribution or realize proceeds from those assets) will be effectively subordinated to the claims of the creditors of any such subsidiary (including trade creditors and holders of indebtedness of such subsidiary), except if and to the extent that the Company is itself a creditor of such subsidiary, in which case the claims of the Company would still be effectively subordinated to any security interest in the assets of such subsidiary held by other creditors. The New Notes are unsecured and therefore will be effectively subordinated in right of payment to any secured indebtedness of the Company. The Indenture permits the Company and its subsidiaries to incur an unlimited amount of indebtedness to finance the acquisition of equipment, inventory and network assets and to secure such indebtedness. Up to $50 million of bank indebtedness may be secured by liens on all assets of the Company and its subsidiaries. In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding with respect to the Company, the holders of any secured indebtedness will be entitled to proceed against the collateral that secures such indebtedness and such collateral will not be available for satisfaction of any amounts owed under the Notes until such other creditors have been paid in full. In addition, to the extent such assets did not satisfy in full the secured indebtedness, the holders of such indebtedness would have a claim for any shortfall that would be pari passu (or effectively senior if the indebtedness were issued by a subsidiary) with the New Notes. Accordingly, there may only be a limited amount of assets available to satisfy any claims of the holders of the New Notes upon an acceleration of the New Notes. See "Description of the New Notes--Ranking." ABILITY TO PAY DIVIDENDS ON THE NEW EXCHANGEABLE PREFERRED STOCK The ability of the Company to pay any dividends is subject to applicable provisions of state law and its ability to pay cash dividends on the New Exchangeable Preferred Stock after February 15, 2003, will be subject to the terms of the Indenture and any other indebtedness of the Company then outstanding. The Indenture contains certain covenants that, among other things, limit the payment of dividends and other distributions by the Company and its Restricted Subsidiaries in respect of their capital stock. There can be no assurance that the Indenture or the terms of other indebtedness of the Company will permit the Company to pay cash dividends on the New Exchangeable Preferred Stock. Moreover, under Illinois law the Company is permitted to pay dividends on its capital stock, including the New Exchangeable Preferred Stock, only out of its surplus, or in the event that it has no surplus, out of its net profits for the year in which a dividend is declared or for the immediately preceding fiscal year. Surplus is defined as the excess of a company's total assets over the sum of its total liabilities plus the par value of its outstanding capital stock. In order to pay dividends in cash, the Company must have surplus or net profits equal to the full amount of the cash 22 dividends at the time such dividend is declared. The Company cannot predict what the value of its assets or the amount of its liabilities will be in the future and, accordingly, there can be no assurance that the Company will be able to pay cash dividends on the New Exchangeable Preferred Stock. RANKING OF THE NEW EXCHANGEABLE PREFERRED STOCK The Company's obligations with respect to the New Exchangeable Preferred Stock are subordinate and junior in right of payment to all present and future indebtedness of the Company and its subsidiaries, including the New Notes, but will rank senior to existing equity securities of the Company (other than the Old Exchangeable Preferred Stock), including but not limited to the 1,554,871 shares of 8% cumulative preferred stock issued pursuant to the January 1997 Stock Purchase Agreement. In the event of bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the New Exchangeable Preferred Stock only after all holders of indebtedness, and all other creditors, of the Company have been paid, and there may not be sufficient assets remaining to pay amounts due on any or all of the New Exchangeable Preferred Stock then outstanding. See "Description of the New Exchangeable Preferred Stock--Ranking." While any shares of New Exchangeable Preferred Stock are outstanding, the Company may not authorize, create or increase the authorized amount of any class or series of stock that ranks senior to or pari passu with the New Exchangeable Preferred Stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up without the consent of the holders of a majority of the outstanding shares of Exchangeable Preferred Stock. However, without the consent of any holder of Exchangeable Preferred Stock, the Company may create additional classes of stock, increase the authorized number of shares of preferred stock or issue a new series of stock that ranks junior to the New Exchangeable Preferred Stock with respect to the payment of dividends and amounts upon liquidation, dissolution or winding up. SUBORDINATION OF THE EXCHANGE DEBENTURES The payment of principal, premium, if any, and interest on or any other amounts owing in respect of, the Exchange Debentures, if issued, will be subordinated to the prior payment in full of all existing and future Senior Indebtedness, including indebtedness represented by the New Notes, and will be effectively subordinated to all indebtedness and other liabilities (including trade payables) of the Company's subsidiaries. The Indenture and the Exchange Indenture permit the incurrence by the Company and its subsidiaries of additional indebtedness, all of which may constitute Senior Indebtedness, under certain circumstances. In addition, the Company may not pay principal of, premium, if any, or interest on or any other amounts owing in respect of, the Exchange Debentures, or purchase, redeem or otherwise retire the Exchange Debentures, if (i) the obligations with respect to the Notes are not paid when due or (ii) any other event of default has occurred under the Indenture, and is continuing or would occur as a consequence of such payment. In the event of bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the Exchange Debentures only after all Senior Indebtedness has been paid, and there may not be sufficient assets remaining to pay amounts due on any or all of the Exchange Debentures then outstanding. See "Description of the Exchange Debentures--Ranking." COMPETITION The cable television, Internet and telephone service businesses are highly competitive and the level of competition is increasing. The ability of the Company to compete will depend in part on the technical advantages of its systems, the quality and performance of the DRS Network, the Company's focus on customer service, the pricing of its services and its ability to offer a bundle of services not available from any other single vendor. There can be no assurance that the Company will be able to compete successfully, that customers will prefer bundled to single services or that competitive pressures will not have a material adverse effect on the Company's business, operating results or financial condition. See "Business--Competition." Also, there can be no assurance that the market for 23 cable, Internet or telephone services will not ultimately be dominated by approaches other than approaches marketed by the Company. Many of the Company's competitors and potential competitors have longer operating histories, greater name recognition, a larger subscriber base and significantly greater financial, marketing, technical and other competitive resources than the Company. As a result, they may be able to adapt more quickly to changes in customer requirements, or to devote greater resources to the promotion and sale of their products than can the Company. There can be no assurance that the Company's current or potential competitors will not develop products comparable or superior to those developed by the Company, adapt more quickly than the Company to new technologies, evolving industry trends or changing customer requirements or be more successful than the Company in marketing their products. Competition could increase if new companies enter the market, which could result in price reductions and loss of market share and could have a material adverse effect on the Company's financial condition or results of operations. Although the Company believes it has certain technological and other advantages over its competitors, such advantages require continued investment by the Company in research, development, DRS Network implementation and sales and marketing, and the Company may not realize upon or maintain such advantages. Television. In providing cable television service, the Company currently competes with other cable television providers in Chicago, including TCI Communications, Inc., which conducts business under the trade name Chicago Cable ("Chicago Cable"), a subsidiary of Tele-Communications, Inc. ("TCI"), and competes or may compete with other means of video distribution, including broadcast television stations, direct broadcast satellite ("DBS") companies, microwave multipoint distribution systems ("MMDS"), satellite master antenna television ("SMATV") and private home dish earth stations. Additional competition may also come from new wireless local multipoint distribution services ("LMDS") authorized by the Federal Communications Commission (the "FCC"). In addition, the Telecommunications Act of 1996 (the "1996 Telecom Act") repealed the cable television cross ownership ban and telephone companies will now be permitted to provide cable television service within their service areas. The Company also faces competition from other communications and entertainment media, including newspapers, movie theaters, live sporting events and entities that make videotaped movies and programs available for home rental. Internet Services. In providing Internet access and high-speed data services, the Company will compete with other network providers of such services, providers of satellite-based Internet services, long-distance carriers that offer Internet services and other cable television companies that offer or may in the future offer Internet services. Technologies such as integrated services digital network ("ISDN"), digital subscriber line ("DSL") and DBS offer high- speed or broadband connections to the Internet, which address the basic requirements for most Internet consumers today. In providing Internet services, the Company likely will compete with companies such as DirecPC, one of the principal providers of satellite-based Internet services in the United States, long-distance carriers such as AT&T Corp. ("AT&T") and MCI Communications Corporation ("MCI") and cable modem services such as @Home, a joint venture among TCI and other large cable companies, and such Internet services providers ("ISPs") as WorldCom, Inc. ("WorldCom") and Teleport Communications Group ("TCG"), which also compete with 21st Century in the telephone and cable industries. The Company will also compete with Ameritech, which recently announced that it is providing high-speed Internet access using asynchronous digital subscriber line ("ADSL") technology and will be collaborating with Microsoft Corporation to facilitate the installation of its ADSL service. Ameritech has announced plans to provide high-speed Internet access initially in Ann Arbor, Michigan, and expects to offer such access in the Chicago area by mid-1998. Telephone. Once the Company begins providing local and long-distance telephone service and long-distance access services, the Company will compete with Ameritech, presently the only facilities-based provider available to the local residential market, as well as with WorldCom and TCG. The Company will also compete with long-distance carriers such as AT&T, MCI and Sprint Corporation ("Sprint"), both in long-distance service and potentially in local service. In January 1998, AT&T entered into an agreement to acquire all of the outstanding common stock of TCG. The Company's ability to compete successfully in telephony will depend on the overall bundle of services the Company is able to offer, including price, features and customer service. 24 ABILITY TO COMPLETE DRS NETWORK CONSTRUCTION The timing of completion of the various phases of construction of the DRS Network is subject to numerous uncertainties. See "--Franchise Compliance and Renewal" and "Legislation and Regulation." Although the CTA, Commonwealth Edison and Ameritech attachment agreements reduce the need for underground construction, the Company still will be required to build significant portions of the DRS Network underground, and also must complete connections through wiring of multiple units in MDUs and other multi-unit buildings. Delays in receiving the necessary financing, in performing the "make-ready" work to use essential utility facilities (e.g., to attach the cable to utility poles), in receiving necessary permits and approvals for underground and other construction, and in conducting the construction itself (due to inclement weather, labor problems and other causes) could adversely affect the Company's schedule. In order to develop the DRS Network, the Company must obtain building access agreements, certain permits and certain rights-of-way and fiber capacity from entities such as telecommunications companies and other utilities, railroads, highway authorities, local governments and transit authorities. There can be no assurance that the Company will be able to maintain its existing franchises, permits and rights or obtain the other permits, building access agreements and rights needed to implement its business plan on acceptable terms and in a timely manner. In constructing the DRS Network, the Company also will be dependent on the performance of contractors and other third parties. There can be no assurance that the Company will be able to secure a sufficient number of contractors or other third parties to construct the DRS Network at an acceptable price or at all or that such contractors or other third parties will perform in accordance with the Company's expectations. Any delay in implementing or constructing the DRS Network or installing necessary equipment will have an adverse effect on the Company's results of operations and financial condition. ABILITY TO MANAGE GROWTH The Company's plan is to obtain subscribers quickly and to grow rapidly. To date, the Company's operations have been limited, and rapid growth may place a significant strain on the Company's DRS Network and management, administrative, operational and financial resources. The Company's ability to manage its growth successfully will require the Company to further enhance its operational, management, financial and information systems and controls. The Company's success will also depend in part upon its ability to hire and retain qualified sales, marketing, administrative, operating and technical personnel. In addition, as the Company increases its service offerings and expands its targeted markets, there will be additional demands on the Company's customer support, sales, marketing and administrative resources as well as on the DRS Network infrastructure. While the Company's DRS Network is operational, it has not been tested under circumstances consistent with the more significant volume of activity anticipated upon buildout of the DRS Network and increase of the Company's subscriber base. The Company's inability to effectively manage its growth could have a significant adverse effect on the Company, its results of operations and financial condition. While the Company does not currently intend to pursue an acquisition strategy, the Company may acquire existing companies or networks under certain circumstances. If the Company acquires existing companies or networks, or enters into joint ventures as part of its expansion plan, it will be subject to the risks generally attendant to an acquisition strategy or joint venture. Such risks include the acquired company or joint venture not having all the benefits that are anticipated, the diversion of resources and management time, the integration of the acquired business or joint venture with the Company's operations, the potential impairment of relationships with employees or customers as a result of the acquisition or joint venture, the additional debt burden or dilution incurred to pay the purchase price or capital investment requirements, and other matters. There are also additional risks in participating in joint ventures, including the risk that the other joint venture partners may at any time have economic, business or legal interests or goals that are inconsistent with those of the joint venture or the Company or that a joint venture partner may be unable to meet its economic or other obligations in the joint venture and that the Company may be required to fulfill some or all of those obligations. 25 SALES AND DISTRIBUTION STAFFING As of March 31, 1998, the Company had 32 employees in sales and marketing, many of whom have been employed by the Company for less than one year. In order to increase its direct sales effort, the Company will need to increase the size of its internal sales and marketing staff, and will be required to obtain marketing personnel who have experience in all three components of its broadband service. There can be no assurance that the Company will be able to identify and attract sufficient numbers of qualified personnel or that the Company's sales and marketing operations will successfully compete against the more extensive and well-funded sales and marketing operations of many of the Company's current and future competitors. UNCERTAIN DEMAND FOR BROADBAND SERVICES The Company's business strategy to provide broadband services is comparatively untested and subject to certain risks such as future competition, pricing, regulatory uncertainties and operating and technical difficulties. The demand for such services, at the prices proposed to be charged by the Company, is uncertain. In addition, some of the broadband services being considered by the Company, including high-speed data transmission services for residential subscribers, are not currently available to business or residential subscribers. The Company's business could be adversely affected if demand for an integrated bundle of broadband services (voice, video and high-speed data) is materially lower than anticipated. FRANCHISE COMPLIANCE AND RENEWAL The Company's franchise for Chicago Area 1 contains many conditions, such as time limitations on commencement and completion of system construction (four years from the grant of the franchise), customer service standards, minimum number of channel requirements (80 channels), the provision of free service to schools and certain other public institutions and payment of a franchise fee equal to 5% of the annual gross revenues of the Company's wholly owned subsidiary that holds the franchise. While the Company believes that the conditions in its Chicago Area 1 franchise are typical for the industry, to the extent that the Company fails to meet these conditions, it may be subject to certain monetary penalties or revocation of the franchise. The Company's franchise for the Chicago system is non-exclusive and expires in June 2011. The Communications Act of 1934, as amended, provides for a reasonable expectation of franchise renewal, limits the ability of local franchise authorities to fail to renew a franchise and specifies a procedure and period within which local franchise authorities must act. Nonetheless, the Company's franchise may be subject to non-renewal under certain circumstances. Failure of the Company to obtain renewal of its franchise would have a material adverse effect on the Company's business. COMMENCEMENT OF TELEPHONY SERVICES The Company does not yet offer telephony services but has completed a number of steps toward that end, including regulatory approval as a local exchange carrier from the Illinois Commerce Commission, completion of a direct interconnection agreement with Ameritech, and completion of an agreement with Nortel to provide the switching and other equipment necessary to offer telephony services. The Company must, however, complete several additional steps before it can begin offering telephony services, including installation of necessary switching and other equipment and negotiating long-distance and other service arrangements. The Company also is seeking additional management, technical and sales personnel with particular expertise in the telephony business to assist in implementing its telephony strategy. Although the company expects to begin offering telephony services in mid-1998, there is no assurance that it will be able to do so. Installing necessary equipment and completing the DRS Network, negotiating or implementing long-distance and other service arrangements, securing necessary personnel, delays in receiving additional regulatory approvals, or any other delay in the telephony service offering, could adversely affect the Company and its results of operations and financial condition. 26 DEPENDENCE ON INTEGRATED BILLING AND INFORMATION SYSTEMS AND CUSTOMER CARE OPERATIONS The Company outsources certain of its billing and customer service operations and is therefore dependent on others to provide sophisticated information and processing systems, monitor costs, bill subscribers, fill subscriber orders and achieve operating efficiencies. As the Company increases its provision of broadband services, its dependence on integrated billing and information management systems will increase significantly. Integrated billing systems for voice, video and data broadband services are in beta testing phase, but are not currently available for commercial use. The inability of the Company to adequately identify all of its information and processing needs or to obtain upgraded billing and information systems as necessary, could have a material adverse impact on the Company's ability to expand its business and on its results of operations and financial condition. Further, the failure of third- party providers to adequately provide billing and customer care services could adversely affect the Company. RAPID TECHNOLOGICAL CHANGES The telecommunications industry is subject to rapid and significant changes in technology and changes in subscriber requirements and preferences. The Company may be required to select, in advance, one technology over another, but at a time when it would be impossible to predict with any certainty which technology will prove to be the most economic, efficient or capable of attracting subscriber usage. There can be no assurance that subsequent technological developments will not reduce the competitiveness of the Company's DRS Network and require upgrades or additional equipment that could be expensive and time consuming. EQUIPMENT COST AND AVAILABILITY The ability of the Company to compete effectively and to expand its customer base will depend, in part, upon the cost and availability of the set-top box to be used with its video and audio offerings. There can be no assurance that the Company will be able to obtain such set-top boxes in a timely manner and in sufficient quantities to enable it to buildout the DRS Network to additional subscribers, or at a cost that enables it to price its video and audio offerings competitively. If the Company cannot obtain such set-top boxes in a timely manner, in sufficient quantities and at an appropriate cost, its business, financial condition and results of operations may be adversely affected. DEPENDENCE ON THE INFRASTRUCTURE AND COMMERCIAL VIABILITY OF THE INTERNET The success of the Company's bundled service offering will depend in part upon the development and commercial viability of an infrastructure for providing Internet access and services. Because global commerce and online exchange of information on the Internet and other similar open wide-area-networks are new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. There can be no assurance that the Internet infrastructure will continue to be able to support the demands placed on it by this continued growth. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of Internet activity or due to 27 increased governmental regulation. If the necessary infrastructure or complementary services or facilities are not developed, or if the Internet does not become a viable commercial marketplace, the Company's results of operations or financial condition could be materially adversely affected. EVOLVING REGULATORY ENVIRONMENT Although the 1996 Telecom Act, together with the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and other recent laws and regulations, eliminated most limitations on competition in the broadband service business, the 1996 Telecom Act is complex and in many areas sets forth policy objectives to be implemented by regulation. It is generally expected that the 1996 Telecom Act will undergo considerable interpretation and implementation through regulation and court decisions over the next several years. There can be no assurance that such interpretation or implementing regulations will be favorable to the Company. In certain areas, particularly telephony, further regulation is expected to affect the Company's provision of service. The Company's ability to compete successfully in the provision of telephone service will depend in part on the timing of the implementation of such regulations and whether they are favorable to the Company. It is also important to the Company that the provisions limiting the ability of franchise authorities to deny awarding or renewing franchises not change in a manner adverse to the Company. See "Legislation and Regulation." DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continuing contributions of its key management, sales, marketing and product development personnel. The Company's business is currently managed by a small number of key management and operating personnel. The Company does not maintain "key man" insurance on these or any other employees. The Company believes that its future success will depend in large part upon its ability to attract and retain highly skilled managerial, sales, marketing and product development personnel. The loss of the services of key personnel, or the inability to attract, recruit and retain sufficient or additional qualified personnel, could have a material adverse effect on the Company. See "Management." DEPENDENCE ON LOCAL/REGIONAL ECONOMY Because the Company's initial market is limited to Chicago's Area 1, it is dependent on the vitality of the local and regional economy. As such, a significant regional or local economic downturn could materially affect the Company's financial condition and results from operations. ABSENCE OF PRIOR MARKET FOR SECURITIES The Securities are new securities for which there is currently no market. Although the Initial Purchasers have informed the Company that they intend to make a market in the Securities and, if issued, the Exchange Debentures, they are not obligated to do so, and any such market-making may be discontinued at any time without notice. Although the Securities and, if issued, the Exchange Debentures, are expected to be tradable in the PORTAL market, the Company does not intend to apply for listing of the Securities or, if issued, the Exchange Debentures, on any securities exchange or for quotation through The Nasdaq Stock Market, Inc. Accordingly, there can be no assurance as to the development or liquidity of any market for the Securities or, if issued, the Exchange Debentures. If a market for the Securities or, if issued, the Exchange Debentures, were to develop, the Securities or, if issued, the Exchange Debentures, may trade at prices that may be higher or lower than their initial offering prices depending upon many factors, including prevailing interest rates, the Company's operating results and the markets for similar securities. Historically, the markets for securities such as the Securities and the Exchange Debentures have been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Securities. There can be no assurance that, if a market for the Securities or, if issued, the Exchange Debentures, were to develop, such a market would not be subject to similar disruptions. Such disruptions may materially and adversely affect such liquidity and trading independent of the financial performance of, and prospects for, the Company. CONSEQUENCES OF ORIGINAL ISSUE DISCOUNT ON NOTES 28 The New Notes will be issued at a substantial discount from their principal amount. Consequently, purchasers of the New Notes generally will be required to include amounts in gross income for Federal tax purposes in advance of receipt of the cash payments to which the income is attributable, and no cash payments of interest will be made until after February 15, 2003. Moreover, the New Notes will constitute "applicable high yield discount obligations" ("AHYDOs") because the yield to maturity of the New Notes exceeds the relevant applicable Federal rate (the "AFR") at the time of issue by more than 5 percentage points. For February 1998, the annual long-term AFR is 5.93% and the annual mid-term AFR is 5.69% (based on semi-annual compounding). The appropriate AFR depends upon the weighted average maturity of the New Notes. Because the New Notes constitute AHYDOs, the Company will not be entitled to deduct OID accruing with respect thereto until such amounts are actually paid. See "Certain United States Federal Income Tax Consequences" for a more detailed discussion of the Federal income tax consequences to holders of New Notes. If a bankruptcy proceeding is commenced by or against the Company under the United States Bankruptcy Code after the issuance of the New Notes, the claim of a holder of New Notes may be limited to an amount equal to the sum of (i) the initial offering price for the Notes and (ii) that portion of the original issue discount that is not deemed to constitute "unmatured interest" for purposes of the United States Bankruptcy Code. Any original issue discount that was not amortized as of the commencement of any such bankruptcy proceeding would constitute "unmatured interest." LIMITATION ON CHANGE OF CONTROL Unless the Company has consummated a Qualified Public Offering (as defined below under "Description of Capital Stock"), beginning on the fourth anniversary of the Issue Date and terminating on the earlier to occur of three years thereafter and the consummation of a Qualified Public Offering by the Company, holders of the Company's Class A Convertible 8% Cumulative Preferred Stock will have the right to require the sale of the Company subject to certain conditions. A Change of Control may occur in such a transaction. In addition, a Change of Control may result from other transactions which could occur at any time. Under the Indenture (in the case of the New Notes), the Amended Articles (in the case of the New Exchangeable Preferred Stock) and the Exchange Indenture (in the case of the Exchange Debentures), in the event of a Change of Control, (i) each holder of New Notes may require the Company to purchase all or any portion of such holder's New Notes at a purchase price equal to 101% of the Accreted Value thereof plus accrued and unpaid interest, if any to the date of purchase, (ii) the Company is required to offer to purchase all outstanding shares of New Exchangeable Preferred Stock, in whole or in part, at a purchase price equal to 101% of the aggregate liquidation preference thereof, plus accumulated and unpaid dividends, if any to the date of purchase and (iii) each holder of Exchange Debentures may require the Company to purchase such holder's Exchange Debentures, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any to the date of purchase. The Company is not required to provide any credit support or otherwise set aside funds for any obligation to purchase the New Notes, the New Exchangeable Preferred Stock or the Exchange Debentures in the event of a Change of Control. Accordingly, there can be no assurance that the Company will have sufficient funds to satisfy any such repurchase obligations. See "Description of the New Notes--Change of Control," "Description of the New Exchangeable Preferred Stock--Change of Control," "Description of the Exchange Debentures--Change of Control," "Description of Capital Stock--Right to Require Sale" and "Description of the Warrants--Take Along Rights." CONTROL BY HOLDERS OF CLASS A CONVERTIBLE 8% CUMULATIVE PREFERRED STOCK Although no single shareholder has control over the corporate decisions of the Company, the holders of the Class A Convertible 8% Cumulative Preferred Stock are collectively in a position to control the taking of many 29 significant corporate actions by the Company, including the making of any significant capital commitments, the incurrence of any significant indebtedness, mergers and the payment of dividends on the Common Stock, pursuant to agreements which provide that prior to taking such actions, the Company will need to obtain the approval of the nominees to the Board of Directors of the holders of the Class A Convertible 8% Cumulative Preferred Stock. These restrictions terminate upon the consummation of a Qualified Public Offering. In addition, in the event that a Qualified Public Offering is not completed before the fourth anniversary of the Issue Date, the holders of the Class A Convertible 8% Cumulative Preferred Stock have the right to require the sale of the Company, subject to certain conditions. See "Description of Capital Stock." DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying cash dividends on its capital stock in the foreseeable future. It is the current policy of the Company's Board of Directors to retain earnings to finance the expansion of the Company's operations. Future declaration and payment of dividends, if any, will be determined in light of the then-current conditions, including the Company's earnings, operations, capital requirements, financial condition and other factors deemed relevant by the Board of Directors. In addition, the Company's ability to pay dividends is limited by the terms of the Indenture, the Amended Articles and the terms of the Company's existing preferred stock. See "Description of the New Notes," "Description of the New Exchangeable Preferred Stock" and "Description of Capital Stock." USE OF PROCEEDS There will be no proceeds to the Company from the Exchange Offer. The net proceeds to the Company from the Private Placement were approximately $240.3 million (after deduction of discounts and estimated offering expenses). The Company will continue using such proceeds for capital expenditures associated with the continued expansion of the DRS Network in Chicago's Area 1 and for additional working capital and other general corporate purposes, including funding operating deficits. The Company estimates that capital expenditures in calendar year 1998 for continued construction of the DRS Network in Chicago Area 1, including the installation of telephony equipment to commence voice services for certain customers, will be approximately $90 million to $120 million. Actual costs, and the timing thereof, may vary from this range and will depend in part on factors affecting construction costs, the number of subscribers, the mix of services purchased, the cost of subscriber equipment paid for or financed by the Company and other factors. 30 CAPITALIZATION The following table sets forth the cash and capitalization of the Company as of December 31, 1997 on a historical basis after reflecting an increase in authorized common shares and a 1,000-for-1 common stock split and as adjusted to reflect the Private Placement, the sale of Class A Convertible 8% Cumulative Preferred Stock and the application of the net proceeds therefrom and the impacts of certain revisions to the Class A Preferred Stock Purchase Agreement. See ''Use of Proceeds'' and ''Selected Financial Data.''
December 31, 1997 ------------------------------------- Historical AS ADJUSTED ------------------ ----------------- Cash and cash equivalents(1)(2)................................................ $ 1,404,975 $235,162,357 ============ ============ Debt(1): 12/1//4% Senior Discount Notes Due 2008...................................... $ -- $200,000,000 Interim credit facility(1)................................................... 8,000,000 -- Debentures and related interest payable...................................... 227,185 227,185 ------------ ------------ Total debt................................................................... 8,227,185 200,227,185 Redeemable preferred stock: 13/3//4% Senior Cumulative Exchangeable Preferred Stock Due 2010 $.01 par value, redemption value $50,000,000, 0 shares authorized, issued and outstanding at September 30, 1997; 100,000 shares authorized, 50,000 issued and outstanding, as adjusted..................... -- 45,455,300 Class A Convertible 8% Cumulative Preferred Stock, no par value, 500,000 shares authorized at December 31, 1997, 1,453.1 shares issued and outstanding(7)............................................................. 19,974,325 -- Shareholders' equity: Class A Convertible 8% Cumulative Preferred Stock, no par value, 500,000 shares authorized at December 31, 1997, 1,548.5 shares issued and outstanding, as adjusted(2)(7)............................................. -- 20,865,388 Common Stock, no par value, 50,000,000 shares authorized, 2,388,743.5 shares issued and outstanding at December 31, 1997, and 1,222,569.0 common share warrants outstanding and 2,939,106.5 shares issued and outstanding, 1,302,868.7 common share warrants outstanding and Non-Voting Common Stock, no par value, 1,000,000 shares authorized, 550,362.3 shares issued and outstanding as adjusted(3)(4)(6)........................................... 7,023,934 7,640,253 Additional paid-in-capital(5)................................................ -- 2,594,700 Accumulated deficit and other................................................ (19,036,919) (19,036,919) ------------ ------------ Total shareholders' equity................................................... (12,012,985) 12,063,422 ------------ ------------ Total capitalization........................................................... $ 16,188,525 $257,745,907 ============ ============
(1) The Company entered into the Interim Credit Facility in November 1997. Borrowings outstanding under the Interim Credit Facility were $8.0 million at December 31, 1997 and $9.0 million at January 31, 1998. The Company used a portion of the proceeds from the Private Placement to repay borrowings outstanding under the Interim Credit Facility, together with accrued and unpaid interest, and to terminate such facility. (2) The as adjusted number includes 95.4 shares of Class A Preferred Stock which the Company issued to several common shareholders and others in January 1998 for an aggregate consideration of approximately $1.5 million. (3) Excludes 728,667.7 shares of Common Stock issuable upon exercise of options outstanding on December 31, 1997. (4) The as adjusted number includes 28,330 shares of common stock and 28,330 shares of non-voting common stock which the Company issued in conjunction with the January 1998 sale of Class A Preferred Stock. (5) Of the $50 million gross proceeds from the issuance of the Units offered hereby, $47.3 million has been allocated to the 13/3//4% Senior Cumulative Exchangeable Preferred Stock Due 2010 and $2.7 million has been allocated to additional paid-in-capital to reflect the issuance of 50,000 Warrants. Each Warrant can be exercised to purchase 8.7774 shares of common stock at an exercise price of $.01 per share for a total of 438,870 shares. No assurance can be given that the value allocated to the Warrants will be indicative of the price at which the Warrants may actually trade. (6) The as adjusted number includes 522,032.3 shares of both voting and non- voting common stock, for a total of 1,044,064.6 shares. These shares reflect those that were issued to the Class A Convertible 8% Cumulative Preferred Stock shareholders in conjunction with a revision to the related preferred stock purchase agreement. This revision replaced the initial and debt warrants with shares of voting and non-voting common stock. (7) The as adjusted number reflects the classification of the Class A Convertible 8% Cumulative Preferred Stock as equity at December 31, 1997. This reclassification was performed to reflect a revision to the Class A Convertible 8% Cumulative Preferred Stock Agreement that removed a put arrangement and replaced it with the ability to compel to sale. 31 SELECTED FINANCIAL DATA The following table sets forth selected financial and operating data for the Company. The selected financial data as of and for the periods ended March 31, 1995, 1996 and 1997 have been derived from the audited financial statements of the Company. The selected financial and operating data as of and for the periods ended March 31, 1993 and 1994, and the nine months ended December 31, 1996 and 1997 have been derived from the unaudited financial statements of the Company and, in the opinion of the Company, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of such information. Operating results for the nine months ended December 31, 1997 are not necessarily indicative of the results that may be expected for the entire year. The selected financial and operating data set forth below should be read in conjunction with ''Use of Proceeds,'' ''Management's Discussion and Analysis of Financial Condition and Results of Operations'' and the Financial Statements included elsewhere in this Offering Circular.
NINE MONTHS ENDED Period From YEAR ENDED MARCH 31, DECEMBER 31, 10/29/92- ----------------------------------------------------- --------------------------- 3/31/93 1994 1995 1996 1997 1996 1997 ----------- ----------- ----------- ----------- ----------- ----------- ------------- Statement of Operations Data: Subscriber revenues $ -- $ -- $ -- $ -- $ 27,480 $ -- $ 123,532 Operating expenses -- -- -- 9,617 200,911 190,817 413,979 Selling, general and administrative expenses 117,604 253,205 624,963 694,122 2,337,534 1,572,936 7,276,439 Depreciation and amortization -- 11,770 38,923 108,182 170,108 114,734 643,427 ---------- ---------- ----------- ----------- ----------- ----------- ------------- Operating loss (117,604) (264,975) (663,886) (811,921) (2,681,073) (1,878,487) (8,210,313) Interest income -- -- -- -- 301,624 142,603 484,678 Interest expense -- (38,055) (115,428) (214,688) (437,843) (376,828) (119,226) ---------- ---------- ----------- ----------- ----------- ----------- ------------- Net loss (117,604) (303,050) (779,314) (1,026,609) (2,817,292) (2,112,712) (7,844,861) Preferred stock requirements -- -- -- -- (478,981) -- (2,287,928) ---------- ---------- ----------- ----------- ----------- ----------- ------------- Net loss attributable to common shares $ (117,604) $ (303,050) $ (779,314) $(1,026,609) $(3,296,273) $(2,112,712) $ (10,132,789) ========== ========== =========== =========== =========== =========== ============= Net loss per common share $(.08) $(.21) $(.52) $(.64) $(1.66) $(1.11) $(4.26) ========== ========== =========== =========== =========== =========== ============= Weighted average common shares 1,443,497 1,470,288 1,508,000 1,609,129 1,988,365 1,900,527 2,380,926 PRO FORMA (1): Net loss (3) (29,640,225) (27,767,025) Preferred stock requirements (4) (8,586,459) (8,274,205) ----------- ------------- Net loss attributable to common shares (38,226,684) (36,041,280) =========== ============= Net loss per common share (19.23) (15.14) =========== ============= Deficiency in earnings to cover combined fixed charges (2) $38,226,684 $ 36,041,280 =========== ============= Deficiency in earnings to cover interest charges (2) $29,640,225 $ 27,767,075 =========== ============= Deficiency in earnings to cover preferred stock requirements (2) $10,947,524 $ 15,851,815 =========== ============= Other Data: Capital expenditures $ -- $ -- $ -- $ -- $ 246,863 $ 47,118 $ 15,007,751 Number of subscribers (end of period) -- -- -- -- 1,734 -- 3,019 Deficiency in earnings to cover combined fixed charges (2) $ 117,604 $ 303,030 $ 779,314 $1,026,609 $ 3,296,273 $ 2,112,712 $ 10,132,789 Deficiency in earnings to cover interest charges (2) $ 117,604 $ 303,030 $ 779,314 $1,026,609 $ 2,817,292 $ 2,112,712 $ 7,844,861 Deficiency in earnings to cover preferred stock requirements (2) N/A N/A N/A N/A $ 2,840,046 N/A $ 9,865,538 BALANCE SHEET DATA (END OF PERIOD): Total assets $ 428,914 $ 847,659 $ 1,664,877 $15,553,488 $ 23,835,488 Total liabilities 726,450 1,910,781 3,409,433 1,718,862 15,874,148 Total redeemable preferred stock -- -- -- 16,794,963 19,974,325 (1) Total shareholders' equity (297,536) (1,063,122) (1,744,556) (2,960,337) (12,012,985)(1)
- -------------- (1) The year ended March 31, 1997 and nine months ended December 31, 1997, net loss, preferred stock requirements, net loss attributable to common shares, net loss per common share, ratio of earnings to combined fixed charges, ratio of earnings to interest charges and ratio of earnings to preferred stock requirements have been adjusted to reflect the impacts of the interest expense, amortization of deferred debt costs, preferred stock dividends and accretion associated with the Private Placement. The year ended March 31, 1997 and nine months ended December 31, 1997 reflect the first twelve and nine months of interest expense, amortized debt costs, preferred stock dividends and accretion, respectively. (2) The Company has a deficiency of earnings necessary to cover its combined fixed charges, interest payments and preferred dividend requirements, historically and on a pro forma basis. (3) The pro forma net income for the year ended March 31, 1997 includes twelve months of pro forma interest expense totaling $27,260,776 which includes $437,843 of historical interest expense as well as $25,276,002 of accretion related to the original issue discount on the senior discount notes and $1,546,931 of amortization of deferred issuance costs related to the senior discount notes. The pro forma net income for the nine months ended December 31, 1997 includes nine months of pro forma interest expense totaling $20,041,440 which includes $119,226 of historical interest expense as well as $18,763,176 of accretion related to the original issue discount on the senior discount notes and $1,159,038 of amortization of deferred issuance costs related to the senior discount notes. The pro forma calculations related to the senior discount notes were performed using the effective interest method based on the following components: (1) the original carrying value of the senior discount notes of $363,135,000 less the original issue discount of $163,135,000 for a net carrying value of $200,000,000 and (2) total issuance costs incurred in relation to the senior discount notes of $7,886,824. (4) The pro forma preferred stock requirements (dividends and accretion) for the year ended March 31, 1997 totals $8,586,459 which includes $478,981 of historical preferred stock requirements as well as twelve months of preferred dividend requirements, $7,237,405, and twelve months of accretion, $870,073, related to the senior exchangeable preferred stock. The pro forma preferred stock requirements for the nine months ended December 31, 1997 totals $8,274,205 which includes $2,287,928 of historical preferred stock requirements as well as nine months of preferred dividend requirements, $5,335,255, and nine months of accretion, $651,022, related to the senior exchangeable preferred stock. The pro forma calculations related to the senior exchangeable preferred stock were performed using the effective interest rate method based on the following components: (1) the redemption value of the redeemable preferred stock of $50,000,000, (2) the portion of the proceeds assigned to the related warrants of $2,605,500, (3) total issuance costs incurred in relation to the senior exchangeable preferred stock of $1,939,200, (4) quarterly compounding of preferred dividends, and (5) dividend rate of 13 3/4%. This results in an initial carrying value of $45,455,300 related to the senior exchangeable preferred stock. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Company's Financial Statements included elsewhere in this Prospectus. GENERAL 21st Century was awarded a franchise in 1996 by the City of Chicago that allows for the construction of the DRS Network in Chicago's Area 1. Under this 15-year renewable license, the Company is granted unrestricted access to the public right-of-way to construct, operate and maintain its DRS Network to all residential and commercial subscribers. From inception through the date of this Prospectus, the Company's principal focus has been the development of its communications business in Chicago's Area 1. The Company has incurred net losses in each quarter since its inception, and as of December 31, 1997, the Company had an accumulated deficit of $14,519,473 The Company anticipates that it will continue to incur net losses during the next several years as it continues to expand its operations as a result of substantially increased depreciation and amortization from the construction of networks and operating expenses as it builds its subscriber base. There can be no assurance that growth in the Company's revenues or subscriber base will occur or that the Company will be able to achieve or sustain profitability or positive cash flow. See ''Risk Factors--History of Losses; Expectation of Future Losses and Negative Cash Flows from Operations.'' RESULTS OF OPERATIONS Nine Months Ended December 31, 1997 Compared to Nine Months Ended December 31, 1996. Revenues. The Company generated subscriber revenues of $123,532 for the nine months ended December 31, 1997. No subscriber revenues were generated for the nine months ended December 31, 1996. The commencement of subscriber revenues resulted principally from the purchase of 1,734 bulk subscribers from an affiliated entity during January 1997. Expenses. The Company incurred operating expenses of $413,979 for the nine months ended December 31, 1997 which represent primarily local access and origination programming support as required by the franchise agreement and the start up of basic programming fees. Operating expenses of $190,817 for the nine months ended December 31, 1996 represent primarily local access and origination programming support as required by the franchise agreement. General and administrative expenses were $7,276,439 and $1,572,936 for the nine months ended December 31, 1997 and December 31, 1996, respectively. Depreciation and amortization costs were $643,427 and $114,734 for the nine months ended December 31, 1997 and December 31, 1996, respectively. The commencement of operating expenses and the increase in general and administrative expenses as well as depreciation and amortization reflects the Company's acquisition of subscribers, the addition of employees and the expansion of the DRS Network, and $849,700 of compensation expense related to stock options granted in October 1997. Interest expense decreased from $376,828 to $119,226 due to the lower levels of borrowings outstanding for the nine months ended December 31, 1997 caused by the conversion of certain subordinated debentures into common stock and the repayment in January 1997 of the June 21, 1996 loan and security agreement. Interest Income. Interest income increased $342,075 for the nine months ended December 31, 1997. The higher interest income is the result of primarily two factors. The first factor is the higher overall cash balance created by the infusion of cash associated with the preferred equity offering in January 1997. This factor accounts for approximately $265,000 of the increase. The second factor is the inclusion of nine months of accrued interest related to the prepaid franchise fees in December 31, 1997 compared to approximately six months included in December 31, 1996. This factor accounts for approximately $77,000 of the increase. Net Loss. For the nine months ended December 31, 1997 the Company incurred a net loss of $7,844,861, and for the nine months ended December 31, 1996 the Company incurred a net loss of $2,112,712. The Company expects its net losses to continue to increase as it introduces new services and as the Company continues to build-out the DRS Network and seeks to expand its business. See ''Risk Factors--History of Losses; Expectation of Future Losses and Negative Cash Flows from Operations.'' 33 Year Ended March 31, 1997 Compared to the Year Ended March 31, 1996. The Company's net loss of $2,817,292 in fiscal 1997 was an increase over the net loss of $1,026,609 in 1996. The higher losses reflect primarily the additional activities undertaken to prepare for the initiation of services in 1997. These activities accelerated in February 1997 with the close of the Company's initial private preferred stock offering. Operating expenses increased to $200,911 in fiscal 1997 from $9,617 in fiscal 1996 primarily due to local access and origination programming support as required by the franchise agreement. Selling, general and administrative expenses increased to $2,337,534 in fiscal 1997 from $694,122 in fiscal 1996. This increase was primarily due to higher payroll-related costs of $675,574, increased legal and professional fees of $561,167, higher bank fees of $130,706 and increased occupancy costs of $122,991. Interest expense increased by $223,155 due to the additional interest on the revolving credit note outstanding for most of fiscal 1997. Depreciation and amortization increased due to higher balances subject thereto. Interest income was $301,624 for the year ended March 31, 1997. There was no interest income for the year ended March 31, 1996. The increase in the interest income is the result of primarily two factors. The first factor relates to the accrued interest associated with prepayment of the franchise fees in June and July 1996. This factor accounts for approximately $217,000 of the increase. The second factor is the higher overall cash balance created by the infusion of cash associated with the preferred equity offering in January 1997. This factor accounts for approximately $84,000 of the increase. Year Ended March 31, 1996 Compared to the Year Ended March 31, 1995. The Company's results of operations for the fiscal year 1996 were comparable to fiscal 1995. Operating expenses in fiscal 1996 of $9,617 represent mapping and design charges. The $69,159 increase in selling, general and administrative expenses is primarily due to increases of $95,569 in professional fees, $31,122 in office expense and $15,051 in travel and entertainment. These increases were offset by a $79,039 decrease in payroll-related costs. Interest expense increased by $99,260 due to the increased balance of debentures and notes payable outstanding during the period. Depreciation and amortization increased due to higher balances subject thereto. LIQUIDITY AND CAPITAL RESOURCES The cost of development, construction and start-up activities of the Company will require substantial capital. As of March 31, 1997, the Company had expended more than $3,800,000 related to the acquisition of the franchise for Chicago's Area 1, including $3,000,000 to the City of Chicago for prepaid franchise fees. The Company also purchased 1,734 bulk video subscribers from an affiliated entity in January 1997 for $3,381,300. Net cash used in operating activities was $5,987,369 for the nine months ended December 31, 1997, $6,910,766 for the year ended March 31, 1997, $611,227 for the year ended March 31, 1996 and $264,216 for the year ended March 31, 1995. Net cash used in operating activities for the nine months ended December 31, 1997 resulted principally from the Company's net loss from operations, offset by increases in accounts payable and the compensation expense recognized related to the stock option plan of $849,700. Net cash used in operating activities for the year ended March 31, 1997 resulted from the net loss from operations and increases in prepayments consisting primarily of the $3,000,000 prepayment of franchise fees to the City of Chicago and decreases in various payables made possible by the equity infusion of approximately $20 million. Net cash required for operations in 1996 and 1995 resulted primarily from net losses and increases in deferred legal costs offset by increases in various payables incurred during the acquisition of the Area 1 franchise. Cash flow used in investing activities totaled $10,014,597 in the nine months ended December 31, 1997 and $3,628,163 in the year ended March 31, 1997. Cash requirements in the nine months ended December 31, 1997 consisted primarily of the cost of building and equipping the NOC, facilitating the corporate headquarters and network construction. Cash requirements in the year ended March 31, 1997 consisted primarily of the purchase of 1,734 Area 1 bulk subscribers for $3,381,300. 34 Cash flow from financing activities was $9,175,999 in the nine months ended December 31, 1997, $18,768,915 in the year ended March 31, 1997, $608,765 in the year ended March 31, 1996 and $266,429 in the year ended March 31, 1995. In the nine months ended December 31, 1997, cash flow from financing activities was generated through borrowings under the interim credit facility of $8,000,000, and through the private sale of preferred equity totaling $1,175,999. For the year ended March 31, 1997 approximately $20,000,000 of cash flow was generated through the private sale of preferred equity. In fiscal 1996, cash flow from financing activities was generated by the private sale of $342,000 in common stock to a small group of Chicago investors and the sale of $266,765 in convertible debentures to existing shareholders. In fiscal 1995, cash flow from financing activities was generated by the sale of $266,429 in convertible debentures. The Company estimates that its aggregate capital expenditure requirements related to DRS Network construction in Area 1 for the period from the date of this Prospectus to the end of the current fiscal year, March 31, 1998 and for the fiscal years 1999, 2000 and 2001, the time frame in which construction of the DRS Network in Area 1 is expected to be completed, will total approximately $270 million, of which between approximately $90 million to $120 million is expected to be spent during calendar year 1998. The Company will fund these expenditures from the net proceeds of the Private Placement and operating cash flows. In order to retain funds available to support its operations, the Company has no expectation of paying cash interest on the Notes or cash dividends on the Exchangeable Preferred Stock prior to February 15, 2003. The Company may require additional financing in the future if it begins to develop additional franchise areas or if the development of Area 1 in Chicago is delayed or requires costs in excess of current expectations. The Company has entered into a commitment letter with BankBoston, N.A. and Bank of America NT&SA for a $50 million bank revolving credit facility to provide supplemental financing. There can be no assurance that the Company will be able to obtain such proposed bank financing or any such additional debt or equity financing, or that the terms thereof will not be unfavorable to the Company or its existing creditors or investors. See ''Risk Factors--Significant Capital Requirements.'' YEAR 2000 POTENTIAL PROBLEMS While the Year 2000 considerations are not expected to materially impact the Company's internal operations, they may have an effect on some of its customers and suppliers, and thus indirectly affect the Company. It is not possible to quantify the aggregate cost to the Company with respect to customers and suppliers with Year 2000 problems, although the Company does not anticipate it will have a material adverse impace in its business. HOLDING COMPANY STRUCTURE Shortly after the Exchange Offer, the Company plans to become a holding company with no direct operations and no significant assets other than the stock of its subsidiaries. The Company currently has three wholly-owned subsidiaries: 21st Century Cable TV of Illinois, Inc.; 21st Century Telecom of Illinois, Inc.; and 21st Century Telecom Group of Michigan, Inc. Moreover, 21st Century Telecom Group of Michigan, Inc. has two wholly-owned subidiaries: 21st Century Cable TV of Grand Rapids, Inc. and 21st Century Telecom of Michigan, Inc. The Company will be dependent on the cash flows of its subsidiaries to meet its obligations, including the payment of the principal of and interest on the Notes and the payment of dividends on the Exchangeable Preferred Stock. The Company's subsidiaries will be separate legal entities that have no obligation to pay any amounts due pursuant to the Notes or the Exchangeable Preferred Stock or to make any funds available therefor, whether by dividends, loans or other payments. The ability of the Company's subsidiaries to make such dividends and other payments to the Company will be subject to, among other things, the availability of funds, the terms of such subsidiaries' indebtedness and applicable state laws. Because the Company's subsidiaries will not guarantee the payment of the principal of or interest on the Notes or the payment of dividends on the Exchangeable Preferred Stock, any right of the Company to receive the assets of any of its subsidiaries upon its liquidation or reorganization (and the consequent right of holders of the Notes or the Exchangeable Preferred Stock to participate in the distribution or realize proceeds from those assets) will be effectively subordinated to the claims of the creditors of any such subsidiary (including trade creditors and holders of indebtedness of such subsidiary), except if and to the extent that the Company is itself a creditor of such subsidiary, in which case the claims of the Company would still be effectively subordinated to any security interest in the assets of such subsidiary held by other creditors. 35 THE EXCHANGE OFFER TERMS OF EXCHANGE OFFER GENERAL In connection with the sale of the Old Securities pursuant to a Purchase Agreement dated as of February 2, 1998, between the Company and the Initial Purchasers, the Initial Purchasers and their assignees became entitled to the benefits of the Registration Rights Agreement, dated February 2, 1998. Under the Registration Rights Agreement, the Company is obligated to (i) file the Registration Statement of which this Prospectus is a part for a registered exchange offer with respect to an issue of New Notes and New Exchangeable Preferred Stock with terms substantially identical in all material respects to the Old Notes and Old Exchangeable Preferred Stock, respectively (except that such New Notes and New Exchangeable Preferred Stock will not contain terms with respect to transfer restrictions), within 45 days after February 9, 1998, the date the Old Notes and Old Exchangeable Preferred Stock were originally issued (the "Issue Date") and (ii) use its best efforts to cause the Registration Statement to be declared effective within 150 days after the Issue Date. For each Old Note surrendered pursuant to the Notes Exchange Offer, the holder of such Old Note will receive a New Note having a principal amount at maturity equal to that of the surrendered Old Note. For each share of Old Exchangeable Preferred Stock surrendered pursuant to the Preferred Stock Exchange Offer, the holder of such share of Old Exchangeable Preferred Stock will receive a share of New Exchangeable Preferred Stock having a liquidation preference equal to that of the surrendered share of Old Exchangeable Preferred Stock. The Exchange Offer being made hereby if commenced and consummated within such applicable time periods will satisfy those requirements under the Registration Rights Agreement. See "Description of the New Notes--Exchange Offer, Registration Rights." Upon the terms and subject to the conditions set forth in this Prospectus and in the Letters of Transmittal (which together constitute the Exchange Offer), the Company will accept for exchange all Old Securities validly tendered and not withdrawn prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. The Company will issue New Notes in exchange for an equal principal amount at maturity of outstanding Old Notes accepted in the Exchange Offer and will issue New Exchangeable Preferred Stock in exchange for an equal number of shares of outstanding Old Exchangeable Preferred Stock accepted in the Exchange Offer. As of the date of this Prospectus, there was outstanding $363,135,000 aggregate principal amount at maturity of Old Notes. This Prospectus, together with the Letters of Transmittal, is being sent to all registered holders as of May [__],1998. The Company's obligation to accept Old Securities for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth herein under "--Conditions." The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Notes Exchange Agent. The Notes Exchange Agent will act as agent for the tendering holders of Old Notes for the purposes of receiving the New Notes from the Company and delivering New Notes to such holders. The Company shall be deemed to have accepted validly tendered Old Exchangeable Preferred Stock when, as and if the Company has given oral or written notice thereof to the Preferred Stock Exchange Agent. The Preferred Stock Exchange Agent will act as agent for the tendering holders of Old Exchangeable Preferred Stock for the purposes of receiving the New Exchangeable Preferred Stock from the Company and delivering New Exchangeable Preferred Stock to such holders. In the event the Exchange Offer is consummated, subject to certain limited exceptions, the Company will not be required to register the Old Securities. In such event, holders of Old Securities seeking liquidity in their investment would have to rely on exemptions to registration requirements under the U.S. securities laws. See "Risk Factors--Consequences of Failure to Exchange." EXPIRATION DATE; EXTENSIONS; AMENDMENTS 36 The term "Expiration Date" shall mean June [__] , 1998 (30 days following the commencement of the Exchange Offer), unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify each Exchange Agent of any extension by oral or written notice and will mail to the record holders of Old Securities an announcement thereof, each prior to 9:00 a.m., Eastern Standard Time, on the next business day after the previously scheduled Expiration Date. Such announcement may state that the Company is extending the Exchange Offer for a specified period of time. Notwithstanding any extension of the Exchange Offer, if for any reason the Exchange Offer is not consummated before August 3, 1998, the Company will, at its own expense, (a) as promptly as practicable, file a shelf registration statement covering resales of the Old Securities (a "Shelf Registration Statement"), (b) use its best efforts to cause a Shelf Registration Statement to be declared effective under the Securities Act and (c) keep the Shelf Registration Statement effective until the earlier of 24 months following the Issue Date and such time as all of the Old Securities have been sold thereunder, or otherwise can be sold pursuant to Rule 144 without any limitations under clauses (c), (e), (f) and (h) of Rule 144. The Company will, in the event a Shelf Registration Statement is filed, among other things, provide to each holder for whom such Shelf Registration Statement was filed copies of the prospectus which is a part of such Shelf Registration Statement, notify each such holder when such Shelf Registration Statement has become effective and take certain other actions as are required to permit unrestricted resales of the Old Securities. A holder selling such Old Securities pursuant to the Shelf Registration Statement generally would be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement which are applicable to such a holder (including certain indemnification obligations). The Company reserves the right (i) to delay accepting any Old Securities, to extend the Exchange Offer or to terminate the Exchange Offer and not accept Old Securities not previously accepted if any of the conditions set forth herein under "--Conditions" shall have occurred and shall not have been waived by the Company, by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner deemed by it to be advantageous to the holders of the Old Securities. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment in a manner reasonably calculated to inform the holders of the Old Securities of such amendment and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to holders of the Old Securities, if the Exchange Offer would otherwise expire during such five to ten business day period. Without limiting the manner in which the Company may choose to make public announcement of any delay, extension, amendment or termination of the Exchange Offer, the Company shall have no obligations to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT HEREBY. Holders of Old Securities do not have any appraisal or dissenters' rights in connection with the Exchange Offer under the Illinois Business Corporation Act, the governing law of the state of incorporation of the Company. PROCEDURES FOR TENDERING 37 To tender in the Exchange Offer, a holder must complete, sign and date the Notes Letter of Transmittal or Preferred Stock Letter of Transmittal, as the case may be, or a facsimile thereof, have the signatures thereon guaranteed if required by such Letter of Transmittal and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with any other required documents, to the Notes Exchange Agent or Preferred Stock Exchange Agent, as the case may be, prior to 5:00 p.m. Eastern Standard Time, on the Expiration Date. In addition, either (i) certificates for such tendered Old Securities must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old Securities, if such procedure is available, into the Exchange Agent's account at the Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date or (iii) the holder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD SECURITIES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD SECURITIES SHOULD BE SENT TO THE COMPANY. To be tendered effectively, the Old Securities, the Letter of Transmittal and all other required documents must be received by the appropriate Exchange Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. Delivery of all documents must be made to the appropriate Exchange Agent at the addresses set forth below. Holders may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect such tender for such holders. The tender by a holder of Old Securities will constitute an agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth therein and in the Letter of Transmittal. Only a holder of Old Securities may tender such Old Securities in the Exchange Offer. The term "holder" with respect to the Exchange Offer means any person in whose name Old Notes or Old Exchangeable Preferred Stock are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder. Any beneficial owner whose Old Securities are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender shall contact such registered holder promptly and instruct such registered holder to tender on his behalf. If such beneficial owner wishes to tender on his own behalf, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering his Old Securities, either make appropriate arrangements to register ownership of the Old Securities in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by any member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the U.S. (an "Eligible Institution") unless the Old Securities tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by an Eligible Institution. If the Letter of Transmittal is signed by a person other than the registered holder of any Old Securities listed therein, such Old Securities must be endorsed or accompanied by bond powers or stock powers, as the case may be, and a proxy which authorizes such person to tender the Old Securities on behalf of the registered holder, in each case as the name of the registered holder or holders appears on the Old Securities. 38 If the Letter of Transmittal of any Old Securities bond powers or stock powers are signed by trustees, executors, administrators, guardians, attorneys- in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such person should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. All questions as the validity, form, eligibility (including time of receipt) and withdrawal of the tendered Old Securities will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Securities not properly tendered or any Old Securities which, if accepted by the Company, would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any irregularities or conditions of tender as to particular Old Securities. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letters of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Securities must be cured within such time as the Company shall determine. None of the Company, the Notes Exchange Agent, the Preferred Stock Exchange Agent or any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Securities, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Securities will not be deemed to have been made until such irregularities have been cured or waived. Any Old Securities received by an Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost to such holder by such Exchange Agent to the tendering holders of such Old Securities, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Company reserves the right in its sole discretion, subject to the provisions of the Indenture and the Amended Articles, to (i) purchase or make offers for any Old Securities that remain outstanding subsequent to the Expiration Date or, as set forth under "--Conditions," to terminate the Exchange Offer in accordance with the terms of the Registration Rights Agreement and (ii) to the extent permitted by applicable law, purchase Old Securities in the open market, in privately negotiated transactions or otherwise. The terms of any such purchase or offers could differ from the terms of the Exchange Offer. By tendering, each holder will represent to the company that (i) it is not an affiliate of the Company (as defined under Rule 405 of the Securities Act), (ii) any New Securities to be received by it were acquired in the ordinary course of its business and (iii) at the time of commencement of the Exchange Offer, it was not engaged in, and did not intend to engage in, a distribution of such New Securities and had no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of the New Securities. If a holder of Old Securities is an affiliate of the Company, and is engaged in or intends to engage in a distribution of the New Securities or has any arrangement or understanding with respect to the distribution of the New Securities to be acquired pursuant to the Exchange Offer, such holder could not rely on the applicable interpretations of the staff of the Commission and must comply with the registration and prospectus delivery requirement of the Securities Act in connection with any secondary resale transaction. Each broker or dealer that receives New Securities for its own account in exchange for Old Securities, where such Old Securities were acquired by such broker or dealer as a result of market-making activities, or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Securities. Each broker-dealer that acquired Old Securities directly from the Company, and not as a result of market-making or trading activities, must, in the absence of an exemption, comply with the registration and prospectus delivery requirements of the Securities Act in connection with the secondary resale of the New Securities and cannot rely on the position of the staff of the Commission enunciated in no-action letters issued to third parties. See "Plan of Distribution." ACCEPTANCE OF OLD SECURITIES FOR EXCHANGE; DELIVERY OF NEW SECURITIES Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Company will accept, promptly after the Expiration Date, all Old Securities properly tendered and will issue the New Securities promptly after acceptance of the Old Securities. See "--Conditions" below. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Old Notes for exchange when, as and if the Company has given oral or written notice thereof to the Notes Exchange Agent, and shall be deemed to have accepted validly tendered Old Exchangeable Preferred Stock for exchange when, as and if the Company has given oral or written notice thereof to the Preferred Stock Exchange Agent. 39 For each Old Note for exchange, the holder of such Old Note will receive a New Note having a principal amount at maturity equal to that of the surrendered Old Note, and for each share of Old Exchangeable Preferred Stock for exchange, the holder of such share will receive a share of New Exchangeable Preferred Stock having a principal amount equal to that of the surrendered share of Old Exchangeable Preferred Stock. If (i) by March 26, 1998 (45 days after the Issue Date), neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the SEC, (ii) by August 8, 1998 (180 days after the Issue Date), the Exchange Offer is not consummated and, if applicable, the Shelf Registration Statement is not declared effective or (iii) after either the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective, such Registration Statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Old Securities or New Securities in accordance with and during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (i) through (iii) a "Registration Default"), additional interest or dividends, as the case may be, will accrue or accumulate on the applicable Old Securities and New Securities at the rate of 0.50% per annum from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Such interest or dividends, as the case may be, will be payable in cash and will be in addition to any other interest or dividends payable from time to time with respect to the Old Securities and the New Securities. In all cases, issuance of New Securities for Old Securities that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the appropriate Exchange Agent of certificates for such Old Securities or a timely Book-Entry Confirmation of such Old Securities into such Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Old Securities are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Old Securities are submitted for a greater principal amount or larger number of shares, as the case may be, than the holder desires to exchange, such unaccepted or nonexchanged Old Securities will be returned without expense to the tendering holder thereof (or, in the case of Old Securities tendered by book-entry transfer procedures described below, such nonexchanged Old Securities will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration or termination of the Exchange Offer. BOOK-ENTRY TRANSFER The Notes Exchange Agent and the Preferred Stock Exchange Agent will make a request to establish an account with respect to the Old Notes and the Old Exchangeable Preferred Stock, respectively, at the Book-Entry Transfer facility for purposes of the Exchange Offer within two business days after the date of the Prospectus. Any financial institution that is a participant in the Book- Entry Transfer Facility's systems may make book-entry delivery of Old Securities by causing the Book-Entry Transfer Facility to transfer such Old Securities into the appropriate Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Old Securities may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof with any required signature guarantees and any other required documents must, in any case, be transmitted to and received by the appropriate Exchange Agent at one of the addresses set forth below under "--Exchange Agents" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES If a registered holder of the Old Securities desires to tender such Old Securities, the Old Securities are not immediately available, or time will not permit such holder's Old Securities or other required documents to reach the appropriate Exchange Agent before the Expiration Date, or the procedures for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent received from such Eligible Institution a properly completed and 40 duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of such Old Securities and the amount of Old Securities tendered, stating that the tender is being made thereby and guaranteeing that within five New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Securities, in proper form to transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the appropriate Exchange Agent and (iii) the certificate for all physically tendered Old Securities, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal are received by the appropriate Exchange Agent within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL OF TENDERS Tenders of Old Securities may be withdrawn at any time prior to 5:00 p.m. Eastern Standard Time, on the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the appropriate Exchange Agent at one of the addresses set forth below under "--Exchange Agents." Any such notice of withdrawal must specify the name of the person having tendered the Old Securities to be withdrawn, identify the Old Securities to be withdrawn (including the principal amount of such Old Notes and the number of shares of such Old Exchangeable Preferred Stock) and (where certificates for Old Securities have been transmitted) specify the name in which such Old Securities are registered, if different from that of the withdrawing holder. If certificates for the Old Securities have been delivered or otherwise identified to an Exchange Agent, then, prior to the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such holder is an Eligible Institution. If Old Securities have been tendered pursuant to the procedures of book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Old Securities and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Securities so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Securities which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or, in the case of Old Securities tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Old Securities will be credited to an account maintained with such Book-Entry Transfer Facility for the Old Securities) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Securities may be retendered by following one of the procedures described under the "--Procedures for Tendering" above at any time on or prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company will not be required to accept for exchange, or to issue New Securities in exchange for, any Old Securities and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Old Securities, if because of any changes in law, or applicable interpretations thereof by the Commission, the Company determines that it is not permitted to effect the Exchange Offer. In addition, the Company has no obligation to, and will not knowingly, accept tenders of Old Securities from affiliates of the Company (within the meaning of Rule 405 under the Securities Act) or from any other holder or holders who are not eligible to participate in the Exchange Offer under applicable law or interpretations thereof by the Commission, or if the New Securities to be received by such holder or holders of Old Securities in the Exchange Offer, upon receipt, will not be tradeable by such holder without restriction under the Securities Act and the Exchange Act and without material restriction under the "blue sky" or securities law of substantially all of the states. 41 EXCHANGE AGENTS State Street Bank and Trust Company has been appointed as Notes Exchange Agent in connection with the Notes Exchange Offer. Questions and requests for assistance in connection with the Notes Exchange Offer and requests for additional copies of this Prospectus or of the Notes Letter of Transmittal should be directed to the Notes Exchange Agent addressed as follows: By Registered or Certified Mail; By Overnight Courier; or By Hand: State Street Bank and Trust Company Two International Place, 4th Floor Boston, Massachusetts 02110-2804 Attention: Corporate Trust Department By Facsimile: (617) 664-5371 Attention: Corporate Trust Department Telephone: (617) 664-5635 Boston EquiServe Trust Company, N.A. has been appointed as Preferred Stock Exchange Agent in connection with the Preferred Stock Exchange Offer. Questions and requests for assistance in connection with the Preferred Stock Exchange Offer and requests for additional copies of this Prospectus or of the Preferred Stock Letter of Transmittal should be directed to the Preferred Stock Exchange Agent addressed as follows: By Registered or Certified Mail; By Overnight Courier; or By Hand: Boston EquiServe Trust Company, N.A. Mail Stop 45-01-40 150 Royall Street Canton, Massachusetts 02021 Attention: Corporate Reorganization Department By Facsimile: (781) 575-2549 Attention: Corporate Reorganization Department Telephone: (781) 575-4325 FEES AND EXPENSES The expenses of soliciting tenders pursuant to the Exchange Offer will be borne by the Company. The principal solicitation for tender pursuant to the Exchange Offer is being made by mail; however, additional solicitations may be made by telegraph, telephone, telecopy or in person by officers and regular employees of the Company. The Company will not make any payments to brokers, dealers or other persons soliciting acceptances of the Exchange Offer. The Company, however, will pay each Exchange Agent reasonable and customary fees for its services and will reimburse such Exchange Agent for its reasonable out-of-pocket expenses in connection therewith. The Company may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of- 42 pocket expenses incurred by them in forwarding copies of the Prospectus and related documents to the beneficial owners of the Old Securities, and in handling or forwarding tenders for exchange. The expenses to be incurred in connection with the Exchange Offer will be paid by the Company, including fees and expenses of each Exchange Agent, the Trustee (as hereinafter defined), the Transfer Agent (as hereinafter defined) and accounting, legal printing and related fees and expenses. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Securities pursuant to the Exchange Offer. If, however, certificates representing New Securities or Old Securities for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Securities tendered, or if tendered Old Securities are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than exchange of Old Securities pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The New Notes and New Exchangeable Preferred Stock will be recorded in the Company's accounting records at the same carrying values as the Old Notes and Old Exchangeable Preferred Stock, respectively, as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized upon the consummation of the Exchange Offer. The expense of the Exchange Offer will be amortized by the Company over the term of the New Notes and New Exchangeable Preferred Stock in accordance with generally accepted accounting principles. 43 BUSINESS GENERAL 21st Century is an integrated, facilities-based communications company, which seeks to be the first provider of bundled voice, video and high-speed data services (including cable television, high-speed internet access, and local and long distance telephone services) in selected midwestern markets beginning with Chicago's Area 1, for which the Company has been awarded a non-exclusive 15-year renewable franchise by the City of Chicago. Area 1 stretches more than 16 miles along Chicago's densely populated lakefront skyline and includes the affluent residential neighborhoods of the Gold Coast, Lincoln Park and Dearborn Park and the nation's second largest business and financial district. The Company has developed (and has begun to install and activate) the DRS Network, which employs a distributed ring-star architecture characterized by fiber-richness, two-way interactivity and SONET-based redundancy and self-healing attributes. The DRS Network accommodates not only traditional voice and video applications, but also the rapidly growing demand for high-speed data services. Although it has claimed no intellectual property rights in the DRS Network, the Company believes that the DRS Network provides the Company with significant strategic advantages that will differentiate 21st Century from its competitors, such as improved time-to- market, multiple revenue streams, enhanced service quality and reliability, and the ability to provide attractively priced bundled services. The Company has secured a non-exclusive 15-year renewable attachment agreement with the CTA, which reduces costly and time-consuming "make-ready" and underground construction for the DRS Network and enables the Company to install and activate the DRS Network rapidly and efficiently by taking advantage of access to the CTA's elevated and underground rail systems. The Company also has secured non-exclusive pole attachment agreements with Commonwealth Edison and Ameritech which provide 21st Century access to scarce pole space within Area 1 to further facilitate deployment of its DRS Network. The decentralized configuration of the DRS Network, which includes distributed hubs and nodes that act "intelligently" to route network traffic efficiently, together with the CTA and the pole attachment agreements, enable network construction to be driven in large part by market demand and revenue potential in contrast to the conventional approach of building a system from the headend outward on a block- by-block basis. To fully exploit this advantage, the Company's sales and marketing strategy is coordinated with ongoing network construction and focused on securing bulk contracts with 125-unit or larger MDUs. The Company believes that this strategy will help to identify the optimal sequence of node activation on the DRS Network and tie capital expenditures directly to revenue-producing subscribers. 21st Century's DRS Network currently provides video, audio and data services. These services include 110 analog video channels, 59 interactive information channels with local content (e.g., train and airline schedules, restaurant menus, local news and sports scores, stock quotes and expressway traffic updates) and 22 specialty audio channels (e.g., international and foreign language programming, BBC radio broadcasts, reading services for the blind, commercial-free music categories and select distant-market FM stations), with significant capacity for additional broadband and narrowband products and services. The Company's data product is its 4 Mbps cable modem Internet access service, which is delivered at symmetrical speeds more than 125 times faster than the prevalent 28.8 Kbps telephone modem and 25 times faster than an ISDN modem. The Company is also hosting websites for commercial customers. The Company will also provide switched, facilities-based CLEC services with last mile connectivity and local dial tone to both commercial accounts and selected residential subscribers upon receipt of the necessary regulatory approval and installation of the requisite telephony equipment. The Company currently provides telephony service on a test basis and plans to begin offering in mid- 1998 a broad range of competitive telephony services (e.g., local, long distance and enhanced services) to both commercial accounts and selected residential subscribers, most of whom currently have no facilities-based alternative to the service provided over the ILEC's network. 21st Century has taken significant steps to implement its business plan and service offerings in Chicago's Area 1. In addition to securing the Area 1 franchise, the CTA attachment agreement and the Commonwealth Edison and Ameritech pole attachment agreements, the Company has (i) constructed and activated its NOC, which includes a video headend and its DOC, (ii) completed the northern fiber transport ring of the DRS Network, extending from 44 the downtown business district to the northern portions of the city bordering Evanston, (iii) secured programming content for more than 170 channels of video and interactive information programming, (iv) constructed and activated portions of the outside fiber distribution network to reach selected MDUs, (v) initiated installation processes, billing, call center and customer care services, (vi) secured contracts for more than 4,000 residential subscribers (which includes more than 2,000 new subscribers under 5-year bulk MDU agreements as well as subscribers acquired in early 1997 from an affiliated company) and (vii) passed with its initial distribution facilities more than 15,800 additional potential subscribers. The Company has completed installation of approximately 5 percent of the fiber optic strand miles that will ultimately make up the DRS Network. The Company has also entered into an agreement with Nortel for the acquisition and installation of the switching and other ancillary equipment necessary for it to provide telephony services. BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES The Company believes that it can exploit its innovative DRS Network, superior product offerings and other strategic assets to compete strongly in Chicago's Area 1 and other selected markets. 21st Century's strategy and competitive advantages include the following: DEVELOP HIGH-CAPACITY, FULL-SERVICE DRS NETWORK. 21st Century intends to exploit the advantages of its innovative, internally-developed DRS Network architecture to provide fully integrated voice, video and high-speed data services. Key attributes of the DRS Network include (i) an advanced integrated network design built to the rigorous Bellcore standards, (ii) the distribution of switching and traffic routing mechanics at specific locations out on the DRS Network (rather than being concentrated at one point as in conventional networks), allowing the Company to efficiently and economically route traffic regardless of penetration and usage levels, (iii) a SONET-based redundancy and self-healing architecture with both circuit and route diversity, (iv) multiple layers of power redundancy to ensure network reliability and (v) a large fiber capacity permitting delivery of advanced two-way, fully-interactive broadband services, as well as significant unutilized capacity to allow the Company to upgrade services, add applications and develop new product offerings without service interruption or interference. DEPLOY DRS NETWORK COST-EFFECTIVELY ON A REVENUE-DRIVEN BASIS. The decentralized configuration of the DRS Network, combined with the CTA and pole attachment agreements, allows the Company to rapidly and efficiently deploy the DRS Network to accommodate market demand on a revenue-driven basis. This strategy contrasts sharply with the typical approach of building a conventional coaxial cable system from the headend outward on a block-by-block basis. This DRS Network advantage will also allow the Company to efficiently utilize its capital resources to secure larger MDU bulk video contracts which will be used as the basis for node activation; thus, more significant revenue streams should be realized earlier in the planned 3-4 year construction buildout than would be realized by a conventional coaxial cable system buildout. After a large MDU is activated within a node, the Company will then market its premium cable and pay- per-view video services, as well as its high-speed data and, when available, telephony services, to its cable subscribers in order to leverage MDU subscriber relationships. In addition, 21st Century will market its full range of voice, video and high-speed data services to Homes Passed. For commercial subscribers, the Company will seek initially to deploy the DRS Network in Chicago's dense central downtown area to (i) small to mid-sized commercial accounts and communications-intensive businesses that have an interest in the Company's high- speed data and Internet services and (ii) organizations such as the Building Owners Management Association and other facilities management companies that influence the selection of communications facilities at multiple buildings, as well as industry associations which the Company believes will encourage member companies to use the Company's services. PROVIDE SUPERIOR PRODUCT OFFERINGS ON A BUNDLED BASIS. The Company believes that its voice, video and high-speed data product offering will be superior to competitive products currently available in Area 1 in terms of (i) the breadth and quality of the individual product offerings, (ii) the extent of the enhanced service features offered to the customer and (iii) the ability to bundle such product offerings into a simple, convenient and attractively priced package. The Company's current video offering includes 110 analog video channels, 59 interactive information channels and 22 specialty audio channels, with significant capacity for additional broadband and narrowband 45 products and services. 21st Century's fiber-rich DRS Network is designed with only one to four amplifiers in cascade between its NOC and the subscriber (compared to up to 40 amplifiers used by conventional networks). This reduction in amplifiers significantly reduces signal degradation and results in higher video quality and telephony reliability, a superior audio component and greater data transmission accuracy. The Company's interactive information channels, which provide useful local content and information, are currently not available from any other single source in Area 1. The Company's high-speed data offering includes cable modems that provide access to the Internet at 4 Mbps, which is approximately 125 times faster than the prevalent 28.8 Kbps telephone modem and 25 times faster than an ISDN modem. Beginning in mid-1998, the Company expects to begin marketing a broad range of competitive telephony services (e.g., local, long distance, call waiting, call forwarding, caller ID and three-way calling) to both commercial accounts and selected residential subscribers, most of whom currently have no facilities-based alternative to the service provided over the ILEC's network. The Company's bundled service offering will provide customers with convenient "one-stop shopping," attractive pricing through significant bundled discounts, a single source for installation and service and the ease of a single monthly bill. LEVERAGE STRATEGIC ASSETS. The Company's core strategic assets include (i) the 15-year renewable franchise granted by the City of Chicago, which permits the construction and installation of a network serving the entirety of Chicago's Area 1 and (ii) the attachment agreement negotiated with the CTA and the pole attachment arrangements negotiated with Commonwealth Edison and Ameritech, which facilitate the timely and efficient buildout of the DRS Network through the utilization of scarce pole space and city infrastructure rights-of-way. Each of these assets is a valuable and important component of the Company's facilities- based business strategy and together would be difficult for another entrant to replicate. SECURE FIRST-TO-MARKET ADVANTAGES. The Company seeks to be the first-to- market in offering bundled voice, video and high-speed data services in Chicago's Area 1 and other selected markets. The Company believes that the rapid buildout of the DRS Network will enable it to acquire a significant customer base and will give it a competitive advantage over other prospective bundled and single-service providers. CONTINUE TO ATTRACT EXPERIENCED MANAGEMENT. The Company's management team has extensive and diverse experience in the cable television, Internet, data and telecommunications industries. During the past year, the Company's senior management has demonstrated its expertise by constructing and activating the NOC, completing the northern fiber transport ring of the DRS Network, securing necessary programming content, and initiating services. The Company intends to continue to attract qualified senior-level management with demonstrated expertise from the various industries comprising the Company's service offering. FOCUS ON SUPERIOR CUSTOMER CARE. The Company is committed to providing superior customer care to differentiate 21st Century from its competitors. To accomplish this, the Company has (i) contracted with a third party to provide a single billing statement for its voice, video and data services (which will facilitate bundled discounting for multiple services, permit customized billing statements and permit monthly, transactional and metered billing to support the Company's planned product lines) and (ii) established a relationship with a leading call center services provider to staff and operate a 24-hour call center. The Company has provided a dedicated toll-free number to the call center for all subscriber needs and has established call center performance parameters under which (i) at least 90% of customer calls are to be answered within 30 seconds, (ii) customers are to receive a busy signal less than 3% of the time and (iii) customer-abandoned calls are to account for less than 5% of all calls. The Company believes that the quality and reliability of its services will result in fewer in-bound subscriber complaints, service requests and other non- revenue producing calls. In addition, the Company has installed sophisticated status monitoring equipment in the NOC and throughout its DRS Network, which should allow the Company to become aware of and remedy many potential problems before they are detectable by subscribers. EXPAND TO ADDITIONAL MARKETS. The Company intends to expand its operations to selected midwestern markets which have the size, demographics and geographical location suitable for its business strategy. Although the Company may consider stand-alone systems, the Company expects to focus on markets in which it can use its Chicago DRS Network and NOC to achieve synergies and economies of scale. The Company has applied for 46 franchises in a number of cities in suburban Chicago, central, south-central and south-western Michigan and northern Indiana. MARKET OVERVIEW The City of Chicago is the third largest urban market in the United States and Area 1 is the densest section of the city, characterized by a high concentration of MDUs and commercial office buildings. Area 1 has several significant and attractive attributes, including a relatively high density of 12,000 housing units per square mile (compared with a density for the entire City of Chicago of 5,000 housing units per square mile); more than 300,000 homes (many of which are located in upscale, demographically attractive lakefront neighborhoods); existing cable penetration that the Company believes is significantly below the national average for urban areas and approximately 51,000 employers in the City's prominent business and financial districts, which include such businesses and landmarks as the Mercantile Exchange, Sears Tower, Chicago Board of Trade, Chicago Board of Options Exchange, Federal Reserve, Hancock Building, Amoco Tower, major banks and other premier businesses. INTERACTIVE BROADBAND DRS NETWORK DRS NETWORK COMPONENTS. The DRS Network consists of six main components: the NOC, the Transport Ring, Transport Hubs, Campus Rings, Campus Hubs and Nodes. The following graphic depicts the design of the DRS Network. [PICTURE OF NETWORK] The NOC processes voice, video and data signals before they are transported to the rest of the system. The DOC and a video headend are located at the NOC and, when the Company begins to offer telephony service, a telephone switch will also be located at the NOC. The NOC also functions as a gateway to other networks outside the DRS Network. The NOC monitors DRS Network activity and receives real-time information regarding DRS Network performance and power supply status. When the Company begins to offer telephony service, the NOC will monitor the activation of equipment at the premises of the Company's telephony subscribers. The Transport Ring, a group of fiber-optic cables that run along the CTA right-of-way, carries voice, video and high-speed data signals between the NOC and the Transport Hubs. Transport Hubs connect the Transport Ring and the Campus Rings and also provide a diagnostic function by trouble-shooting potential problems on the DRS Network. The Campus Rings are groups of fiber-optic cables that carry voice, video and high-speed data signals between the Transport Hubs and the Campus Hubs. The Campus Hubs connect the Campus Rings and the lines that feed the Nodes and provide a diagnostic function similar to the Transport Hubs. The Nodes connect the subscribers to the Campus Hubs via coaxial cable. The Nodes represent the point in the DRS Network where light sent over the DRS Network via fiber-optic cable is translated into radio frequencies for delivery to the subscriber. The Nodes also monitor the DRS Network and detect potential problems. The "star distribution" of the DRS Network refers to the star-shaped DRS Network components branching off each Node to the subscribers. Delivery of telephony services over the DRS Network will require the installation of switching and other ancillary equipment at the NOC and at the Nodes, where the existing twisted-pair telephone wire will connect to the DRS Network. The Company has entered into an agreement with Nortel for the acquisition and installation of such equipment. DESIGN ATTRIBUTES. The Company's DRS Network was conceived and designed by the Company's engineers and incorporates SONET, Ring and Star architectures as well as wave-division multi-plexing elements, and includes certain attributes of Hybrid Fiber Coax ("HFC"). Key attributes of the DRS Network include (i) an advanced integrated network design built to the rigorous Bellcore standards, (ii) the distribution of switching and traffic 47 routing mechanics at specific locations out on the DRS Network (rather than being concentrated at one point as in conventional networks), allowing the Company to efficiently and economically route traffic regardless of penetration and usage levels, (iii) a SONET-based redundancy and self-healing architecture with both circuit and route diversity, (iv) multiple layers of power redundancy to ensure network reliability and (v) a large fiber capacity permitting delivery of advanced two-way, fully-interactive broadband services, as well as significant unutilized capacity to allow the Company to upgrade services, add applications and develop new product offerings without service interruption or interference. In addition, the DRS Network is designed with only one to four amplifiers in cascade between its NOC and the subscriber (compared to up to 40 amplifiers used by conventional networks). This reduction in amplifiers significantly reduces signal degradation and results in higher video quality and telephony reliability, a superior audio component and greater data transmission accuracy. The DRS Network uses signal processing techniques to deliver communication services such as Internet access and high-speed data, Shared Tenant Services ("STS"), Small Business Services and Plain Old Telephone Services, which the Company intends to provide directly or in conjunction with strategic business partners. The DRS Network is able to separate data and voice signals from the video signals, which will enable it to provide higher reliability and the advanced network management necessary for residential and commercial data communications and telephony services. DRS NETWORK ADVANTAGES. The DRS Network has several advantages including (i) intelligent routing of network traffic, (ii) advanced functionality at subscribers' premises, (iii) efficient introduction of new switched and broadband services and (iv) dedicated, two-way, high-speed data connectivity. INTELLIGENT ROUTING OF TRAFFIC. The DRS Network routes traffic intelligently using grooming and hairpinning techniques. Grooming is a technique by which voice, video and data signals are kept on the DRS Network, thereby decreasing the reliance on and the costs incurred by using other companies' communications networks. Hairpinning, a type of grooming, is a technique that allows voice, video and data signals to be diverted away from the Company's NOC, where network traffic is likely to be heavy, and routed by Campus Hubs or Transport Hubs. ADVANCED FUNCTIONALITY AT SUBSCRIBERS' PREMISES. The Company uses an advanced analog set-top box with 512K RAM and flash memory, which will allow it to provide subscribers additional functions and features. Among such functions and features are interactive data channel capability, impulse pay- per-view, fully computerized addressability, forward and return path capability, bit-mapped graphics, downloadable software capability, fully interactive seven-day electronic program guide, enhanced signal theft protection and dataport connectivity to printers, faxes and personal computers. The Company believes that this terminal is designed to readily convert to digital technology at a cost that is competitive with analog industry standards. See "Risk Factors--Equipment Cost and Availability." EFFICIENT INTRODUCTION OF NEW SWITCHED AND BROADBAND TECHNOLOGIES. 21st Century should be able to introduce most new switched and broadband technologies to its subscribers without causing service interruption or interference. The DRS Network's architecture has reserved bandwidth from 750MHz to 860MHz. This bandwidth has been allocated for future digital video services representing approximately 90 to 100 channels. While the Company does not anticipate conversion to digital in the near future given the DRS Network's initial 110 analog video channel offering, the DRS Network's large fiber capacity will allow the Company to upgrade services, add applications and develop new product offerings without service interruption or interference. DEDICATED, TWO-WAY, HIGH-SPEED DATA CONNECTIVITY. The DOC allows true two-way (duplex), high-speed interactivity. At the DOC a redundant series of routers, servers and switches are installed, from which typical ISP functionalities (Domain Naming System, Mail, News, Proxy, etc.) are administered and dual connections to national ISPs are maintained. 21st Century will store the most popular Web pages, along with local content, in servers located in the DOC. By storing these Web pages and local content within the DOC and 48 providing cable modem access to these resources, subscribers can receive any of this information at up to four Mbps, or approximately 125 times faster than the prevalent 28.8 Kbps telephone modem. As a further benefit, since the cable modem is connected directly from the subscriber's PC to the coaxial portion of the DRS Network, there is no need for a second telephone line to access the Internet, no delay associated with dialing into and signing onto a typical ISP's modem service and no surcharge for making a call into the DOC (as is typically the case with 128 Kbps ISDN service). As an integral part of the DRS Network design, the Company has reserved fiber- optic capacity dedicated for providing a wide variety of high-speed data services, including high-speed (up to OC-12) private line quality access to the Internet. The use of multi-protocol switching platforms in both the Campus and Transport hubs and the DRS Network's high fiber count will allow the Company to offer private virtual networks to link offices, buildings and campuses located in Area 1. Further, the high-speed data network will extend to both commercial as well as residential areas and will support a host of other applications, including telecommuting, distance-learning, software distribution, site mirroring, bulk data transfer and teleconferencing. BROADBAND SERVICES The Company's service offering will include a wide range of voice, video and high-speed data services that the Company expects to provide on a bundled basis. The Company's bundled service offering will provide customers with convenient "one-stop shopping," attractive pricing through significant bundled discounts, a single source for installation and service and the ease of a single monthly bill. VIDEO AND AUDIO. The Company currently offers 110 analog video channels, 59 interactive information channels with local content and 22 specialty audio channels, with significant capacity for additional broadband and narrowband products and services. The 110 analog video channels include a basic package of 84 channels, one of the largest basic packages in the United States, designed to appeal to Chicago's ethnic and cultural diversity. Basic video channels for business customers also include specialized business programming such as Bloomberg, CNN, CNN Financial and Knowledge TV. This specialized business programming will be combined with downlink teleconferencing from the NOC. Programming for the Company's video offering comes from national and local networks, including most major networks such as ESPN, HBO, Showtime, Disney and CourtTV and local networks such as local affiliates of ABC, CBS, NBC and Fox. The video offering includes an on-screen 7-day interactive program guide, one- button VCR recording and near-video-on-demand pay-per-view movies, with start times every 30 minutes, 24 hours per day. The Company also plans to offer a custom camera-monitored security channel for apartment and condominium buildings that execute master agreements with the Company. Also included in the Company's basic video package are 59 interactive information channels, which include local bus and train schedules, airline schedules, employment ads, restaurant menus, local news and sports scores, stock quotes, expressway traffic updates, personal ads and other relevant local content (including building-specific information for large MDU accounts). The Company plans to expand its interactive information offering to 100 channels during 1998. This server-delivered information is accessed on the customer's television via a specialized universal remote control. The Company's 22 specialty audio channels include international and foreign language broadcasts (selected to appeal to concentrations of nationalities residing in Chicago's Area 1), BBC radio broadcasts, reading services for the blind, commercial-free music categories and select distant-market FM stations. HIGH-SPEED DATA AND INTERNET SERVICES. The Company will provide high-speed Internet access services using a high-speed cable modem in much the same way customers currently receive Internet services over a modem linked to the local telephone network. The cable modems presently being used with the Company's DRS Network will operate at 4 Mbps, which is approximately 25 times faster than ISDN modems and more than 125 times faster than the prevalent 28.8 Kbps analog modems. The customer's cable line (with cable modem) will be connected 49 directly into the Internet. Because the cable modem connects through a cable line rather than through a telephone line, the Internet connection will always be active and there will be no need to dial up for access to the Internet or wait to connect through a port leased by an ISP. The Company is also hosting websites for commercial customers and expects to offer private virtual networks to link offices, buildings or campuses located throughout the franchise area. In addition to supporting cable modem services for Internet access, the DRS Network is capable of connecting computers or computer networks via a separate fiber connection. By connecting computers or computer networks at multiple locations, subscribers can establish virtual local area networks, over which they can transport data. The Company expects to offer such connections, which will enable subscribers to conduct video conferences, provide Internet-protocol telephony services, conduct electronic commerce, connect hospitals and universities for tele-medicine and distance-learning applications and access their office networks with the same speed and functionality as though they were using their office desktop computers. TELEPHONY. The Company has received regulatory approval from the Illinois Commerce Commission to provide CLEC services. The DRS Network will allow the Company, after installation of the requisite telephony equipment, to act as a facilities-based CLEC offering telecommunications services with last mile connectivity and local dial tone. The Company anticipates that the necessary equipment and installation will cost approximately $40 million over five years and that the installation necessary for the Company to begin providing telephony service will take approximately five to six months. The Company plans to begin offering in mid-1998 a broad range of competitive telephony services (e.g., local, long distance and enhanced services) to both commercial accounts and selected residential subscribers, most of whom currently have no facilities- based alternative to the service provided over the ILEC's network. The selected residential customers to which the Company will offer telephony services initially will be limited to those residing in, or in close proximity to, MDUs containing 24 or more residences, but the Company expects that the threshold number of residences in MDUs to which this service can be viably offered will be reduced over time. The Company anticipates that it s telecommunications service offerings will include local service, long-distance and enhanced service packages. Enhanced services will include custom calling features such as call waiting, call forwarding and three-way calling. The Company also expects to offer more advanced custom local area signaling services ("CLASS") features, such as caller ID and caller masking and plans to offer voice mail as an optional service. The Company expects to provide long-distance service on a resale basis from one or more national interexchange carriers. The Company also plans to make available to businesses Centrex services and PBX trunk provisioning. The Company anticipates that it will establish wireless and paging services on a resale basis. The Company will be required to rely on local exchange carriers ("LECs") and interexchange carriers to provide communications capacity or interconnection for its local and long-distance telephone service. The Company has entered into a direct interconnection agreement with Ameritech. The terms of the interconnection agreement require the approval of the Illinois Commerce Commission. The 1996 Telecom Act established certain requirements and standards for interconnection arrangements, and the Company's interconnection agreement with Ameritech is based in part on such requirements. However, these requirements and standards are still being developed and implemented by the FCC in conjunction with the states through a process of negotiation and arbitration. See "Risk Factors--Commencement of Telephony Services" and "Legislation and Regulation--Federal Regulation of Telecommunications Services." The DRS Network is capable of providing telephony services, but will require the installation of switching and other ancillary equipment at the NOC and at the nodes, where the customer's existing twisted-pair telephone wire will connect to the DRS Network. The Company has entered into an agreement with Nortel for the acquisition and installation of such equipment. 50 FUTURE BROADBAND SERVICES. The Company believes that the DRS Network will enable it to provide additional broadband services in the future, including (i) high-speed data transmission connecting homes and offices ("extranets"), (ii) wholesale transport and interconnection (local loop) services to connect long- distance carriers to their customers, (iii) security services, including closed- circuit television security monitoring and alarm systems and (iv) interactive energy management services, which involve active monitoring by the customer of energy usage and cost. The Company expects to commence trials of certain of these services in 1998. The Company plans to seek strategic partnerships and alliances to provide a number of these services. See "Risk Factors--Uncertain Demand for Broadband Services." SALES AND MARKETING 21st Century seeks to capitalize on its position as a new communications company that brings competition, choice and an innovative bundle of communications products to the residential and commercial markets covered by its DRS Network. RESIDENTIAL MARKETING. The Company's marketing plan for residential customers is initially focused on establishing relationships with the managers of residential rental properties and presidents of condominium associations which the Company expects will lead to long-term bulk video service contracts with the residents of targeted MDUs. Once the Company has entered into bulk MDU contracts and has connected its DRS Network to the buildings, the Company will then market its premium cable and pay-per-view video services, as well as its high-speed data and, when available, telephony services, to its cable subscribers in order to leverage its existing MDU subscriber relationships. In addition, the Company will utilize direct mail and personal sales calls to market its full range of voice, video and data services to Homes Passed. COMMERCIAL MARKETING. The Company's commercial marketing plan is initially focused on Chicago's central downtown area due to the heavy concentration of potential commercial accounts. Further, the Company expects to focus on small to mid-sized commercial accounts (under 50 employees), a market that the Company believes has been underserved by the incumbent providers and which has the potential for higher margins and greater interest in switching carriers for better pricing and customer care. Because the Company is not yet widely known, it will seek to acquire visibility and recognition by selling to well-known, communications-intensive accounts that have an interest in the Company's high- speed data and Internet services. At the same time, the Company's sales staff will seek to develop relationships with organizations such as the Building Owners Management Association and other facilities management companies that influence the selection of communications facilities installed at multiple buildings, as well as industry associations which the Company believes will encourage member companies to use the Company's services. The Company will also focus its marketing efforts on the commercial market outside of Chicago's central downtown area, which is made up primarily of small businesses operating in shopping strips, commercial boulevards or small- office/home-office environments. This market has an expanding diversity of communications needs which 21st Century believes are well-suited to the bundled products offered by the Company. The Company plans to focus its marketing efforts to these subscribers on its high-speed data service capabilities, which the Company believes will be an attractive alternative to data connectivity via the lower-speed, twisted-pair copper lines that are currently available. SALES AND MARKETING STAFF. The Company's sales and marketing staff currently consists of 25 individuals. The Company expects to increase this staff to approximately 28 during the first quarter of 1998. The sales and marketing staff is comprised of a commercial division and a residential division, each of which is headed by a manager who supervises various account executives. In addition, the Company has contracted with a third-party organization for sales support on an interim basis to assist the Company in marketing and selling its services to certain Homes Passed. The Company has selected its account executives for the collective diversity of their industry experience across the cable television, telephony and data service sectors. 51 CUSTOMER CARE The Company believes that customer care is an essential element of its operations and is committed to providing superior customer care to differentiate it from its competitors. The Company believes that the quality and reliability of its services will result in fewer in-bound subscriber complaints, service requests and other non-revenue producing calls. In addition, the Company has installed sophisticated status-monitoring and diagnostic equipment on both the NOC and its DRS Network which should allow the Company to become aware of and remedy many potential problems before they are detectable by subscribers. BILLING. The Company has contracted with a third party to provide a single billing statement for its voice, video and data services. This technology will facilitate bundled discounting for multiple services, permit customized billing statements and permit monthly, transactional and metered billing to support the Company's planned product lines. The third party's billing and information management system is currently integrated for video and data services, and is in the beta testing phase for integrated voice, video and data services. If an integrated billing and information management system for all three services is not commercially available when the Company begins providing telephony service, the Company's customers will still receive a single billing statement, but such statement will be generated from two separate billing and information management systems. CUSTOMER SERVICE REPRESENTATIVES. The Company has established a relationship with a leading call-center services provider to outsource its customer service operations. The call center is currently staffed with six full-time customer service representatives ("CSRs") trained to handle calls 24 hours per day, 365 days per year. An additional 20 CSRs have been trained and will be available to the Company as demand requires. Each CSR is required to have a thorough understanding of the Company's service offerings. The Company has provided a dedicated toll-free number to the call center for all subscriber needs and has established call center performance parameters under which (i) at least 90% of customer calls are to be answered within 30 seconds, (ii) customers are to receive a busy signal less than 3% of the time and (iii) customer-abandoned calls are to account for less than 5% of all calls. COMPETITION VIDEO SERVICE Cable television providers compete for subscribers in local markets with other providers of television services and other providers of entertainment, news and information. The competition in these markets includes broadcast television and radio, satellite and wireless video distribution systems and competitive television operations, newspapers, magazines and other printed sources of information and entertainment. The enactment of the 1996 Telecom Act may create more competition in providing cable television because it allows LECs to provide video services in their local service areas. CABLE SYSTEMS AND OTHER VIDEO PROVIDERS. There are existing cable television operations and other video providers in Chicago's Area 1. In addition, because Federal law prohibits cities from granting exclusive cable franchises and from unreasonably refusing to grant additional competitive franchises, additional cable television operators could obtain franchises in the future. An increasing number of cities are exploring the feasibility of owning their own cable systems in a manner similar to city-provided utility services. Chicago Cable, the local subsidiary of TCI, is the incumbent provider of cable services in Chicago's Area 1. Chicago Cable's legacy system is a traditional street-grid, coaxial cable system, is one-way, non-interactive, limited to the residential sector and does not currently accommodate enhanced communications transmissions. In the Chicago metropolitan area, of which Area 1 is a part, Chicago Cable and other subsidiaries of TCI have 52 approximately 515,000 subscribers for their basic cable services and their cable networks pass approximately 1,340,000 homes. OTHER VIDEO COMPETITION IN CHICAGO. There are small wireless cable providers serving certain MDUs in Chicago. In its current analog format, wireless cable has limited bandwidth and cannot accommodate a video channel offering comparable to 21st Century's. Further, the Company believes that the wireless technology required to provide bundled voice, video and high-speed data services with real interactivity does not exist at the present time, and the current technology that requires a phone-line return path should be at a competitive disadvantage to 21st Century's online cable modem Internet and high-speed data offerings. There are alternative methods of distributing the same or similar video programming offered by cable television systems, although cable television systems currently account for a substantial percentage of total subscribership to multichannel video programming distributors ("MVPDs"). In addition to broadcast television stations, the Company competes with other multichannel programming service providers on a direct over-the-air basis. Multichannel programming services are distributed by communications satellites directly to satellite dishes serving residences, private businesses and various nonprofit organizations. The Company expects a more significant competitive impact from medium-power and high-power communications DBS that transmit signals that can be received by small dish antennas. Hughes Communications, Inc. ("Hughes") commonly known as DirecTV, a subsidiary of General Motors Corporation, and United States Satellite Broadcasting Company, a subsidiary of Hubbard Broadcasting, began offering multichannel programming services in 1994 via high-power communications satellites that require a dish antenna of only approximately 18 inches. Other DBS providers include PrimeStar and EchoStar. Although DBS providers presently serve a relatively small percentage of pay television subscribers, their share has been growing steadily. Competition from both medium- and high-power DBS services could become substantial as developments in technology continue to increase satellite transmitter power and decrease the cost and size of equipment needed to receive these transmissions. However, the Company believes that equipment and programming costs presently are limiting DBS market share in cabled areas. The Company also believes that Area 1 has lower potential for DBS due to the difficulties of attaching dishes to high-rise structures. DBS has advantages and disadvantages as an alternative means of distributing video signals to the home. Among the advantages are that the capital investment (although initially high) for the satellite and uplinking segment of a DBS system is fixed and does not increase with the number of subscribers receiving satellite transmissions, that DBS is not currently subject to local regulation of service or required to pay franchise fees and that the capital costs for the ground segment of a DBS system (the reception equipment) are directly related to and limited by the number of service subscribers. The disadvantages of DBS presently include a limited ability to tailor the programming package to the interests of different geographic markets, such as providing local news, other local origination services and local broadcast stations, signal reception being subject to line of sight angles and intermittent interference from atmospheric conditions and terrestrially-generated radio frequency noise. The long-term effect of competition from these services cannot be predicted. Nonetheless, the Company believes that such competition will be significant. MMDS and LMDS systems represent another type of video distribution service. Both systems deliver programming services over microwave channels received by subscribers with a special antenna. LMDS, operating in the higher 28GHz frequency band, employs frequency reuse within a distributed architecture and is also capable of providing simultaneous delivery of two-way voice and data, as well as video services. MMDS and LMDS systems are less capital-intensive, are not required to obtain local franchises or pay franchise fees and are subject to fewer regulatory requirements than cable television systems. Although there are relatively few MMDS systems in the United States that are currently in operation or under construction, many markets have been licensed or tentatively licensed by the FCC. The FCC has taken a series of actions intended to facilitate the development of these "wireless cable systems" as alternative means of distributing video programming, including reallocating the use of certain frequencies to these services and expanding the permissible use of certain channels reserved for 53 educational purposes. The FCC's actions enable a single entity to develop a MMDS system with a potential of up to 35 channels, and thus compete more effectively with cable television. Developments in compression technology have significantly increased the number of channels that can be available from other over-the-air technologies. Subscribing to MMDS services is projected to continue to increase over the next several years. There are currently no commercial operating licensed LMDS systems in the United States. The FCC began auctioning commercial LMDS licenses in February 1998. It is not expected that any commercial LMDS systems will begin operating until late 1998. 21st Century believes that the density of high-rise buildings in the Chicago market area is a limiting factor for wireless technologies, such as DBS, LMDS and MMDS, all of which require a direct line of sight to the satellite or headend tower, respectively. Satellite dish installations on metropolitan Chicago MDUs have proven to be problematic and aesthetically undesirable. Moreover, the Company believes that "ghosting" and other distortion created by areas with substantial high-rise density, such as Area 1, may represent a quality disadvantage for potential wireless competitors. The Company also competes with master antenna television systems ("MATV") and SMATV systems, which provide multichannel program services directly to hotel, motel, apartment, condominium and similar multi-unit complexes within a cable television system's franchise area. These systems are generally free of any regulation by state and local government authorities. The 1996 Telecom Act changed the definition of a "cable-system" to include only systems that cross public rights-of-way. Therefore SMATV systems that serve buildings that are not commonly owned or managed and which do not cross public rights-of-way are no longer considered cable systems and no longer require a franchise to operate. Prior to enactment of the 1996 Telecom Act, LECs were prohibited from offering video programming directly to subscribers in their telephone service areas (except in limited circumstances in rural areas). The 1996 Telecom Act eliminated restrictions on LECs and the Company may face increased competition from local telephone companies, which in most cases have greater financial resources than the Company. Several major LECs, including Ameritech, have announced plans to acquire cable television systems or provide video services to the home through fiber optic technology. The 1996 Telecom Act provides LECs with four options for providing video programming directly to customers in their local exchange areas. Telephone companies may provide video programming by radio-based systems, common carrier systems, "open video" systems or "cable systems." LECs that elect to provide service via "open video" systems must allow others to use up to two-thirds of their activated channel capacity. They will be relieved of regulation as "common carriers" and are not required to obtain local franchises, but will still be subject to all rules governing cable systems, including franchising requirements. It is unclear which model LECs will ultimately choose but the video distribution service developed by local telephone companies is likely to represent direct competition for the Company. The ability of local telephone companies to compete with the Company by acquiring an existing cable system is limited. The 1996 Telecom Act prohibits a LEC and its affiliates from acquiring more than a 10% financial or management interest in any cable company providing cable service in its telephone service area. It further prohibits a cable operator and its affiliates from acquiring more than a 10% financial or management interest in any LEC providing telephone exchange service in its franchise area. A LEC and a cable operator that have a telephone service and cable franchise in the same market may not enter into a joint venture to provide telecommunications services or video programming. There are exceptions to these limitations for rural locations, very small cable systems and LECs in non-urban areas. INTERNET AND HIGH-SPEED DATA SERVICES 54 Internet service, both Internet access and on-line content services, is provided by ISPs, satellite-based companies, long-distance carriers and other cable television companies. A large number of companies provide businesses and individuals with direct access to the Internet and a variety of supporting services. In addition, many companies (such as America Online, Inc., MSN Computers, Prodigy Services Company and WebTV Networks) offer "online" services consisting of access to closed, proprietary information networks with services similar to those available on the Internet, in addition to direct access to the Internet. Such companies generally offer Internet services over telephone lines using standard computer modems. The Company believes that this form of transmission works well for smaller amounts of data, but standard telephone lines have limitations in handling large volumes of information, multimedia applications or high-speed data transmissions, resulting in lengthy delays. Also, ISPs have limited numbers of ports available for customers to dial in to the Internet, and their customers may experience difficulties in obtaining access to the Internet or be disconnected if activity is too great. A few ISPs also offer high-speed ISDN connections to the Internet. The Company believes that broadband transmission is the most efficient means of transmitting large volumes of data and information on a high-speed basis to and from the Internet. A few satellite companies provide broadband access to the Internet from desktop PCs using a small dish antenna and receiver kit comparable to that used for satellite television reception. DirecPC, principally owned and operated by Hughes, is a prominent provider of satellite-based Internet services in the United States. These satellite-based Internet services generally require a local wireline telephone (twisted copper pair) return path, which will have inherent capacity limitations and costs. Long-distance companies are aggressively entering the Internet access markets. Long-distance carriers have substantial transmission capabilities, traditionally carry data to large numbers of customers and have an established billing system infrastructure that permits them to add new services. For example, AT&T began providing Internet access in the United States through a new service called WorldNet, offering its long-distance customers five free hours of Internet access per month for a one-year period. MCI is offering MCI Internet in competition with AT&T's WorldNet service. The Company expects competition for the end-consumer from such companies to be vigorous due to such competitors' greater resources, operating histories and name recognition. However, the long- distance companies are still limited by the inherent speed constraints of traditional copper twisted-pair telephone lines. Other cable television companies can enter the Internet services market. Traditional cable networks provide only one-way transmission and must be upgraded (and often reconfigured) to permit two-way data transmission, which requires significant investments on the part of service providers. Broadband technology must be incorporated to enable digital data to be transmitted over a separate channel. The Company is not aware of any cable television competitors in its existing service area providing Internet access service using cable modems. However, owners of newer or upgraded cable television networks have the ability to provide Internet services using cable modems. The Company believes that some existing cable television providers are beginning to provide such services in certain of their major markets or clusters. @Home, a joint venture among TCI and several other large cable companies, is offering high-speed Internet service using cable modems in areas where its affiliates have HFC networks. The Company believes that high-speed Internet services ultimately will be offered by other cable providers and companies such as @Home in most of the Company's present and future service areas. In addition, @Home announced in December 1997 that it and Best Internet Communications would collaborate to deliver web hosting to customers of @Home's @Work division. Wireline and wireless telephony operators also provide high-speed data services. The wireline carriers include Ameritech and two competitive access providers ("CAPs"): WorldCom and TCG. While Ameritech provides telephony service in all of Area 1, its existing copper lines are not well suited to provide high-speed data services. Recent advances in DSL technology have made it possible to enhance the data transport capabilities over copper lines and Ameritech recently announced that it is providing high-speed Internet access using ADSL technology and will be collaborating with Microsoft Corporation to facilitate the installation of its ADSL service. Ameritech has announced plans to provide high-speed Internet access initially in Ann Arbor, Michigan, and expects to offer such 55 access in the Chicago area by mid-1998. However, the Company believes that the installation and operation of ADSL technology (especially in residential areas) will be costly to Ameritech. Neither of the CAPs offers ubiquitous telephony service in Chicago's business district or has built a network infrastructure in Chicago's residential areas. In addition, as in the case of Ameritech's network, the CAPs' networks are currently designed primarily for the transport of voice rather than data services and the Company believes the network upgrades necessary for the CAPs to provide competitive high-speed data services will be costly. Wireless telephony providers offer high-speed data services via satellite dishes. Data is transmitted to the subscriber from the satellite dish at relatively fast rates, but the subscriber must use a telephone line to send data. This restricts the ability of the subscriber to send information to the speed of an analog modem (generally 56 Kbps) and necessitates the use and expense of an additional telephone line. In addition, installation of a satellite dish is generally difficult in an MDU environment and in Chicago's business district. VOICE SERVICES Once the Company begins providing local and long-distance telephony services, it will likely face competition in providing such services. The 1996 Telecom Act is expected to have a substantial impact on the degree of competition because it permits providers to enter markets that were previously closed to them. Specifically, the 1996 Telecom Act preempts state policies that have historically protected LECs from significant competition in local service markets. In addition, the 1996 Telecom Act supersedes the antitrust consent decree that prohibited the Regional Bell Operating Companies ("RBOCs") from providing long-distance services, and establishes terms and conditions under which RBOC entry into the long-distance market will be permitted. The overall effect of these provisions is to blur the distinctions that previously existed between local and long-distance services. One major impact of the 1996 Telecom Act may be a trend toward the use and the acceptance of bundled service packages, consisting of local and long-distance telephony, combined with other elements such as cable television and wireless telecommunications service. As a result, the Company will be competing with the ILEC, Ameritech, with traditional providers of long-distance service, such as AT&T, MCI, Sprint and WorldCom and with competitive local service providers, and may face competition from other providers of cable television service, such as TCI. The Company's ability to compete successfully in telephony will depend on the attributes of the overall bundle of services the Company is able to offer, including price, features and customer service. Wireless telephone service (cellular and personal communication service ("PCS")) now is generally viewed by consumers as a supplement to, not a replacement for, wireline telephone service. In particular, wireless is more expensive than wireline local service and is generally priced on a usage basis. However, it is possible that in the future the rate and quality differential between wireless and wireline service will decrease, leading to more direct competition between providers of these two types of services. In that event, the Company's telephony operations may also face competition from wireless operators. OTHER TELEPHONY COMPETITORS. There are currently three principal competitive telecommunications carriers in Chicago's Area 1: Ameritech, WorldCom and TCG. Others have announced their entry into the local telephone business in Chicago, but none is offering a commercially available product at this time. Of the "Big Three" interexchange carriers, only MCI has attempted to enter the local market to date. AT&T has publicly stated that it will be in the local Chicago market by the end of 1998. Ameritech is the regulated monopoly local carrier in Chicago's Area 1. It was formed in 1983 as a result of the divestiture of AT&T. The local operating company is known as Ameritech-Illinois, formerly Illinois Bell, and reported operating revenues of $3.7 billion for 1996. Presently, its telephony services are provided largely over restricted bandwidth, twisted-copper pair wire. Ameritech offers local residential service on the basis of a per-line charge and measured usage charges based on distance and time-of-day. Ameritech is the only facilities-based provider presently available to the local residential market. On the business side, Ameritech offers a wide range of 56 switched and dedicated intraLATA local and toll services. Ameritech also offers enhanced services such as custom calling and CLASS features to both residential and business customers. In late 1994, Ameritech received FCC approval to enter the cable television business. Ameritech is initially targeting franchises in suburban Chicago and Michigan. This new unregulated organization is called Ameritech New Media. Ameritech is formally seeking the Area 5 franchise to compete with TCI in a predominantly residential, single-family home market. Because Ameritech's video division is not currently regulated, telephony services cannot currently be bundled with cable services. WorldCom is an integrated communications provider of local and long-distance telecommunications services and certain Internet-related services to business and government end-users nationally and internationally. It considers itself to be the first CLEC and promotes its ability to offer an integrated set of communications services. WorldCom says its strategy is to become the premier provider of communications services to business and government end-users. WorldCom has used a merger/acquisition strategy to achieve some of its goals. In August 1996, MFS (now WorldCom) acquired Internet service provider UUNet Technologies, Inc. and in August 1996, announced a merger with interexchange carrier LDDS WorldCom. More recently, in October 1997, WorldCom announced the purchase of Brooks Fiber Communications, which boosts its presence in the local telecommunications arena. Finally, in November 1997, WorldCom announced a merger with MCI, subject to regulatory approval. The combined WorldCom-MCI will offer a broad range of services and will be one of the largest communications companies in the world. The resulting integration of service offerings should strongly position WorldCom against other interexchange carriers and local monopoly carriers that do not yet provide the same range of services. TCG is the nation's oldest competitive local telecommunications provider for businesses and long-distance carriers. TCG's network currently encompasses more than 6,200 route miles through 51 major markets. TCG markets its services particularly to large businesses, interexchange carriers, ISPs, STS companies, cable companies (dark and lit fiber transport) and other information-intensive businesses. TCG provides dedicated and switched access, local-transport services, central office switched services and fax and data services. TCG also supplies point-to-point, broadcast-quality video channels between two or more locations. TCG offers local access and is targeting interexchange carriers and ISPs. Switched services represented about 40% of TCG's revenue in 1996; special access accounted for 60% during the same period. As of March 1997, four of the nation's largest cable television companies (TCI, Cox Communications, Inc., Comcast Corporation and Media One) controlled approximately 88% of the voting power of TCG. In January 1998, AT&T entered into an agreement to acquire all of the outstanding common stock of TCG. In Chicago, TCG operates a 372-route mile network, serving 144 commercial buildings in the downtown Loop. In September 1994, TCG was granted a CLEC license to operate in the Chicago area and has focused its marketing efforts in Chicago's western suburbs. TCI has formed a new division, TCI Telephony, Inc., to enable TCI to become a participant in the competitive telephony market, and has indicated that it intends to offer a full-range of both wired and wireless services to residential and business customers. TCI has indicated that it plans to package its telecommunications products with its cable services. It has been granted a license to offer residential telephony service in Arlington Heights, Illinois (a suburb of Chicago), but it has not stated any plan to enter the City of Chicago, although it may choose to do so in the future. CHICAGO FRANCHISE 21st Century was awarded a franchise effective June 1996 by the City of Chicago for the construction of a fiber cable network in Chicago's Area 1, representing one of the first second-provider franchise awards for a large urban 57 area. Under this non-exclusive 15-year renewable franchise, the Company has been granted unrestricted access to the public right-of-way to construct, operate and maintain its DRS Network to all residential and commercial subscribers in the franchise area. The franchise requires that the Company provide ubiquitous service to all residential subscribers in the franchise area in accordance with a specified time schedule, and allows the Company to selectively provide service to the franchise area's business and financial districts. Franchises typically contain many conditions, such as time limitations on commencement and completion of system construction, customer service standards, minimum number of channels and the provision of free service to schools and certain other public institutions. The Company believes that the conditions in its franchise in Chicago's Area 1 are fairly typical. The franchise obligates the Company to meet a number of local regulatory requirements, including (i) notices to subscribers of service and fee changes, (ii) system design, construction, maintenance and technical criteria that, among other things, require that the system be fully constructed within four years, (iii) interconnection with other cable operators serving the City for purposes of public, educational and governmental ("PEG") and leased access, (iv) various payments to the Chicago Access Corp. ("CAC") for PEG local access obligations, including (a) payments over ten years to CAC aggregating $1.1 million to fund CAC's PEG local access capital costs and (b) an annual payment to CAC of one percent of annual gross revenues, (v) preservation of 10 percent of channel capacity for PEG local access, (vi) equal employment and affirmative action requirements and (vii) development and fulfillment of standards for customer service and consumer complaints. The Company may not transfer or assign the franchise until June 1999, and then only with the prior consent of the City. The Company is required to pay a quarterly fee for the franchise to the issuing authority equal to 5% of gross revenues received from the operation of its cable television system. The Company prepaid $3 million of its franchise fee, which amount was credited toward future franchise fee payments, including a credit for the time value of the prepayment. EMPLOYEES At March 31, 1998, the Company had 120 full-time employees, of which 48 were technicians or others performing installation, maintenance, construction and design repair on the DRS Network, 27 were involved principally in sales and marketing, 15 were involved in matters relating to Internet and high-speed data services and 30 had management or administrative responsibilities. The Company considers its relations with its employees to be satisfactory. The Company recruits from several major industries for employees with skills in voice, video and data technologies. PROPERTIES The Company entered into a license agreement dated October 27, 1994 with the CTA. The term of the agreement commenced on June 24, 1996 and is for 15 years. The parties may elect to extend the agreement for additional 15-year terms. Pursuant to this agreement, the CTA gave the Company a nonexclusive license to install and maintain fiber optic cable on railway structures of the CTA's red, brown and green transit lines. The Company entered into a five-year pole attachment agreement dated April 3, 1996 with Commonwealth Edison. The Company has the option to renew this agreement for one additional five-year term. Pursuant to this agreement, Commonwealth Edison gave the Company nonexclusive licenses to attach fiber optic strands and/or cable wire, strand hardware, hardware and power supplies to utility poles that are owned by Commonwealth Edison so long as it does not interfere with Commonwealth's use of such utility poles. The Company entered into a pole attachment agreement dated November 14, 1996 with Ameritech. Either party may terminate the agreement upon six month's notice to the other party. Pursuant to this agreement, Ameritech has given the Company the nonexclusive right to place communications facilities on Ameritech's poles and/or conduit systems. 58 The Company entered into a 15-year lease dated January 31, 1997 for its headquarters (which includes the NOC) (the "Apparel Lease") with LaSalle National Bank. The Apparel Lease currently covers 32,422 square feet, and will be increased on December 1, 1998 to cover 36,410 square feet and on December 1, 2000 to cover 40,397 square feet. The Company's principal physical assets consist of fiber optic network and equipment, located either at the equipment site or along the DRS Network. The Company's distribution equipment along the DRS Network is generally attached to utility poles under pole rental agreements with local public utilities, although in some areas the distribution cable is buried in underground ducts or trenches. The Company's franchise from the City of Chicago gives the Company rights of way for its DRS Network. The physical components of the DRS Network require maintenance and periodic upgrading to keep pace with technology advances. The Company believes that its properties, taken as a whole, are in good operating condition and are suitable for the Company's business operations. INDUSTRY STRUCTURE AND TECHNOLOGY GENERAL Under the 1996 Telecom Act, cable companies may provide telephone service and telephone companies may provide cable service, local telephone companies may provide long-distance service and long-distance telephone companies may provide local service, and all may provide numerous ancillary services (with certain exceptions not material to the Company). Municipalities are required to grant cable television franchises to qualified applicants. This change in the regulatory environment, along with substantial growth in use of the Internet, has led and is generally expected to continue to lead to a rush by communications companies and other companies (such as utilities) to provide a wider range of voice, video and data communications services to consumers. COMMUNICATIONS TECHNOLOGIES AND SERVICES Set forth below is a brief description of the current communications industry systems, the technology generally used by each system (although numerous variations exist, and some systems combine a variety of technologies), and the hurdles each set of providers faces in offering new services. CABLE TELEVISION. Cable television systems generally consist of coaxial cable (which carries signals via radio frequency) and/or fiber optic cable (which carries signal via light waves generated by a laser) that runs along aerial or underground rights-of-way past the homes and businesses in a service area, connecting to each home and business individually through a coaxial cable connection tap located outside of the premises. Subscriber premises have internal wiring running from the coaxial cable connection tap to one or more outlets or "jacks" into which television sets or set-top terminals (which are used for special services, descrambling, "pay-per-view" and other features) may be connected. HFC cable networks rely on numerous amplifiers cascaded throughout the network to increase the signal strength, which diminishes as it travels through the network. The use of amplifiers produces distortion and noise which causes the signal quality to degrade, and this degradation increases as the number of amplifiers increases. Networks which are primarily fiber optic do not use amplifiers in the fiber optic portion of the network. Optical networks use lasers and fiber optic cable to distribute signals throughout the network. The number of channels or features that a cable network can offer is limited by the capacity of the HFC network and the electronic equipment which processes and amplifies the signal. Many traditional cable companies have sought to compete by increasing channel capacity through the use of extensive electronics, often resulting in poor signal quality. Most cable television systems use one-way (half-duplex, non- interactive) networks and accordingly do not have the ability to provide telephone services, which require full-duplex, two-way interactive cable. Several cable companies, including large cable companies, are beginning to offer 59 one-way data transmission (with telephony dial-back services). However, such services generally cannot deliver high-speed performance unless the operator substantially upgrades its cable system infrastructure. WIRELESS CABLE. MMDS, LMDS and DBS technologies allow the transmission of television programming, including high-speed computer data, high-definition television and facsimile transmissions, via microwave frequencies from a single location. Wireless cable was designed to serve primarily rural areas where laying traditional coaxial cable is not economically feasible. The wireless cable system's signal is sent from a centrally located facility equipped with transmitters, antennas, satellite dishes and scrambling and descrambling equipment, and is received by subscribers with rooftop antennas and the necessary converters. Because wireless cable signals are sent via microwaves, they require line-of-sight transmission from the central source to the subscribers. Obstructions such as trees, uneven terrain or dense urban skylines can interfere with reception, although repeaters that aid in reaching subscribers in certain obstructed areas are being developed to alleviate these shortcomings. As a result, the Company believes that at present this technology is not well suited to providing broadband services in urban areas such as those targeted by the Company. DTH, DBS AND OTHER SATELLITE TECHNOLOGIES. Direct-to-home Satellite TV ("DTH") companies provide the satellite transmission of television products and services. As part of the programming package, DTH companies generally include hardware and software for the reception and decryption of satellite television programming. The majority of DTH programming is transmitted on C-band radio frequency, which typically requires dish sizes ranging from six to twelve feet in diameter, depending upon the geographic location of the subscriber. In 1982, the FCC allocated spectrum within the Ku-band for DBS systems. The Ku-band historically has allowed for higher power transmission than C-band, enabling recipients to receive Ku-band signals using smaller satellite dishes (ranging in size from 15 to 18 inches in diameter). DBS systems generally offer more channels (often over 100 channels in all) than cable systems, although DBS providers usually do not offer local programming. Unlike cable television, DBS and DTH do not require ground construction to install or maintain or to upgrade services, but do require a southern line-of-site, a separate dish for every television and are not suitable for use in large MDUs. Rather, the programming is transmitted from a ground station to the subscriber via a communications satellite. These systems require the subscriber to purchase or lease a satellite dish to receive signals and a receiver system to process and descramble signals for television viewing. Most of the small satellite dishes available at present are not two-way interactive and therefore are not suitable for telephone or Internet services, although businesses that can afford to do so purchase expensive dishes with two- way interactivity and can receive each of the broadband services. Residential systems have been designed using telephone lines to transmit to the Internet and satellite transmission for reception from the Internet. This approach still is subject to dial-up delays and has many of the same limitations as two-way telephone communications as compared to service via an interactive broadband network. Satellite transmissions are also ill-suited for voice transmissions utilizing existing technologies due to the delay and echo inherent in the transmission from ground to satellite and back. WIRELINE TELEPHONY. Local wireline telephone systems consist of a network of switches, transmission facilities between switches and the "local loop" connections between customer premises and the nearest local exchange switch. A call initiated by a customer can be routed by the local exchange switch either directly to the called party, if that party is served by the same switch, to another local or toll switch for delivery to the called party, or through one or more switches to the POP of a long-distance carrier that transmits the call to a more distant local switch for ultimate delivery to the called party. The transmission facilities connecting switches are comprised primarily of very high-capacity fiber optic cables. However, local loops generally consist of twisted copper wire pairs that run along aerial or underground rights-of-way to each of the premises served. These local loops generally carry analog transmission and have relatively low transmission capacity, sufficient to carry only one two-way voice conversation. Local loop capacity can be expanded somewhat by using advanced technologies such as ISDN and DSL, which permits voice and data transmission to occur simultaneously and can support some limited level of video teleconferencing. 60 Local loops (even with ISDN or DSL) do not have sufficient capacity for large- scale provision of full-motion video services. Telephone service is the most common way of communication with the Internet, but existing local loop telephone lines do not have enough capacity for rapid downloading of large volumes of data (such as graphics), leading many Internet users to experience delays and ISPs to experience circuit overload. WIRELESS TELEPHONY (CELLULAR, PCS AND ENHANCED SPECIALIZED MOBILE RADIO ("ESMR")). Wireless telephone technology is based upon the division of a given market area into a number of smaller geographic areas or "cells." Each cell has "base stations" or "cell sites," which are physical locations equipped with transmitter-receivers and other equipment that communicate by radio signal with cellular telephones located within range of the cell-site. Cells generally have an operating range from 2 to 25 miles. Each cell site is connected to a mobile telephone switching office ("MTSO"), which, in turn, is connected to the local landline telephone network. When a subscriber in a particular cell dials a number, the cellular telephone sends the call by radio signal to the cell's transmitter-receiver, which then sends it to the MTSO. The MTSO then completes the call by connecting it with the landline telephone network or another cellular telephone unit. Incoming calls are received by the MTSO, which instructs the appropriate cell to complete the communications link by radio signal between the cell's transmitter-receiver and the cellular telephone. Like wireline local loops, wireless telephone technologies do not have sufficient capacity for large scale provision of video and data services. INTERNET ACCESS. Most Internet access takes place over telephone lines using computer modems. This form of transmission works well for text and small amounts of data, but telephone lines generally are not capable of handling large volumes of information, multimedia applications or high-speed data transmission, resulting in lengthy delays. Also, ISPs have limited numbers of ports available for customers to dial into the Internet, and their customers may experience difficulties obtaining access to the Internet or be disconnected if the access network is congested. A few satellite companies provide broadband access to the Internet from desktop PCs using a small dish antenna and receiver kit comparable to that used for satellite television reception, although such systems generally provide only one-way satellite transmission, requiring communications in the other direction to travel over telephone lines. High-speed cable modems used over traditional non-interactive cable networks similarly permit high-speed broadband reception from the Internet, but require communications from the user to the Internet to travel over telephone lines and are therefore hampered by the same delays and access difficulties associated with their telephone-only counterparts. LEGISLATION AND REGULATION The cable television industry currently is regulated by the FCC, some state governments and most local governments. Telecommunications services are regulated by the FCC and state public utility commissions. Internet services are generally unregulated at the Federal and state levels. In addition, legislative and regulatory proposals under consideration by Congress and Federal agencies may materially affect the cable television, telecommunications and Internet industries. The following is a brief summary of Federal laws and regulations affecting the growth and operation of the cable television, telecommunications and Internet industries and a description of certain state and local laws. CABLE COMMUNICATIONS POLICY ACT OF 1984 The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), which amended the Communications Act of 1934, as amended (the "Communications Act"), established comprehensive national standards and guidelines for the regulation of cable television systems and identified the boundaries of permissible Federal, state and local government regulation. The FCC was charged with the responsibility for adopting rules to implement the 1984 Cable Act. Among other things, the 1984 Cable Act affirmed the right of franchising authorities (state or local, depending on the practice in individual states) to award one or more franchises within their jurisdictions. The 1984 Cable Act provided that in granting or renewing franchises, franchising authorities may establish requirements for 61 cable-related facilities and equipment, but may not establish or enforce requirements for video programming or information services other than in broad categories. CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992 The 1992 Cable Act, which also amended the Communications Act, permitted a greater degree of regulation of the cable industry with respect to, among other things: (i) cable system rates for both basic and certain cable programming services; (ii) programming access and exclusivity arrangements; (iii) access to cable channels by unaffiliated programming services; (iv) leased access terms and conditions; (v) horizontal and vertical ownership of cable systems; (vi) customer service requirements; (vii) television broadcast signal carriage and retransmission consent; (viii) technical standards and (ix) cable equipment compatibility. Additionally, the 1992 Cable Act allowed municipalities to own and operate their own cable television systems without a franchise, prevented franchising authorities from granting exclusive franchises or unreasonably refusing to award additional franchises covering an existing cable system's service area, and prohibited the common ownership of cable systems and co- located MMDS or SMATV systems. The 1992 Cable Act also prevented video programmers affiliated with cable television companies from favoring cable operators over competitors and required such programmers to sell their programming to other multichannel video distributors. The legislation required the FCC to initiate a number of rulemaking proceedings to implement various provisions of the statute, the majority of which have been completed. On June 28, 1996, the Supreme Court upheld cable operators' ability to enforce prospective written policies against carrying programming that depicts sexual or excretory activities or organs in an offensive manner on commercial leased access channels. The Court also ruled that cable operators may not be required to segregate indecent commercial leased access programming and block it from viewer access, finding that this statutory provision violated cable operators' First Amendment rights. The Court also struck down on First Amendment grounds the statutory provision that enabled cable operators to prohibit obscene material, sexually explicit conduct or material soliciting unlawful acts on PEG channels. TELECOMMUNICATIONS ACT OF 1996 The 1996 Telecom Act significantly altered the regulatory structure of telecommunications markets by mandating that states permit competition for local exchange services. The 1996 Telecom Act also required ILECs to provide competitors with interconnection on reasonable and non-discriminatory terms and conditions, with access to ILEC facilities on an unbundled basis, and to provide competitors, at wholesale rates, telecommunications services for resale. In addition, the 1996 Telecom Act provided a statutory procedure for the RBOCs, which offer local exchange service, to apply to the FCC for authority to provide long-distance services. The 1996 Telecom Act also included significant changes in the regulation of cable operators. Specifically, the 1996 Telecom Act reversed over a three-year period much of the cable rate regulation established by the 1992 Cable Act. The rates for cable programming service ("CPS" or "expanded-basic") tiers offered by small cable operators in small cable systems were deregulated immediately. The FCC's authority to regulate the CPS tier rates of all other cable operators will expire on March 31, 1999. The legislation also (i) eliminated the uniform rate requirements of the 1992 Cable Act where effective competition exists, (ii) repealed the anti-trafficking provisions of the 1992 Cable Act, which prohibited transfers of ownership of cable systems within three years after initial construction or acquisition, (iii) limited the rights of franchising authorities to require certain technology and prohibit or condition the provision of telecommunications services by the cable operator, (iv) required cable operators to fully block or scramble both the audio and video on sexually-explicit or indecent programming on channels primarily dedicated to sexually-oriented programming, (v) allowed cable operators to refuse to carry leased access programs containing "obscenity, indecency or nudity," (vi) adjusted the pole attachment laws and (vii) allowed cable operators to enter telecommunications markets which historically have been closed to them, while also allowing some telecommunications providers to begin providing competitive cable service in their local service areas. 62 FEDERAL REGULATION OF CABLE SERVICES The FCC has promulgated regulations covering many aspects of cable television operations, and is required to adopt additional regulations or repeal or modify existing regulations to implement the 1996 Telecom Act. The FCC may enforce its regulations through the imposition of fines, issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities often used in connection with cable operations. A brief summary of certain Federal regulations follows. RATE REGULATIONS. Local franchising authorities may regulate rates for basic cable services and equipment in communities where the cable operator is not subject to "effective competition." The FCC resolves complaints about rates for expanded-basic CPS and can reduce rates found to be unreasonable. Cable services offered on a per channel or on a per program basis are not subject to rate regulation by either local franchising authorities or the FCC. The 1996 Telecom Act deregulated the CPS rates of "small cable operators" immediately and the CPS rates of all other cable operators after March 31, 1999. A "small operator" is an operator that has fewer than 50,000 subscribers in the franchise area, that with its affiliates serves less than 617,000 subscribers and that is not affiliated with entities with annual aggregate gross revenues of more than $250 million. Local franchise authorities must be certified by the FCC before regulating basic cable rates. Upon certification, the local community obtains the right to evaluate the reasonableness of basic rates under standards established by the FCC. Certified franchising authorities are also empowered to regulate rates charged for additional outlets and for the installation, lease and sale of equipment used by subscribers to receive the basic service tier. Cable operators may be required to refund overcharges with interest. The 1992 Cable Act permits communities to certify at any time, so it is possible that the Company's franchising authorities may choose in the future to certify to regulate the Company's basic rates. FCC review of CPS rates is triggered by franchising authority complaints filed within 180 days of a rate increase. The FCC's rate regulations do not apply where a cable operator demonstrates that it is subject to "effective competition" as defined under the 1992 Cable Act. The Company believes that it is subject to effective competition in the area that it currently serves. The 1992 Cable Act also requires cable systems to permit subscribers to purchase video programming offered by the operator on a per channel or a per program basis without the necessity of subscribing to any tier of service, other than the basic service tier, unless the system's lack of addressable converter boxes or other technological limitations do not permit it to do so. Systems facing "effective competition" are not subject to this tier buy-through prohibition. The 1996 Telecom Act allows cable operators to pass through franchise fees and regulatory fees to subscribers without any prior notice. Notices of other rate changes may be given by any reasonable written means, at the cable operator's "sole discretion." CARRIAGE OF BROADCAST TELEVISION SIGNALS. The 1992 Cable Act established signal carriage requirements for cable operators. These regulations allow commercial television broadcast stations which are "local" to a cable system, to elect every three years whether to require the cable system to carry the station, subject to certain exceptions, or whether to require the cable system to negotiate for "retransmission consent" to carry the station. Commercial stations are generally considered "local" to a cable system where the system is located in the station's 1992 ADI, as determined by Arbitron; the regulatory method for determining whether a station is "local" to a cable system may change at the time of the October 1999 election. Cable systems must obtain retransmission consent for 63 the carriage of all "distant" commercial broadcast stations, except for certain "superstations" (i.e., commercial satellite-delivered independent stations such as WGN). Local non-commercial educational television stations are also given mandatory signal carriage rights. Subject to certain exceptions, a cable operator must carry all such stations if the cable system is within the larger of (i) a 50- mile radius of the station's city of license or (ii) the station's Grade B contour (a measure of signal strength). Non-commercial stations are not given the option to negotiate for retransmission consent. DELETION OF NETWORK AND SYNDICATED PROGRAMMING. Cable television systems that have 1,000 or more subscribers must, upon the appropriate request of a local television station, delete or "black out" the network and/or syndicated non-network programming of a distant station when the local station has contracted for such programming on an exclusive basis. REGISTRATION PROCEDURES AND TECHNICAL REQUIREMENTS. Prior to commencing operation in a particular community, all cable television systems must file a registration statement with the FCC listing the broadcast signals that it will carry and certain other information. The Company has filed its registration statement with the FCC. Additionally, cable operators periodically are required to file various informational reports with the FCC. Cable operators that operate in certain frequency bands used in the aeronautical service for airport air-to- ground communications (108-137 MHz and 225-400 MHz bands) must notify the FCC before commencing operations and, on an annual basis, file the results of periodic cumulative leakage testing measurements to insure that they do not interfere with aeronautical stations. Operators that fail to make these filings or who exceed the FCC's allowable cumulative leakage index risk being prohibited from operating in those frequency bands in addition to other sanctions. The Company has filed its initial aeronautical notice with the FCC. The FCC has also imposed technical standards applicable to the cable channels on which broadcast stations are carried, and has prohibited franchising authorities from adopting standards which conflict with or are more restrictive than those established by the FCC. The FCC has applied its standards to all classes which carry downstream National Television System Committee ("NTSC") video programming. The 1992 Cable Act requires the FCC to update periodically its technical standards to reflect improvements in technology. FRANCHISE AUTHORITY. The 1984 Cable Act affirmed the right of franchising authorities (the cities, counties or political subdivisions in which a cable operator provides cable service) to award franchises within their jurisdictions and prohibited non-grandfathered cable systems from operating without a franchise in such jurisdictions. The Company holds a cable franchise in the franchise area in which it currently provides service. In addition to the franchise matters discussed in greater detail below, local franchise authorities typically exercise regulatory jurisdiction over cable system design and construction, safe use of public rights-of-way, consumer protection and customer service. The Company's franchise contains such requirements. The 1996 Telecom Act exempts from franchise requirements those telecommunications services provided by a cable operator or its affiliate. Franchise authorities may not require a cable operator to provide telecommunications service or facilities, other than institutional networks, as a condition of franchise grant, renewal or transfer. Similarly, franchise authorities may not impose any conditions on the provision of such service. Local officials may, however, regulate cable-provided telecommunications services' use of public rights-of-way, provided that it is done outside the cable franchising process and in a competitively neutral, non-discriminatory way. FRANCHISE FEES. Although franchising authorities may impose franchise fees under the 1984 Cable Act, as modified by the 1996 Telecom Act, such payments cannot exceed 5% of the cable system's annual gross revenues derived from the operation of the cable system to provide cable services. Franchise fees apply only to revenues from cable services. Franchising authorities are permitted to charge a fee for any telecommunications provider's use of public rights-of-way "on a competitively neutral and nondiscriminatory basis." 64 FRANCHISE RENEWAL. Federal statutory law provides renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal. These formal procedures are mandatory only if timely invoked by either the cable operator or the franchising authority. Even after the formal renewal procedures are invoked, franchising authorities and cable operators remain free to negotiate a renewal outside the formal process. Although the procedures provide substantial protection to incumbent franchisees, renewal is by no means assured, as the franchisee must meet a number of statutory standards and filing deadlines. Even if a franchise is renewed, a franchising authority may impose new and more onerous requirements such as upgrading facilities and equipment, although the municipality must take into account the cost of meeting such requirements. CHANNEL SET-ASIDES. Federal law permits local franchising authorities to require cable operators to set aside certain channels for PEG access programming. In addition, cable television systems with 36 or more activated channels are required to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties. Leased access rates are to be set according to an FCC-prescribed formula. OWNERSHIP. The 1996 Telecom Act prohibits a LEC or its affiliate from acquiring more than a 10% financial or management interest in any cable operator providing cable service in its telephone service area. It also prohibits a cable operator or its affiliate from acquiring more than a 10% financial or management interest in any LEC providing telephone exchange service in its franchise area. A LEC and cable operator whose telephone service area and cable franchise area are in the same market may not enter into a joint venture to provide telecommunications service or video programming. There are exceptions to these limitations for rural facilities, very small cable systems and small LECs in non-urban areas. The 1984 Cable Act prohibited the common ownership, operation, control or interest in a cable system and a local television broadcast station whose predicted Grade B contour covers any portion of the community served by the cable system, and FCC rules continue to prohibit such cross-ownership. The 1996 Telecom Act repeals this statutory restriction on broadcast-cable cross- ownership, but does not require the FCC to repeal its cross-ownership rule. Nevertheless, the FCC intends to review this rule. The 1996 Telecom Act also eliminates the FCC's restriction against the ownership or control of both a broadcast network and a cable system, but it authorizes the FCC to adopt regulations which will ensure carriage, channel positioning and nondiscriminatory treatment of non-affiliated broadcast stations by cable systems which are owned by a broadcast network. The 1992 Cable Act prohibits the common ownership, affiliation, control or interest in cable television systems and MMDS facilities or SMATV systems with overlapping service areas. However, a cable system may acquire a co-located SMATV system if it provides cable service to the SMATV system in accordance with the terms of its cable television franchise. The 1996 Telecom Act provides that these rules shall not apply where the cable operator is subject to effective competition. Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of cable systems a single cable operator may own. In general, no cable operator may hold an attributable interest in cable systems which pass more than 30% of all homes nationwide. This statutory provision was found to be unconstitutional by a Federal district court in 1993, and the FCC has stayed the effectiveness of its applicable rules pending disposition of further administrative reconsideration and judicial appeal. Attributable interests for these purposes include voting interests of 5% or more (unless there is another single holder of more than 50% of the voting stock), officerships, directorships and general partnership interests. An FCC proceeding in which ownership attribution standards currently are under review may lead to changes in FCC policies affecting cable ownership. PRIVACY. The 1984 Cable Act imposes a number of restrictions on the manner in which cable system operators can collect and disclose data about individual system subscribers. The statute also requires that the system operator periodically provide all subscribers with written information about its policies regarding the collection and handling of data about subscribers, their privacy rights under Federal law and their enforcement rights. Under the 1992 Cable Act, the privacy requirements are strengthened to require that cable operators take such actions as are necessary to prevent unauthorized access to personally identifiable information. 65 ANTI-TRAFFICKING. Under the 1996 Telecom Act, a local franchise may require prior approval of a transfer or sale of a cable system. The 1992 Cable Act requires franchising authorities to act on a franchise transfer request within 120 days after receipt of all information required by FCC regulations and the franchising authority. Approval is deemed granted if the franchising authority fails to act within such period. ACCESS TO PROGRAMMING AND EXCLUSIVITY. As required by the 1992 Cable Act, the FCC adopted regulations designed to increase access to video programming for all multichannel video programming distributors by prohibiting unfair or discriminatory practices in the sale of satellite cable programming distributed by cable-affiliated programmers. The rules also limit exclusive programming contracts that may be entered into between cable operators and cable-affiliated programmers. COPYRIGHT. Cable television systems are subject to Federal compulsory copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a Federal copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory license to retransmit broadcast signals. The amount of the royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried and the location of the cable system with respect to over-the-air television stations. Cable operators are liable for interest on underpaid and unpaid royalty fees, but are not entitled to collect interest on refunds received for overpayment of copyright fees. Copyright music performed in programming supplied to cable television systems by pay cable networks (such as HBO) and cable programming networks (such as USA Network) has generally been licensed by the networks through private "through to the viewer" license agreements with the American Society of Composers and Publishers and BMI, Inc., although music used in local origination programming is not yet covered by a license. TELECOMMUNICATIONS AND CABLE INSIDE WIRING. The FCC recently issued new rules of particular importance to providers of cable television and telecommunications services to MDUs. These rules, which govern such inside wiring matters as procedures for an incumbent provider to sell, remove or abandon its wiring upon termination of service and shared use of space by competing providers, may affect the competitive position of providers of cable and telephone service to the MDU market. The FCC is continuing to review issues such as exclusive service contracts and application of cable home wiring rules to non-cable video distributors. POLE ATTACHMENTS. The Communications Act permits the FCC, in the absence of state regulation, to regulate rates, terms and conditions for pole attachments and use of utility conduits, ducts or other rights-of-way by cable operators. Rates for pole attachments and use of conduits and other facilities for providers of telecommunications services are subject to different FCC regulations. REGULATORY FEES AND OTHER MATTERS. The FCC requires payment of annual "regulatory fees" by the various industries it regulates, including the cable television industry. The current fee is $0.54 per subscriber. Fees are also assessed for other FCC licenses, including licenses for business radio, cable television relay system and earth stations. Fees are reassessed by the FCC annually. In December 1994, the FCC adopted new cable television and broadcast technical standards to support a new Emergency Alert System. The FCC has not established a date by which cable operators must install and activate equipment necessary to implement the new Emergency Alert System. FCC regulations also address the carriage of local sports programming, restrictions on origination and cablecasting by cable system operators, application of the rules governing political broadcasts, customer service standards, closed captioning of programming for the hearing impaired, limitations on advertising contained in nonbroadcast children's programming and equal employment opportunity requirements for cable system employees. 66 FEDERAL REGULATION OF TELECOMMUNICATIONS SERVICES Telecommunications services are subject to varying degrees of Federal, state and local regulation. The FCC exercises jurisdiction over all facilities of and services offered by telecommunications carriers to the extent those facilities are used to provide, originate or terminate interstate or international communications. The 1996 Telecom Act substantially revised communications regulation in the United States. The legislation is intended to allow providers to enter communications markets that have historically been closed to them as a result of legal restrictions and due to practical and economic considerations. At the same time, implementation of the 1996 Telecom Act and regulatory actions at the state level may result in increased competition in the local exchange business, which, in turn, will give incumbent providers greater flexibility to compete aggressively. The Company is unable to predict the ultimate outcome of Federal and state proceedings to implement the legislation. INTERCONNECTION. The 1996 Telecom Act establishes local exchange competition as a national policy by preempting laws that prohibit competition in the local exchange. The 1996 Telecom Act also requires ILECs to enter into mutual compensation arrangements with new local telephone companies for transport and termination of local calls on each others' networks. The Act's interconnection, unbundling and resale standards have been developed in the first instance by the FCC and will be implemented by the states in numerous proceedings and through a process of negotiation and arbitration. In August 1996, the FCC adopted a wide- ranging decision regarding the statutory interconnection obligations of the LECs. Among other things, the order established pricing principles to be used by the states in determining rates for unbundled local network elements and established a method for calculating discounts to reflect costs saved by the LECs in offering their retail services to other carriers on a wholesale basis. In July 1997, the United States Court of Appeals for the Eighth Circuit struck down the pricing rules established by the FCC, ruling that the FCC lacked jurisdiction under the 1996 Telecom Act to establish pricing rules to be applied by the states. Consequently, the pricing of interconnection, unbundled network elements and wholesale ILEC services is a matter primarily within the jurisdiction of state commissions at the present time. The court generally upheld the FCC's non-pricing requirements for unbundling of network elements and offering of wholesale services. The FCC has appealed such decision to the United States Supreme Court. NUMBER PORTABILITY. Another new statutory provision requires all providers of local exchange services to give users the ability (without the impairment of quality, reliability or convenience) to retain their existing telephone numbers if they switch local exchange service providers ("number portability"). The FCC has adopted an order requiring the implementation of interim portability and mandating that permanent number portability be available in the 100 largest metropolitan areas by December 31, 1998. However, an appeal challenging that decision is pending. UNIVERSAL SERVICE AND ACCESS CHARGE REFORM. The FCC has adopted rules implementing the universal service requirements of the 1996 Telecom Act. Pursuant to those rules, all telecommunications providers must contribute to a newly established Universal Service Fund. Carriers providing service to customers in high-cost and rural areas, as well as to low-income customers, will be eligible to collect subsidies from the fund. The fund also will subsidize service provided to schools, libraries and rural health care providers. The FCC also completed a proceeding in which it revised the rules governing access charges imposed by ILECs on interexchange carriers for use of the local network to complete long-distance calls. The policies adopted in that proceeding are intended to move the ILECs' charges for access services closer to cost. Appeals of the FCC's access charge reform and universal service orders are currently pending. RBOC ENTRY INTO LONG DISTANCE. The 1996 Telecom Act opens the way for RBOCs and their affiliates to provide long-distance telecommunications services between a local access and transport area ("LATA") and points outside that area. Prior to the 1996 Telecom Act, RBOCs were generally prohibited from offering such "interLATA" services. Under the 1996 Telecom Act such services may be offered by a RBOC outside of its local exchange service states immediately. RBOCs may offer interLATA services from within such states (in- region) only after receiving FCC approval, and in accordance with regulatory requirements. On December 31, 1997, a Federal district court judge in Texas declared portions of the 1996 Telecom Act unconstitutional. If this ruling is upheld on appeal, 67 RBOCs could enter the interLATA market in the very near future. If the Company decides itself to provide interLATA service, it will likely face vigorous competition from RBOC entrants, as well as from existing long-distance carriers. TARIFFS. Pursuant to its forbearance authority, the FCC recently determined that it will no longer require nondominant interexchange carriers to file tariffs listing their rates, terms and conditions. This decision has been stayed by the United States Court of Appeals for the District of Columbia Circuit. Nondominant providers of exchange access services provided to interexchange carriers no longer are required to file tariffs at the FCC. Authorization from the FCC must be obtained, and a carrier must file a tariff at the FCC detailing the rates, terms and conditions of service, prior to offering international service. ADDITIONAL REQUIREMENTS. Federal law imposes a number of additional obligations on all telecommunications carriers, including the obligations to: (i) interconnect with other carriers and not to install equipment that cannot be connected with the facilities of other carriers; (ii) ensure that their services are accessible and usable by persons with disabilities; (iii) provide Telecommunications Relay Service ("TRS"), either directly or through arrangements with other carriers or service providers (TRS enables hearing impaired individuals to communicate by telephone with hearing individuals through an operator at a relay center); (iv) comply with verification procedures in connection with changing the prescribed interexchange carrier of a customer so as to prevent "slamming," a practice by which a customer's chosen long- distance carrier is switched without the customer's knowledge; (v) protect the confidentiality of proprietary information obtained from other carriers, manufacturers and customers; (vi) pay annual regulatory fees to the FCC; (vii) contribute to the Telecommunications Relay Services Fund; and (viii) cooperate with Federal, state and local law enforcement officials in lawful investigations, while protecting the confidentiality of subscribers' communications. In addition, the Company will be subject to requirements potentially affording competitors access to its facilities and rights-of-way and enabling others to resell the Company's services. ADDITIONAL REQUIREMENTS IMPOSED ON LECS. Federal law imposes a number of additional obligations that will apply to the Company to the extent it provides local exchange and exchange access services, including the duty (i) not to prohibit or impose unreasonable or discriminatory conditions or limitations on the resale of its telecommunications services, (ii) to provide, to the extent technically feasible, number portability in accordance with FCC requirements, to provide dialing parity to competing providers of telephone exchange service and telephone toll service and the duty to permit all such providers to have nondiscriminatory access to telephone numbers, operator services, directory assistance and directory listing, with no unreasonable dialing delays, (iii) to afford access to its poles, ducts, conduits and rights-of-way to competing providers of telecommunications services on rates, terms and conditions that are consistent with section 224 of the Communications Act and (iv) to establish reciprocal compensation arrangements for the transport and termination of telecommunications. STATE AND LOCAL REGULATION CABLE TELEVISION REGULATIONS In June of 1996, the Company and the City of Chicago entered into a franchise agreement to provide cable services to Area 1 of the City. The franchise remains in effect for 15 years, until June 2011. Under the franchise, the Company is obligated to pay to the City a franchise fee of 5 percent of its annual gross revenues received from operation of its cable television system. The franchise obligates the Company to meet a number of local regulatory requirements, including: (i) notices to subscribers of service and fee changes; (ii) system design, construction, maintenance and technical criteria that, among other things, require that the system be fully constructed within four years; (iii) interconnection with other cable operators serving the City for purposes of City PEG and leased access; (iv) various payments to the CAC for PEG local access obligations, including (a) payments over ten years aggregating $1,125,000 to fund CAC's PEG local access capital costs and (b) an annual payment of one percent of annual gross revenues; (v) preservation of 10 percent of channel capacity for PEG local access; (vi) equal employment and affirmative action requirements; and (vii) development and fulfillment of standards for customer 68 service and consumer complaints. The Company may not transfer or assign the franchise until June 1999, and then only with the prior consent of the City. TELECOMMUNICATIONS REGULATIONS The 1996 Telecommunications Act contains provisions that prohibit states and localities from adopting or imposing any legal requirement that may prohibit, or have the effect of prohibiting, market entry by new providers of intrastate or interstate telecommunications services. The FCC is required to preempt any state or local requirements to the extent necessary to enforce the open market entry requirements. States and localities may continue to regulate the provision of intrastate telecommunications services and require carriers to obtain certificates or licenses before providing service. These regulatory agencies are governed by respective Federal or state legislation and, therefore, any change or modification to such regulation or legislation can result in positive or negative effects upon the Company. Moreover, any significant changes in regulations by Federal or state governmental agencies could significantly increase the Company's costs or otherwise have an adverse effect on the Company's activities. STATE CERTIFICATION PROCEDURES. CLECs desiring to provide service within the State of Illinois must obtain certificates of exchange and interexchange telecommunications service authority. On October 27, 1997, the Company applied to the Illinois Commerce Commission ("ICC") for such certificates. Those applications are currently pending. To be awarded a certificate, an applicant must show that it has the requisite technical, financial and managerial expertise to offer the underlying services. In addition, an application for a certificate to provide local exchange service must prove that grant of the certificate would not adversely affect the prices, network design or the financial viability of the principal provider of local exchange telecommunications service. In addition to obtaining the requisite certificates, carriers are required to file tariffs describing the nature of the service, applicable rates and other charges, terms and conditions of service and the exchange, exchanges or other geographical area or areas in which the service shall be offered or provided. STATE RESALE REQUIREMENTS. Once the Company receives its certification from the ICC, it will be required to offer for resale all noncompetitive services. A carrier offering noncompetitive services to any customer must provide that service pursuant to tariff to all persons, including all telecommunications carriers and competitors. A service is competitive if it is reasonably available (or its functional equivalent or substitute is reasonably available) for some identifiable class or group of customers. A carrier may petition the ICC to request a ruling that a service be declared competitive, and thus, not subject to the resale requirements. In addition, noncompetitive services are subject to additional tariffing requirements and other regulation. STATE INTERCONNECTION REQUIREMENTS. Illinois statutory law does not explicitly regulate the terms of interconnection between telecommunications carriers. The ICC, however, has adopted detailed regulations to implement interconnection under Section 252 of the Communications Act. Specifically, the ICC is required to arbitrate interconnection agreements between competitive local exchange providers, such as the Company, and incumbent local exchange providers. STATE UNIVERSAL SERVICE REQUIREMENTS. Similar to the universal service fund mandated by the FCC, the ICC established a Universal Service Telephone Service Assistance Program whereby providers of local exchange services pay into a fund designed to subsidize local service for low-income residents of the state. Such funds are available to providers that service such customers. LOCAL FEES AND TAXES. All providers operating in the City of Chicago are required to remit a fee of 2 percent of all gross charges paid to the provider for telecommunications received or originated within the City. The fee is for the use of the public ways within the City. Providers, such as the Company, are required to pass the fee on to customers, and are permitted to retain up to 2 percent of the total amounts collected to reimburse themselves for expenses incurred in submitting this fee to the City. In addition, a tax of 5 percent of all gross charges for all 69 telecommunications originated within the City of Chicago must be remitted to the City. Providers may charge customers directly for this tax, and may keep up to 1.75 percent of the amounts collected to reimburse themselves for the expenses of collecting such taxes. LOCAL EMERGENCY SYSTEM REQUIREMENTS. The City of Chicago imposes upon every network connection within the City's corporate limits a monthly rate of $1.25 per network connection to support the City's Emergency Telephone System. Each carrier, such as the Company, is required to collect this amount from each subscriber as a separate billed amount on a monthly basis. Carriers, such as the Company, can deduct three percent of the gross amount collected to reimburse themselves for the expenses of collecting and accounting for these charges. Carriers must remit the amount collected to the Chicago Emergency Telephone System Board monthly. To the best of the Company's knowledge, there exist no local or city regulations which materially affect the Company's planned offerings of telecommunications services. FEDERAL AND STATE REGULATION OF INTERNET SERVICES Internet services, including Internet access, have traditionally been deemed an "enhanced" or "information" service and, as such, neither Federal nor state telecommunications regulations apply. As a matter of Federal policy, the FCC does not regulate the provision of "information" and "enhanced" services, and preempts certain state regulation of such services that would frustrate the Federal deregulatory policy. However, it is likely that, in the next year, the FCC will investigate the status of Internet services to discern, among other things, whether some or all Internet services should be classified as "telecommunications" and not as "information" or "enhanced" services. At this time, the Company cannot estimate whether the FCC's future proceeding will lead to a change of regulatory treatment of Internet services, or what impact such a change would have on the Company's business plans for providing Internet services. The Communications Decency Act ("CD Act") would make it unlawful to: (i) knowingly send to a minor or display in a manner available to a minor "obscene", "indecent" or "patently offensive" communications using a telecommunications device or on-line service; (ii) send such a communication to anyone with the intent to annoy, threaten or harass; or (iii) allow a telecommunications facility under one's control to be used for such purpose. A preliminary injunction against enforcement of the CD Act with respect to indecent or patently offensive communications has been affirmed by the United States Supreme Court, which found the CD Act's provisions to violate the First Amendment. Although it is unlikely that the enjoined provisions of the CD Act will ever become effective, there can be no assurance that information content made available on or through the Company's offerings, by the Company or by users of those offerings would not violate the CD Act, if it were to become effective, or similar legislation that Congress might enact in the future, or that attempts to implement defenses to such legislation would not adversely affect the Company's business or operations. Federal laws dealing with obscenity and child pornography as well as various state laws similar to those laws or to the CD Act may also apply to information content available on or through the Company's offerings. There is no assurance that those laws will not be applied in a manner that will adversely affect the Company's business or operations. Proposals for additional or revised statutory or regulatory requirements are considered by Congress, the FCC and state and local governments from time to time, and a number of such proposals are under consideration at this time. It is possible that certain of the provisions and requirements described herein are now, and in the future may be, the subject of federal or state legislation, agency proceedings or court litigation. It is not possible to predict what legislative, regulatory or judicial changes, if any, may occur or their impact on the Company's business or operations. 70 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are listed below. Directors of the Company are elected at the annual meeting of shareholders and officers of the Company are appointed at the first meeting of the Board of Directors after each annual meeting of shareholders. Directors and executive officers of the Company are elected to serve until they resign or are removed, are otherwise disqualified to serve or until their successors are elected and qualified. The ages of the persons set forth below are as of December 31, 1997.
NAME AGE POSITION(S) WITH COMPANY - ----------------------------- --- ------------------------------------------- Glenn W. Milligan........... 50 Chairman of the Board and Chief Executive Officer Robert J. Currey............ 52 President, Chief Operating Officer and Director Ronald D. Webster........... 48 Chief Financial Officer Jay E. Carlson.............. 36 Chief Technical Officer Richard Wiegand-Moss........ 50 Senior Vice President of Customer Operations Stephen Lee................. 41 Senior Vice President of Internet and Data Services Susan R. Quandt............. 43 Senior Vice President of Corporate Marketing John Brouse................. 49 Vice President of Network Operations Eric D. Kurtz............... 33 Vice President of Corporate Development and Regulatory Affairs Roxanne Jackson............. 33 Vice President of Human Resources Donna Clayburn.............. 40 Vice President of Marketing Edward T. Joyce............. 55 Director Dr. Charles E. Kaegi........ 47 Director James H. Lowry.............. 58 Director David Kronfeld.............. 50 Director Thomas Neustaetter.......... 45 Director
GLENN W. MILLIGAN, the Company's founder, has been Chairman of the Board and Chief Executive Officer of the Company since its inception in October 1992. Prior to founding the Company, Mr. Milligan was President and Chief Executive Officer of 21st Century Technology Group, Inc. from April 1986 to October 1992. From July 1985 until March 1986, Mr. Milligan served as Regional Director for the Walt Disney Company, where he was responsible for sales and marketing in eight midwestern states. From March 1984 to March 1985, Mr. Milligan served as Area Manager of the Midwest offices of Showtime Networks, Inc. and Regional Sales Director of their North Central offices from March 1985 to June 1985. From July 1979 to November 1983, Mr. Milligan was the Chief Executive Officer of DAEOC, Inc., a diversified government contractor. ROBERT J. CURREY has served as a Director of the Company since February 1997 and was named President and Chief Operating Officer on March 1, 1998. Mr. Currey served as Group President of Telecommunications Services for McLeod USA, a wholly owned subsidiary of McLeod, Inc., from September 1997 through February 1998. Mr. Currey continues to serve on the board of directors of McLeod USA. From March 1990 until September 1997, he served as President and Chief Executive Officer of Consolidated Communications. From 1988 to 1990, Mr. Currey served as Senior Vice President of Operations and Engineering at Citizens Utilities Company in Stanford, CT. From 1987 to 1988, Mr. Currey served as Executive Vice President at US Sprint in Kansas City, MO. RONALD D. WEBSTER joined the Company as Chief Financial Officer in September 1997. He was previously Vice President and Treasurer at Telephone Data Systems, Inc., where he served from April 1988 until August 1997. Prior thereto, he held executive positions with Ideal School Supply Corp. and Trans Union Corporation. JAY E. CARLSON has served as the Company's Chief Technical Officer since March 1997. From October 1989 to March 1997, Mr. Carlson was the Fund Engineering Director for Jones Intercable, Inc. where he was responsible for 71 engineering operations in the Western region. He was also instrumental in the design and construction of Jones Intercable's Alexandria, Virginia HFC broadband network, which was one of the first platforms to simultaneously carry residential and commercial telephony, video and data. RICHARD WIEGAND-MOSS joined the Company in May 1996 and serves as Senior Vice President of Customer Operations. Prior to joining the Company, from May 1994 to April 1996, Mr. Wiegand-Moss was Vice President of Customer Operations for Time Warner Entertainment Co. L.P. From October 1993 to April 1994, he was Senior Consultant/Project Manager for International Profit Associates, a management consulting firm providing turnaround services for companies in financial trouble and from January 1991 to September 1993, Mr. Wiegand-Moss was General Manager and Chief Operating Officer of TCI Chicago. From August 1982 until December 1990, Mr. Wiegand-Moss was Vice President and District Manager for Continental Cablevision. STEPHEN LEE joined the Company in January 1997 as Senior Vice President of Internet and Data Services. Mr. Lee was the Director of the Central Region Sales for MFS Datanet, Inc. from October 1993 to April 1996. From April 1996 to January 1997, Mr. Lee served as a technical consultant to the Company. From October 1983 until October 1993, Mr. Lee held various managerial positions at Graphnet, Inc. From January 1979 to October 1983, Mr. Lee was the Major Account Manager/Systems Sales Engineer for ITT World Communications, Inc. SUSAN R. QUANDT has served as the Company's Senior Vice President of Corporate Marketing since December 1997. From December 1994 to December 1997, Ms. Quandt served as Executive Vice President of Taylor-Winfield, an information technology market consulting and executive recruiting firm. From January 1992 to September 1994, Ms. Quandt served as Vice President of Marketing and Product Development of Call-Net Enterprises Inc., a national long-distance telephone company owned by Sprint Canada. From January 1989 to December 1991, Ms. Quandt served as Vice President of Marketing for Schneider Communications, Inc., a regional long- distance telephone company. JOHN BROUSE has served as the Company's Vice President of Network Operations since April 1997. Prior to that time, Mr. Brouse was Operations Engineering Director for Jones Intercable, Inc. from June 1988 to April 1997. Mr. Brouse received the cable industry's prestigious Polaris Award in 1996. ERIC D. KURTZ has served as the Company's Vice President of Corporate Development and Regulatory Affairs since March 1997. From April 1989 until July 1996, Mr. Kurtz was a General Manager with Time Warner's Milwaukee & Chicago Divisions. During this time span he also served as a board member of the Wisconsin Cable Communications Association and as its President from September 1994 to September 1996. ROXANNE JACKSON has served as the Company's Vice President of Human Resources since May 1996. Prior to that time, from January 1994 to May 1996, Ms. Jackson was the Human Resources Director for Metz Baking Group. From August 1992 until January 1994, Ms. Jackson served as the Director of Human Resources for Fox Television Stations, Inc. DONNA CLAYBURN has served as the Company's Vice President of Marketing since March 1997. Prior to joining the Company, from November 1994 until September 1996, Ms. Clayburn was a Senior Vice President, Affiliate Sales & Marketing and later a Marketing Consultant for Scholastic, Inc., a book and magazine publishing company. From March 1993 to November 1994, Ms. Clayburn was the Vice President, Affiliate Sales & Marketing with World African Network. From April 1989 until February 1993, she was the National Accounts Director for ESPN. From October 1986 to April 1989, Ms. Clayburn was Account Executive for Turner Broadcasting. Ms. Clayburn served as HBO Manager, BET Marketing with Time Warner from December 1982 to October 1986. EDWARD T. JOYCE has served as a Director of the Company since the Company's inception in October 1992. Mr. Joyce founded his own firm in 1971, now known as Edward T. Joyce and Associates, P.C., a law firm dealing with commercial litigation. 72 DR. CHARLES E. KAEGI has served as a Director of the Company since the Company's inception in October 1992. Dr. Kaegi has been in private practice of medicine since July 1979. From November 1979 to present, Dr. Kaegi has held the following positions at Ravenswood Hospital Medical Center: Attending Physician (November 1979 to present); Medical Director, Alcohol & Drug Abuse Program (July 1994 to present); Medical Director, Community Mental Health Center (November 1994 to present); Medical Education (January 1980 to present); Secretary of the Department of Psychiatry (January 1993-present); and Consultant to Community Mental Health Center (March 1980 to August 1985). Dr. Kaegi is the cousin of Mr. Glenn Milligan. JAMES H. LOWRY has served as a Director of the Company since February 1997. Mr. Lowry serves as President and Chief Executive Officer of James H. Lowry & Associates ("JHLA"), a consulting company established in 1975. Prior to establishing JHLA, Mr. Lowry served as the Director of Public Service Practice for McKinsey & Company from 1967 to 1975. DAVID KRONFELD has served as a Director of the Company since February 1997. Mr. Kronfield founded JK&B Capital in January 1996 and has been its general partner since that time. Before founding JK&B Capital, Mr. Kronfield was a General Partner at Boston Capital Ventures from August 1989 to October 1995, where he specialized in the telecommunications and software industries. From October 1984 to August 1989, Mr. Kronfield served as Vice President of Acquisitions and Venture Investments at Ameritech. THOMAS NEUSTAETTER has served as a Director of the Company since February 1997. Mr. Neustaetter has been an officer of the Chatterjee Management Group, a division of Chatterjee Management Company, since January 1996. From January 1995 to January 1996, Mr. Neustaetter was the Managing Director for Bancroft Capital Corporation in New York City, a company he founded. From August 1986 to December 1994, Mr. Neustaetter was employed at Chemical Banking Corporation in New York City. COMMITTEES OF THE BOARD OF DIRECTORS The Board currently has two committees, the Executive Committee and the Compensation Committee. The Executive Committee makes recommendations to the Board of Directors regarding issues such as finance, strategic planning and long-range goals for the Company. The current members of the Executive Committee are Glenn Milligan, Edward Joyce and David Kronfeld. The Compensation Committee reviews and recommends the compensation and bonus arrangements for executive level management of the Company and administers the Company's stock option plans. The current members of the Compensation Committee are Glenn Milligan, Edward Joyce and Thomas Neustaetter. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION As stated above, the current members of the Compensation Committee are Messrs. Milligan, Joyce and Neustaetter. Mr. Milligan is also the Chief Executive Officer of the Company. TRANSACTION WITH 21ST CENTURY TECHNOLOGY GROUP, INC. Messrs. Milligan, Joyce and Kaegi served as executive officers and directors of 21st Century Technology Group, Inc. As of March 26, 1996 the Company entered into an Asset Purchase Agreement with 21st Century Technology Group, Inc. pursuant to which the Company acquired (i) the contract rights to service 1,734 cable television subscribers, (ii) contracts pertaining to subscriber lists and (iii) certain electronic equipment in exchange for the purchase price of $3,381,300. On March 26, 1996 Messrs. Milligan, Joyce and Kaegi beneficially owned approximately 15%, 27% and 24%, respectively, of the common stock of 21st Century Technology Group, Inc. 73 PAYMENT OF LEGAL FEES TO EDWARD JOYCE. In January 1997, the Company paid approximately $459,000 of accrued legal fees to Edward Joyce, either individually or to entities controlled by him, for legal services rendered by Mr. Joyce to the Company in connection with the Company's cable service offering and its obtaining the Chicago franchise. Mr. Joyce continues from time to time to perform legal services for the Company. SALE OF CAPITAL STOCK. In June 1996, the Company entered into a loan agreement with LaSalle Northwest National Bank (the "Bank") pursuant to which the Bank agreed to make certain loans available to the Company on a revolving credit basis in the maximum principal amount of $5.0 million. In order to induce the Bank to enter into this agreement, the Bank required that the loan be unconditionally guaranteed by certain directors of the Company. Messrs. Milligan, Kaegi and Joyce agreed to be guarantors in exchange for the right and option to acquire up to an aggregate of 1,250,000 shares of Common Stock of the Company at $4 per share for a period of 10 years. In January 1997, pursuant to the Stock Purchase Agreement dated January 30, 1997, the Company issued an aggregate of 1,380.3 shares of Class A Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share, and warrants to purchase up to 1,161,307.6 shares of Common Stock at a price of $.000001 per share, of which 19.2 shares of Class A Convertible 8% Cumulative Preferred Stock and warrants to purchase up to 16,141.1 shares of Common Stock were issued to Mr. Joyce. In January 1998, the Company agreed to issue to Messrs. Milligan, Kaegi and Joyce 4.7, 6.3 and 31.7 shares of Class A Convertible 8% Cumulative Preferred Stock, respectively, at a price of $15,793.84 per share, and warrants to purchase up to 3,995.3, 5,327.1 and 26,635.5 shares of Common Stock, respectively, at a price of $.000001 per share. See also "Executive Compensation--Employment Agreements" for a description of employment agreements between the Company and Messrs. Milligan, Wiegand-Moss and Day. See also "Certain Transactions--Sale of Capital Stock" for a description of the issuance of Common Stock and non-voting Common Stock in January 1998 to Messrs. Neustaetter, Joyce, Kronfeld, Currey, Milligan and Kaegi. DIRECTOR COMPENSATION Directors of the Company receive no directors' fees. Directors are reimbursed for their reasonable out-of-pocket travel expenditures incurred in connection with their service as directors. COMPENSATION PLAN 1997 STOCK OPTION PLAN. The Company's Stock Option Plan (the "Stock Option Plan") provides for the grant of options that are not intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to key employees. The Compensation Committee of the Board of Directors administers the Stock Option Plan and grants options to purchase Common Stock thereunder. The aggregate number of shares of Common Stock that may be issued under options under the Stock Option Plan may not exceed 728,667.7 shares. Reserved shares may be either authorized but unissued shares or treasury shares, and will be distributed at the discretion of the Board of Directors. The Compensation Committee has the exclusive authority to establish, amend and rescind appropriate rules and regulations relating to the Stock Option Plan. Each participant's option will expire as of the earliest of : (i) the date on which it is forfeited under the provisions of the Stock Option Plan; (ii) ten years from the option date; and (iii) the date on which it expires pursuant to the relevant option agreement. The option price may be greater than, less 74 than or equal to the fair market value on the option date as determined in the sole discretion of the Compensation Committee. An option participant may not exercise an option or any portion thereof until such option or such portion thereof has become fully vested. Pursuant to the Stock Option Plan, options generally vest 1/48th each month and are fully vested after four years. All options become 100% vested and immediately exercisable prior to a Change in Control (as such term is defined in the Stock Option Plan). On October 14, 1997, the Compensation Committee granted Messrs. Milligan and Wiegand-Moss options to acquire 131,160.3 and 109,300.0 shares of Common Stock, respectively. Each of such options vests 1/48th per month from the optionee's date of employment with the Company, even if such employment precedes the date of grant. During October and December 1997, the Compensation Committee granted options to acquire an aggregate of 488,207.4 shares of Common Stock to other current executive officers of the Company. As of December 31, 1997, options to acquire 728,667.7 shares of Common Stock were outstanding pursuant to the Stock Option Plan. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information for the Company's fiscal year ended March 31, 1997 concerning compensation of (i) all individuals serving as the Company's Chief Executive Officer during the fiscal year ended March 31, 1997 and (ii) each other executive officer of the Company whose total annual salary and bonus equaled or exceeded $100,000 in the fiscal year ended March 31, 1997 (collectively, the "Named Executive Officers"):
ANNUAL COMPENSATION - ------------------------------------ ------------------------------ SALARY BONUS OTHER(1) - ------------------------------------ -------- ------ ---------- Glenn W. Milligan(2)............... $170,833 $6,875 $ 4,000 Chairman of the Board, President and Chief Executive Officer (as of March 31, 1997) Richard Wiegand-Moss(3)............ 117,709 5,729 13,750(4) Chief Operating Officer (as of March 31, 1997) Daniel O. Day(5)................... 116,041 5,208 2,500 Chief Financial Officer (as of March 31, 1997) - --------------
(1) These amounts represent automobile allowances paid to the Named Executive Officers in the fiscal year ended March 31, 1997. (2) Mr. Milligan currently serves as the Company's Chairman of the Board and Chief Executive Officer. (3) Mr. Wiegand-Moss currently serves as the Company's Senior Vice President of Customer Operations. (4) This amount represents automobile allowances and relocation expenses paid in fiscal year ended March 31, 1997. (5) Mr. Day's employment with the Company was terminated in February 1998. EMPLOYMENT AGREEMENTS GLENN W. MILLIGAN. Mr. Milligan entered into an employment agreement with the Company as of August 1996 for a five-year term, which will be automatically renewed for consecutive five-year terms unless either party elects not to renew the agreement. Pursuant to the employment agreement, Mr. Milligan is entitled to an initial annual base salary of $165,000 which was increased to $200,000 on February 1, 1997 upon the consummation of the Company's initial private preferred stock offering and will increase by ten percent annually. In addition, if the Company obtains a new franchise and finances its construction, Mr. Milligan's annual base salary will be increased 75 in an amount equal to $.20 times the number of new homes passed by the Company in the new franchise area. Mr. Milligan is entitled to an annual bonus, based upon a bonus plan to be developed by management and approved by the Board of Directors, in a minimum amount of 1/24th of his annual base salary. Mr. Milligan is also entitled annually to receive shares of the Company's common stock in an amount equal to 5,000 shares or such other number of shares as is necessary to provide him with .261% of the outstanding shares of common stock and to receive stock options covering such number of shares pursuant to a separate agreement. The agreement provides that Mr. Milligan is entitled to various fringe benefits, including a monthly automobile allowance in an amount equal to 1% of his annual base salary. Mr. Milligan has agreed not to disclose confidential information relating to the Company and has agreed not to compete with, or solicit employees or customers of, the Company during specified periods following discontinuance of his employment for any reason. Upon a termination of the employment agreement, Mr. Milligan is generally entitled to severance benefits, including continuation of health benefits for Mr. Milligan and his family for three years, outplacement services, such vested stock and stock options to which Mr. Milligan would have been entitled during the remaining contract term had the employment agreement not been terminated and a lump-sum payment, the amount of which is dependent upon the reason for termination. In addition, upon a termination of the employment agreement for any reason, Mr. Milligan has the right to require the Company to repurchase all shares of the Company's capital stock then beneficially owned by him for their fair market value. RICHARD WIEGAND-MOSS. Mr. Wiegand-Moss entered into an employment agreement with the Company as of August 1996 for a five-year term, which will be automatically renewed for consecutive four-year terms unless either party elects not to renew the agreement. Pursuant to the employment agreement, Mr. Wiegand- Moss is entitled to an initial annual base salary of $137,500 which will increase by ten percent annually. In addition, if the Company obtains a new franchise and finances its construction, Mr. Wiegand-Moss's annual base salary will be increased in an amount equal to $.165 times the number of new homes passed by the Company in the new franchise area. Mr. Wiegand-Moss is entitled to an annual bonus, based upon a bonus plan to be developed by management and approved by the Board of Directors, in a minimum amount of 1/24th of his annual base salary. Mr. Wiegand-Moss is also entitled annually to receive shares of the Company's common stock in an amount equal to 4,000 shares or such other number of shares as is necessary to provide him with .2088% of the outstanding shares of common stock and to receive stock options covering such number of shares pursuant to a separate agreement. The agreement provides that Mr. Wiegand-Moss is entitled to various fringe benefits, including a monthly automobile allowance in an amount equal to 1% of his annual base salary. Mr. Wiegand-Moss has agreed not to disclose confidential information relating to the Company and has agreed not to compete with, or solicit employees or customers of, the Company during specified periods following discontinuance of his employment for any reason. Upon a termination of the employment agreement, Mr. Wiegand-Moss is generally entitled to severance benefits, including continuation of health benefits for Mr. Wiegand-Moss and his family for three years, outplacement services and a lump-sum payment, the amount of which is dependent upon the reason for termination. In addition, upon a termination of the employment agreement for any reason, Mr. Wiegand-Moss has the right to require the Company to repurchase all shares of the Company's capital stock then beneficially owned by him for their fair market value. DANIEL O. DAY. Mr. Day's employment with the Company was terminated in February 1998. Mr. Day entered into an employment agreement with the Company as of August 1996 for a four-year term. Mr. Day has agreed not to disclose confidential information relating to the Company and has agreed not to compete with, or solicit employees or customers of, the Company during specified periods following discontinuance of his employment for any reason. Upon a termination of the employment agreement, Mr. Day is generally entitled to severance benefits, including continuation of health benefits for Mr. Day and his family for three years, outplacement services and a lump-sum payment, the amount of which is dependent upon the reason for termination. In addition, upon a termination of the employment agreement for any reason, Mr. Day has the right to require the Company to repurchase all shares of the Company's capital stock then beneficially owned by him for their fair market value. 76 CERTAIN TRANSACTIONS TRANSACTION WITH JAMES LOWRY & ASSOCIATES On December 9, 1997 the Board of Directors of the Company authorized the Company to enter into a contract whereby James Lowry & Associates would assist the Company in the development of a plan to meet Chicago's Minority Business Enterprise/Women Business Enterprise certification requirements. The contract calls for payment for services rendered on an hourly basis, but not to exceed $200,000 per annum. Mr. Lowry, who became a Director of the Company in February 1997, is the President and Chief Executive Officer and the sole beneficial owner of James Lowry & Associates. SALE OF CAPITAL STOCK In September 1997, pursuant to a Purchase, Joinder and Waiver Agreement (the "Purchase Agreement"), the Company issued 63.3 shares of Class A Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share, and warrants to purchase up to 53,271 shares of Common Stock at a price of $.000001 per share to Consolidated Communications, whose President and Chief Executive Officer at such time was Mr. Currey, a Director of the Company at that time and currently the Company's President and Chief Operating Officer. In November 1997, pursuant to a Purchase, Joinder and Waiver Agreement, the Company issued 9.5 shares of Class A Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share, and warrants to purchase up to 7,990.6 shares of Common Stock at a price of $.000001 per share to Mr. Webster, the Company's Chief Financial Officer. In January 1998, the Company agreed to issue an aggregate of 550,362.2 shares of Common Stock and an equal number of shares of non-voting Common Stock, for a total of 1,100,724.3 shares. These shares were issued in exchange for the initial and debt warrants which arose from the purchase of Class A Convertible 8% Cumulative Preferred Stock and were assigned a value of $2,343,746. The beneficial owners of such shares included Purnendu Chattenjee, JK&B Capital, William Farley, Boston Capital Ventures III, L.P., Thomas Neustaetter, Edward T. Joyce, David Kronfeld, Robert Currey, Glenn W. Milligan and Charles E. Kaegi, MD. The number of shares issued to each of these beneficial owners is set forth in the principal shareholders table. In April 1998, pursuant to a Purchase, Joinder & Waiver Agreement, the Company issued 6.3316 shares of Class A Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share and a warrant to purchase 5327.1 shares of Common Stock at a price of $.000001 per share to Wendy Dietze, Managing Director of Credit Suisse First Boston Corporation. TRANSACTION WITH 21ST CENTURY TECHNOLOGY GROUP, INC. Glenn Milligan, Edward Joyce and charles Kaegi served as executive officers and directors of 21st Century Technology Group, Inc. ("Technology"), a related party through both common ownership and common management. As of March 26, 1996 the Company entered into an Asset Purchase Agreement with technology pursuant to which the Company acquired (i) the contract rights to service 1,734 cable television subscribers, (ii) contracts pertaining to subscriber lists and (iii) certain electronic equipment in exchange for the purchase price of $3,381,300. On March 26, 1996 Messrs. Milligan, Joyce and Kaegi beneficially owned approximately 15%, 27% and 24%, respectively, of the common stock of Technology. From inception to March 31, 1996, operating expenses, except interest and amortization, had been allocated from Technology based on estimates of time spent by management and employees of Technology on Company activities. The Company's Board of Directors approved these allocations. Technology's Board of Directors did not formally approve these allocations. However, at the time the allocations were made, the Company's and Technology's Boards contained substantially the same individuals. For the years ended March 31, 1995 and 1996, the Company also recognized 100% of expenses paid by Technology on behalf of the Company, as well as 100% of expenses incurred by the Company. Effective April 1, 1996, the Company began recognizing and paying substantially all of its own expenses. Therefore, for the year ended March 31, 1997, there were no significant allocations from Technology or payments made by Technology on the Company's behalf. The Company believes that all transactions set forth above were made on terms no less favorable to the Company than would have been obtained from unaffiliated third parties. The Company has adopted a policy whereby all future transactions between the Company and its officers, directors and affiliates will be on terms no less favorable to the Company than could be obtained from unrelated third parties and will be approved by a majority of the disinterested members of the Board of Directors. See also "Management--Compensation Committee Interlocks and Insider Participation" for a description of certain other transactions with officers and directors of the Company. 77 PRINCIPAL SHAREHOLDERS The following table sets forth certain information at January 15, 1998, regarding beneficial ownership of the capital stock of the Company by (i) each person known by the Company to beneficially own more than 5% of the outstanding capital stock of the Company, (ii) each director of the Company, (iii) each Named Executive Officer of the Company and (iv) all directors and executive officers as a group.
NUMBER OF SHARES OF --------------------- CLASS A CONVERTIBLE --------------------- NUMBER OF SHARES OF 8% CUMULATIVE --------------------- --------------------- COMMON STOCK PREFERRED STOCK PERCENT OF AGGREGATE --------------------- --------------------- ----------------------- NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(2) VOTING RIGHTS(3) - ---------------------------------------- --------------------- --------------------- ----------------------- Purnendu Chatterjee(4).................. 757,744.7 633.2 31.1% JK&B Capital(5)......................... 378,872.4 316.6 16.5 William Farley(6)....................... 303,097.7 249.3 13.3 Myron M. Cherry(7)...................... 274,066.6 12.7 7.1 Boston Capital Ventures III, L.P.(8).... 151,549.0 126.6 6.9 Elske Bolitho(9)........................ 305,000.0 -- 7.7 Thomas Neustaetter(4)(10)............... 757,744.7 633.2 31.1 Charles E. Kaegi, M.D.(11)(18).......... 934,700.7 6.3 14.3 Edward T. Joyce(12)(18)................. 768,714.4 50.8 19.1 David Kronfeld(13)...................... 530,421.4 443.2 22.6 Glenn W. Milligan(14)(18)............... 661,925.1 4.7 15.4 James H. Lowry(18)...................... 19,000.0 -- * Robert J. Currey(15).................... 75,774.5 63.3 3.5 Richard Wiegand-Moss(16)(18)............ 52,813.6 -- 1.2 Daniel O. Day(17)(18)................... 16,673.6 -- * All executive officers and directors as a group (17 persons)(19)............... 3,493,703.7 1,211.1 73.5 - --------------
* Less than 1%. (1) The persons named in this table have sole voting power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the other footnotes to this table. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days after January 15, 1998, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. (2) Each share of Class A Convertible 8% Cumulative Preferred Stock converts into one thousand shares of Common Stock at the option of the shareholder. (3) Percent of Aggregate Voting Rights, for each beneficial owner, was determined based upon a fraction. The numerator of such fraction is the sum of (a) the number of outstanding shares of Common Stock beneficially owned by such owner, plus (b) the number of shares of Common Stock into which the number of shares of Class A Convertible 8% Cumulative Preferred Stock beneficially owned by such owner are convertible, plus (c) the number of shares of Common Stock issuable upon exercise of options and warrants beneficially owned by such owner and which are exercisable within 60 days of January 15, 1998. The denominator of such fraction is the sum of (a) the aggregate number of shares of Common Stock outstanding on January 15, 1998, 78 plus (b) the number of shares of Common Stock into which the aggregate number of shares of Class A Convertible 8% Cumulative Preferred Stock outstanding on January 15, 1998 are convertible, plus (c) the aggregate number of shares of Common Stock issuable upon exercise of options and warrants beneficially owned by such owner and which are exercisable within 60 days of January 15, 1998. (4) Represents 112,517.4 shares of Common Stock, 266,354.9 shares of Common Stock issuable upon exercise of warrants and 316.6 shares of Class A Convertible 8% Cumulative Preferred Stock held by Quantum Industrial Partners LDC ("QIP"). The address of QIP is c/o Curacao Corporation Company, Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. Also includes 65,260.1 shares of Common Stock, 154,485.9 shares of Common Stock issuable upon exercise of warrants and 183.6 shares of Class A Convertible 8% Cumulative Preferred Stock held by S-C Phoenix Holdings, L.L.C. ("S-C Phoenix"). The address of S-C Phoenix is c/o Chatterjee Management Company, 888 Seventh Avenue, New York, New York 10106. This total also includes 45.2 shares of Class A Convertible 8% Cumulative Preferred Stock, 16,067.5 shares of Common Stock and 38,035.5 shares of Common Stock issuable upon exercise of warrants held by Winston Partners II, LLC and 87.8 shares of Class A Convertible 8% Cumulative Preferred Stock, 31,189.8 shares of Common Stock and 73,833.6 shares of Common Stock issuable upon exercise of warrants held by Winston Partners II, LDC (Winston Partners II, LLC and Winston Partners II, LDC, collectively "Winston Partners"). The address of Winston Partners II, LLC is c/o Chatterjee Management Company, 888 Seventh Avenue, New York, New York 10106. The address of Winston Partners II, LDC is c/o Curacao Corporation Company, Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. QIP, S-C Phoenix and Winston Partners are associated with Chatterjee Management Company. Chatterjee Management Company is managed and controlled by Purnendu Chatterjee. Dr. Chatterjee may be deemed to have the power to direct the voting and disposition of the shares owned by QIP, S-C Phoenix and Winston Partners. Dr. Chatterjee and Mr. George Soros may each be deemed to have the power to direct the voting and disposition of the shares owned by S-C Phoenix. In addition, Mr. Soros, Mr. Stanley F. Druckenmiller and Soros Fund Management LLC may be deemed to have the power to direct the voting and disposition of the shares owned by QIP. The Percent of Aggregate Voting Rights excludes 225,034.8 shares of non-voting Common Stock beneficially owned by Purnendu Chatterjee which the Company has agreed to issue. (5) Represents 221.6 shares of Class A Convertible 8% Cumulative Preferred Stock, 78,762.2 shares of Common Stock and 186,448.5 shares of Common Stock issuable upon exercise of warrants held by JK&B Capital, L.P. and 95.0 shares of Class A Convertible 8% Cumulative Preferred Stock, 33,755.2 shares of Common Stock and 79,906.5 shares of Common Stock issuable upon exercise of warrants held by JK&B Capital II, L.P. (JK&B Capital, L.P. and JK&B Capital II, L.P., collectively "JK&B Capital"). The address of JK&B Capital is 205 North Michigan, Suite 800, Chicago, IL 60601. The Percent of Aggregate Voting Rights excludes 112,517.4 shares of non-voting Common Stock beneficially owned by JK&B Capital which the Company has agreed to issue. (6) Represents the following securities held by the following entities, all of which are beneficially owned by Mr. Farley: 73.9 shares of Class A Convertible 8% Cumulative Preferred Stock, 26,254.0 shares of Common Stock and 62,149.4 shares of Common Stock issuable upon exercise of warrants held by Farley, Inc. of which Mr. Farley is the sole owner, and 105.5 shares of Class A Convertible 8% Cumulative Preferred Stock, 37,505.8 shares of Common Stock and 88,785.0 shares of Common Stock issuable upon exercise of warrants held by The Retirement Program of Farley, Inc. of which Mr. Farley is the sole member of the Pension Investment Committee of the Retirement Program of Farley, Inc. Also includes 42.2 shares of Class A Convertible 8% Cumulative Preferred Stock, 15,002.3 shares of Common Stock and 35,514 shares of Common Stock issuable upon exercise of warrants held by FTL Investments Inc. of which Mr. Farley is Chairman and Chief Executive Officer, and 31.7 shares of Class A Convertible 8% Cumulative Preferred Stock, 11,251.7 shares of Common Stock and 26,635.5 shares of Common Stock issuable upon exercise of warrants held by Union Underwear Pension Plan of which Mr. Farley is the sole member of the Pension Investment Committee of the Fruit of the Loom Board of Directors. The address of Mr. Farley is 233 South 79 Wacker Drive, Chicago, Illinois, 60606. The Percent of Aggregate Voting Rights excludes 90,013.8 shares of non-voting Common Stock beneficially owned by Mr. Farley which the Company has agreed to issue. (7) Includes 72,223.3 shares of Common Stock issuable upon exercise of options. The address of Mr. Cherry is 30 North LaSalle, #2300, Chicago, Illinois 60602. The Percent of Aggregate Voting Rights excludes 4,500.7 shares of non-voting Common Stock beneficially owned by Mr. Cherry which the Company has agreed to issue. (8) Includes 106,542.0 shares of Common Stock issuable upon exercise of warrants. The address of Boston Capital Ventures III, L.P. is Old City Hall, 45 School Street, Boston, MA 02108. The Percent of Aggregate Voting Rights excludes 45,007.0 shares of non-voting Common Stock beneficially owned by Boston Capital Ventures III, L.P. which the Company has agreed to issue. (9) Represents 153,000 shares of Common Stock held by Elske Bolitho, Trustee of Robert W. Bolitho Trust, and 152,000 shares of Common Stock held by Elske Bolitho, Trustee of Elske Bolitho Trust. The address of Ms. Bolitho is 13376 185th Place N, Jupiter, Florida 33478. (10) All of such shares are beneficially owned by Purnendu Chatterjee. Mr. Neustaetter is an officer of the Chatterjee Management Group, a division of Chatterjee Management Company. Mr. Neustaetter is an officer of Chatterjee Management Company. Mr. Neustaetter disclaims beneficial ownership of these shares, over which he does not have dispositive or voting control. The business address of Mr. Neustaetter is c/o Chatterjee Management Company, 888 Seventh Avenue, New York, NY 10106. (11) Includes 172,202.2 shares of Common Stock and 376,721.8 shares of Common Stock issuable upon exercise of options held by Charles E. Kaegi, M.D., S.C., Defined Contribution Pension Plan and Trust, 26,990.0 shares of Common Stock held by Charles E. Kaegi, M.D., S.C., Defined Benefit Pension Plan and Trust, 1,700.0 shares of Common Stock held by Charles E. Kaegi, M.D., S.C. Profit Sharing Pension Plan and Trust, 321,240.0 shares of Common Stock held jointly with Mr. Kaegi's wife, and 17,470.0 shares of non-voting Common Stock owned by Mr. Kaegi's wife. The Percent of Aggregate Voting Rights excludes 2,250.4 shares of non-voting Common Stock held by Mr. Kaegi which the Company has agreed to issue. (12) Includes 269,516.5 shares of Common Stock issuable upon exercise of options held by Mr. Joyce, 96,620.0 shares of Common Stock and 52,291.5 shares of Common Stock issuable upon exercise of options held by Mr. Joyce's wife, 1.864.5 shares of Common Stock issuable upon exercise of warrants held by Mr. Joyce, 12.9 shares of Class A Convertible 8% Cumulative Preferred Stock and 10,867.3 shares of Common Stock issuable upon exercise of warrants held by Edward T. Joyce, as Trustee of the Edward T. Joyce Ltd. Employees' Profit Sharing Plan, and 4.1 shares of Convertible Class A Preferred Stock and 3,409.3 shares of Common Stock issuable upon exercise of warrants held by Edward T. Joyce, as Trustee of the Individual Retirement Account for Edward T. Joyce. The Percent of Aggregate Voting Rights excludes 18,070.2 shares of non-voting Common Stock beneficially owned by Mr. Joyce which the Company has agreed to issue. (13) All such shares are held of record by JK&B Capital and Boston Capital Ventures III, L.P. Mr. Kronfeld is a Manager of JK&B Management, L.L.C. and General Partner of JK&B Capital, L.P. and JK&B Capital II, L.P. The business address of Mr. Kronfeld is c/o JK&B Capital, 205 North Michigan, Suite 800, Chicago, IL 60601. (14) Includes 316,060.3 shares of Common Stock issuable upon exercise of options held by Mr. Milligan, and 93,750.0 shares of Common Stock and 61,225.5 shares of Common Stock issuable upon exercise of options held by Mr. Milligan's wife. The Percent of Aggregate Voting Rights excludes 1,687.8 shares of non-voting Common Stock beneficially owned by Mr. Milligan which the Company has agreed to issue. 80 (15) All of such Shares are held of record by Consolidated Communications. Mr. Currey, a Director of the Company and its current President and Chief Operating Officer, was formerly Group President of Telecommunications Services for McLeod USA. Consolidated Communication and McLeod USA are both wholly owned subsidiaries of McLeod, Inc. The Percent of Aggregate Voting Rights excludes 22,503.5 shares of non-voting Common Stock beneficially owned by Consolidated Communications which the Company has agreed to issue. (16) Includes 47,818.7 shares of Common Stock issuable upon exercise of options. (17) Includes 3,527.2 shares of Common Stock issuable upon exercise of options. (18) The address of each such person is c/o the Company, 350 N. Orleans Street, Suite 600, Chicago, IL 60654. (19) Includes the aggregate of 1,216,271.6 shares of Common Stock issuable upon exercise of options and 1,018,967.5 shares of Common Stock issuable upon exercise of warrants. See notes 10, 11, 12, 13, 14, 15, 16 and 17 above. The Percent of Aggregate Voting Rights excludes 428,758.8 shares of non- voting Common Stock which the Company has agreed to issue. DESCRIPTION OF CERTAIN INDEBTEDNESS BANK CREDIT FACILITY The Company has received a commitment letter (the "Commitment Letter") from BankBoston, N.A. and Bank of America National Trust and Savings Association (collectively, the "Senior Lenders") pursuant to which the Senior Lenders have agreed, subject to the terms and conditions set forth in the Commitment Letter (including the negotiation of definitive loan documents and satisfactory completion by the Senior Lenders of their due diligence review), to provide a senior secured revolving credit facility (the "Bank Credit Facility") of up to $50.0 million to a subsidiary of the Company that will own the assets used in Chicago's Area 1 (the "Borrower"), which will be guaranteed by the Company, to be used for working capital and other general corporate purposes, except that prior to the time that the Borrower has at least 30,000 total subscribers and has expended at least $75 million of proceeds from the Company to expand network operations, all borrowings under the Bank Credit Facility will be required to be fully cash collateralized in accounts maintained by the Senior Lenders. The Borrower will be permitted to make available to the Company a portion of the Bank Credit Facility to finance the Company's expansion of its operations to markets outside of Chicago's Area 1. There are currently no outstanding amounts under the Bank Credit Facility. The following summary of the material provisions of the Commitment Letter does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Commitment Letter, a copy of which is available from the Company upon request. Defined terms that are used but not defined in this section have the meanings given to such terms in the Commitment Letter. Because the terms, conditions and covenants of the Bank Credit Facility are subject to the negotiation, execution and delivery of the definitive loan documents, certain of the actual terms, conditions and covenants thereof may differ from those described below. The Bank Credit Facility will mature in 2003. Borrowings under the Bank Credit Facility will be subject to a borrowing base determined on the basis of 7.5 times the prior three months' collected revenues. Amounts drawn under the Bank Credit Facility will bear interest, at the Borrower's option, at either (i) a base rate equal to the higher of (x) BankBoston, N.A.'s prime rate and (y) .50% plus the Federal funds rate or (ii) the LIBOR rate, plus, in each case, an Applicable Margin. The Applicable Margin will be an annual rate which will fluctuate based on the Borrower's Total Leverage Ratio (as defined below) and which will be between .50% and 2.00% for base rate borrowings and between 2.00% and 3.50% for LIBOR rate borrowings. 81 The Bank Credit Facility will begin amortizing by equal quarterly installments of $3,125,000 beginning on the last day of the first quarter after the second anniversary of its closing plus a final payment of $12,500,000. The Commitment Letter contemplates that the Borrower will be required to repay indebtedness outstanding under the Bank Credit Facility with (i) the net cash proceeds in excess of $1 million from sales of assets, (ii) the net cash proceeds from certain issuances of debt (iii) the net cash proceeds from certain issuances of equity, (iv) the net cash proceeds in excess of $1 million from insurance recoveries and (v) 50% of annual Excess Cash Flow (as defined below) beginning on the third anniversary of the closing of the Bank Credit Facility if the leverage is greater than 4.5 to 1.0. The Commitment Letter contemplates that, subject to customary exceptions, the Borrowers' obligations under the Bank Credit Facility will be secured by a first priority security interest in all tangible and intangible assets of the Borrower and any of its subsidiaries, including the Area 1 franchise, the CTA attachment agreement and the pole attachment agreements with Commonwealth Edison and Ameritech and that the Company's obligations under its guarantee will be secured by a pledge of the stock of the Borrower. The Commitment Letter contemplates that the Bank Credit Facility will contain a number of negative covenants, including, among others, covenants limiting the ability of the Borrower, subject to customary exceptions, to incur debt, create liens, pay dividends, make distributions, make guarantees, sell assets and engage in mergers. In addition, the Commitment Letter contemplates that the Bank Credit Facility will contain usual and customary affirmative covenants, including the delivery of financial and other information. The Commitment Letter contemplates that the Borrower will be required to comply with certain financial tests and to maintain certain financial ratios on a consolidated basis. The Borrower must maintain (i) a Total Leverage Ratio, as of the end of any fiscal quarter beginning with the fiscal quarter ending December 31, 2000, no greater than 10.0 to 1.0 initially, with subsequent step- downs, (ii) a Senior Leverage Ratio, as of the end of any fiscal quarter beginning with the fiscal quarter ending December 31, 2000, no greater than 4.25 to 1.0 initially, with subsequent step-downs, (iii) a Fixed Charge Coverage Ratio, as of the end of each fiscal quarter beginning with the fiscal quarter ending December 31, 2001, no less than 1.0 to 1.0, (iv) an Interest Coverage Ratio, as of the end of any fiscal quarter beginning with the fiscal quarter ending December 21, 2000, no less than 2.0 to 1.0 and (v) a minimum number of subscribers to be agreed upon and a maximum level of EBITDA losses to be agreed upon, as of the end of each fiscal quarter beginning after the closing. Total Leverage Ratio means the ratio of total funded debt consisting of senior funded debt (including amounts outstanding under the Bank Credit Facility, capitalized leases and the Notes to Annualized EBITDA. Annualized EBITDA means EBITDA for the two most recent fiscal quarters multiplied by two. EBITDA means consolidated net income, plus depreciation, amortization, any non-cash charges, interest expense and tax expense deducted in calculating net income. Senior Leverage Ratio means the ratio of total funded debt consisting of senior funded debt (including amounts outstanding under the Bank Credit Facility and capitalized leases to Annualized EBITDA. Fixed Charge Coverage Ratio means the ratio of EBITDA to the sum of interest expense which is paid or payable in cash, distributions made to the Company for payment of cash interest on the Notes, income taxes paid or payable in cash, capital expenditures, required principal payments and required capital lease payments. Excess Cash Flow means EBITDA minus the sum of cash taxes, capital expenditures, required principal repayments, interest expense paid or payable in cash, distributions made to the Company for payment of cash interest on the Notes and the increase in working capital calculated quarterly (net of cash or cash equivalents). Interest Coverage Ratio means the ratio of EBITDA to the sum of interest expense on total debt and dividends which is paid or payable in cash for the succeeding four fiscal quarters. The Commitment Letter contemplates that the Bank Credit Facility will include usual and customary events of default. 82 DESCRIPTION OF THE NEW NOTES GENERAL The Old Notes have been, and the New Notes will be, issued under an Indenture, dated as of February 15, 1998 (the "Indenture"), between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"). The following is a summary of certain provisions of the Indenture and the New Notes, a copy of which Indenture and the form of New Notes is available upon request to the Company at the address set forth under "Available Information". The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. For the definition of certain capitalized terms used in the following summary, see "--Certain Definitions." The New Notes will be issued only in fully registered form, without coupons, in denominations of principal amount at maturity of $1,000 and any integral multiple of $1,000. No service charge shall be made for any registration of transfer or exchange of New Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. TERMS OF THE NEW NOTES The New Notes will be unsecured senior obligations of the Company, initially limited to $363,135,000 aggregate principal amount at maturity, and will mature on February 15, 2008. Except as described under "Exchange Offer--Acceptance of Old Securities for Exchange; Delivery of New Securities", no cash interest will accrue on the Notes prior to February 15, 2003, although for U.S. Federal income tax purposes a significant amount of OID will be recognized by a Holder as such discount accrues. See "Certain United States Federal Income Tax Consequences" for a discussion regarding the taxation of such OID. Cash interest will accrue on the Notes at the rate per annum shown on the front cover of this Prospectus from February 15, 2003, or from the most recent date to which interest has been paid or provided for, payable semiannually on February 15 and August 15 of each year, commencing August 15, 2003 to holders of record at the close of business on the February 1 or August 1 immediately preceding the interest payment date. The Company will pay interest on overdue principal at 1% per annum in excess of such rate, and it will pay interest on overdue installments of interest at such higher rate applicable to overdue principal to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The interest rate on the New Notes is subject to increase in certain circumstances if the Company does not file a registration statement relating to the Exchange Offer or if the registration statement is not declared effective on a timely basis or if certain other conditions are not satisfied, all as further described under "Exchange Offer." Subject to the covenants described below under "--Certain Covenants" and applicable law, the Company may issue additional Notes under the Indenture in an unlimited principal amount at maturity. The Old Notes, the New Notes offered pursuant to the Exchange Offer and any additional Notes subsequently issued would be treated as a single class for all purposes under the Indenture. OPTIONAL REDEMPTION Except as set forth in the following paragraph the New Notes will not be redeemable at the option of the Company prior to February 15, 2003. Thereafter, the New Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of Accreted Value), plus accrued interest to the redemption date (subject to the right of Holders of record on the 83 relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on February 15 of the years set forth below:
REDEMPTION ----------- PERIOD PRICE - ------------ ----------- 2003.................... 106.1250% 2004.................... 104.0833 2005.................... 102.0417 2006 and thereafter..... 100.0000
In addition, at any time and from time to time prior to February 15, 2001, the Company may redeem in the aggregate up to 35% of the original principal amount at maturity of the New Notes with the proceeds (to the extent received by the Company) of one or more Equity Offerings following which there is a Public Market at a redemption price (expressed as a percentage of Accreted Value) of 112 1/4% plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least $236.0 million aggregate principal amount at maturity of the Notes must remain outstanding after each such redemption. In the case of any partial redemption, selection of the New Notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no New Note of $1,000 in principal amount at maturity or less shall be redeemed in part. If any New Note is to be redeemed in part only, the notice of redemption relating to such New Note shall state the portion of the principal amount thereof to be redeemed. A different New Note in principal amount at maturity equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original New Note. RANKING The indebtedness evidenced by the New Notes will be senior unsecured obligations of the Company, will rank pari passu in right of payment with all existing and future senior indebtedness of the Company and will be senior in right of payment to all future subordinated indebtedness of the Company. As of December 31, 1997, after giving effect to the Private Placement and the application of the proceeds therefrom, the Company's total indebtedness outstanding would have been approximately $200.2 million. Substantially all the operations of the Company are or will be conducted through one or more of its subsidiaries. The Company currently has three wholly- owned subsidiaries: 21st Century Cable TV of Illinois, Inc.; 21st Century Telecom of Illinois, Inc.; and 21st Century Telecom Group of Michigan, Inc. Moreover, 21st Century Telecom Group of Michigan, Inc. has two wholly-owned subidiaries: 21st Century Cable TV of Grand Rapids, Inc. and 21st Century Telecom of Michigan, Inc. The Company intends to transfer substantially all its assets to newly formed Restricted Subsidiaries, and thereafter the Company will be a holding company with no assets other than the capital stock of its subsidiaries. Claims of creditors of such subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by such subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries generally will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the New Notes. The New Notes, therefore, will be effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of subsidiaries of the Company. Although the Indenture limits the incurrence of Indebtedness and preferred stock of certain of the Company's subsidiaries, such limitation is subject to a number of significant qualifications. Moreover, the Indenture does not impose any limitation on the incurrence by such subsidiaries of liabilities that are not considered Indebtedness or Preferred Stock under the Indenture. See "--Certain Covenants-- Limitation on Indebtedness." CHANGE OF CONTROL 84 Upon the occurrence of any of the following events (each a "Change of Control"), each Holder shall have the right to require that the Company repurchase such Holder's New Notes at a purchase price in cash equal to 101% of the Accreted Value thereof on the date of purchase, plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date): (i) Prior to the earlier to occur of (A) the first public offering of common stock of Parent or (B) the first public offering of common stock of the Company, the Permitted Holders cease to be the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a majority in the aggregate of the total voting power of the Voting Stock of the Company, whether as a result of issuance of securities of the Parent or the Company, any merger, consolidation, liquidation or dissolution of the Parent or the Company, any direct or indirect transfer of securities by Parent or otherwise (for purposes of this clause (i) and clause (ii) below, the Permitted Holders shall be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own (as so defined), directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of the parent corporation); (ii) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in clause (i) above, except that for purposes of this clause (ii) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders beneficially own (as defined in clause (i) above), directly or indirectly, in the aggregate a lesser percentage of the total voting power of the Voting Stock of the Company than such other person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors (for the purposes of this clause (ii), such other person shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation, if such other person is the beneficial owner (as defined in this clause (ii)), directly or indirectly, of more than 35% of the voting power of the Voting Stock of such parent corporation and the Permitted Holders beneficially own (as defined in clause (i) above), directly or indirectly, in the aggregate a lesser percentage of the voting power of the Voting Stock of such parent corporation and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the board of directors of such parent corporation); (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of 66 2/3% of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; or (iv) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company to another Person (other than a Person that is controlled by the Permitted Holders), and, in the case of any such merger or consolidation, the securities of the Company that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Company are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation that represent immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving corporation. 85 Within 30 days following any Change of Control, the Company shall mail a notice to each Holder with a copy to the Trustee stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase such Holder's New Notes at a purchase price in cash equal to 101% of the Accreted Value thereof on the date of purchase plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest on the relevant interest payment date); (2) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (3) the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company, consistent with the covenant described hereunder, that a Holder must follow in order to have its New Notes purchased. The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of New Notes pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof. The Change of Control purchase feature is a result of negotiations between the Company and the Initial Purchasers. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Company's capital structure or credit ratings. Restrictions on the ability of the Company to incur additional Indebtedness are contained in the covenants described under "--Certain Covenants--Limitation on Indebtedness," "--Limitation on Liens" and "--Limitation on Sale/Leaseback Transactions." Such restrictions can only be waived with the consent of the holders of a majority in principal amount at maturity of the Notes (including both Old Notes and New Notes) then outstanding. Except for the limitations contained in such covenants, however, the Indenture will not contain any covenants or provisions that may afford holders of the New Notes protection in the event of a highly leveraged transaction. Future indebtedness of the Company may contain prohibitions on the occurrence of certain events that would constitute a Change of Control or require such indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the holders of their right to require the Company to repurchase the New Notes could cause a default under such indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, the Company's ability to pay cash to the holders of New Notes following the occurrence of a Change of Control may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The provisions under the Indenture relative to the Company's obligation to make an offer to repurchase the New Notes as a result of a Change of Control may be waived or modified with the written consent of the holders of a majority in principal amount at maturity of the outstanding Notes. CERTAIN COVENANTS The Indenture contains covenants including, among others, the following: Limitation on Indebtedness. (a) The Company shall not Incur, and shall not permit any of its Restricted Subsidiaries to Incur, directly or indirectly, any Indebtedness, except that the Company may Incur Indebtedness if, on the date of such Incurrence and after giving effect thereto, the Consolidated Leverage Ratio would be less than 6.0 to 1.0, for Indebtedness Incurred prior to or on December 31, 1999, and less than 5.0 to 1.0 for Indebtedness Incurred thereafter. 86 (b) Notwithstanding the foregoing paragraph (a), the Company and (except as specified below) any Restricted Subsidiary may Incur any or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the Credit Agreement; provided, however, that the aggregate amount of such Indebtedness, when taken together with all other Indebtedness Incurred pursuant to this clause (1) and then outstanding, does not exceed the remainder of (x) $50 million minus (y) the sum of all principal payments with respect to the permanent retirement of such Indebtedness pursuant to paragraph (a)(ii)(A) of the covenant described under "--Limitation on Sales of Assets and Subsidiary Stock;" (2) Indebtedness owed to and held by the Company or a Restricted Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof; (3) the Notes; (4) Indebtedness outstanding on the Issue Date (other than Indebtedness described in clause (1), (2) or (3) of this covenant); (5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (3) or (4) above, this clause (5) or clauses (7), (8) or (11) below; provided, however, that to the extent such Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a Restricted Subsidiary described in clause (11), such Refinancing Indebtedness shall be Incurred only by such Restricted Subsidiary; (6) Hedging Obligations consisting of Interest Rate Agreements directly related to Indebtedness permitted to be Incurred by the Company or any Restricted Subsidiary pursuant to paragraphs (a) or (b) hereof; (7) Indebtedness, including Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company, Incurred to finance the cost (including the cost of design, development, acquisition, construction, installation, improvement, transportation or integration) to acquire equipment, inventory or network assets (including real estate) (including acquisitions by way of capital lease and acquisitions of the Capital Stock of a Person that becomes a Restricted Subsidiary to the extent of the fair market value of the equipment, inventory or networks assets so acquired) by the Company or a Restricted Subsidiary after the Issue Date for use in a Related Business; (8) Indebtedness of the Company in an amount which, when taken together with the amount of Indebtedness Incurred pursuant to this clause (8) and then outstanding, does not exceed two times the Net Cash Proceeds received by the Company after the Issue Date as a capital contribution from, or from the issuance and sale of its Capital Stock (other than Disqualified Stock) to, a Person that is not a Subsidiary of the Company, to the extent such Net Cash Proceeds have not been used pursuant to paragraph (a)(3)(B) or paragraph (b)(i) of the covenant described under "--Limitation on Restricted Payments" to make a Restricted Payment; provided, however, that such Indebtedness does not mature prior to the Stated Maturity of the Notes and has an Average Life longer than the Average Life of the Notes; (9) Indebtedness in respect of performance, surety or appeal bonds or similar obligations, in each case Incurred in the ordinary course of business of the Company and its Restricted Subsidiaries and Indebtedness due and owing to governmental entities in connection with any licenses and franchises issued by a governmental entity and necessary or desirable to conduct a Related Business; (10) Guarantees of the Notes issued by any Restricted Subsidiary; 87 (11) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company (other than Indebtedness Incurred in connection with, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by the Company); provided, however, that on the date of such acquisition and after giving effect thereto, the Company would have been able to Incur at least $1.00 of additional Indebtedness pursuant to paragraph (a) hereof; and (12) Indebtedness Incurred in an aggregate amount which, when taken together with the aggregate amount of all other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (1) through (11) above or paragraph (a)) does not exceed the greater of (a) $10 million and (b) an amount equal to 5% of the Company's Consolidated Net Tangible Assets as of such date. (c) Notwithstanding the foregoing, the Company shall not Incur any Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Indebtedness shall be subordinated to the Notes to at least the same extent as such Subordinated Obligations. (d) For purposes of determining compliance with the foregoing covenant, (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above, the Company, in its sole discretion, will classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described above. (e) For the purposes of determining the amount of Indebtedness outstanding at any time, Guarantees with respect to Indebtedness otherwise included in the determination of such amount shall not be included. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, make a Restricted Payment if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); (2) the Company is not able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under "--Limitation on Indebtedness;" or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount of any Restricted Payment, if other than in cash, to be determined in good faith by the Board of Directors and to be evidenced by a resolution of such Board set forth in an Officer's Certificate delivered to the Trustee) since the Issue Date would exceed the sum of, without duplication: (A) the remainder of (x) cumulative EBITDA during the period (taken as a single accounting period) beginning on the first day of the fiscal quarter of the Company beginning after the Issue Date and ending on the last day of the most recent fiscal quarter for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination minus (y) the product of 1.5 times cumulative Consolidated Interest Expense during such period; (B) the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); (C) the amount by which Indebtedness of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of the Company convertible or exchangeable for Capital Stock (other than Disqualified Stock) of 88 the Company (less the amount of any cash, or the fair value of any other property, distributed by the Company upon such conversion or exchange); and (D) an amount equal to the sum of (i) the net reduction in Investments in Unrestricted Subsidiaries resulting from payments of interest, dividends, repayments of loans or advances or other transfers of assets, in each case to the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary. (b) The provisions of the foregoing paragraph (a) shall not prohibit: (i) any acquisition of any Capital Stock of the Company or any Restricted Subsidiary or any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations made out of the proceeds of the substantially concurrent sale of, or made by exchange for, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (A) such acquisition of Capital Stock or of Subordinated Obligations shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above and (B) the Net Cash Proceeds from such sale shall be excluded from the calculation of amounts under clause (3)(B) of paragraph (a) above; (ii) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations in whole or in part (including premium, if any, and accrued and unpaid interest) made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Company which is permitted to be Incurred pursuant to the covenant described under "--Limitation on Indebtedness;" provided, however, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this covenant; provided, however, that at the time of payment of such dividend, no other Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (iv) the purchase, redemption, retirement, repurchase or other acquisition of shares of, or options to purchase shares of, Capital Stock (other than Disqualified Stock) of the Company or Capital Stock (other than Preferred Stock) of any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors including their estates or beneficiaries under their estates), (a) upon their death, disability, retirement or termination of employment or (b) otherwise pursuant to the terms of agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals received such Capital Stock; provided, however, that the aggregate amount of consideration paid for such purchases, redemptions, retirements, repurchases and other acquisitions made pursuant to this clause (iv) shall not exceed $500,000 in any calendar year; provided further, however, that such purchases, redemptions, retirements, repurchases and other acquisitions pursuant to this clause shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; 89 (v) any purchase or redemption of Subordinated Obligations in whole or in part (including premium, if any, and accrued and unpaid interest) from Net Available Cash to the extent permitted by the covenant described under "-- Limitation on Sales of Assets and Subsidiary Stock;" provided, however, that such purchase or redemption shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (vi) the purchase, redemption, acquisition, cancelation or other retirement for value of shares of Capital Stock of the Company or any of its Restricted Subsidiaries to the extent necessary, as determined in good faith by a majority of the disinterested members of the Board of Directors, to prevent the loss or to secure the renewal or reinstatement of any license or franchise held by the Company or any Restricted Subsidiary from any governmental entity; provided, however, that such purchase or redemption shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (vii) any purchase or redemption of Subordinated Obligations or Preferred Stock following a Change of Control pursuant to an obligation in the instruments governing such Subordinated Obligations or Preferred Stock to purchase or redeem such Subordinated Obligations or Preferred Stock as a result of such Change of Control; provided, however, that no such purchase or redemption shall be permitted until the Company has completely discharged its obligations described under "--Change of Control" (including the purchase of all Notes tendered for purchase by holders) arising as a result of such Change of Control; provided further, however, that such purchase or redemption shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; or (viii) cash dividends paid after February 15, 2003 in respect of the Exchangeable Preferred Stock in an aggregate amount in any twelve month period not to exceed 13 3/4% of the aggregate liquidation preference outstanding at the beginning of such twelve month period; provided, however, that at the time of payment of any such dividends, no Default shall have occurred and be continuing; provided further, however, that all such dividends shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock to the Company or a Restricted Subsidiary, (b) pay any Indebtedness owed to the Company, (c) make any loans or advances to the Company or (d) transfer any of its property or assets to the Company, except: (i) any encumbrance or restriction pursuant to the Indenture, the Exchangeable Preferred Stock or any other agreement in effect at or entered into on the Issue Date; (ii) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company) and outstanding on such date; (iii) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement or instrument referred to in clause (i) or (ii) of this covenant or this clause (iii) or contained in any amendment to an agreement or instrument referred to in clause (i) or (ii) of this covenant or this clause (iii); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any such refinancing agreement or amendment are no less favorable to the 90 Noteholders than encumbrances and restrictions with respect to such Restricted Subsidiary contained in such predecessor agreements; (iv) any such encumbrance or restriction consisting of customary non- assignment or anti-alienation provisions in (a) leases governing leasehold interests to the extent such provisions restrict the transfer of the lease or the property leased thereunder or subletting and (b) licenses or franchises to the extent such provisions restrict the transfer of the license or franchise; (v) in the case of clause (d) above, restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages; (vi) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition; and (vii) any encumbrance or restriction contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was Incurred if the Board of Directors determines in good faith that any such encumbrance or restriction will not materially affect the Company's ability to pay principal or interest on the Notes when due and such encumbrance or restriction by its terms expressly permits such Restricted Subsidiary, (A) in the absence of a payment default in respect of such Indebtedness or other agreement, to make cash payments to the Company (in any form) sufficient to pay when due all amounts of principal and interest on the Notes and (B) following the occurrence and during the continuance of a payment default in respect of such Indebtedness or other agreement, to resume making cash payments to the Company (in any form) sufficient to pay when due all amounts of principal and interest on the Notes upon the earlier of the cure of such payment default and the lapse of 179 consecutive days following the date when such encumbrance or restriction became operative to prohibit or limit such Restricted Subsidiary from making such payments to the Company; provided, however, that no Restricted Subsidiary shall be affected by the operation of any such encumbrances or restrictions following the occurrence of a payment default on more than one occasion in any consecutive 360-day period. Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the shares and assets subject to such Asset Disposition and at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be): (A) first, to the extent the Company elects in its sole discretion (or is required by the terms of any Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness or Indebtedness (other than any Disqualified Stock) of a Restricted Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company) within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to the extent the Company elects in its sole discretion, to acquire Additional Assets within one year after the receipt of such Net Available Cash; (C) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an offer to the holders of the Notes (and to holders of other Senior Indebtedness 91 designated by the Company) to purchase Notes (and such other Senior Indebtedness) pursuant to and subject to the conditions contained in the Indenture; and (D) fourth, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), for the general corporate and working capital purposes of the Company and its Restricted Subsidiaries; provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) or (C) above, the Company or such Restricted Subsidiary shall permanently retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions of this paragraph, the Company and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with this paragraph except to the extent that the aggregate Net Available Cash from all Asset Dispositions occurring after the Issue Date which are not applied in accordance with this paragraph exceeds $5 million. Pending application of Net Available Cash pursuant to this covenant, such Net Available Cash shall be invested in Permitted Investments. For the purposes of this covenant, the following are deemed to be cash or cash equivalents: (x) the assumption of Indebtedness of the Company or any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition, (y) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash; and (z) Temporary Cash Investments. (b) In the event of an Asset Disposition that requires the purchase of the Notes (and other Senior Indebtedness) pursuant to clause (a) (ii) (C) above, the Company will be required to purchase Notes tendered pursuant to an offer by the Company for the Notes (and other Senior Indebtedness) at a purchase price of 100% of their Accreted Value (in the case of Notes) or 100% of their principal amount (in the case of other Senior Indebtedness) plus accrued but unpaid interest, if any, to the date of purchase (or, in respect of such other Senior Indebtedness, such lesser price, if any, as may be provided for by the terms of such Senior Indebtedness) in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. If the aggregate purchase price of Notes (and any other Senior Indebtedness) tendered pursuant to such offer is less than the Net Available Cash allotted to the purchase thereof, the Company will be required to apply the remaining Net Available Cash in accordance with clause (a) (ii) (D) above. The Company shall not be required to make such an offer to purchase Notes (and other Senior Indebtedness) pursuant to this covenant if the Net Available Cash available therefor is less than $5.0 million (which lesser amount shall be carried forward for purposes of determining whether such an offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). (c) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this clause by virtue thereof. Limitation on Affiliate Transactions. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, enter into or permit to exist any transaction (including the purchase, sale, license, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof (1) are no less favorable to the Company or such Restricted Subsidiary than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate, (2) if such Affiliate Transaction involves an amount in excess of $1.0 million, (i) are set forth in writing and (ii) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction and (3) if such Affiliate Transaction involves an amount in excess of $5.0 million, have been determined by a nationally recognized investment banking firm or other qualified 92 appraiser under the relevant circumstances to be fair, from a financial standpoint, to the Company and its Restricted Subsidiaries. (b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any Permitted Investment or any Restricted Payment permitted to be paid pursuant to the covenant described under "--Limitation on Restricted Payments," (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (iii) the grant of stock options or similar rights to employees and directors of the Company pursuant to plans approved by the Board of Directors, (iv) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Company or its Restricted Subsidiaries, but in any event not to exceed $500,000 in the aggregate outstanding at any one time, (v) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries, (vi) any Affiliate Transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries; provided, however, that no beneficial owner (as defined in Rule 13d-1 and 13d-5 of the Exchange Act) of 5% or more of the Capital Stock of the Company holds, directly or indirectly, any Investments in any such Restricted Subsidiary (other than indirectly through the Company), (vii) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Company and (viii) any transaction pursuant to an agreement or arrangement in effect on the Issue Date. Limitation on the Sale or Issuance of Capital Stock of Certain Restricted Subsidiaries. The Company shall not sell or otherwise dispose of any Capital Stock (other than Qualified Preferred Stock) of an Existing Restricted Subsidiary, and shall not permit any Existing Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock (other than Qualified Preferred Stock), except (i) to the Company or a Wholly Owned Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or other disposition, neither the Company nor any of its Subsidiaries own any Capital Stock of such Restricted Subsidiary, (iii) if, immediately after giving effect to such issuance, sale or other disposition, such Existing Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto would have been permitted to be made under the covenant described under "--Limitation on Restricted Payments" if made on the date of such issuance, sale or other disposition, (iv) to directors of directors' qualifying shares of common stock of any Restricted Subsidiary, to the extent mandated by applicable law, or (v) the issuance or sale of Capital Stock of a Restricted Subsidiary that has a class of equity security registered under Section 12 of the Exchange Act pursuant to an employee stock option plan approved by the Board of Directors. Limitation on Liens. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any Lien of any nature whatsoever on any of its properties (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, other than Permitted Liens, without effectively providing that the Notes shall be secured equally and ratably with (or, if the obligation or liability to be secured by such Lien is subordinated in respect of payment to the Notes, prior to) the obligations so secured for so long as such obligations are so secured; provided, however, that the Company and its Restricted Subsidiaries may Incur other Liens to secure Indebtedness as long as the amount of outstanding Indebtedness secured by Liens Incurred pursuant to this proviso at any time does not exceed $5.0 million. Limitation on Sale/Leaseback Transactions. The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any property unless (i) the Company or such Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to the covenant described under "--Limitation on Indebtedness" and (B) create a Lien on such property securing such Attributable Debt without equally and ratably securing the Notes pursuant to the covenant described under "-- Limitation on Liens," (ii) the net proceeds received by the Company or any Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the fair value (as determined by the Board of Directors) of such property and (iii) the Company applies the proceeds of such transaction in compliance with the covenant described under "--Limitation on Sale of Assets and Subsidiary Stock." 93 Limitation on Market Swaps. The Company will not, and will not permit any Restricted Subsidiary to, engage in any Market Swaps, unless: (i) at the time of entering into the agreement to swap markets and immediately after giving effect to the proposed Market Swap, no Default shall have occurred and be continuing; (ii) the respective fair market values of the markets and other assets (to be determined in good faith by the Board of Directors and to be evidenced by a resolution of such Board set forth in an Officer's Certificate delivered to the Trustee) being purchased and sold by the Company or any of its Restricted Subsidiaries are substantially the same at the time of entering into the agreement to swap markets; and (iii) the cash payments, if any, received by the Company or such Restricted Subsidiary in connection with such Market Swap are treated as Net Available Cash received from an Asset Disposition. Limitation on Lines of Business. The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any trade or business other than a Related Business. Merger and Consolidation. The Company shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) shall expressly assume, by an indenture supplemental thereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Subsidiary as a result of such transaction as having been Incurred by such Successor Company or such Subsidiary at the time of such transaction), no Default shall have occurred and be continuing, (iii) immediately after giving effect to such transaction, the Successor Company would be able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under "--Limitation on Indebtedness;" (iv) immediately after giving effect to such transaction, the Successor Company shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Company immediately prior to such transaction; (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture; and (vi) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. The Successor Company shall be the successor to the Company and shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture, but the predecessor Company in the 94 case of a conveyance, transfer or lease shall not be released from the obligation to pay the principal of and interest on the Notes. SEC Reports. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the Trustee and Noteholders with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections if it were subject thereto (unless the Commission will not accept such a filing, in which case the Company shall provide such documents to the Trustee). In addition, for so long as any of the Notes are outstanding, the Company will make available to any prospective purchaser of the Notes or beneficial owner thereof (upon written request to the Company) in connection with any sales thereof the information required by Rule 144A(d) (4) under the Securities Act. DEFAULTS An Event of Default is defined in the Indenture as (i) a default in the payment of interest on the Notes when due, continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, (iii) the failure by the Company to comply with its obligations under "-- Certain Covenants--Merger and Consolidation" above, (iv) the failure by the Company to comply for 30 days after the notice described below with any of its obligations in the covenants described above under "--Change of Control" (other than a failure to purchase Notes) or under "--Certain Covenants" under "--Limitation on Indebtedness," "--Limitation on Restricted Payments," "-- Limitation on Restrictions on Distributions from Restricted Subsidiaries," "-- Limitation on Sales of Assets and Subsidiary Stock" (other than a failure to purchase Notes), "--Limitation on Affiliate Transactions," "--Limitation on the Sale or Issuance of Capital Stock of Certain Restricted Subsidiaries," "-- Limitation on Liens," "--Limitation on Sale/Leaseback Transactions," "Limitation on Market Swaps," "Limitation on Lines of Business" or "--SEC Reports," (v) the failure by the Company to comply for 60 days after the notice described below with its other agreements contained in the Indenture, (vi) Indebtedness of the Company or any Significant Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $10 million and such non-payment continues, or such acceleration is not rescinded, within 10 days after notice (the "cross acceleration provision"), (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary (the "bankruptcy provisions") or (viii) any judgment or decree (not covered by insurance or indemnification by a Person other than the Company or a Restricted Subsidiary, which indemnity party is solvent and has acknowledged responsibility) for the payment of money in excess of $10 million is entered against the Company or a Significant Subsidiary, remains outstanding for a period of 60 days following such judgment and is not discharged, waived, bonded over or stayed within 10 days after notice (the "judgment default provision") . However, a default under clauses (iv), (v), (vi) and (viii) will not constitute an Event of Default until the Trustee or the holders of 25% in principal amount at maturity of the outstanding Notes notify the Company of the default and the Company does not cure such default within the time specified herein after receipt of such notice. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount at maturity of the outstanding Notes may declare the Accreted Value of and accrued but unpaid interest on all the Notes to be due and payable (collectively, the "Default Amount"). Upon such a declaration, the Default Amount shall be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs and is continuing, the Default Amount on all the Notes will ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holders of the Notes. Under certain circumstances, the holders of a majority in principal amount at maturity of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, 95 the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the holders of the Notes unless such holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no holder of a Note may pursue any remedy with respect to the Indenture or the Notes unless (i) such holder has previously given the Trustee notice that an Event of Default is continuing, (ii) holders of at least 25% in principal amount at maturity of the outstanding Notes have requested the Trustee to pursue the remedy, (iii) such holders have offered the Trustee reasonable security or indemnity against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt thereof and the offer of security or indemnity and (v) the holders of a majority in principal amount at maturity of the outstanding Notes have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the holders of a majority in principal amount at maturity of the outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder of a Note or that would involve the Trustee in personal liability. The Indenture provides that if a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each holder of the Notes notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of or interest on any Note, the Trustee may withhold notice if and so long as a committee of its trust officers determines that withholding notice is not opposed to the interest of the holders of the Notes. In addition, the Company is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Company also is required to deliver to the Trustee, within 30 days after the Company becomes aware of the occurrence thereof, written notice of any event which would constitute certain Defaults, their status and what action the Company is taking or proposes to take in respect thereof. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the holders of a majority in principal amount at maturity of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange for the Notes) and any past default or compliance with any provisions may also be waived with the consent of the holders of a majority in principal amount at maturity of the Notes then outstanding. However, without the consent of each holder of an outstanding Note affected thereby, no amendment may, among other things, (i) reduce the amount of Notes whose holders must consent to an amendment, (ii) reduce the rate of or extend the time for payment of interest on any Note, (iii) reduce the principal of or extend the Stated Maturity of any Note, (iv) reduce the amount payable upon the redemption of any Note or change the time at which any Note may be redeemed as described under "--Optional Redemption," (v) make any Note payable in money other than that stated in the Note, (vi) impair the right of any holder of the Notes to receive payment of principal of and interest on such holder's Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Notes or (vii) make any change in the amendment provisions which require each holder's consent or in the waiver provisions. Without the consent of any holder of the Notes, the Company and Trustee may amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company under the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes (provided that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add guarantees with respect to the Notes, to secure the Notes, to add to the covenants of the Company for the benefit of the holders of the Notes or to surrender any right or power conferred upon the Company, to make any change that does not adversely affect the rights of any holder of the Notes or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the Trust Indenture Act. 96 The consent of the holders of the Notes is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Indenture becomes effective, the Company is required to mail to holders of the Notes a notice briefly describing such amendment. However, the failure to give such notice to all holders of the Notes, or any defect therein, will not impair or affect the validity of the amendment. TRANSFER AND EXCHANGE A holder may transfer or exchange the New Notes in accordance with the Exchange Offer and the Indenture. The Company, the Registrar and the Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a holder to pay any taxes and fees required by law or permitted by the Indenture. DEFEASANCE The Company at any time may terminate all its obligations under the Notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes. The Company at any time may terminate its obligations under "--Change of Control" and under the covenants described under "--Certain Covenants" (other than the covenant described under "--Merger and Consolidation"), the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries and the judgment default provision described under "-- Defaults" above and the limitations contained in clauses (iii) and (iv) under "--Certain Covenants--Merger and Consolidation" above ("covenant defeasance"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in clause (iv), (vi), (vii) (with respect only to Significant Subsidiaries) or (viii) under "--Defaults" above or because of the failure of the Company to comply with clause (iii) or (iv) under "--Certain Covenants--Merger and Consolidation" above. In order to exercise either defeasance option, the Company must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay principal and interest on the Notes when due (whether at scheduled maturity or upon redemption as to which irrevocable instructions have been given to the Trustee) in accordance with the terms of the Indenture and the Notes (the value of such money or U.S. Government Obligations may not be sufficient to pay the Default Amount at any particular point in time) and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable Federal income tax law). CONCERNING THE TRUSTEE 97 State Street Bank and Trust Company is the Trustee under the Indenture and has been appointed by the Company as Registrar and Paying Agent with regard to the Notes. The Holders of a majority in principal amount at maturity of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions, including furnishing the Trustee with indemnity satisfactory to it. The Indenture provides that if an Event of Default occurs (and is not cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Indenture. GOVERNING LAW The Indenture provides that it and the Notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. CERTAIN DEFINITIONS "Accreted Value" means, as of any date (the "Specified Date"), the amount provided below for each $1,000 principal amount at maturity of Notes: (i) if the Specified Date occurs on one of the following dates (each, a "Semi-Annual Accrual Date"), the Accreted Value will equal the amount set forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL - ------------------------- ACCRUAL DATE ACCRETED VALUE - ------------------------- -------------- Issue Date............. $ 550.76 August 15, 1998........ 585.69 February 15, 1999...... 621.56 August 15, 1999........ 659.63 February 15, 2000...... 700.03 August 15, 2000........ 742.91 February 15, 2001...... 788.41 August 15, 2001........ 836.70 February 15, 2002...... 887.95 August 15, 2002........ 942.34 February 15, 2003...... 1,000.00
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates, the Accreted Value will equal the sum of (a) the Accreted Value for the Semi- Annual Accrual Date immediately preceding such Specified Date and (b) an amount equal to the product of (1) the Accreted Value for the immediately following Semi-Annual Accrual Date less the Accreted Value for the immediately preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator of which is the number of days elapsed from the immediately preceding Semi- Annual Accrual Date to the Specified Date, using a 360-day year of 12 30-day months, and the denominator of which is 180 (or, if the Semi-Annual Accrual Date immediately preceding the Specified Date is the Issue Date, the denominator of which is 186); or 98 (iii) if the Specified Date occurs after the last Semi-Annual Accrual Date, the Accreted Value will equal $1,000. "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock constituting a minority interest in any Person that at such time is or becomes a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a Related Business. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the provisions described under "--Certain Covenants--Limitation on Restricted Payments," "--Certain Covenants--Limitation on Affiliate Transactions" and "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Annualized EBITDA" as of any date of determination means EBITDA for the most recent two consecutive fiscal quarters for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination multiplied by two. "Area 1 Franchise" means the Company's cable television franchise pursuant to a Franchise Agreement between the Company and the City of Chicago in effect on the Issue Date. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) (that is not for security purposes) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (i) any shares of Capital Stock (other than Qualified Preferred Stock) of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary), (ii) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary or (iii) any other assets (other than Capital Stock or other Investments in an Unrestricted Subsidiary) of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of (i), (ii) and (iii) above, (a) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to another Restricted Subsidiary, (b) for purposes of the covenant described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a disposition that (x) constitutes a Permitted Investment or a Restricted Payment permitted by the covenant described under "--Certain Covenants--Limitation on Restricted Payments," (y) complies with the covenant described under "--Certain Covenants--Merger and Consolidation" or (z) constitutes a Market Swap permitted by the covenant described under "--Certain Covenants--Limitation on Market Swaps" and (c) a disposition of assets with a fair market value of less than $250,000). "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the Notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). 99 "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the products of numbers of years (calculated to the nearest one-twelfth) from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of each such principal payment by (ii) the sum of all such principal payments. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means any day other than a Saturday, Sunday or day on which banking institutions are not required to be open in the States of New York, Illinois and Massachusetts. "Capital Lease Obligation" means an obligation that is required to be classified and accounted for as a capital lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated, whether voting or nonvoting) equity of such Person, including any common stock and Preferred Stock, whether outstanding on the Issue Date or issued after the Issue Date, but excluding any debt securities convertible into such equity. "Code" means the Internal Revenue Code of 1986, as amended. "consolidated" means the consolidation of accounts of the Company and its Subsidiaries in accordance with GAAP. "Consolidated Current Liabilities" as of the date of determination means the aggregate amount of liabilities of the Company and its Restricted Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), on a consolidated basis, after eliminating (i) all intercompany items between the Company and any Restricted Subsidiary and (ii) all current maturities of long-term Indebtedness, all as determined in accordance with GAAP consistently applied. "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent incurred in such period by the Company or its Restricted Subsidiaries, without duplication, (i) interest expense attributable to capital leases and the interest expense attributable to leases constituting part of a Sale/Leaseback Transaction, (ii) amortization of debt discount and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs associated with Hedging Obligations (including amortization of fees), (vii) Preferred Stock dividends in respect of all Preferred Stock held by Persons other than the Company or a Restricted Subsidiary, (viii) interest incurred in connection with Investments in discontinued operations, (ix) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by (or secured by the assets of) the Company or any Restricted Subsidiary and (x) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust; excluding, however, (y) a proportional amount of any of the foregoing items or other interest expense incurred by a Restricted Subsidiary in such period to the extent the net income of such Restricted Subsidiary is excluded in the calculation of Consolidated Net Income pursuant to clause (iii) of the definition thereof and (z) any fees or debt issuance costs (and any amortization thereof) payable in connection with the sale of the Notes and Units on the Issue Date. 100 "Consolidated Leverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of Indebtedness of the Company and its Restricted Subsidiaries calculated on a consolidated basis as of the end of the most recent fiscal quarter for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination to (ii) Annualized EBITDA as of such date of determination; provided, however, that (1) if the transaction giving rise to the need to calculate the Consolidated Leverage Ratio is an Incurrence of Indebtedness, the amount of Indebtedness outstanding at the end of such fiscal quarter shall be calculated after giving effect on a pro forma basis to the Incurrence of such Indebtedness as if such Indebtedness had been outstanding as of the end of such fiscal quarter and to the discharge of any other Indebtedness to the extent it was outstanding as of the end of such fiscal quarter and is to be repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such Indebtedness had been discharged as of the end of such fiscal quarter, (2) if the Company or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness that was outstanding as of the end of such fiscal quarter or if any Indebtedness that was outstanding as of the end of such fiscal quarter is to be repaid, repurchased, defeased or otherwise discharged on the date of the transaction giving rise to the need to calculate the Consolidated Leverage Ratio, the aggregate amount of Indebtedness outstanding as of the end of such fiscal quarter shall be calculated on a pro forma basis as if such discharge had occurred as of the end of such fiscal quarter and EBITDA shall be calculated as if the Company or such Restricted Subsidiary had not earned the interest income, if any, actually earned during the period of the most recent two consecutive fiscal quarters for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination (the "Reference Period") in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if since the beginning of the Reference Period the Company or any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for the Reference Period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Disposition for the Reference Period, or increased by an amount equal to the EBITDA (if negative), directly attributable thereto for the Reference Period, (4) if since the beginning of the Reference Period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any person which becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder, which constitutes all or substantially all an operating unit of a business, EBITDA for the Reference Period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of the Reference Period, (5) if since the beginning of the Reference Period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such Reference Period) shall have made any Asset Disposition, any Investment or acquisition of assets that would have required an adjustment pursuant to clause (3) or (4) above if made by the Company or a Restricted Subsidiary during the Reference Period, EBITDA for the Reference Period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition occurred on the first day of the Reference Period; and (6) the aggregate amount of Indebtedness outstanding at the end of such most recent fiscal quarter will be deemed to include the total principal amount of funds outstanding or available to be borrowed on the date of determination under any revolving credit or similar facilities of the Company or its Restricted Subsidiaries. 101 For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets or the amount of income or earnings relating thereto, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. "Consolidated Net Income" means, for any period, the aggregate net income of the Company and its consolidated Subsidiaries for such period; provided, however, that the following shall not be included in such Consolidated Net Income: (i) any net income (or loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitations contained in clause (iii) below); (ii) any net income (or loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that (A) subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (iv) the after-tax gain or loss realized upon the sale or other disposition of any assets of the Company, its consolidated Subsidiaries or any other Person (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and the after-tax gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; (v) extraordinary gains or losses; and (vi) the cumulative effect of a change in accounting principles. Notwithstanding the foregoing, for the purposes of the covenant described under "Certain Covenants--Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any payments of interest, dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such interest, dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof. "Consolidated Net Tangible Assets" as of any date of determination, means the total amount of assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) which would appear on a balance sheet of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, and after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of: (i) minority interests in consolidated Subsidiaries held by Persons other than the Company or a Restricted Subsidiary; (ii) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the Board of Directors; (iii) any revaluation or other write-up in book value of assets subsequent to the Issue Date as a result of a change in the method of valuation in accordance with GAAP consistently applied; (iv) unamortized debt discount 102 and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; (v) treasury stock; (vi) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and (vii) Investments in and assets of Unrestricted Subsidiaries. "Consolidated Net Worth" means, at any date of determination, the total of the amounts shown on the balance sheet of the Company and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company for which financial statements have been made publicly available but in no event ending more than 135 days prior to the taking of any action for the purpose of which the determination is being made, as (i) the par or stated value of all outstanding Capital Stock of the Company plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Credit Agreement" means one or more term loans or revolving credit or working capital facilities (including any letter of credit subfacility) with one or more banks or other institutional lenders in favor of the Company or any Restricted Subsidiary. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement designed to protect such Person against fluctuations in currency values. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable or must be purchased, upon the occurrence of certain events or otherwise, by such Person at the option of the holder thereof, in whole or in part, in each case on or prior to the first anniversary of the Stated Maturity of the Notes; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the Notes shall not constitute Disqualified Stock if (x) the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the terms applicable to the Notes and described under "-- Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" and "-- Change of Control" and (y) any such requirement only becomes operative after compliance with such terms applicable to the Notes, including the purchase of any Notes tendered pursuant thereto. "EBITDA" for any period means the sum of Consolidated Net Income, plus the following to the extent deducted in calculating such Consolidated Net Income: (a) Consolidated Interest Expense, (b) all income tax expense of the Company and its consolidated Restricted Subsidiaries, (c) depreciation expense of the Company and its consolidated Restricted Subsidiaries, (d) amortization expense of the Company and its consolidated Restricted Subsidiaries (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period) and (e) all other non-cash charges of the Company and its consolidated Restricted Subsidiaries (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenditures in any future period), in each case for such period, all as determined on a consolidated basis for the Company and its Restricted Subsidiaries. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that 103 has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders. "Equity Offering" means either (a) an underwritten primary public offering of common stock of Parent or the Company pursuant to an effective registration statement under the Securities Act or (b) a primary offering of Capital Stock (other than Disqualified Stock) of the Company to one or more Persons primarily engaged in a Related Business. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Restricted Subsidiary" means any Restricted Subsidiary in existence on the Issue Date and any Restricted Subsidiary formed after the Issue Date which thereafter conducts all or any portion of the Company's business pertaining to its Area 1 Franchise in Chicago, as in effect on the Issue Date. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date, including those set forth in (i) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) statements and pronouncements of the Financial Accounting Standards Board, (iii) such other statements by such other entity as approved by a significant segment of the accounting profession and (iv) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" or "Noteholder" means the Person in whose name a Note is registered on the Registrar's books. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. The accretion of principal of a non-interest bearing or other discount security shall be deemed the Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person on any date of determination (without duplication): (i) the principal in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable, including, in each case, any premium on such indebtedness to the extent such premium has become due and payable; 104 (ii) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale/Leaseback Transactions entered into by such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following payment on the letter of credit); (v) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person (including any Restricted Subsidiary), the liquidation preference with respect to, any Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the fair value of such property or assets or the amount of the obligation so secured, in each case as of the date of determination; and (viii) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. "Interest Rate Agreement" means in respect of a Person any interest rate swap agreement, interest rate cap, floor, collar or forward interest rate agreement or other financial agreement or arrangement designed to protect such Person against fluctuations in interest rates. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary," the definition of "Restricted Payment" and the covenant described under "--Certain Covenants--Limitation on Restricted Payments," (i) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary 105 shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors. "Issue Date" means the date on which the Old Notes were issued under the Indenture. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Market Assets" means assets used or useful in the ownership or operation of a Related Business, including any and all licenses, franchises and assets related thereto. "Market Swap" means the execution of a definitive agreement, subject only to governmental approval and other customary closing conditions, that the Company in good faith believes will be satisfied, for a substantially concurrent purchase and sale, or exchange, of Market Assets between the Company or any of its Restricted Subsidiaries and another Person or group of Persons; provided that any amendment to or waiver of any closing condition which individually or in the aggregate is material to the Market Swap will be deemed to be a new Market Swap; provided, however, that the Market Assets to be sold by the Company or its Restricted Subsidiaries in connection with a Market Swap do not include assets used in or necessary for the ownership or operation of the Company's business pertaining to its Area 1 franchise in Chicago; provided further, however, that the cash and other assets to be received by the Company or its Restricted Subsidiaries which do not constitute Market Assets do not constitute more than 15% of the total consideration to be received by the Company or its Restricted Subsidiaries in such Market Swap. "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form), in each case net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments required to be made to minority interest holders in Restricted Subsidiaries as a result of such Asset Disposition and (iv) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the proceeds of such issuance or sale in the form of cash or cash equivalents including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in such form of cash or cash equivalents and the conversion of other property received when converted to such form of cash or cash equivalents, net of any and all issuance costs, including attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Parent" means any Person that owns directly or indirectly all the Voting Stock of the Company. "Permitted Holders" means Purnendu Chatterjee, JK&B Capital, William Farley, Boston Capital Ventures II, L.P., Glenn W. Milligan, Edward T. Joyce and each of their affiliates. 106 "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Related Business; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that such Person's primary business is a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (v) commissions, payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (vi) loans or advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary; (vii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) any Person to the extent such Investment represents either the non-cash portion of the consideration received for an Asset Disposition as permitted pursuant to the covenant described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" or the consideration not constituting Market Assets received in a Market Swap as permitted pursuant to the covenant described under "--Certain Covenants--Limitation on Market Swaps;" and (ix) any Person principally engaged in a Related Business if (a) the Company or a Restricted Subsidiary, after giving effect to such Investment, will own at least 20% of the Voting Stock of such Person and (b) the amount of such Investment, when taken together with the aggregate amount of all Investments made pursuant to this clause (ix) and then outstanding, does not exceed $10.0 million. "Permitted Liens" means, with respect to any Person, (a) pledges or deposits by such Person under worker's compensation laws, unemployment insurance laws or similar legislation and other types of social security, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory or regulatory obligations of such Person or deposits of cash, cash equivalents or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of business; (b) Liens imposed by law, such as carriers', landlords', warehousemen's and mechanics', suppliers', repairmen's or other similar Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review and Liens in favor of customs and revenue authorities to secure payment of customs duties; (c) Liens for taxes, assessments, governmental charges or claims subject to penalties for non-payment or which are being contested in good faith and by appropriate proceedings; (d) Liens in favor of issuers of surety or payment and performance bonds or letters of credit and bankers' acceptances issued pursuant to the request of and for the account of such Person in the ordinary course of its business; provided, however, that such letters of credit and bankers' acceptances do not constitute Indebtedness; (e) survey exceptions, encumbrances, easements or reservations of, or rights of others for, licenses, rights-of-way, pole attachment, use of conduit, use of trenches, or similar rights, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real property or Liens incidental to the conduct of the business of such Person or to the ownership of its properties or other municipal and zoning ordinances, title defects or other irregularities which were not Incurred in connection with 107 Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (f) Liens securing Indebtedness Incurred after the Issue Date pursuant to clause (b) (7) of the covenant described under "--Limitation on Indebtedness" or otherwise Incurred to finance the construction, purchase or lease of, or repairs, improvements or additions to, property of such Person; provided, however, that the Liens securing such Indebtedness may not extend to any property owned by such Person or any of its Subsidiaries at the time the Lien is Incurred other than the property financed with the proceeds of such Indebtedness and the proceeds thereof, and the Indebtedness (other than any interest thereon) secured by the Lien may not be Incurred more than 180 days after the later of the acquisition, completion of construction, repair, improvement, addition or commencement of full operation of the property subject to the Lien; (g) Liens to secure Indebtedness permitted under the provisions described in clause (b)(1) under "--Certain Covenants--Limitation on Indebtedness;" (h) Liens existing on the Issue Date; (i) Liens on property or shares of Capital Stock of another Person at the time such other Person becomes a Subsidiary of such Person; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of, such other Person becoming such a Subsidiary; provided further, however, that such Lien may not extend to any other property owned by such Person or any of its Subsidiaries; (j) Liens on property at the time such Person or any of its Subsidiaries acquires the property, including any acquisition by means of a merger or consolidation with or into such Person or a Subsidiary of such Person; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of, such acquisition; provided further, however, that the Liens may not extend to any other property owned by such Person or any of its Subsidiaries; (k) Liens securing Indebtedness or other obligations of a Subsidiary of such Person owing to such Person or a Subsidiary of such Person; (l) Liens securing Hedging Obligations so long as such Hedging Obligations relate to Indebtedness that is, and is permitted to be under the Indenture, secured by a Lien on the same property securing such Hedging Obligations; and (m) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (n) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business; and (o) Liens to secure any Refinancing (or successive Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clauses (f), (h), (i) and (j); provided, however, that (I) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements to or on such property) and (II) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clauses (f), (h), (i) or (j) at the time the original Lien became a Permitted Lien and (B) an amount necessary to pay any accrued and unpaid interest, fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement. Notwithstanding the foregoing, "Permitted Liens" will not include any Lien described in clauses (f), (i) or (j) above to the extent such Lien applies to any Additional Assets acquired directly or indirectly from Net Available Cash 108 pursuant to the covenant described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock." For purposes of this definition, the term "Indebtedness" shall be deemed to include interest on such Indebtedness. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated, whether voting or nonvoting) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "principal" of a Note means the Accreted Value of the Note plus the premium, if any, payable on the Note which is due or overdue or is to become due at the relevant time. "principal amount at maturity" of a Note means the amount specified as such on the face of such Note. "Public Market" means any time after (x) a Public Offering has been consummated and (y) at least 15% of the total issued and outstanding common stock of Parent or the Company has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. "Public Offering" means an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Qualified Preferred Stock" of a Restricted Subsidiary means a series of Preferred Stock of such Restricted Subsidiary which (i) has a fixed liquidation preference that is no greater in the aggregate than the sum of (x) the fair market value (as determined in good faith by the Board of Directors at the time of the issuance of such series of Preferred Stock) of the consideration received by such Restricted Subsidiary for the issuance of such series of Preferred Stock and (y) accrued and unpaid dividends to the date of liquidation, (ii) has a fixed annual dividend and has no right to share in any dividend or other distributions based on the financial or other similar performance of such Restricted Subsidiary and (iii) does not entitle the holders thereof to vote in the election of directors, managers or trustees of such Restricted Subsidiary unless such Restricted Subsidiary has failed to pay dividends on such series of Preferred Stock for a period of at least 12 consecutive calendar months. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with the Indenture, including Indebtedness that Refinances Refinancing Indebtedness; provided, however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding or committed (plus accrued and unpaid interest, fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. 109 "Related Business" means the businesses of the Company and the Restricted Subsidiaries on the Issue Date and any business related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Restricted Payment" with respect to any Person means (i) the declaration or payment of any dividends or any other distributions of any sort (including any payment in connection with any merger or consolidation involving such Person) in respect of its Capital Stock held by Persons other than the Company or any Restricted Subsidiary or similar payment to the direct or indirect holders (other than the Company or a Restricted Subsidiary) of its Capital Stock (other than dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock), and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation)), (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any Person or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the Company (other than a Restricted Subsidiary), including the exercise of any option to exchange any Capital Stock (other than into Capital Stock of the Company that is not Disqualified Stock), (iii) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations (other than the purchase, repurchase, redemption or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such purchase, repurchase, redemption or acquisition) or (iv) the making of any Investment (other than a Permitted Investment) in any Person. "Restricted Subsidiary" means any Subsidiary of the Company that is not an Unrestricted Subsidiary. "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Restricted Subsidiary leases it from such Person. "SEC" means the Securities and Exchange Commission. "Senior Indebtedness" means Indebtedness (including interest on such Indebtedness) of the Company, whether outstanding on the Issue Date or thereafter Incurred, unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are subordinate in right of payment to the Notes; provided, however, that Senior Indebtedness shall not include (1) any obligation of the Company to any Subsidiary, (2) any liability for Federal, state, local or other taxes owed or owing by the Company, (3) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities), (4) any Indebtedness of the Company (and any accrued and unpaid interest in respect thereof) which is subordinate or junior in any respect to any other Indebtedness or other obligation of the Company or (5) that portion of any Indebtedness which at the time of Incurrence is Incurred in violation of the Indenture. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory 110 redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred). "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the Issue Date or thereafter Incurred) which is expressly subordinate or junior in right of payment to the Notes pursuant to a written agreement to that effect. "Subsidiary" means, in respect of any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Voting Stock is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations of the United States of America or any agency thereof or obligations guaranteed by the United States of America or any agency thereof, (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 365 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50,000,000 (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) investments in commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group, (v) investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc., and (vi) investments in money-market funds (other than single-state funds) that make investments in instruments of the type described in clause (i)-(v) above in accordance with the regulations of the Securities and Exchange Commission under the Investment Company Act of 1940, as amended. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the covenant described under 111 "--Certain Covenants--Limitation on Restricted Payments." The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant described under "--Certain Covenants--Limitation on Indebtedness" and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the issuer's option. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or one or more Wholly Owned Subsidiaries. DESCRIPTION OF THE NEW EXCHANGEABLE PREFERRED STOCK The following is a summary of certain provisions of the New Exchangeable Preferred Stock and the Amendment to the Articles of Incorporation (the "Amended Articles") setting forth the rights and privileges of the New Exchangeable Preferred Stock. A copy of the Amended Articles and the form of New Exchangeable Preferred Stock is available upon request to the Company at the address set forth under "Available Information." The following summary of certain provisions of the Amended Articles does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Amended Articles. The definitions of certain capitalized terms used but not defined in the following summary are set forth under "Description of the Exchange Debentures--Certain Definitions." Other capitalized terms used but not defined herein and not otherwise defined under "Description of the Exchange Debentures--Certain Definitions" are defined in the Amended Articles. GENERAL At the consummation of the Exchange Offer, the Company will issue up to 51,833.33 shares of its registered 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010, $0.01 par value per share, designated as "13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010," in exchange for an equal number shares of its outstanding 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010, $0.01 par value per share. Subject to certain conditions, the New Exchangeable Preferred Stock will be exchangeable for the Exchange Debentures at the option of the Company on any scheduled dividend payment date on or after the date of issuance of the New Exchangeable Preferred Stock. When issued, the New Exchangeable Preferred Stock will be validly issued, fully paid and nonassessable. The holders of the New Exchangeable Preferred Stock will have no preemptive or preferential right to purchase or subscribe for stock, obligations, warrants, or other securities of the Company of any class. RANKING 112 The Exchangeable Preferred Stock will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank (i) senior to all classes of common stock and to each other class of Capital Stock or series of Preferred Stock outstanding on the Issue Date (including the Class A Preferred Stock and the Class B Preferred Stock) and each other class or series established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Exchangeable Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with all classes of common stock of the Company, as "Junior Stock"); (ii) subject to certain conditions, on a parity with each class of Capital Stock or series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Exchangeable Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as "Parity Stock"); and (iii) subject to certain conditions, junior to each class of Capital Stock or series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such class or series will rank senior to the Exchangeable Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Stock"). While any shares of Exchangeable Preferred Stock are outstanding, the Company may not authorize, create or increase the authorized amount of any class or series of stock that ranks senior to or on parity with the Exchangeable Preferred Stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up without the consent of the holders of a majority of the outstanding shares of Exchangeable Preferred Stock. However, without the consent of any holder of Exchangeable Preferred Stock, the Company may create additional classes of stock, increase the authorized number of shares of preferred stock or issue series of a stock that ranks junior to the Exchangeable Preferred Stock with respect, in each case, to the payment of dividends and amounts upon liquidation, dissolution and winding up. See "-- Voting Rights." Substantially all the operations of the Company are or will be conducted through one or more of its subsidiaries. The Company currently has three wholly- owned subsidiaries: 21st Century Cable TV of Illinois, Inc.; 21st Century Telecom of Illinois, Inc.; and 21st Century Telecom Group of Michigan, Inc. Moreover, 21st Century Telecom Group of Michigan, Inc. has two wholly-owned subidiaries: 21st Century Cable TV of Grand Rapids, Inc. and 21st Century Telecom of Michigan, Inc. The Company intends to transfer substantially all its assets to newly formed Restricted Subsidiaries, and thereafter the Company will be a holding company with no assets other than the capital stock of its subsidiaries. Claims of creditors of such subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by such subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries generally will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the Exchangeable Preferred Stock. The Exchangeable Preferred Stock, therefore, will be effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of subsidiaries of the Company. Although the Amended Articles limit the incurrence of Indebtedness and preferred stock of certain of the Company's subsidiaries, such limitation is subject to a number of significant qualifications. Moreover, the Amended Articles does not impose any limitation on the incurrence by such subsidiaries of liabilities that are not considered Indebtedness or Preferred Stock under the Amended Articles. See "--Certain Covenants--Limitation on Indebtedness." DIVIDENDS The holders of shares of New Exchangeable Preferred Stock will be entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Company legally available therefor, cumulative preferential dividends from the Issue Date accruing at the rate per share of 13 3/4% per annum, payable quarterly in arrears on each of February 15, May 15, August 15 and November 15 or, if any such date is not a Business Day, on the next succeeding Business Day, to the holders of record as of the next preceding February 1, May 1, August 1 and November 1. Dividends will be payable in cash, except that on each dividend payment date occurring on or prior to the fifth anniversary of the Issue Date, dividends may be paid, at the Company's option, by the issuance of additional shares of New Exchangeable Preferred Stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. The issuance of such additional shares of New Exchangeable Preferred Stock will constitute "payment" of the related dividend for all purposes of the Amended Articles. The first dividend payment of New Exchangeable Preferred Stock will be payable on May 15, 1998. 113 Dividends payable on the New Exchangeable Preferred Stock will be computed on a basis of the 360-day year consisting of twelve 30-day months and will be deemed to accrue on a daily basis. For a discussion of certain Federal income tax considerations relevant to the payment of dividends on the New Exchangeable Preferred Stock, see "Certain United States Federal Income Tax Consequences." Dividends on the New Exchangeable Preferred Stock will accrue whether or not the Company has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. The Amended Articles will provide that the Company will take all actions required or permitted under the Illinois Business Corporation Act (the "IBCA") to permit the payment of dividends on the Exchangeable Preferred Stock, including through the revaluation of its assets in accordance with the IBCA. No dividend whatsoever shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the New Exchangeable Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid or declared and a sufficient sum set apart (or, on or prior to February 15, 2003, shares of New Exchangeable Preferred Stock for which have been issued and are held for holders by the Transfer Agent) for the payment of such dividend, upon all outstanding shares of New Exchangeable Preferred Stock. Except as provided in the next sentence, no dividend will be declared or paid on any Parity Stock unless full cumulative dividends have been paid on the New Exchangeable Preferred Stock for all prior dividend periods. If accrued dividends on the New Exchangeable Preferred Stock for all prior dividend periods have not been paid in full then any dividend declared on the New Exchangeable Preferred Stock for any dividend period and on any Parity Stock will be declared ratably in proportion to accrued and unpaid dividends on the New Exchangeable Preferred Stock and such Parity Stock. The Company will not (i) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (ii) redeem, purchase or otherwise acquire for consideration any Junior Stock through a sinking fund or otherwise, unless (A) all accrued and unpaid dividends with respect to the New Exchangeable Preferred Stock and any Parity Stock at the time such dividends are payable have been paid or funds have been set apart (or, on or prior to February 15, 2003, shares of New Exchangeable Preferred Stock for which have been issued and are held for holders by the Transfer Agent) for payment of such dividends and (B) sufficient funds have been paid or set apart (or, on or prior to February 15, 2003, shares of New Exchangeable Preferred Stock for which have been issued and are held for holders by the Transfer Agent) for the payment of the dividend for the current dividend period with respect to the New Exchangeable Preferred Stock and any Parity Stock. OPTIONAL REDEMPTION Except as set forth in the following paragraph, the Exchangeable Preferred Stock will not be redeemable at the option of the Company prior to February 15, 2003. Thereafter, the Exchangeable Preferred Stock will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of the liquidation preference thereof), plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period) (subject to the rights of holders of record on the relevant record date to receive dividends due on the relevant dividend payment date), if redeemed during the 12-month period commencing on February 15 of the years set forth below:
REDEMPTION ---------- PERIOD PRICE - ---------- ----- 2003..................... 106.8750% 2004..................... 104.5833
114 2005..................... 102.2917 2006 and thereafter...... 100.0000
In the case of any partial redemption, selection of the Exchangeable Preferred Stock for redemption will be made on a pro rata basis. In addition, at any time prior to February 15, 2001, the Company may redeem the Exchangeable Preferred Stock, in whole, but not in part, with the proceeds (to the extent received by the Company) of an Equity Offering, at a redemption price of 113 3/4% of the liquidation preference thereof, plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period) (subject to the rights of holders of record on the relevant record date to receive dividends due on the relevant dividend payment date). MANDATORY REDEMPTION On February 15, 2010, the Company will be required to redeem (subject to the legal availability of funds therefor) all outstanding shares of Exchangeable Preferred Stock at a price in cash equal to the liquidation preference thereof, plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period), if any, to the date of redemption (subject to the rights of holders of record on the relevant record date to receive dividends on the relevant dividend payment date). The Company will not be required to make sinking fund payments with respect to the Exchangeable Preferred Stock. The Amended Articles will provide that the Company will take all actions required or permitted under the IBCA to permit such redemption. EXCHANGE The Company may, at its option, subject to certain conditions, on any scheduled dividend payment date, exchange the Exchangeable Preferred Stock, in whole, but not in part, for the Exchange Debentures; provided, however, that (i) on the date of such exchange there are no accumulated and unpaid dividends on the Exchangeable Preferred Stock (including the dividend payable on such date) or other contractual impediments to such exchange; (ii) there shall be funds legally available sufficient therefor; (iii) immediately after giving effect to such exchange, no Default (as defined in the Exchange Indenture) shall have occurred and be continuing; and (iv) the Company shall have delivered to the Trustee under the Exchange Indenture an opinion of counsel with respect to the due authorization and issuance of the Exchange Debentures. Upon any exchange pursuant to the preceding paragraph, holders of outstanding shares of Exchangeable Preferred Stock will be entitled to receive, subject to the second succeeding sentence, $1.00 principal amount of Exchange Debentures for each $1.00 liquidation preference of Exchangeable Preferred Stock held by them. The Exchange Debentures will be issued in registered form, without coupons. Exchange Debentures issued in exchange for Exchangeable Preferred Stock will be issued in principal amounts of $1,000 and integral multiples thereof to the extent possible, and will also be issued in principal amounts less than $1,000 so that each holder of Exchangeable Preferred Stock will receive certificates representing the entire amount of Exchange Debentures to which such holder's shares of Exchangeable Preferred Stock entitle such holder; provided, however, that the Company may pay cash in lieu of issuing an Exchange Debenture in a principal amount less than $1,000. The Company will send a written notice of exchange by mail to each holder of record of shares of Exchangeable Preferred Stock not fewer than 30 days nor more than 60 days before the date fixed for such exchange. On and after the Exchange Date, dividends will cease to accrue on the outstanding shares of Exchangeable Preferred Stock, and all rights of the holders of Exchangeable Preferred Stock (except the right to receive the Exchange Debentures, an amount in cash (or, prior to February 15, 2003, at the option of the Company, in Exchange Debentures), in each case, to the extent applicable, equal to the accumulated and unpaid dividends to the exchange date and, if the Company so elects, cash in lieu of any Exchange Debenture that is in a principal amount that is not an integral multiple of $1,000) will 115 terminate. The person entitled to receive the Exchange Debentures issuable upon such exchange will be treated for all purposes as the registered holder of such Exchange Debentures. See "Description of the Exchange Debentures." LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, each holder of Exchangeable Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to stockholders, an amount equal to the liquidation preference per share of Exchangeable Preferred Stock held by such holder, plus accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding-up before any distribution is made on any Junior Stock, including the Class A Preferred Stock, the Class B Preferred Stock and the common stock of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the Exchangeable Preferred Stock and all other Parity Stock are not paid in full, the holders of the Exchangeable Preferred Stock and the Parity Stock will share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference and accumulated and unpaid dividends to which each is entitled. After payment of the full amount of the liquidation preference and accumulated and unpaid dividends to which they are entitled, the holders of shares of Exchangeable Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. However, neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the property or assets of the Company nor the consolidation or merger of the Company with one or more entities shall be deemed to be a liquidation, dissolution or winding-up of the Company. The Amended Articles will not contain any provision requiring funds to be set aside to protect the liquidation preference of the Exchangeable Preferred Stock, although such liquidation preference will be substantially in excess of the par value of such shares of Exchangeable Preferred Stock. VOTING RIGHTS The holders of Exchangeable Preferred Stock, except as otherwise required under Illinois law or as provided in the Amended Articles, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the stockholders of the Company. The Amended Articles will provide that if (i) dividends on the Exchangeable Preferred Stock are in arrears and unpaid for six or more dividend periods (whether or not consecutive); (ii) the Company fails to redeem the Exchangeable Preferred Stock on February 15, 2010, or fails to otherwise discharge any redemption obligation with respect to the Exchangeable Preferred Stock; (iii) a breach or violation of any of the provisions described under the captions "-- Change of Control" or "--Certain Covenants" occurs and the breach or violation continues for a period of 30 days or more after the Company receives notice thereof specifying the default from the holders of at least 25% of the shares of Exchangeable Preferred Stock then outstanding; or (iv) the Company fails to pay at final maturity (giving effect to any applicable grace period) the principal amount of any Indebtedness of the Company or any Significant Subsidiary or the final maturity of any such Indebtedness is accelerated because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $10 million and such nonpayment continues, or such acceleration is not rescinded, within 10 days, then the holders of the outstanding shares of Exchangeable Preferred Stock, voting together as a single class, will be entitled to elect to serve on the Board of Directors the lesser of (x) two additional members to the Board of Directors or (y) that number of directors constituting 25% of the members of the Board of Directors, and the number of members of the Board of Directors will be immediately and automatically increased by such number. Such voting rights of the Exchangeable Preferred Stock will continue until such time as, in the case of a dividend default, all dividends in arrears on the Exchangeable Preferred Stock are paid in full in cash (or, if prior to February 15, 2003, in shares of Exchangeable Preferred Stock) and, in all other cases, any failure, breach or default giving rise to such voting rights is remedied or waived by the holders of a majority of the shares of Exchangeable Preferred Stock then outstanding, at which time the term of any directors elected 116 pursuant to the provisions of this paragraph (subject to the rights of holders of any other preferred stock to elect such directors) shall terminate. Each such event described in clauses (i) through (iv) above is referred to herein as a "Voting Rights Triggering Event." The Amended Articles will also provide that the Company will not authorize, create or increase the authorized amount of any class of Senior Stock or Parity Stock without the affirmative vote or consent of holders of a majority of the shares of Exchangeable Preferred Stock then outstanding, voting or consenting, as the case may be, as one class. In addition, the Amended Articles will provide that the Company may not authorize the issuance of any additional shares of Exchangeable Preferred Stock without the affirmative vote or consent of the holders of a majority of the then outstanding shares of Exchangeable Preferred Stock, voting or consenting, as the case may be, as one class. The Amended Articles will also provide that, except as set forth above, (a) the creation, authorization or issuance of any shares of Junior Stock, or (b) the increase or decrease in the amount of authorized Capital Stock of any class, including any preferred stock, shall not require the consent of the holders of Exchangeable Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of Exchangeable Preferred Stock. CHANGE OF CONTROL The Amended Articles will provide that upon the occurrence of a Change of Control, the Company shall offer to repurchase the Exchangeable Preferred Stock at a purchase price in cash equal to 101% of the liquidation preference thereof plus accumulated and unpaid dividends, if any, to the date of purchase (subject to the rights of holders of record on the relevant record date to receive dividends due on the relevant dividend payment date), as described below. A Change of Control will be deemed to have occurred upon the occurrence of any of the following events (each a "Change of Control"): (i) Prior to the earlier to occur of (A) the first public offering of common stock of Parent or (B) the first public offering of common stock of the Company, the Permitted Holders cease to be the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a majority in the aggregate of the total voting power of the Voting Stock of the Company, whether as a result of issuance of securities of the Parent or the Company, any merger, consolidation, liquidation or dissolution of the Parent or the Company, any direct or indirect transfer of securities by Parent or otherwise (for purposes of this clause (i) and clause (ii) below, the Permitted Holders shall be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own (as so defined), directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of the parent corporation); (ii) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in clause (i) above, except that for purposes of this clause (ii) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders beneficially own (as defined in clause (i) above), directly or indirectly, in the aggregate a lesser percentage of the total voting power of the Voting Stock of the Company than such other person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors (for the purposes of this clause (ii), such other person shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation, if such other person is the beneficial owner (as defined in this clause (ii)), directly or indirectly, of more than 35% of the voting power of the Voting Stock of such parent corporation and the Permitted Holders beneficially own (as defined in clause (i) above), directly or indirectly, in the aggregate a lesser percentage of 117 the voting power of the Voting Stock of such parent corporation and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the board of directors of such parent corporation); (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of 66 2/3% of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; or (iv) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company to another Person (other than a Person that is controlled by the Permitted Holders), and, in the case of any such merger or consolidation, the securities of the Company that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Company are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation that represent immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving Person. Within 30 days following any Change of Control, the Company shall mail a notice to each Holder stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase such Holder's Exchangeable Preferred Stock at a purchase price in cash equal to 101% of the aggregate liquidation preference thereof plus accumulated and unpaid dividends, if any, thereon to the date of purchase; (2) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (3) the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company, consistent with the covenant described hereunder, that a Holder must follow in order to have its Exchangeable Preferred Stock purchased. In the event the Company is prohibited by applicable law or by the terms of Indebtedness of the Company from making the offer described above or from purchasing Exchangeable Preferred Stock pursuant to such offer then, within 60 days of the occurrence of the Change of Control, holders of a majority of the Exchangeable Preferred Stock may designate an Independent Financial Advisor to determine, within 20 days of such designation, in the opinion of such firm, the appropriate dividend rate (the "reset rate") that the Exchangeable Preferred Stock should bear so that, after the dividend rate on the shares of Exchangeable Preferred Stock is reset to such reset rate, the Exchangeable Preferred Stock would have a market value of 101% of the liquidation preference; provided, however, that no such reset shall be required to be made if such Independent Financial Advisor determines that the Exchangeable Preferred Stock, after giving effect to the Change of Control, has a market value of 101% of the liquidation preference thereof or greater. Upon the determination of the reset rate, the Exchangeable Preferred Stock shall accrue and accumulate dividends at the reset rate as of the date of occurrence of the Change of Control; provided, however, that the reset rate shall in no event be less than 13 3/4% per annum (the initial dividend rate on the Exchangeable Preferred Stock) or greater than 15% per annum. The reasonable fees and expenses, including reasonable fees and expenses of legal counsel, if any, and customary indemnification, of the above- referenced Independent Financial Advisor shall be borne by the Company. The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the purchase of Exchangeable Preferred Stock pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, the Company shall comply with the applicable 118 securities laws and regulations and shall not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof. The Change of Control purchase feature is a result of negotiations between the Company and the Initial Purchasers. The Company has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Company's capital structure or credit ratings. Restrictions on the ability of the Company and its Restricted Subsidiaries to incur additional indebtedness are contained in the covenant described under "--Certain Covenants--Limitation on Indebtedness." Such restrictions can only be waived with the consent of the holders of a majority of the outstanding shares of the Exchangeable Preferred Stock. Except for the limitations contained in such covenants, however, the Amended Articles of Designation will not contain any covenants or provisions that may afford holders of the Exchangeable Preferred Stock protection in the event of a highly leveraged transaction. Future indebtedness of the Company may contain, prohibitions on the occurrence of certain events that would constitute a Change of Control or require such indebtedness to be repurchased upon a Change of Control. Moreover, the Company's ability to pay cash to the holders of Exchangeable Preferred Stock following the occurrence of a Change of Control may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any repurchases. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing Exchangeable Preferred Stock, the Company could seek the consent of its lenders to make such purchase, or could attempt to refinance the borrowings that contain such prohibitions. If the Company does not obtain such consent or repay such borrowings, the Company would be required to utilize the reset provision described herein. CERTAIN COVENANTS The Amended Articles contains covenants including, among others, the following: Limitation on Indebtedness. (a) The Company shall not Incur, and shall not permit any of its Restricted Subsidiaries to Incur, directly or indirectly, any Indebtedness, except that the Company may Incur Indebtedness if, on the date of such Incurrence and after giving effect thereto, the Consolidated Leverage Ratio would be less than 6.0 to 1.0, for Indebtedness Incurred prior to or on December 31, 1999, and less than 5.0 to 1.0 for Indebtedness Incurred thereafter. (b) Notwithstanding the foregoing paragraph (a), the Company and (except as specified below) any Restricted Subsidiary may Incur any or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the Credit Agreement; provided, however, that the aggregate amount of such Indebtedness, when taken together with all other Indebtedness Incurred pursuant to this clause (1) and then outstanding, does not exceed the remainder of (x) $50 million minus (y) the sum of all principal payments with respect to the permanent retirement of such Indebtedness pursuant to paragraph (a)(ii)(A) of the covenant described under "--Limitation on Sales of Assets and Subsidiary Stock;" (2) Indebtedness owed to and held by the Company or a Restricted Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof; 119 (3) the Notes; (4) Indebtedness outstanding on the Issue Date (other than Indebtedness described in clause (1), (2) or (3) of this covenant); (5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (3) or (4) above, this clause (5) or clauses (7), (8) or (11) below; provided, however, that to the extent such Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a Restricted Subsidiary described in clause (11), such Refinancing Indebtedness shall be Incurred only by such Restricted Subsidiary; (6) Hedging Obligations consisting of Interest Rate Agreements directly related to Indebtedness permitted to be Incurred by the Company or any Restricted Subsidiary pursuant to paragraphs (a) or (b) hereof; (7) Indebtedness, including Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company, Incurred to finance the cost (including the cost of design, development, acquisition, construction, installation, improvement, transportation or integration) to acquire equipment, inventory or network assets (including real estate) (including acquisitions by way of capital lease and acquisitions of the Capital Stock of a Person that becomes a Restricted Subsidiary to the extent of the fair market value of the equipment, inventory or networks assets so acquired) by the Company or a Restricted Subsidiary after the Issue Date for use in a Related Business; (8) Indebtedness of the Company in an amount which, when taken together with the amount of Indebtedness Incurred pursuant to this clause (8) and then outstanding, does not exceed two times the Net Cash Proceeds received by the Company after the Issue Date as a capital contribution from, or from the issuance and sale of its Capital Stock (other than Disqualified Stock) to, a Person that is not a Subsidiary of the Company, to the extent such Net Cash Proceeds have not been used pursuant to paragraph (a) (3) (B) or paragraph (b) (i) of the covenant described under "--Limitation on Restricted Payments" to make a Restricted Payment; provided, however, that such Indebtedness does not mature prior to the Stated Maturity of the Exchangeable Preferred Stock and has an Average Life longer than the Average Life of the Exchangeable Preferred Stock; (9) Indebtedness in respect of performance, surety or appeal bonds or similar obligations, in each case Incurred in the ordinary course of business of the Company and its Restricted Subsidiaries and Indebtedness due and owing to governmental entities in connection with any licenses and franchises issued by a governmental entity and necessary or desirable to conduct a Related Business; (10) Guarantees of the Notes issued by any Restricted Subsidiary; (11) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company (other than Indebtedness Incurred in connection with, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by the Company); provided, however, that on the date of such acquisition and after giving effect thereto, the Company would have been able to Incur at least $1.00 of additional Indebtedness pursuant to paragraph (a) hereof; and (12) Indebtedness Incurred in an aggregate amount which, when taken together with the aggregate amount of all other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (1) through (11) above or paragraph (a)) does not exceed the greater of (a) $10 million and (b) an amount equal to 5% of the Company's Consolidated Net Tangible Assets as of such date. (c) For purposes of determining compliance with the foregoing covenant, (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above, the Company, in its 120 sole discretion, will classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described above. (d) For the purposes of determining the amount of Indebtedness outstanding at any time, Guarantees with respect to Indebtedness otherwise included in the determination of such amount shall not be included. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay any dividend or make any distribution (including any payment in connection with any merger or consolidation involving the Company) on or in respect of, in the case of the Company, any Junior Stock or, in the case of any Restricted Subsidiary, any Capital Stock, in each case held by Persons other than the Company or any Restricted Subsidiary or similar payment to the direct or indirect holders (other than the Company or a Restricted Subsidiary) of any such Stock (other than dividends or distributions payable solely in Junior Stock (other than Disqualified Stock) and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation)), (ii) purchase, redeem or otherwise acquire or retire for value any Junior Stock of the Company or any Capital Stock of any direct or indirect parent of the Company, or (iii) make any Investment (other than a Permitted Investment) in any Person (any such dividend, distribution, purchase, redemption, other acquisition, retirement or investment being herein referred to as a "Restricted Payment") if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) any accrued and payable dividends (including dividends for the then current dividend period) with respect to the Exchangeable Preferred Stock or any Parity Stock have not been paid in full and funds for such payment have not been set apart (or, if on or prior to February 15, 2003, shares of Exchangeable Preferred Stock have not been issued in payment of such dividends and are not held by the Transfer Agent); (2) the Company is not able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under "--Limitation on Indebtedness;" or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount of any Restricted Payments, if other than in cash, to be determined in good faith by the Board of Directors and to be evidenced by a resolution of such Board set forth in an Officer's Certificate delivered to the Transfer Agent) since the Issue Date would exceed the sum of, without duplication: (A) the remainder of (x) cumulative EBITDA during the period (taken as a single accounting period) beginning on the first day of the fiscal quarter of the Company beginning after the Issue Date and ending on the last day of the most recent fiscal quarter for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination minus (y) the product of 1.5 times cumulative Consolidated Interest Expense during such period; (B) the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Junior Stock (in each case other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); (C) the amount by which Indebtedness of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of the Company convertible or exchangeable for Junior Stock (in each case other than Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any other property, distributed by the Company upon such conversion or exchange); and (D) an amount equal to the sum of (i) the net reduction in Investments in Unrestricted Subsidiaries resulting from payments of interest, dividends, repayments of loans or advances or other transfers of assets, in each case to the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; 121 provided, however, that the foregoing sum shall not exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary. (b) The provisions of the foregoing paragraph (a) shall not prohibit: (i) any acquisition of Junior Stock made out of the proceeds of the substantially concurrent sale of, or any acquisition of any Junior Stock of the Company made by exchange for, other Junior Stock of the Company (in each case other than Disqualified Stock and other than Junior Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (A) such acquisition of Junior Stock shall be excluded in the calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be excluded from the calculation of amounts under clause (3)(B) of paragraph (a) above; (ii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this covenant; provided, however, that at the time of payment of such dividend, all accumulated dividends on the Exchangeable Preferred Stock have been paid in full and no other Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments; (iii) the purchase, redemption, retirement, repurchase or other acquisition of shares of, or options to purchase shares of, Junior Stock (other than Disqualified Stock) of the Company or Capital Stock (other than Preferred Stock) of any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors including their estates or beneficiaries under their estates), (a) upon their death, disability, retirement or termination of employment or (b) otherwise pursuant to the terms of agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals received such Capital Stock; provided, however, that the aggregate amount of consideration paid for such purchases, redemptions, retirements, repurchases and other acquisitions made pursuant to this clause (iv) shall not exceed $500,000 in any calendar year; provided further, however, that such purchases, redemptions, retirements, repurchases and other acquisitions pursuant to this clause shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (iv) the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Junior Stock of the Company or Capital Stock of any of its Restricted Subsidiaries to the extent necessary, as determined in good faith by a majority of the disinterested members of the Board of Directors, to prevent the loss or to secure the renewal or reinstatement of any license or franchise held by the Company or any Restricted Subsidiary from any governmental entity; provided, however, that such purchase or redemption shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; or (v) any purchase or redemption of Junior Stock following a Change of Control pursuant to an obligation in the instruments governing such Junior Stock to purchase or redeem such Junior Stock as a result of such Change of Control; provided, however, that no such purchase or redemption shall be permitted until the Company has completely discharged its obligations described under "--Change of Control" (including the purchase of all Exchangeable Preferred Stock tendered for purchase by holders) arising as a result of such Change of Control; provided further, however, that such purchase or redemption shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any 122 other distributions on its Capital Stock to the Company or a Restricted Subsidiary, (b) pay any Indebtedness owed to the Company, (c) make any loans or advances to the Company or (d) transfer any of its property or assets to the Company, except: (i) any encumbrance or restriction pursuant to the Indenture, the Amended Articles or any other agreement in effect at or entered into on the Issue Date; (ii) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company) and outstanding on such date; (iii) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement or instrument referred to in clause (i) or (ii) of this covenant or this clause (iii) or contained in any amendment to an agreement or instrument referred to in clause (i) or (ii) of this covenant or this clause (iii); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any such refinancing agreement or amendment are no less favorable to the holders of the Exchangeable Preferred Stock than encumbrances and restrictions with respect to such Restricted Subsidiary contained in such predecessor agreements; (iv) any such encumbrance or restriction consisting of customary non- assignment or anti-alienation provisions in (a) leases governing leasehold interests to the extent such provisions restrict the transfer of the lease or the property leased thereunder or subletting and (b) licenses or franchises to the extent such provisions restrict the transfer of the license or franchise; (v) in the case of clause (d) above, restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages; (vi) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition; and (vii) any encumbrance or restriction contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was Incurred if the Board of Directors determines in good faith that any such encumbrance or restriction will not materially affect the Company's ability to pay the mandatory redemption price and dividends on the Exchangeable Preferred Stock when due and such encumbrance or restriction by its terms expressly permits such Restricted Subsidiary, (A) in the absence of a payment default in respect of such Indebtedness or other agreement, to make cash payments to the Company (in any form) sufficient to pay when due all amounts of the mandatory redemption price and dividends on the Exchangeable Preferred Stock and (B) following the occurrence and during the continuance of a payment default in respect of such Indebtedness or other agreement, to resume making cash payments to the Company (in any form) sufficient to pay when due all amounts of the mandatory redemption price and dividends on the Exchangeable Preferred Stock upon the earlier of the cure of such payment default and the lapse of 179 consecutive days following the date when such encumbrance or restriction became operative to prohibit or limit such Restricted Subsidiary from making such payments to the Company; provided, however, that no Restricted Subsidiary shall be affected by the operation of such encumbrances or restrictions following the occurrence of a payment default on more than one occasion in any consecutive 360-day period. 123 Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the shares and assets subject to such Asset Disposition and at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be) (A) first, to the extent the Company elects in its sole discretion (or is required by the terms of any Indebtedness), to prepay, repay, redeem or purchase Indebtedness (other than any Disqualified Stock) of the Company or a Restricted Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company) within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to the extent the Company elects in its sole discretion, to acquire Additional Assets within one year after the receipt of such Net Available Cash; (C) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an offer to the holders of the Exchangeable Preferred Stock (and to holders of Parity Stock designated by the Company) to purchase Exchangeable Preferred Stock (and such Parity Stock) pursuant to and subject to the conditions contained in the Amended Articles; and (D) fourth, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), for the general corporate and working capital purposes of the Company and its Restricted Subsidiaries; provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) above, the Company or such Restricted Subsidiary shall permanently retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions of this paragraph, the Company and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with this paragraph except to the extent that the aggregate Net Available Cash from all Asset Dispositions occurring after the Issue Date which are not applied in accordance with this paragraph exceeds $5 million. Pending application of Net Available Cash pursuant to this covenant, such Net Available Cash shall be invested in Permitted Investments. For the purposes of this covenant, the following are deemed to be cash or cash equivalents: (x) the assumption of Indebtedness of the Company or any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition, (y) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash; and (z) Temporary Cash Investments. (b) In the event of an Asset Disposition that requires the purchase of Exchangeable Preferred Stock (and Parity Stock) pursuant to clause (a)(ii)(C) above, the Company will be required to purchase Exchangeable Preferred Stock tendered pursuant to an offer by the Company for the Exchangeable Preferred Stock (and Parity Stock) at a purchase price of 100% of their liquidation preference plus accrued but unpaid dividends, if any, to the date of purchase (or, in respect of such Parity Stock, such lesser price, if any, as may be provided for by the terms of such Parity Stock) in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Amended Articles. If the aggregate purchase price of Exchangeable Preferred Stock (and any Parity Stock) tendered pursuant to such offer is less than the Net Available Cash allotted to the purchase thereof, the Company will be required to apply the remaining Net Available Cash in accordance with clause (a)(ii)(D) above. The 124 Company shall not be required to make such an offer to purchase Exchangeable Preferred Stock (and Parity Stock) pursuant to this covenant if the Net Available Cash available therefor is less than $5.0 million (which lesser amount shall be carried forward for purposes of determining whether such an offer is required by this covenant or by the covenant in the Exchange Indenture described under "Description of the Exchange Debentures--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" with respect to the Net Available Cash from any subsequent Asset Disposition). (c) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Exchangeable Preferred Stock pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this clause by virtue thereof. Limitation on Affiliate Transactions. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, enter into or permit to exist any transaction (including the purchase, sale, license, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof (1) are no less favorable to the Company or such Restricted Subsidiary than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate, (2) if such Affiliate Transaction involves an amount in excess of $1.0 million, (i) are set forth in writing and (ii) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction and (3) if such Affiliate Transaction involves an amount in excess of $5.0 million, have been determined by a nationally recognized investment banking firm or other qualified appraiser under the relevant circumstances to be fair, from a financial standpoint, to the Company and its Restricted Subsidiaries. (b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any Permitted Investment or any Restricted Payment permitted to be paid pursuant to the covenant described under "--Limitation on Restricted Payments," (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (iii) the grant of stock options or similar rights to employees and directors of the Company pursuant to plans approved by the Board of Directors, (iv) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Company or its Restricted Subsidiaries, but in any event not to exceed $500,000 in the aggregate outstanding at any one time, (v) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries, (vi) any Affiliate Transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries; provided, however, that no beneficial owner (as defined in Rule 13d-1 and 13d-5 of the Exchange Act) of 5% or more of the Capital Stock of the Company holds, directly or indirectly, any Investments in any such Restricted Subsidiary (other than indirectly through the Company), (vii) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Company and (viii) any transaction pursuant to an agreement or arrangement in effect on the Issue Date. Limitation on the Sale or Issuance of Capital Stock of Certain Restricted Subsidiaries. The Company shall not sell or otherwise dispose of any Capital Stock (other than Qualified Preferred Stock) of an Existing Restricted Subsidiary, and shall not permit any Existing Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock (other than Qualified Preferred Stock), except (i) to the Company or a Wholly Owned Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or other disposition, neither the Company nor any of its Subsidiaries own any Capital Stock of such Restricted Subsidiary, (iii) if, immediately after giving effect to such issuance, sale or other disposition, such Existing Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto would have been permitted to be made under the covenant described under "--Limitation on Restricted Payments" if made on the date of such issuance, sale or other disposition, (iv) to directors of directors' qualifying shares of common stock of any Restricted Subsidiary, to the extent mandated by applicable law, or (v) the issuance or sale of Capital 125 Stock of a Restricted Subsidiary that has a class of equity security registered under Section 12 of the Exchange Act pursuant to an employee stock option plan approved by the Board of Directors. Limitation on Market Swaps. The Company will not, and will not permit any Restricted Subsidiary to, engage in any Market Swaps, unless: (i) at the time of entering into the agreement to swap markets and immediately after giving effect to the proposed Market Swap, no Default shall have occurred and be continuing; (ii) the respective fair market values of the markets and other assets (to be determined in good faith by the Board of Directors and to be evidenced by a resolution of such Board set forth in an Officer's Certificate delivered to the Transfer Agent) being purchased and sold by the Company or any of its Restricted Subsidiaries are substantially the same at the time of entering into the agreement to swap markets; and (iii) the cash payments, if any, received by the Company or such Restricted Subsidiary in connection with such Market Swap are treated as Net Available Cash received from an Asset Disposition. Limitation on Lines of Business. The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any trade or business other than a Related Business. Merger and Consolidation. The Company shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) shall expressly assume all the obligations of the Company under the Exchangeable Preferred Stock and the Amended Articles; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Subsidiary as a result of such transaction as having been Incurred by such Successor Company or such Subsidiary at the time of such transaction), no Default shall have occurred and be continuing, (iii) immediately after giving effect to such transaction, the Successor Company would be able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under "--Limitation on Indebtedness;" (iv) immediately after giving effect to such transaction, the Successor Company shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Company immediately prior to such transaction; (v) the Company shall have delivered to the Transfer Agent an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer comply with the Amended Articles; and (vi) the Company shall have delivered to the Transfer Agent an Opinion of Counsel to the effect that the holders of the Exchangeable Preferred Stock will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. The Successor Company shall be the successor to the Company and shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Amended Articles, but the predecessor 126 Company in the case of a conveyance, transfer or lease shall not be released from the obligation to pay the liquidation preference of, the mandatory redemption price of and dividends on the Exchangeable Preferred Stock. SEC Reports. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the holders of the Exchangeable Preferred Stock with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections if it were subject thereto (unless the SEC will not accept such a filing, in which case the Company shall provide such documents to the Transfer Agent). In addition, for so long as any of the Exchangeable Preferred Stock is outstanding, the Company will make available to any prospective purchaser of the Exchangeable Preferred Stock or beneficial owner thereof (upon written request to the Company) in connection with any sales thereof the information required by Rule144A(d) (4) under the Securities Act. DESCRIPTION OF THE EXCHANGE DEBENTURES The Exchange Debentures, if issued, will be issued under the Exchange Indenture, to be dated as of February 15, 1998 (the "Exchange Indenture"), between the Company and IBJ Schroder Bank and Trust Company, as Trustee (the "Trustee"). The following is a summary of certain provisions of the Exchange Indenture and the Exchange Debentures. A copy of the Exchange Indenture and the form of Exchange Debentures are available upon request to the Company at the address set forth under "Available Information." The following summary of certain provisions of the Exchange Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Exchange Indenture, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. The terms of the Notes limit the Company's ability to issue the Exchange Debentures. For definition of certain capitalized terms used in the following summary, see "Description of the New Notes--Certain Definitions." The Exchange Debentures will be unsecured subordinated obligations of the Company, limited in aggregate principal amount to the sum of the liquidation preference of the Exchangeable Preferred Stock, plus, without duplication, accumulated and unpaid dividends on the Exchange Date of the Exchangeable Preferred Stock (plus any additional Exchange Debentures issued in lieu of cash interest as described herein). The Exchange Debentures will be issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000 (other than as described in "--Exchangeable Preferred Stock--Exchange" or with respect to additional Exchange Debentures issued in lieu of cash interest as described herein). The Exchange Debentures will be subordinated to all existing and future senior and senior subordinated debt of the Company. Principal of, premium, if any, and interest on the Exchange Debentures will be payable, and the Exchange Debentures may be presented for registration of transfer or exchange, at the office of the Paying Agent and Registrar. The Trustee will initially act as Paying Agent and Registrar. The Company may change any Paying Agent and Registrar without prior notice to holders of the Exchange Debentures. Holders of the Exchange Debentures must surrender Exchange Debentures to the Paying Agent to collect principal payments. The Exchange Debentures will mature on February 15, 2010. Each Exchange Debenture will bear interest at the rate of 13 3/4% per annum from the most recent interest payment date to which interest has been paid or provided for or, if no interest has been paid or provided for, from the Exchange Date. Interest will be payable semiannually in cash (or, on or prior to February 15, 2003, in additional Exchange Debentures, at the option of the Company) in arrears on each February 15 and August 15, commencing with the first such date after the Exchange Date. Interest on the Exchange Debentures will be computed on the basis of a 360-day year comprised of twelve 30-day months and the actual number of days elapsed. 127 OPTIONAL REDEMPTION Except as set forth in the following paragraph, the Exchange Debentures will not be redeemable at the option of the Company prior to February 15, 2003. Thereafter, the Exchange Debentures will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on February 15 of the years set forth below:
REDEMPTION ---------- PERIOD PRICE - -------- ----- 2003....................... 106.8750% 2004....................... 104.5833 2005....................... 102.2917 2006 and thereafter........ 100.0000
In addition, at any time and from time to time prior to February 15, 2001, the Company may redeem the Exchange Debentures, in whole, but not in part, with the proceeds of an Equity Offering at 113 3/4% of the principal amount thereof, plus accrued and unpaid interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date). RANKING The indebtedness evidenced by the Exchange Debentures will be subordinated, unsecured obligations of the Company. The payment of the principal of, premium (if any) and interest on the Exchange Debentures is subordinate in right of payment, as set forth in the Exchange Indenture, to the prior payment in full of all Senior Indebtedness (including senior subordinated indebtedness) of the Company, whether outstanding on the Issue Date or thereafter incurred. As of December 31, 1997, after giving effect to the Private Placement and the application of the proceeds thereof, the outstanding Senior Indebtedness of the Company would have been approximately $200.2 million. Although the Exchange Indenture contains limitations on the amount of additional Indebtedness that the Company may incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be Senior Indebtedness. See "--Certain Covenants--Limitation on Indebtedness." Substantially all the operations of the Company are or will be conducted through one or more of its subsidiaries. The Company currently has three wholly- owned subsidiaries: 21st Century Cable TV of Illinois, Inc.; 21st Century Telecom of Illinois, Inc.; and 21st Century Telecom Group of Michigan, Inc. Moreover, 21st Century Telecom Group of Michigan, Inc. has two wholly-owned subidiaries: 21st Century Cable TV of Grand Rapids, Inc. and 21st Century Telecom of Michigan, Inc. The Company intends to transfer substantially all its assets to newly formed Restricted Subsidiaries, and thereafter the Company will be a holding company with no assets other than the capital stock of its subsidiaries. Claims of creditors of such subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by such subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries generally will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the Exchange Debentures, even if such obligations do not constitute Senior Indebtedness. The Exchange Debentures, therefore, will be effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of subsidiaries of the Company. Although the Exchange Indenture limits the incurrence of Indebtedness and preferred stock of certain of the Company's subsidiaries, such limitation is subject to a number of significant qualifications. Moreover, the Exchange Indenture does not impose any limitation on the incurrence by such subsidiaries of liabilities that are not considered Indebtedness or Preferred Stock under the Exchange Indenture. See "-- Certain Covenants--Limitation on Indebtedness." 128 Only Indebtedness of the Company that is Senior Indebtedness (including senior subordinated indebtedness) will rank senior to the Exchange Debentures in accordance with the provisions of the Exchange Indenture. The Exchange Debentures will in all respects rank pari passu with all other Subordinated Indebtedness of the Company. The Company may not pay principal of, premium (if any) or interest on, the Exchange Debentures or make any deposit pursuant to the provisions described under "Defeasance" below and may not repurchase, redeem or otherwise retire any Exchange Debentures (collectively, "pay the Exchange Debentures") if (i) any Designated Senior Indebtedness is not paid when due or (ii) any other default on Designated Senior Indebtedness occurs and the maturity of such Designated Senior Indebtedness is accelerated in accordance with its terms unless, in either case, the default has been cured or waived and any such acceleration has been rescinded or such Designated Senior Indebtedness has been paid in full. However, the Company may pay the Exchange Debentures without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of the Designated Senior Indebtedness with respect to which either of the events set forth in clause (i) or (ii) of the immediately preceding sentence has occurred and is continuing. During the continuance of any default (other than a default described in clause (i) or (ii) of the second preceding sentence) with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated immediately without further notice (except such notice as may be required to effect such acceleration) or the expiration of any applicable grace periods, the Company may not pay the Exchange Debentures for a period (a "Payment Blockage Period") commencing upon the receipt by the Trustee (with a copy to the Company) of written notice (a "Blockage Notice") of such default from the Representative of the holders of such Designated Senior Indebtedness specifying an election to effect a Payment Blockage Period and ending 179 days thereafter (or earlier if such Payment Blockage Period is terminated (i) by written notice to the Trustee and the Company from the Person or Persons who gave such Blockage Notice, (ii) because the default giving rise to such Blockage Notice is no longer continuing or (iii) because such Designated Senior Indebtedness has been repaid in full). Notwithstanding the provisions described in the immediately preceding sentence (but subject to the provisions described in the first sentence of this paragraph), unless the holders of such Designated Senior Indebtedness or the Representative of such holders have accelerated the maturity of such Designated Senior Indebtedness, the Company may resume payments on the Exchange Debentures after the end of such Payment Blockage Period. The Exchange Debentures shall not be subject to more than one Payment Blockage Period in any consecutive 360-day period, irrespective of the number of defaults with respect to Designated Senior Indebtedness during such period. Upon any payment or distribution of the assets of the Company upon a total or partial liquidation or dissolution or reorganization of or similar proceeding relating to the Company or its property, the holders of Senior Indebtedness will be entitled to receive payment in full of such Senior Indebtedness before the holders of Exchange Debentures are entitled to receive any payment, and until the Senior Indebtedness is paid in full, any payment or distribution to which holders of Exchange Debentures would be entitled but for the subordination provisions of the Exchange Indenture will be made to holders of such Senior Indebtedness as their interests may appear. If a distribution is made to holders of Exchange Debentures that, due to the subordination provisions, should not have been made to them, such holders are required to hold it in trust for the holders of Senior Indebtedness and pay it over to them as their interests may appear. If payment of the Exchange Debentures is accelerated because of an Event of Default, the Company or the Trustee shall promptly notify the holders of Designated Senior Indebtedness or the Representative of such holders of the acceleration. By reason of the subordination provisions contained in the Exchange Indenture, in the event of insolvency, creditors of the Company who are holders of Senior Indebtedness of the Company may recover more, ratably, than the holders of Exchange Debentures, and creditors of the Company who are not holders of Senior Indebtedness may recover less, ratably, than holders of Senior Indebtedness and may recover more, ratably, than holders of Exchange Debentures. 129 The terms of the subordination provisions described above will not apply to payments from money or the proceeds of U.S. Government Obligations held in trust by the Trustee for the payment of principal of and interest on the Exchange Debentures pursuant to the provisions described under "--Defeasance." CHANGE OF CONTROL The Exchange Indenture will provide that upon the occurrence of a Change of Control (as defined under "Description of the New Exchangeable Preferred Stock- - -Change of Control"), each holder of Exchange Debentures shall have the right to require that the Company repurchase such holder's Exchange Debentures at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). Within 30 days following any Change of Control, the Company shall mail a notice to each Holder with a copy to the Trustee stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase such Holder's Exchange Debentures at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest on the relevant interest payment date); (2) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (3) the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company, consistent with the covenant described hereunder, that a Holder must follow in order to have its Exchange Debentures purchased. The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the purchase of Exchange Debentures pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof. The Change of Control purchase feature is a result of negotiations between the Company and the Initial Purchasers. The Company has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Exchange Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Company's capital structure or credit ratings. Restrictions on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness are contained in the covenants described under "-- Certain Covenants--Limitation on Indebtedness." Such restrictions can only be waived with the consent of the holders of a majority in principal amount of the Exchange Debentures then outstanding. Except for the limitations contained in such covenants, however, the Exchange Indenture will not contain any covenants or provisions that may afford holders of the Exchange Debentures protection in the event of a highly leveraged transaction. Future indebtedness of the Company may contain, prohibitions on the occurrence of certain events that would constitute a Change of Control or require such indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the holders of their right to require the Company to repurchase the Exchange Debentures could cause a default under such indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, the Company's ability to pay cash to the holders of Exchange Debentures following the occurrence of a Change of Control may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. 130 In the event a Change of Control occurs at a time when the Company is prohibited from purchasing Exchange Debentures, the Company could seek the consent of its lenders to make such purchase, or could attempt to refinance the borrowings that contain such prohibitions. If the Company does not obtain such consent or repay such borrowings, the Company will remain prohibited from purchasing Exchange Debentures. The provisions under the Exchange Indenture relative to the Company's obligation to make an offer to repurchase the Exchange Debentures as a result of a Change of Control may be waived or modified with the written consent of the holders of a majority in principal amount of the outstanding Exchange Debentures. CERTAIN COVENANTS The Exchange Indenture contains covenants including, among others, the following: Limitation on Indebtedness. (a) The Company shall not Incur, and shall not permit any of its Restricted Subsidiaries to Incur, directly or indirectly, any Indebtedness, except that the Company may Incur Indebtedness if, on the date of such Incurrence and after giving effect thereto, the Consolidated Leverage Ratio would be less than 6.0 to 1.0, for Indebtedness Incurred prior to or on December 31, 1999, and less than 5.0 to 1.0 for Indebtedness Incurred thereafter. (b) Notwithstanding the foregoing paragraph (a), the Company and (except as specified below) any Restricted Subsidiary may Incur any or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the Credit Agreement; provided, however, that the aggregate amount of such Indebtedness, when taken together with all other Indebtedness Incurred pursuant to this clause (1) and then outstanding, does not exceed the remainder of (x) $50 million minus (y) the sum of all principal payments with respect to the permanent retirement of such Indebtedness pursuant to paragraph (a) (ii) (A) of the covenant described under "--Limitation on Sales of Assets and Subsidiary Stock;" (2) Indebtedness owed to and held by the Company or a Restricted Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof; (3) the Notes and the Exchange Debentures (including any Exchange Debentures issued in lieu of cash interest payments with respect to the Exchange Debentures); (4) Indebtedness outstanding on the Issue Date (other than Indebtedness described in clause (1), (2) or (3) of this covenant); (5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (3) or (4) above, this clause (5) or clauses (7), (8) or (11) below; provided, however, that to the extent such Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a Restricted Subsidiary described in clause (11), such Refinancing Indebtedness shall be Incurred only by such Restricted Subsidiary; (6) Hedging Obligations consisting of Interest Rate Agreements directly related to Indebtedness permitted to be Incurred by the Company or any Restricted Subsidiary pursuant to paragraphs (a) or (b) hereof; (7) Indebtedness, including Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company, Incurred to finance the cost (including the cost of design, development, acquisition, construction, installation, improvement, transportation or integration) to acquire equipment, inventory or network assets (including real estate) (including acquisitions by way of 131 capital lease and acquisitions of the Capital Stock of a Person that becomes a Restricted Subsidiary to the extent of the fair market value of the equipment, inventory or networks assets so acquired) by the Company or a Restricted Subsidiary after the Issue Date for use in a Related Business; (8) Indebtedness of the Company in an amount which, when taken together with the amount of Indebtedness Incurred pursuant to this clause (8) and then outstanding, does not exceed two times the Net Cash Proceeds received by the Company after the Issue Date as a capital contribution from, or from the issuance and sale of its Capital Stock (other than Disqualified Stock) to, a Person that is not a Subsidiary of the Company, to the extent such Net Cash Proceeds have not been used pursuant to paragraph (a) (3) (B) or paragraph (b) (i) of the covenant described under "--Limitation on Restricted Payments" to make a Restricted Payment; provided, however, that such Indebtedness does not mature prior to the Stated Maturity of the Exchange Debentures and has an Average Life longer than the Average Life of the Exchange Debentures; (9) Indebtedness in respect of performance, surety or appeal bonds or similar obligations, in each case Incurred in the ordinary course of business of the Company and its Restricted Subsidiaries and Indebtedness due and owing to governmental entities in connection with any licenses and franchises issued by a governmental entity and necessary or desirable to conduct a Related Business; (10) Guarantees of the Notes issued by any Restricted Subsidiary; (11) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company (other than Indebtedness Incurred in connection with, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by the Company); provided, however, that on the date of such acquisition and after giving effect thereto, the Company would have been able to Incur at least $1.00 of additional Indebtedness pursuant to paragraph (a) hereof; and (12) Indebtedness Incurred in an aggregate amount which, when taken together with the aggregate amount of all other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (1) through (11) above or paragraph (a)) does not exceed the greater of (a) $10 million and (b) an amount equal to 5% of the Company's Consolidated Net Tangible Assets as of such date. (c) Notwithstanding the foregoing, the Company shall not Incur (i) any Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Indebtedness shall be subordinated to the Exchange Debentures to at least the same extent as such Subordinated Obligations or (ii) any Secured Indebtedness that is not Senior Indebtedness unless contemporaneously therewith effective provision is made to secure the Exchange Debentures equally and ratably with such Secured Indebtedness for so long as such Secured Indebtedness is secured by a Lien. (d) For purposes of determining compliance with the foregoing covenant, (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above, the Company, in its sole discretion, will classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described above. (e) For the purposes of determining the amount of Indebtedness outstanding at any time, Guarantees with respect to Indebtedness otherwise included in the determination of such amount shall not be included. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, make a Restricted Payment if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); (2) the 132 Company is not able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under "--Limitation on Indebtedness;" or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount of any Restricted Payment, if other than in cash, to be determined in good faith by the Board of Directors and to be evidenced by a resolution of such Board set forth in an Officer's Certificate delivered to the Trustee) since the Issue Date would exceed the sum of, without duplication: (A) the remainder of (x) cumulative EBITDA during the period (taken as a single accounting period) beginning on the first day of the fiscal quarter of the Company beginning after the Issue Date and ending on the last day of the most recent fiscal quarter for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination minus (y) the product of 1.5 times cumulative Consolidated Interest Expense during such period; (B) the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); (C) the amount by which Indebtedness of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of the Company convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any other property, distributed by the Company upon such conversion or exchange); and (D) an amount equal to the sum of (i) the net reduction in Investments in Unrestricted Subsidiaries resulting from payments of interest, dividends, repayments of loans or advances or other transfers of assets, in each case to the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary. (b) The provisions of the foregoing paragraph (a) shall not prohibit: (i) any acquisition of any Capital Stock of the Company or any Restricted Subsidiary or any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations made out of the proceeds of the substantially concurrent sale of, or made by exchange for, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (A) such acquisition of Capital Stock or of Subordinated Obligations shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above and (B) the Net Cash Proceeds from such sale shall be excluded from the calculation of amounts under clause (3) (B) of paragraph(a) above; (ii) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations in whole or in part (including premium, if any, and accrued and unpaid interest) made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Company which is permitted to be Incurred pursuant to the covenant described under "--Limitation on Indebtedness;" provided, however, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; 133 (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this covenant; provided, however, that at the time of payment of such dividend, no other Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (iv) the purchase, redemption, retirement, repurchase or other acquisition of shares of, or options to purchase shares of, Capital Stock (other than Disqualified Stock) of the Company or Capital Stock (other than Preferred Stock) of any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors including their estates or beneficiaries under their estates), (a) upon their death, disability, retirement or termination of employment or (b) otherwise pursuant to the terms of agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals received such Capital Stock; provided, however, that the aggregate amount of consideration paid for such purchases, redemptions, retirements, repurchases and other acquisitions made pursuant to this clause (iv) shall not exceed $500,000 in any calendar year; provided further, however, that such purchases, redemptions, retirements, repurchases and other acquisitions pursuant to this clause shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (v) any purchase or redemption of Subordinated Obligations in whole or in part (including premium, if any, and accrued and unpaid interest) from Net Available Cash to the extent permitted by the covenant described under "-- Limitation on Sales of Assets and Subsidiary Stock;" provided, however, that such purchase or redemption shall be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (vi) the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Capital Stock of the Company or any of its Restricted Subsidiaries to the extent necessary, as determined in good faith by a majority of the disinterested members of the Board of Directors, to prevent the loss or to secure the renewal or reinstatement of any license or franchise held by the Company or any Restricted Subsidiary from any governmental entity; provided, however, that such purchase or redemption shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; or (vii) any purchase or redemption of Subordinated Obligations or Preferred Stock following a Change of Control pursuant to an obligation in the instruments governing such Subordinated Obligations or Preferred Stock to purchase or redeem such Subordinated Obligations or Preferred Stock as a result of such Change of Control; provided, however, that no such purchase or redemption shall be permitted until the Company has completely discharged its obligations described under "--Change of Control" (including the purchase of all Exchange Debentures tendered for purchase by holders) arising as a result of such Change of Control; provided further, however, that such purchase or redemption shall be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock to the Company or a Restricted Subsidiary, (b) pay any Indebtedness owed to the Company, (c) make any loans or advances to the Company or (d) transfer any of its property or assets to the Company, except: (i) any encumbrance or restriction pursuant to the Indenture, the Exchange Indenture or any other agreement in effect at or entered into on the Issue Date; 134 (ii) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company) and outstanding on such date; (iii) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement or instrument referred to in clause (i) or (ii) of this covenant or this clause (iii) or contained in any amendment to an agreement or instrument referred to in clause (i) or (ii) of this covenant or this clause (iii); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any such refinancing agreement or amendment are no less favorable to the Noteholders than encumbrances and restrictions with respect to such Restricted Subsidiary contained in such predecessor agreements; (iv) any such encumbrance or restriction consisting of customary non- assignment or anti-alienation provisions in (a) leases governing leasehold interests to the extent such provisions restrict the transfer of the lease or the property leased thereunder or subletting and (b) licenses or franchises to the extent such provisions restrict the transfer of the license or franchise; (v) in the case of clause (d) above, restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages; (vi) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition; and (vii) any encumbrance or restriction contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was Incurred if the Board of Directors determines in good faith that any such encumbrance or restriction will not materially affect the Company's ability to pay principal or interest on the Exchange Debentures when due and such encumbrance or restriction by its terms expressly permits such Restricted Subsidiary, (A) in the absence of a payment default in respect of such Indebtedness or other agreement, to make cash payments to the Company (in any form) sufficient to pay when due all amounts of principal and interest on the Exchange Debentures and (B) following the occurrence and during the continuance of a payment default in respect of such Indebtedness or other agreement, to resume making cash payments to the Company (in any form) sufficient to pay when due all amounts of principal and interest on the Exchange Debentures upon the earlier of the cure of such payment default and the lapse of 179 consecutive days following the date when such encumbrance or restriction became operative to prohibit or limit such Restricted Subsidiary from making such payments to the Company; provided, however, that no restricted Subsidiary shall be affected by the operation of any such encumbrances or restrictions following the occurrence of a payment default on more than one occasion in any consecutive 360-day period. Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the shares and assets subject to such Asset Disposition and at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be) 135 (A) first, to the extent the Company elects in its sole discretion (or is required by the terms of any Indebtedness), to prepay, repay, redeem or purchase Indebtedness (other than any Disqualified Stock) of the Company or a Restricted Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company) within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to the extent the Company elects in its sole discretion, to acquire Additional Assets within one year after the receipt of such Net Available Cash; (C) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an offer to the holders of the Exchange Debentures to purchase Exchange Debentures pursuant to and subject to the conditions contained in the Exchange Indenture; and (D) fourth, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), for the general corporate and working capital purposes of the Company and its Restricted Subsidiaries; provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) above, the Company or such Restricted Subsidiary shall permanently retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions of this paragraph, the Company and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with this paragraph except to the extent that the aggregate Net Available Cash from all Asset Dispositions occurring after the Issue Date which are not applied in accordance with this paragraph or with the covenant in the Amended Articles described under "Description of Exchangeable Preferred Stock--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" exceeds $5 million. Pending application of Net Available Cash pursuant to this covenant, such Net Available Cash shall be invested in Permitted Investments. For the purposes of this covenant, the following are deemed to be cash or cash equivalents: (x) the assumption of Indebtedness of the Company or any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition, (y) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash; and (z) Temporary Cash Investments. (b) In the event of an Asset Disposition that requires the purchase of the Exchange Debentures pursuant to clause (a) (ii) (C) above, the Company will be required to purchase Exchange Debentures tendered pursuant to an offer by the Company for the Exchange Debentures at a purchase price of 100% of their principal amount plus accrued but unpaid interest, if any, to the date of purchase in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Exchange Indenture. If the aggregate purchase price of Exchange Debentures tendered pursuant to such offer is less than the Net Available Cash allotted to the purchase thereof, the Company will be required to apply the remaining Net Available Cash in accordance with clause (a) (ii) (D) above. The Company shall not be required to make such an offer to purchase Exchange Debentures pursuant to this covenant if the Net Available Cash available therefor (including any Net Available Cash that was not required to be applied to make on an offer under the corresponding provisions of the Amended Articles) is less than $5.0 million (which lesser amount shall be carried forward for purposes of determining whether such an offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). (c) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Exchange Debentures pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict 136 with provisions of this covenant, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this clause by virtue thereof. Limitation on Affiliate Transactions. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, enter into or permit to exist any transaction (including the purchase, sale, license, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof (1) are no less favorable to the Company or such Restricted Subsidiary than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate, (2) if such Affiliate Transaction involves an amount in excess of $1.0 million, (i) are set forth in writing and (ii) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction and (3) if such Affiliate Transaction involves as amount in excess of $5.0 million, have been determined by a nationally recognized investment banking firm or other qualified appraiser under the relevant circumstances to be fair, from a financial standpoint, to the Company and its Restricted Subsidiaries. (b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any Permitted Investment or any Restricted Payment permitted to be paid pursuant to the covenant described under "--Limitation on Restricted Payments," (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (iii) the grant of stock options or similar rights to employees and directors of the Company pursuant to plans approved by the Board of Directors, (iv) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Company or its Restricted Subsidiaries, but in any event not to exceed $500,000 in the aggregate outstanding at any one time, (v) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries, (vi) any Affiliate Transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries; provided, however, that no beneficial owner (as defined in Rule 13d-1 and 13d-5 of the Exchange Act) of 5% or more of the Capital Stock of the Company holds, directly or indirectly, any Investments in any such Restricted Subsidiary (other than indirectly through the Company), (vii) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Company and (viii) any transaction pursuant to an agreement or arrangement in effect on the Issue Date. Limitation on the Sale or Issuance of Capital Stock of Certain Restricted Subsidiaries. The Company shall not sell or otherwise dispose of any Capital Stock (other than Qualified Preferred Stock) of an Existing Restricted Subsidiary, and shall not permit any Existing Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock (other than Qualified Preferred Stock), except (i) to the Company or a Wholly Owned Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or other disposition, neither the Company nor any of its Subsidiaries own any Capital Stock of such Restricted Subsidiary, (iii) if, immediately after giving effect to such issuance, sale or other disposition, such Existing Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto would have been permitted to be made under the covenant described under "--Limitation on Restricted Payments" if made on the date of such issuance, sale or other disposition, (iv) to directors of directors' qualifying shares of common stock of any Restricted Subsidiary, to the extent mandated by applicable law, or (v) the issuance or sale of Capital Stock of a Restricted Subsidiary that has a class of equity security registered under Section 12 of the Exchange Act pursuant to an employee stock option plan approved by the Board of Directors. Limitation on Market Swaps. The Company will not, and will not permit any Restricted Subsidiary to, engage in any Market Swaps, unless: (i) at the time of entering into the agreement to swap markets and immediately after giving effect to the proposed Market Swap, no Default shall have occurred and be continuing; 137 (ii) the respective fair market values of the markets and other assets (to be determined in good faith by the Board of Directors and to be evidenced by a resolution of such Board set forth in an Officer's Certificate delivered to the Trustee) being purchased and sold by the Company or any of its Restricted Subsidiaries are substantially the same at the time of entering into the agreement to swap markets; and (iii) the cash payments, if any, received by the Company or such Restricted Subsidiary in connection with such Market Swap are treated as Net Available Cash received from an Asset Disposition. Limitation on Lines of Business. The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any trade or business other than a Related Business. Merger and Consolidation. The Company shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) shall expressly assume, by an indenture supplemental thereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Exchange Debentures and the Exchange Indenture; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Subsidiary as a result of such transaction as having been Incurred by such Successor Company or such Subsidiary at the time of such transaction), no Default shall have occurred and be continuing, (iii) immediately after giving effect to such transaction, the Successor Company would be able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under "--Limitation on Indebtedness;" (iv) immediately after giving effect to such transaction, the Successor Company shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Company immediately prior to such transaction; (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Exchange Indenture; and (vi) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. The Successor Company shall be the successor to the Company and shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Exchange Indenture, but the predecessor Company in the case of a conveyance, transfer or lease shall not be released from the obligation to pay the principal of and interest on the Exchange Debentures. SEC Reports. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the Trustee and holders of the Exchange Debentures with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filing of such 138 information, documents and reports under such Sections if it were subject thereto (unless the SEC will not accept such a filing, in which case the Company shall provide such documents to the Trustee). In addition, for so long as any of the Exchange Debentures are outstanding, the Company will make available to any prospective purchaser of the Exchange Debentures or beneficial owner thereof (upon written request to the Company) in connection with any sales thereof the information required by Rule 144A(d) (4) under the Securities Act. DEFAULTS An Event of Default is defined in the Exchange Indenture as (i) a default in the payment of interest on the Exchange Debentures when due and continued for 30 days, (ii) a default in the payment of principal of any Exchange Debenture when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, (iii) the failure by the Company to comply with its obligations under "--Certain Covenants--Merger and Consolidation" above, (iv) the failure by the Company to comply for 30 days after the notice described below with any of its obligations in the covenants described above under "Change of Control" (other than a failure to purchase Exchange Debentures) or under "--Certain Covenants" under "--Limitation on Indebtedness," "-- Limitation on Restricted Payments," "--Limitation on Restrictions on Distributions from Restricted Subsidiaries," "--Limitation on Sales of Assets and Subsidiary Stock" (other than a failure to purchase Exchange Debentures), "--Limitation on Affiliate Transactions," "--Limitation on the Sale or Issuance of Capital Stock of Certain Restricted Subsidiaries," "--Limitation on Market Swaps," "--Limitation on Lines of Business" or "--SEC Reports," (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Exchange Indenture, (vi) Indebtedness of the Company or any Significant Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $10 million and such nonpayment continues, or such acceleration is not rescinded, within 10 days after notice (the "cross acceleration provision"), (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary (the "bankruptcy provisions") or (viii) any judgment or decree (not covered by insurance or indemnification by a person other than the Company or a Restricted Subsidiary, which indemnity party is solvent and has acknowledged responsibility) for the payment of money in excess of $10 million is entered against the Company or a Significant Subsidiary, remains outstanding for a period of 60 days following such judgment and is not discharged, waived, bonded over or stayed within 10 days after notice (the "judgment default provision"). However, a default under clauses (iv), (v), (vi) and (viii) will not constitute an Event of Default until the Trustee or the holders of 25% in principal amount of the outstanding Exchange Debentures notify the Company of the default and the Company does not cure such default within the time specified after receipt of such notice. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the outstanding Exchange Debentures may declare the principal of and accrued but unpaid interest on all the Exchange Debentures to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs and is continuing, the principal of and interest on all the Exchange Debentures will ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holders of the Exchange Debentures. Under certain circumstances, the holders of a majority in principal amount of the outstanding Exchange Debentures may rescind any such acceleration with respect to the Exchange Debentures and its consequences. Subject to the provisions of the Exchange Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Exchange Indenture at the request or direction of any of the holders of the Exchange Debentures unless such holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no holder of an Exchange Debenture may pursue any remedy with respect to the Exchange Indenture or the Exchange Debentures unless (i) such holder has previously given the Trustee notice that an Event of Default is continuing, (ii) holders of at least 25% in principal amount of the outstanding Exchange Debentures have requested the Trustee to pursue the remedy, (iii) such holders have offered the Trustee reasonable security or indemnity 139 against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt thereof and the offer of security or indemnity and (v) the holders of a majority in principal amount of the outstanding Exchange Debentures have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the holders of a majority in principal amount of the outstanding Exchange Debentures are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Exchange Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder of an Exchange Debenture or that would involve the Trustee in personal liability. The Exchange Indenture provides that if a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each holder of the Exchange Debentures notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of or interest on any Exchange Debenture, the Trustee may withhold notice if and so long as a committee of its trust officers determines that withholding notice is not opposed to the interest of the holders of the Exchange Debentures. In addition, the Company is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Company also is required to deliver to the Trustee, within 30 days after the Company becomes aware of the occurrence thereof, written notice of any event which would constitute certain Defaults, their status and what action the Company is taking or proposes to take in respect thereof. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Exchange Indenture may be amended with the consent of the holders of a majority in principal amount of the Exchange Debentures then outstanding (including consents obtained in connection with a tender offer or exchange for the Exchange Debentures) and any past default or compliance with any provisions may also be waived with the consent of the holders of a majority in principal amount of the Exchange Debentures then outstanding. However, without the consent of each holder of an outstanding Exchange Debenture affected thereby, no amendment may, among other things, (i) reduce the amount of Exchange Debentures whose holders must consent to an amendment, (ii) reduce the rate of or extend the time for payment of interest on any Exchange Debenture, (iii) reduce the principal of or extend the Stated Maturity of any Exchange Debenture, (iv) reduce the premium payable upon the redemption of any Exchange Debenture or change the time at which any Exchange Debenture may be redeemed as described under "--Optional Redemption," (v) make any Exchange Debenture payable in money other than that stated in the Exchange Debenture, (vi) impair the right of any holder of the Exchange Debentures to receive payment of principal of and interest on such holder's Exchange Debentures on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Exchange Debentures, (vii) make any change in the amendment provisions which require each holder's consent or in the waiver provisions or (viii) make any change to the subordination provisions of the Exchange Indenture that would adversely affect the holders of Exchange Debentures. Without the consent of any holder of the Exchange Debentures, the Company and Trustee may amend the Exchange Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company under the Exchange Indenture, to provide for uncertificated Exchange Debentures in addition to or in place of certificated Exchange Debentures (provided that the uncertificated Exchange Debentures are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Exchange Debentures are described in Section 163(f) (2) (B) of the Code), to add guarantees with respect to the Exchange Debentures, to secure the Exchange Debentures, to add to the covenants of the Company for the benefit of the holders of the Exchange Debentures or to surrender any right or power conferred upon the Company, to make any change that does not adversely affect the rights of any holder of the Exchange Debentures or to comply with any requirement of the SEC in connection with the qualification of the Exchange Indenture under the Trust Indenture Act. However, no amendment may be made to the subordination 140 provisions of the Exchange Indenture that adversely affects the rights of any holder of Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness (or their Representative) consent to such change. The consent of the holders of the Exchange Debentures is not necessary under the Exchange Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Exchange Indenture becomes effective, the Company is required to mail to holders of the Exchange Debentures a notice briefly describing such amendment. However, the failure to give such notice to all holders of the Exchange Debentures, or any defect therein, will not impair or affect the validity of the amendment. TRANSFER The Exchange Debentures will be issued in registered form and will be transferable only upon the surrender of the Exchange Debentures being transferred for registration of transfer. The Company may require payment of a sum sufficient to cover any tax, assessment or other governmental charge payable in connection with certain transfers and exchanges. DEFEASANCE The Company at any time may terminate all its obligations under the Exchange Debentures and the Exchange Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Exchange Debentures, to replace mutilated, destroyed, lost or stolen Exchange Debentures and to maintain a registrar and paying agent in respect of the Exchange Debentures. The Company at any time may terminate its obligations under "Change of Control" and under the covenants described under "--Certain Covenants" (other than the covenant described under "--Merger and Consolidation"), the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries and the judgment default provision described under "--Defaults" above and the limitations contained in clauses (iii) and (iv) under "--Certain Covenants--Merger and Consolidation" above ("covenant defeasance"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Exchange Debentures may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Exchange Debentures may not be accelerated because of an Event of Default specified in clause (iv), (vi), (vii) (with respect only to Significant Subsidiaries) or (viii) under "--Defaults" above or because of the failure of the Company to comply with clause (iii) or (iv) under "--Certain Covenants--Merger and Consolidation" above. In order to exercise either defeasance option, the Company must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay principal and interest on the Exchange Debentures when due (whether at scheduled maturity or upon redemption as to which irrevocable instructions have been given to the Trustee) in accordance with terms of the Exchange Indenture and the Exchange Debentures and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that holders of the Exchange Debentures will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable Federal income tax law). 141 CONCERNING THE TRUSTEE IBJ Schroder Bank and Trust Company is to be the Trustee under the Exchange Indenture and has been appointed by the Company as Registrar and Paying Agent with regard to the Exchange Debentures. The Holders of a majority in principal amount of the outstanding Exchange Debentures will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Exchange Indenture provides that if an Event of Default occurs (and is not cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Exchange Indenture at the request of any holder of Exchange Debentures, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Exchange Indenture. GOVERNING LAW The Exchange Indenture provides that it and the Exchange Debentures will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. CERTAIN DEFINITIONS "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock constituting a minority interest in any Person that at such time is or becomes a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a Related Business. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the provisions described under "--Certain Covenants--Limitation on Restricted Payments," "--Certain Covenants--Limitation on Affiliate Transactions" and "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Annualized EBITDA" as of any date of determination means EBITDA for the most recent two consecutive fiscal quarters for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination multiplied by two. "Area 1 Franchise" means the Company's cable television franchise pursuant to a Franchise Agreement between the Company and the City of Chicago in effect on the Issue Date. 142 "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) (that is not for security purposes) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (i) any shares of Capital Stock (other than Qualified Preferred Stock) of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary), (ii) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary or (iii) any other assets (other than Capital Stock or other Investments in an Unrestricted Subsidiary) of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of (i), (ii) and (iii) above, (a) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to another Restricted Subsidiary, (b) for purposes of the covenant described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a disposition that (x) constitutes a Permitted Investment or a Restricted Payment permitted by the covenant described under "--Certain Covenants-- Limitation on Restricted Payments," (y) complies with the covenant described under "--Certain Covenants--Merger and Consolidation" or (z) constitutes a Market Swap permitted by the covenant described under "--Certain Covenants-- Limitation on Market Swaps" and (c) a disposition of assets with a fair market value of less than $250,000). "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the Notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the products of numbers of years (calculated to the nearest one-twelfth) from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of each such principal payment by (ii) the sum of all such principal payments. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means any day other than a Saturday, Sunday or day on which banking institutions are not required to be open in the States of New York, Illinois or Massachusetts. "Capital Lease Obligation" means an obligation that is required to be classified and accounted for as a capital lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated, whether voting or nonvoting) equity of such Person, including any common stock and Preferred Stock, whether outstanding on the Issue Date or issued after the Issue Date, but excluding any debt securities convertible into such equity. "Code" means the Internal Revenue Code of 1986, as amended. "consolidated" means the consolidation of accounts of the Company and its Subsidiaries in accordance with GAAP. "Consolidated Current Liabilities" as of the date of determination means the aggregate amount of liabilities of the Company and its Restricted Subsidiaries which may properly be classified as current liabilities (including taxes 143 accrued as estimated), on a consolidated basis, after eliminating (i) all intercompany items between the Company and any Restricted Subsidiary and (ii) all current maturities of long-term Indebtedness, all as determined in accordance with GAAP consistently applied. "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent incurred in such period by the Company or its Restricted Subsidiaries, without duplication, (i) interest expense attributable to capital leases and the interest expense attributable to leases constituting part of a Sale/Leaseback Transaction, (ii) amortization of debt discount and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs associated with Hedging Obligations (including amortization of fees), (vii) Preferred Stock dividends in respect of all Preferred Stock held by Persons other than the Company or a Restricted Subsidiary, (viii) interest incurred in connection with Investments in discontinued operations, (ix) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by (or secured by the assets of) the Company or any Restricted Subsidiary and (x) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust; excluding, however, (y) a proportional amount of any of the foregoing items or other interest expense incurred by a Restricted Subsidiary in such period to the extent the net income of such Restricted Subsidiary is excluded in the calculation of Consolidated Net Income pursuant to clause (iii) of the definition thereof and (z) any fees or debt issuance costs (and any amortization thereof) payable in connection with the sale of the Notes and Units on the Issue Date. "Consolidated Leverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of Indebtedness of the Company and its Restricted Subsidiaries calculated on a consolidated basis as of the end of the most recent fiscal quarter for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination to (ii) Annualized EBITDA as of such date of determination; provided, however, that (1) if the transaction giving rise to the need to calculate the Consolidated Leverage Ratio is an Incurrence of Indebtedness, the amount of Indebtedness outstanding at the end of such fiscal quarter shall be calculated after giving effect on a pro forma basis to the Incurrence of such Indebtedness as if such Indebtedness had been outstanding as of the end of such fiscal quarter and to the discharge of any other Indebtedness to the extent it was outstanding as of the end of such fiscal quarter and is to be repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such Indebtedness had been discharged as of the end of such fiscal quarter, (2) if the Company or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness that was outstanding as of the end of such fiscal quarter or if any Indebtedness that was outstanding as of the end of such fiscal quarter is to be repaid, repurchased, defeased or otherwise discharged on the date of the transaction giving rise to the need to calculate the Consolidated Leverage Ratio, the aggregate amount of Indebtedness outstanding as of the end of such fiscal quarter shall be calculated on a pro forma basis as if such discharge had occurred as of the end of such fiscal quarter and EBITDA shall be calculated as if the Company or such Restricted Subsidiary had not earned the interest income, if any, actually earned during the period of the most recent two consecutive fiscal quarters for which financial statements have been made publicly available but in no event ending more than 135 days prior to the date of such determination (the "Reference Period") in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if since the beginning of the Reference Period the Company or any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for the Reference Period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Disposition for the 144 Reference Period, or increased by an amount equal to the EBITDA (if negative), directly attributable thereto for the Reference Period, (4) if since the beginning of the Reference Period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any person which becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder, which constitutes all or substantially all an operating unit of a business, EBITDA for the Reference Period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of the Reference Period, (5) if since the beginning of the Reference Period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such Reference Period) shall have made any Asset Disposition, any Investment or acquisition of assets that would have required an adjustment pursuant to clause (3) or (4) above if made by the Company or a Restricted Subsidiary during the Reference Period, EBITDA for the Reference Period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition occurred on the first day of the Reference Period; and (6) the aggregate amount of Indebtedness outstanding at the end of such most recent fiscal quarter will be deemed to include the total principal amount of funds outstanding or available to be borrowed on the date of determination under any revolving credit or similar facilities of the Company or its Restricted Subsidiaries. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. "Consolidated Net Income" means, for any period, the aggregate net income of the Company and its consolidated Subsidiaries for such period; provided, however, that the following shall not be included in such Consolidated Net Income: (i) any net income (or loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitations contained in clause (iii) below); (ii) any net income (or loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that (A) subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; 145 (iv) the after-tax gain or loss realized upon the sale or other disposition of any assets of the Company, its consolidated Subsidiaries or any other Person (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and the after-tax gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; (v) extraordinary gains or losses; and (vi) the cumulative effect of a change in accounting principles. Notwithstanding the foregoing, for the purposes of the covenant described under "Certain Covenants--Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any payments of interest, dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such interest, dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof. "Consolidated Net Tangible Assets" as of any date of determination, means the total amount of assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) which would appear on a balance sheet of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, and after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of: (i) minority interests in consolidated Subsidiaries held by Persons other than the Company or a Restricted Subsidiary; (ii) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the Board of Directors; (iii) any revaluation or other write-up in book value of assets subsequent to the Issue Date as a result of a change in the method of valuation in accordance with GAAP consistently applied; (iv) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; (v) treasury stock; (vi) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and (vii) Investments in and assets of Unrestricted Subsidiaries. "Consolidated Net Worth" means, at any date of determination, the total of the amounts shown on the balance sheet of the Company and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company for which financial statements have been made publicly available but in no event ending more than 135 days prior to the taking of any action for the purpose of which the determination is being made, as (i) the par or stated value of all outstanding Capital Stock of the Company plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Credit Agreement" means one or more term loans or revolving credit or working capital facilities (including any letter of credit subfacility) with one or more banks or other institutional lenders in favor of the Company or any Restricted Subsidiary. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement designed to protect such Person against fluctuations in currency values. "Default" means any event which is, or after notice or passage of time or both would be, in the case of the Exchangeable Preferred Stock, a Voting Rights Triggering Event and, in the case of the Exchange Debentures, an Event of Default. "Designated Senior Indebtedness" means (i) the Notes and any Indebtedness Incurred pursuant to paragraph (b) (1) of the covenant described under "-- Certain Covenants--Limitation on Indebtedness" and (ii) any other Senior Indebtedness of the Company which, at the date of determination, has an aggregate amount outstanding of, or under 146 which, at the date of determination, the holders thereof are committed to lend up to, at least $25 million and is specifically designated by the Company in the instrument evidencing or governing such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of the Exchange Indenture. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable or must be purchased, upon the occurrence of certain events or otherwise, by such Person at the option of the holder thereof, in whole or in part, in each case on or prior to the first anniversary of the Stated Maturity of the Exchangeable Preferred Stock or Exchange Debentures, as the case may be; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the Exchangeable Preferred Stock or Exchange Debentures, as the case may be, shall not constitute Disqualified Stock if (x) the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the terms applicable to the Exchangeable Preferred Stock or Exchange Debentures, as the case may be, and described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" and "--Change of Control" and (y) any such requirement only becomes operative after compliance with such terms applicable to the Exchangeable Preferred Stock or Exchange Debentures, as the case may be, including the purchase of any Exchangeable Preferred Stock or Exchange Debentures, as the case may be, tendered pursuant thereto. "EBITDA" for any period means the sum of Consolidated Net Income, plus the following to the extent deducted in calculating such Consolidated Net Income: (a) Consolidated Interest Expense, (b) all income tax expense of the Company and its consolidated Restricted Subsidiaries, (c) depreciation expense of the Company and its consolidated Restricted Subsidiaries, (d) amortization expense of the Company and its consolidated Restricted Subsidiaries (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period) and (e) all other non-cash charges of the Company and its consolidated Restricted Subsidiaries (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenditures in any future period), in each case for such period, all as determined on a consolidated basis for the Company and its Restricted Subsidiaries. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders. "Equity Offering" means either (a) an underwritten primary public offering of common stock of Parent or the Company pursuant to an effective registration statement under the Securities Act or (b) a primary offering of Capital Stock (other than Disqualified Stock) of the Company to one or more Persons primarily engaged in a Related Business. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Date" means the date on which the Exchange Debentures are exchanged for the Exchangeable Preferred Stock. "Existing Restricted Subsidiary" means any Restricted Subsidiary in existence on the Issue Date and any Restricted Subsidiary formed after the Issue Date which thereafter conducts all or any portion of the Company's business pertaining to its Area 1 franchise in Chicago, as in effect on the Issue Date. 147 "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date, including those set forth in (i) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) statements and pronouncements of the Financial Accounting Standards Board, (iii) such other statements by such other entity as approved by a significant segment of the accounting profession and (iv) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" or "Debentureholder" means the Person in whose name an Exchange Debenture is registered on the Registrar's books. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. The accretion of principal of a non-interest bearing or other discount security shall be deemed the Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person on any date of determination (without duplication): (i) the principal in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable, including, in each case, any premium on such indebtedness to the extent such premium has become due and payable; (ii) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale/Leaseback Transactions entered into by such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following payment on the letter of credit); 148 (v) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person (including any Restricted Subsidiary), the liquidation preference with respect to, any Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the fair value of such property or assets or the amount of the obligation so secured, in each case as of the date of determination; and (viii) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. "Independent Financial Advisor" means a United States investment banking firm of national standing in the United States which does not, and whose directors, officers and employees or affiliates do not, have a direct or indirect financial interest in the Company. "Interest Rate Agreement" means in respect of a Person any interest rate swap agreement, interest rate cap, floor, collar or forward interest rate agreement or other financial agreement or arrangement designed to protect such Person against fluctuations in interest rates. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary", the definition of "Restricted Payment" and the covenant described under "--Certain Covenants--Limitation on Restricted Payments," (i) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time of such redesignation; and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors. "Issue Date" means the date on which the shares of Old Exchangeable Preferred Stock were issued pursuant to the Amended Articles. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). 149 "Market Assets" means assets used or useful in the ownership or operation of a Related Business, including any and all licenses, franchises and assets related thereto. "Market Swap" means the execution of a definitive agreement, subject only to governmental approval and other customary closing conditions, that the Company in good faith believes will be satisfied, for a substantially concurrent purchase and sale, or exchange, of Market Assets between the Company or any of its Restricted Subsidiaries and another Person or group of Persons; provided that any amendment to or waiver of any closing condition which individually or in the aggregate is material to the Market Swap will be deemed to be a new Market Swap; provided, however, that the Market Assets to be sold by the Company or its Restricted Subsidiaries in connection with a Market Swap do not include assets used in or necessary for the ownership or operation of the Company's business pertaining to its Area 1 Franchise in Chicago; provided further, however, that the cash and other assets to be received by the Company or its Restricted Subsidiaries which do not constitute Market Assets do not constitute more than 15% of the total consideration to be received by the Company or its Restricted Subsidiaries in such Market Swap. "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form), in each case net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments required to be made to minority interest holders in Restricted Subsidiaries as a result of such Asset Disposition and (iv) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the proceeds of such issuance or sale in the form of cash or cash equivalents including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in such form of cash or cash equivalents and the conversion of other property received when converted to such form of cash or cash equivalents, net of any and all issuance costs, including attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Parent" means any Person that owns directly or indirectly all the Voting Stock of the Company. "Permitted Holders" means Purnendu Chatterjee, JK&B Capital, William Farley, Boston Capital Ventures II, L.P., Glenn W. Milligan, Edward T. Joyce and each of their affiliates. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Related Business; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that such Person's primary business is a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary 150 trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (v) commissions, payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (vi) loans or advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary; (vii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) any Person to the extent such Investment represents either the non-cash portion of the consideration received for an Asset Disposition as permitted pursuant to the covenant described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" or the consideration not constituting Market Assets received in a Market Swap as permitted pursuant to the covenant described under "-- Certain Covenants--Limitation on Market Swaps;" and (ix) any Person principally engaged in a Related Business if (a) the Company or a Restricted Subsidiary, after giving effect to such Investment, will own at least 20% of the Voting Stock of such Person and (b) the amount of such Investment, when taken together with the aggregate amount of all Investments made pursuant to this clause (ix) and then outstanding, does not exceed $10.0 million. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated, whether voting or nonvoting) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "principal" of an Exchange Debenture means the principal amount of the Exchange Debenture plus the premium, if any, payable on the Exchange Debenture which is due or overdue or is to become due at the relevant time. "Public Market" means any time after (x) a Public Offering has been consummated and (y) at least 15% of the total issued and outstanding common stock of Parent or the Company has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. "Public Offering" means an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Qualified Preferred Stock" of a Restricted Subsidiary means a series of Preferred Stock of such Restricted Subsidiary which (i) has a fixed liquidation preference that is no greater in the aggregate than the sum of (x) the fair market value (as determined in good faith by the Board of Directors at the time of the issuance of such series of Preferred Stock) of the consideration received by such Restricted Subsidiary for the issuance of such series of Preferred Stock and (y) accrued and unpaid dividends to the date of liquidation, (ii) has a fixed annual dividend and has no right to share in any dividend or other distributions based on the financial or other similar performance of such Restricted Subsidiary and (iii) does not entitle the holders thereof to vote in the election of directors, managers or trustees of such Restricted Subsidiary unless such Restricted Subsidiary has failed to pay dividends on such series of Preferred Stock for a period of at least 12 consecutive calendar months. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with the covenant described under "Certain Covenants--Limitation on Indebtedness", including Indebtedness that Refinances Refinancing 151 Indebtedness; provided, however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced, and (iii) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding or committed (plus accrued and unpaid interest, fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means the businesses of the Company and the Restricted Subsidiaries on the Issue Date and any business related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Representative" means any trustee, agent or representative (if any) for an issue of Senior Indebtedness of the Company. "Restricted Payment" with respect to any Person means (i) the declaration or payment of any dividends or any other distributions of any sort (including any payment in connection with any merger or consolidation involving such Person) in respect of its Capital Stock held by Persons other than the Company or any Restricted Subsidiary or similar payment to the direct or indirect holders (other than the Company or a Restricted Subsidiary) of its Capital Stock (other than dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock), and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation)), (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any Person or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the Company (other than a Restricted Subsidiary), including the exercise of any option to exchange any Capital Stock (other than into Capital Stock of the Company that is not Disqualified Stock), (iii) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations (other than the purchase, repurchase, redemption or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such purchase, repurchase, redemption or acquisition) or (iv) the making of any Investment (other than a Permitted Investment) in any Person. "Restricted Subsidiary" means any Subsidiary of the Company that is not an Unrestricted Subsidiary. "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Restricted Subsidiary leases it from such Person. "SEC" means the Securities and Exchange Commission. "Secured Indebtedness" means Indebtedness that is secured by a Lien on assets of the Company or a Restricted Subsidiary. 152 "Senior Indebtedness" of the Company means (i) Indebtedness of the Company, whether outstanding on the Issue Date or thereafter Incurred, and (ii) accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company to the extent post-filing interest is allowed in such proceeding) in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable unless, in the case of (i) and (ii), in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior in right of payment to the Exchange Debentures; provided, however, that Senior Indebtedness shall not include (1) any obligation of such Person to any Subsidiary of such Person, (2) any liability for Federal, state, local or other taxes owed or owing by such Person, (3) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities) or (4) that portion of any Indebtedness which at the time of Incurrence is Incurred in violation of the Exchange Indenture. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred). "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Exchange Debentures pursuant to a written agreement to that effect. "Subsidiary" means, in respect of any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Voting Stock is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations of the United States of America or any agency thereof or obligations guaranteed by the United States of America or any agency thereof, (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 365 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50,000,000 (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) investments in commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating 153 at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group, (v) investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc., and (vi) investments in money-market funds (other than single-state funds) that make investments in instruments of the type described in clauses (i)-(v) above in accordance with the regulations of the SEC under the Investment Company Act of 1940, as amended. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the covenant described under "--Certain Covenants--Limitation on Restricted Payments." The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant described under "-- Certain Covenants--Limitation on Indebtedness" and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee and the Transfer Agent by promptly filing with the Trustee and the Transfer Agent a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the issuer's option. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or one or more Wholly Owned Subsidiaries. BOOK-ENTRY, DELIVERY AND FORM GENERAL The New Notes and New Exchangeable Preferred Stock will be issued in the form of one or more fully registered New Notes in global form ("Global Notes") or one or more shares of New Exchangeable Preferred Stock in global form ("Global Preferred Stock"). Global Notes and Global Preferred Stock are collectively referred to herein as "Global Securities." 154 Upon issuance of the Global Securities, the Depositary or its nominee will credit, on its book-entry registration and transfer system, the number of New Notes or New Exchangeable Preferred Stock, as the case may be, represented by such Global Securities to the accounts of institutions that have accounts with the Depositary or its nominee ("participants"). The accounts to be credited shall be designated by the Initial Purchasers. Ownership of beneficial interests in the Global Securities will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interest in such Global Securities will be shown on, and the transfer of that ownership will be effected only through, records maintained by the Depositary or its nominee (with respect to participants' interests) for such Global Securities, or by participants or persons that hold interests through participants (with respect to beneficial interests of persons other than participants). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and laws may impair the ability to transfer or pledge beneficial interests in the Global Securities. So long as the Depositary, or its nominee, is the registered holder of any Global Securities, the Depositary or such nominee, as the case may be, will be considered the sole legal owner and holder of such New Notes or New Exchangeable Preferred Stock (or Exchange Debentures), as the case may be, represented by such Global Securities for all purposes under the Indenture and the Amended Articles (or the Exchange Indenture) and the New Notes and New Exchangeable Preferred Stock (or Exchange Debentures), as the case may be. Except as set forth below, owners of beneficial interests in Global Securities will not be entitled to have such Global Securities or any New Notes or New Exchangeable Preferred Stock (or Exchange Debentures) represented thereby registered in their names, will not receive or be entitled to receive physical delivery or certificated securities in exchange therefor and will not be considered to be the owners or holders of such Global Securities or any New Notes or New Exchangeable Preferred Stock (or Exchange Debentures) represented thereby for any purpose under the New Notes or New Exchangeable Preferred Stock (or Exchange Debentures), the Amended Articles or the Indentures. The Company understands that under existing industry practice, in the event an owner of a beneficial interest in a Global Security desires to take any action that the Depositary, as the holder of such Global Security, is entitled to take, the Depositary would authorize the participants to take such action, and that the participants would authorize beneficial owners owning through such participants to take such action or would otherwise act upon the instructions of beneficial owners owning through them. Any payment of principal, interest, liquidation preference or dividends due on the Securities on any payment date or at maturity or upon mandatory redemption will be made available by the Company to the applicable Trustee or Transfer Agent by such date. As soon as possible thereafter, the Trustee or Transfer Agent will make such payments to the Depositary or its nominee, as the case may be, as the registered owner of the applicable Global Security in accordance with existing arrangements between the Trustee or the Transfer Agent and the Depositary. The Company expects that the Depositary or its nominee, upon receipt of any payment of principal, interest, liquidation preference or dividends in respect of the Global Securities will credit immediately the accounts of the related participants with payments in amounts proportionate to their respective beneficial interests in such Global Security as shown on the records of the Depositary. The Company also expects that payments by participants to owners of beneficial interests in the Global Securities held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such participants. None of the Company, the Trustee, the Transfer Agent and any payment agent for the Global Securities will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in any of the Global Securities or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for other aspects of the relationship between the Depositary and its participants or the relationship between such participants and the owners of beneficial interests in the Global Securities owning through such participants. As long as the New Notes or the New Exchangeable Preferred Stock (or Exchange Debentures) are represented by a Global Security, the Depositary's nominee will be the holder of such securities and therefore will be the only 155 entity that can exercise a right to repayment or repurchase of such securities, including following a change of control or a tender offer for such securities. Notice by participants or by owners of beneficial interests in a Global Security held through such participants of the exercise of the option to elect repayment of beneficial interests in securities represented by a Global Security must be transmitted to the Depositary in accordance with its procedures on a form required by the Depositary and provided to participants. In order to ensure that the Depositary's nominee will timely exercise a right to repayment with respect to a particular security, the beneficial owner of such security must instruct the broker or other participant to exercise a right to repayment. Different firms have cut-off times for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other participant through which it holds an interest in a security in order to ascertain the cut-off time by which such an instruction must be given in order for timely notice to be delivered to the Depositary. The Company will not be liable for any delay in delivery of notices of the exercise of the option to elect repayment. Unless and until exchanged in whole or in part for securities in definitive form in accordance with the terms of such securities, the Global Securities may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor of the Depositary or a nominee of each successor. Although the Depositary has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Securities among participants of the Depositary, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Trustees, the Company and the Transfer Agent will have any responsibility for the performance by the Depositary or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. The Company, the Trustees and the Transfer Agent may conclusively rely on, and shall be protected in relying on, instructions from the Depositary for all purposes. Certificated Securities A Global Security shall be exchangeable for corresponding certificated securities registered in the name of persons other than the Depositary or its nominee only if (A) the Depositary (i) notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security or (ii) at any time ceases to be a clearing agency registered under the Exchange Act, (B) there shall have occurred and be continuing an Event of Default (as defined in the Indenture) with respect to the Notes or the Exchange Debentures or a Voting Rights Triggering Event with respect to the Exchangeable Preferred Stock or (C) the Company executes and delivers to the applicable Trustee or the Transfer Agent, as appropriate, an order that such Global Security shall be so exchangeable. Any certificated Securities will be issued only in fully registered form, and in the case of Certificated Notes or Certificated Exchange Debentures, as the case may be, shall be issued without coupons in denominations of $1,000 and integral multiples thereof. Any Certificated Securities so issued will be registered in such names and in such denominations as the Depositary shall request. The Clearing System The Depositary has advised the Company as follows: The Depositary is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and "a clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depositary was created to hold securities of institutions that have accounts with the Depositary ("participants") and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of participants, thereby eliminating the need for physical movement of securities certificates. The Depositary's participants include securities brokers and dealers (which may include the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to the Depositary's book-entry system is 156 also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, whether directly or indirectly. DESCRIPTION OF CAPITAL STOCK The following summary description of the Company's existing equity securities and of certain provisions of the Company's Articles of Incorporation and Bylaws does not purport to be complete and is qualified in its entirety by reference to the provisions of the Company's Articles of Incorporation and Bylaws and other material agreements referenced herein. However, such description describes all material matters relating to such securities. AUTHORIZED CAPITAL STOCK Pursuant to the Company's Articles of Incorporation, the Company has the authority to issue up to 50,000,000 shares of common stock, with no par value (the "Common Stock"), 1,000,000 shares of non-voting common stock, with no par value (the "Non-Voting Common Stock"), 500,000 shares of Class A Convertible 8% Cumulative Preferred Stock, with no par value (the "Class A Preferred Stock"), 500,000 shares of Class B Convertible 8% Cumulative Preferred Stock, with no par value (the "Class B Preferred Stock" and, together with the Class A Preferred Stock, the "Existing Preferred Stock"), and 100,000 shares of 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010, par value $.01 per share. The rights of the holders of Common Stock discussed below are subject to the rights of the holders of Existing Preferred Stock and to such rights as the Board of Directors may hereafter confer on future holders of other series of the Company's preferred stock. COMMON STOCK At December 31, 1997, there were 2,388,743.5 shares of Common Stock outstanding and held of record by approximately 60 shareholders. In January 1998 the purchase agreement associated with the Class A Convertible 8% Cumulative Preferred Stock was amended to replace the initial and debt warrant provisions with a provision that would provide for the issuance of additional shares of voting and non-voting common stock that would increase the Class A preferred shareholders' ownership on a fully-diluted basis by an additional 8%. This amendment resulted in the Company issuing 522,032.2 shares of voting common stock related to the Class A Convertible 8% Cumulative Preferred Stock that was outstanding at December 31, 1997. At December 31, 1997, options and warrants to purchase an aggregate of 3,220,231.3 shares of Common Stock were outstanding. In addition, in connection with the sale of shares of Class A Preferred Stock to several common shareholders and certain other persons and entities in January 1998, the Company agreed to issue warrants to purchase an aggregate of 80,299.6 shares of Common Stock and to issue 28,330 shares of Common Stock. All outstanding options and warrants provide for antidilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits or other changes in the corporate structure of the Company. Voting Rights. Except as otherwise required by law, the holders of Common Stock are entitled to attend all special and annual meetings of the shareholders of the Company. Holders of Common Stock are entitled to vote on all matters submitted to the shareholders together with holders of the Existing Preferred Stock, with all such holders voting together as a single class and with each share of Common Stock entitled to one vote. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary (collectively, a "Liquidation"), holders of Common Stock, together with holders of non-voting Common Stock, will be entitled to participate in the distribution of any assets of the Company remaining after the Company shall have paid, or provided for payment of, all debts and liabilities of the Company (including the Notes and, if issued, the Exchange Debentures) and after the Company shall have paid, or set aside for payment, to the holders of the Existing Preferred Stock and any other class of stock having a liquidation preference over the Common Stock (including the Exchangeable Preferred Stock), up to the full preferential amounts to which they are entitled. 157 NON-VOTING COMMON STOCK In January 1998 the purchase agreement associated with the Class A Convertible 8% Cumulative Preferred Stock was amended to replace the initial and debt warrant provisions with a provision that would provide for the issuance of additional shares of voting and non-voting common stock that would increase the Class A preferred shareholders' ownership on a fully-diluted basis by an additional 8%. This amendment resulted in the Company issuing 522,032.2 shares of non-voting common stock related to the Class A Convertible 8% Cumulative Preferred Stock that was outstanding at December 31, 1997. In addition, in connection with the sale of shares of Class A Preferred Stock to several common shareholders and certain other persons and entities in January 1998, the Company has agreed to issue 28,330.0 shares of Non-Voting Common Stock. The terms of the Non-Voting Common Stock are the same as those of the Common Stock, except that shares of the Non-Voting Common Stock do not have voting rights. CLASS A PREFERRED STOCK At December 31, 1997, 1,453.1 shares of Class A Preferred Stock were outstanding and held of record by approximately 35 shareholders. The Company issued to several common shareholders and certain other persons and entities in January 1998 an aggregate of 95.4 shares of Class A Preferred Stock at a price of $15,793.84 per share. Voting Rights. Except as otherwise required by law, the holders of shares of Class A Preferred Stock are entitled to attend all special and annual meetings of the shareholders of the Company. Holders of Class A Preferred Stock are entitled to vote on all matters submitted to the shareholders for a vote, together with holders of the Common Stock and the Class B Preferred Stock, with all such holders voting together as a single class and with each share of Class A Preferred Stock entitled to one vote for each share of Common Stock issuable upon conversion of such share of Class A Preferred Stock. Nominees to the Board of Directors. Pursuant to the Shareholders Agreement dated as of January 30, 1997, as amended (the "Shareholders Agreement"), the shareholders of the Company have agreed to elect to the Board of Directors three persons designated by the holders of Class A Preferred Stock. Liquidation Rights. Upon a Liquidation, each holder of shares of Class A Preferred Stock will be entitled to receive out of the assets of the Company remaining after the Company shall have paid, or provided payment for, all debts and liabilities of the Company (including the Notes and, if issued, the Exchange Debentures) and after the Company shall have paid, or set aside for payment, to the holders of the Exchangeable Preferred Stock and any other class of stock having a liquidation preference senior to the Class A Preferred Stock, up to the full preferential amounts to which they are entitled, but before any payment or distribution is made on the Common Stock or any other class of stock of the Company ranking junior to the Class A Preferred Stock as to liquidation preference, an amount in cash equal to the greater of (i) that amount which such holder would have received if such holder had converted all its Class A Preferred Stock into Common Stock immediately prior to the Liquidation; and (ii) the aggregate Liquidation Value (defined below) of all shares of Class A Preferred Stock then held by such holder (plus all accrued and unpaid dividends thereon). The Liquidation Value of any share of Class A Preferred Stock is equal to the aggregate purchase price paid pursuant to the Stock Purchase Agreement dated January 30, 1997, as amended (the "Stock Purchase Agreement"), by and among the Company and certain investors (the "Investors") for Class A Preferred Stock and warrants to purchase Common Stock divided by the number of shares of Class A Preferred Stock issued pursuant to the Stock Purchase Agreement. If the assets distributable upon such dissolution, liquidation or winding up are insufficient to pay cash in the full amount of the liquidation preference on the Existing Preferred Stock, then such assets or the proceeds thereof will be distributed among the holders of shares of Existing Preferred Stock ratably based upon the aggregate Liquidation Value (plus all accrued and unpaid dividends) of the Existing Preferred Stock then held by such holders. Conversion Into Common Stock. At any time and from time to time, any holder of Class A Preferred Stock may convert all or any portion of the Class A Preferred Stock (including any fraction of a share) held by such holder 158 into Common Stock, with each share of Class A Preferred Stock being convertible into one thousand shares of Common Stock (subject to adjustment under certain circumstances). The Class A Preferred Stock will be automatically so converted into Common Stock upon the closing of a firm commitment underwritten public offering (a "Qualified Public Offering") of Common Stock in which (i) the aggregate public offering price is at least $25 million, (ii) the price per share of Common Stock is at least twice the Liquidation Value per share of Class A Preferred Stock (subject to adjustment in the event of an "Organic Change," as defined in the Company's Articles of Incorporation), (iii) the Common Stock will be traded on a national securities exchange or The Nasdaq Stock Market and (iv) the shares of Common Stock issued in such offering represent at least 20% of the sum of (a) the aggregate shares of Common Stock outstanding after such offering plus (b) the number of shares of Common Stock underlying options having an exercise price less than the "Conversion Price," as defined in the Company's Articles of Incorporation, in effect at the time of issuance of said options, plus (c) the number of shares of Common Stock issuable upon conversion or exchange of a convertible security issuable upon exercise of options and having a conversion price less than the Conversion Price in effect at the time of issuance of said convertible securities, plus (d) the number of shares of Common Stock issuable upon conversion or exchange of a convertible or exchangeable security having a per share conversion or exchange price less than the Conversion Price in effect at the time of issuance of said convertible or exchangeable securities. CLASS B PREFERRED STOCK As of the date hereof, there are no outstanding shares of Class B Preferred Stock. Pursuant to the Stock Purchase Agreement, shares of Class B Preferred Stock are issuable in exchange for a like number of shares of Class A Preferred Stock upon the refusal of a holder of Class A Preferred Stock to purchase such holder's pro rata portion of additional shares of Class A Preferred Stock offered to the holders of Class A Preferred Stock. The terms of the Class B Preferred Stock are the same as those of the Class A Preferred Stock, except that the conversion rights associated with the Class B Preferred Stock have more limited anti-dilution protection than the Class A Preferred Stock. WARRANTS At December 31, 1997, pursuant to the Stock Purchase Agreement, the Company had issued warrants ("Secondary Warrants") to the holders of Class A Preferred Stock to purchase, in the aggregate, 1,222,569.0 shares of Common Stock at a price of $.000001 per share. In addition, in connection with the sale of shares of Class A Preferred Stock to several holders of Common Stock in January 1998, the Company has agreed to issue warrants to purchase an aggregate of 80,299.6 shares of Common Stock. These warrants are exercisable at any time until January 30, 2007. In addition, warrants having the same terms as the Secondary Warrants entitling the holder thereof to purchase 18,994.6 shares of Common Stock are held by a financial advisor of the Company. CERTAIN COVENANTS Pursuant to the Shareholders Agreement, the Company has agreed that, unless it has obtained the prior approval of a majority of the members of the Company's Board of Directors elected by the holders of Class A Preferred Stock, voting as a separate class, it will not (i) pay or declare dividends on any of its equity securities other than the Exchangeable Preferred Stock and the Existing Preferred Stock, (ii) redeem or otherwise acquire any of its equity securities other than mandatory redemptions of the Exchangeable Preferred Stock and mandatory repurchases of the Warrants, (iii) issue or sell any Existing Preferred Stock or any other equity securities other than equity securities that rank junior to the Existing Preferred Stock, (iv) merge or consolidate with another person or entity, (v) sell more that 20% of the consolidated assets of the Company and its subsidiaries, (vi) liquidate itself, (vii) agree to restrictions on its ability to perform its obligations in respect of the Existing Preferred Stock (other than as set forth in the Indenture, the Amended Articles, the Warrant Agreement, the Exchange Indenture or in 159 connection with certain senior indebtedness) and (viii) incur or commit to incur more than $500,000 of indebtedness (subject to certain limited exceptions). These restrictions will terminate upon consummation of a Qualified Public Offering. In addition, pursuant to the Stock Purchase Agreement, the Company has agreed that, without the prior written consent of the holders of a majority of the Common Stock issuable upon conversion of the Class A Preferred Stock, it will not (i) increase the authorized number of shares of the Existing Preferred Stock or impair the rights of the holders thereof, (ii) prior to May 31, 1999, grant or issue any phantom stock, shadow stock, stock appreciation or other right directly or indirectly to participate in or benefit from the common equity of the Company on an ongoing basis, other than capital stock of the Company or options, warrants or other securities exercisable or exchangeable for or convertible into any such capital stock or (iii) grant to the Company's employees, directors and consultants any options, warrants or other rights to subscribe for capital stock of the Company other than pursuant to the Company's stock option plan in effect on the date of the Stock Purchase Agreement, unless all options covered by such plan have been granted. REGISTRATION RIGHTS The Company is obligated under the Registration Rights Agreement dated January 30, 1997 (the "1997 Registration Rights Agreement") at any time after the earlier of January 30, 2001 or the completion of a public offering of its equity securities, at the demand of the holders (the "Majority Holders") of a majority of the Common Stock underlying the Existing Preferred Stock and the Existing Warrants (the "Underlying Common Stock") to register under the Securities Act the Underlying Common Stock held by such holders. In addition, if the Company proposes to register any of its securities under the Securities Act (subject to certain limited exceptions, including the Exchange Offer or the Shelf Registration Statement for the Old Notes or the Old Exchangeable Preferred Stock and any registration statement for the Warrants and the Common Stock underlying the Warrants) it must include in such registration all Registrable Common Stock (as defined below) that the Company has been requested to include therein. "Registrable Common Stock" means (i) Underlying Common Stock (when issued) and any other Common Stock held by a holder (other than an Original Common Stock Holder (as defined below)) of such Underlying Common Stock (collectively, "New Registrable Common Stock") and (ii) Common Stock that on January 30, 1997 was held, and that when requested to be registered is held, by a person or entity that owned Common Stock on January 30, 1997 (such person or entity being herein referred to as an "Original Common Stock Holder.") Pursuant to the 1997 Registration Rights Agreement, except with respect to the Notes and the Units, the Company may not grant demand registration rights to any other person or entity without the prior written consent of the holders of a majority of the Underlying Common Stock. The Company can, however, grant rights to other persons to (i) participate in a piggyback registration so long as such rights are subordinate to the rights of the holders of New Registrable Common Stock and (ii) demand registration so long as the holders of New Registrable Common Stock are entitled to participate in any such registrations with such persons or entities pro rata on the basis of the number of shares owned by each such holder. Except with respect to the shares of Common Stock issuable upon the exercise of the Warrants, the Company may not include in any demand registration triggered by the holders of New Registrable Common Stock any securities which are not New Registrable Common Stock without the prior written consent of the holders of a majority of the New Registrable Common Stock that requested such demand registration. PREEMPTIVE RIGHTS If the Company issues any equity securities subject to certain limited exemptions (including the New Exchangeable Preferred Stock), the Company must first offer to sell such equity securities to the holders of Class A 160 Preferred Stock ratably based on the number of shares then held by such holders. If the holders of Class A Preferred Stock do not purchase all the offered securities, then the Company may sell the remaining securities, for a period of 120 days, to purchasers on terms no more favorable to such purchasers than those offered to the holders of Class A Preferred Stock. RIGHT TO REQUIRE SALE Unless the Company has theretofore consummated a Qualified Public Offering, beginning on the fourth anniversary of the date of issuance of the Notes and terminating on the earlier to occur of three years thereafter or the consummation of a Qualified Public Offering, the Majority Holders shall have the right to require the Company to retain an investment banking firm of nationally recognized standing, selected by the Company and reasonably acceptable to the Designated Holders (as defined below), for the purpose of soliciting bids in connection with a sale of the Company. The Board of Directors of the Company shall consider all bona fide bids received, and shall, in good faith, select the best offer. The Company's shareholders have agreed to vote for the approval of the bid selected by the Board of Directors, and to sell their shares of Company capital stock if the transaction is structured as a stock sale. "Designated Holders" means holders of not less than 51% of the sum of (i) the shares of outstanding Common Stock held by holders of Class A Preferred Stock and (ii) the shares of Common Stock issuable upon conversion of the Class A Preferred Stock. RESTRICTIONS ON TRANSFER If any Original Common Stock Holder proposes to transfer any of the Company's equity securities held by it, it must first offer such equity securities to the holders of the Existing Preferred Stock on the same terms and conditions as the proposed transfer. Such holders of Existing Preferred Stock (or their designees) may purchase all, but not less than all, of such equity securities, which will be allocated among the holders of the Existing Preferred Stock (or their designees) ratably in accordance with the number of shares of Existing Preferred Stock held by such holders. If holders of the Existing Preferred Stock do not purchase all such equity securities, then such Original Common Stock Holder may sell the equity securities for a period of 60 days to other purchasers on terms no more favorable to such purchasers than those offered to the holders of the Existing Preferred Stock. In addition, if any Original Common Stock Holder or holder of Existing Preferred Stock (the "Transferring Holder") proposes to transfer any of the Company's equity securities, it must offer the right to participate in the proposed transfer to the other Original Common Stock Holders and holders of Existing Preferred Stock (collectively, the "Other Holders"). If any of the Other Holders elects to participate in the proposed transfer, the Transferring Holder and such Other Holders will be entitled to transfer their equity securities to the proposed transferee ratably in accordance with their securities to be transferred. If the prospective transferee declines to allow the participation of Other Holders, then no equity securities are permitted to be sold to such prospective transferee. Furthermore, no Original Common Stock Holder or holder of Existing Preferred Stock may encumber any of the Company's equity securities without the prior consent of the Majority Holders. DIVIDEND POLICY Except with respect to the Exchangeable Preferred Stock and the Existing Preferred Stock, the Board of Directors may not declare or pay any dividends on any class or series of stock without the prior consent of the Majority Holders. When and if dividends are declared (other than with respect to the Exchangeable Preferred Stock), and to the extent permitted under the Illinois Business Corporation Act, the Company is required to pay preferential dividends in cash to holders of Existing Preferred Stock. Dividends on each share of Existing Preferred Stock will accrue on a daily basis at a rate of eight percent (8%) per annum of the sum of the Liquidation Value plus all accumulated and unpaid dividends from and including the date of issuance. Such dividends will accrue whether 161 or not they have been declared and whether or not there are profits, surpluses or other funds of the Company legally available for payment of dividends. Accrued dividends on the Existing Preferred Stock are required to be paid upon a Liquidation, although no portion of such accrued dividends may be paid in shares of Common Stock or Existing Preferred Stock and no portion of such accrued dividends may be converted into Common Stock. Except as otherwise provided, if at any time the Company pays less than the total amount of dividends than accrued with respect to the Existing Preferred Stock, such payment shall be distributed pro rata among holders thereof based on the number of shares of the Existing Preferred Stock held by each such holder. If the Company declares or pays a dividend upon any class of Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of such class of Common Stock, then the Company shall pay to the holders of Existing Warrants the dividend that would have been paid on the shares of Common Stock issuable upon the exercise of the Existing Warrants had the Existing Warrants been exercised in full immediately prior to the date on which a record is taken, or if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends are to be determined. 162 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES GENERAL The Federal income tax discussion set forth below summarizes certain United States Federal income tax consequences that may be relevant to initial holders of the New Exchangeable Preferred Stock, Exchange Debentures, and New Notes who are United States Persons (as defined below) and hold their New Exchangeable Preferred Stock, Exchange Debentures and New Notes as capital assets ("Holders"). The discussion is intended only as a summary and does not purport to be a complete analysis or listing of all potential tax considerations that may be relevant to such Holders of the New Exchangeable Preferred Stock, Exchange Debentures and New Notes. The discussion does not include special rules that may apply to certain holders (including insurance companies, tax-exempt organizations, financial institutions or broker-dealers, and persons holding the New Exchangeable Preferred Stock, Exchange Debentures and New Notes as part of a "straddle," "hedge" or "conversion transaction," and investors who are not United States Persons), and does not address the tax consequences of the law of any state, locality or foreign jurisdiction. The discussion is based upon currently existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury regulations promulgated thereunder and current administrative rulings and court decisions. All of the foregoing are subject to change (possibly with retroactive effect) and any such change could affect the continuing validity of this discussion. As used herein, "United States Person" means a beneficial owner of the New Exchangeable Preferred Stock, Exchange Debentures or New Notes who or that (i) is a citizen or resident of the United States, (ii) is a corporation, partnership or other entity created or organized in or under the laws of the United States or political subdivision thereof, (iii) is an estate the income of which is subject to United States Federal income taxation regardless of its source, (iv) is a trust if (A) a United States court is able to exercise primary supervision over the administration of the trust and (B) one or more United States fiduciaries have authority to control all substantial decisions of the trust or (v) is otherwise subject to United States Federal income tax on a net income basis in respect of its worldwide taxable income. THE NEW NOTES THE EXCHANGE. The exchange of Old Notes for New Notes will not be treated as an exchange for federal income tax purposes because the New Notes will not differ materially in kind or extent from the Old Notes and because the exchange will occur by operation of the original terms of the Old Notes. As a result, U.S. Holders who exchange their Old Notes for New Notes will not recognize any income, gain or loss for federal income tax purposes. A U.S. Holder will have the same adjusted issue price, adjusted basis and holding period in the New Notes immediately after the exchange as it had in the Old Notes immediately before the exchange. STATUS OF THE NEW NOTES FOR FEDERAL INCOME TAX PURPOSES. The discussion set forth in this section is based on the assumption that the New Notes will be treated as indebtedness for Federal income tax purposes. Based upon the facts that the Company's sole business enterprise is in a developmental stage, the New Notes are effectively subordinated to indebtedness incurred by the Restricted Subsidiaries, and the proceeds of the New Notes are to be used in substantial part to acquire basic business assets, the IRS may contend that the New Notes do not, in whole or in part, constitute indebtedness for Federal income tax purposes. If it were determined that the New Notes should be treated, in whole or in part, as an equity interest in the Company, rather than as indebtedness, some portion or all of the interest expense (including original issue discount) on the New Notes would not be deductible for Federal income tax purposes. As a result, the amount of after tax income available to pay amounts due under the New Notes, as well as distributions with respect to the New Exchangeable Preferred Stock, could be substantially reduced with a material adverse affect on the Holders of the New Notes and the New Exchangeable Preferred Stock. In addition, the tax consequences of holding the New Notes would differ significantly from those described below. 163 The determination of whether an instrument issued by a corporation constitutes indebtedness for Federal income tax purpose or should be treated, in whole or in part, as an equity interest in the corporation is determined under current law by reference to certain general guidelines and factors distilled from decisional law and IRS rulings. The following are the principal factors that weigh in favor of treating an instrument as indebtedness (i) the instrument has a fixed maturity that is not unreasonably far in the future, (ii) the instrument contains an unconditional obligation to pay a fixed amount upon maturity, (iii) the instrument contains an unconditional obligation to pay interest determined at a fixed rate, (iv) the holder has customary creditor remedies upon default, (v) the instrument is not convertible into equity of the issuer, does not provide for payments based upon the income or profits of the issuer and does not confer upon the holder voting rights or other powers to affect control of the management of the issuer, (vi) the issuer has sufficient anticipated cash flow to satisfy the payments anticipated to become due under the instrument, (vii) there is substantial disparity between the holdings of the instrument and the holdings of the stock of the issuer in terms of the identity of the holders and their proportionate interest, (viii) the issuer's debt/equity ratio is not excessive, (ix) the obligations evidenced by the instrument are not subordinated to other creditors, (x) subsequent to issuance, the holder takes reasonable steps to enforce its rights as a creditor and (xi) the instrument was not issued to provide funds for the acquisition of basic business assets. The presence or absence of any one of the foregoing factors is not determinative. Counsel to the Company has given an opinion that, more likely than not, the New Notes will be treated as indebtedness for Federal income tax purposes. Counsel's opinion is based upon the clear presence of factors (i), (ii), (iii), (iv) and (v) and its assessment of the other factors, relying significantly on the validity and reasonableness (without independent investigation) of the Company's business plan under which there is projected sufficient cash flow to satisfy all payment obligations under the New Notes. Moreover, Counsel's view is based in part on its understanding that the Old Notes would not be sold at original issuance to holders of the Company's Common Stock or Class A Preferred Stock and would be sold at original issuance to traditional purchasers of high yield debt and that the original purchasers of the Old Notes and the original purchasers of the Units would not, in every case, purchase the Old Notes and Units in identical proportions. No assurance can be given that the IRS will not assert that the New Notes do not, in whole or in part, constitute indebtedness for federal income tax purposes. Moreover, although the opinion represents counsel to the Company's view that the factors indicating that the New Notes should be treated as indebtedness outweigh those indicating that it should be treated, in whole or in part, as a form of equity interest in the Company, that opinion is not binding on any court that might have jurisdiction to adjudicate the matter. ORIGINAL ISSUE DISCOUNT. The New Notes have original issue discount for Federal income tax purposes. The amount of OID on a New Note is the excess of its "stated redemption price at maturity" (the sum of all payments to be made on the New Note, whether denominated as interest or principal) over its "issue price." The "issue price" of each New Note is equal to the first price at which a substantial amount of the Notes were sold for money (excluding sales to bond houses, brokers or similar persons acting as underwriters, placement agents or wholesalers). Each New Note Holder (whether a cash or accrual method taxpayer) is required to include in income such OID as it accrues, in advance of the receipt of some or all of the related cash payments. The amount of OID includable in income by the initial Holder of a New Note is the sum of the "daily portions" of OID with respect to the New Note for each day during the taxable year or portion of the taxable year on which such Holder held such New Note ("accrued OID"). The daily portion is determined by allocating to each day in any "accrual period" a pro rata portion of the OID allocable to that accrual period. The accrual periods for a New Note will be periods that are each selected by the New Note Holder that are no longer than one year, provided that each scheduled payment occurs either on the final day of an accrual period or on the first day of an accrual period. The amount of OID allocable to any accrual period other than the initial short accrual period (if any) and the final accrual period is an amount equal to the product of the New Note's "adjusted issue price" at the beginning of such accrual period and its yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period). The amount of OID allocable to the final accrual period is the difference between the amount payable at maturity and the adjusted issue price of the New Note at the beginning of the final accrual period. The amount of OID allocable to any initial short accrual period may be computed under any reasonable method. The adjusted issue price of the New Note at the start of any accrual period 164 is equal to its issue price increased by the accrued OID for each prior accrual period and reduced by any prior payments (whether stated as interest or principal) with respect to such New Note. The Company is required to report the amount of OID accrued on New Notes held of record by persons other than corporations and other exempt New Note Holders, which may be based on accrual periods other than those chosen by the New Note Holder. A New Note Holder is not required to recognize any income upon the receipt of interest payments on the New Notes. The tax basis of a New Note in the hands of the Holder will be increased by the amount of OID, if any, on the New Note that is included in the Holder's income pursuant to these rules, and will decreased by the amount of any payments (whether stated as interest or principal) made with respect to the New Note. APPLICABLE HIGH YIELD DISCOUNT OBLIGATION. If the yield to maturity of the New Notes (as determined for United States Federal income tax purposes) exceeds the AFR plus 500 basis points, the New Notes will be subject to the AHYDO rules of the Code. The AFR is an interest rate, announced monthly by the IRS, that is based on the yield of debt obligations issued by the U.S. Treasury. The AFR for the month of February, 1998 for instruments with a weighted average maturity in excess of nine years providing for semi-annual compounding is 5.93%. Pursuant to the AHYDO rules, the Company's deductions with respect to OID will be suspended until such OID is actually paid, and the "disqualified portion" of such OID (defined as the portion that is attributable to the yield on such New Note in excess of the applicable Federal rate plus 600 basis points) will be permanently nondeductible. These rules generally do not affect the amount, timing or character of a Holder's income; however, domestic corporate Holders may be eligible for a dividends-received deduction with respect to their inclusion in income of the "disqualified portion" (as defined above) if such amount, if paid with respect to stock, would have been treated as a dividend (i.e., among other things, would have been paid out of earnings and profits, which the Company does not believe that it currently has). See "--The New Exchangeable Preferred Stock--Certain Federal Income Tax Consequences to the Company and to Corporate Holders" for a more extensive discussion of the AHYDO rules. The availability of the dividends-received deduction is subject to a number of complex limitations. See "--The New Exchangeable Preferred Stock--Distributions on the New Exchangeable Preferred Stock." MARKET DISCOUNT. If a New Note is acquired by a subsequent purchaser at a "market discount," some or all of any gain realized upon a disposition (including a sale or a taxable exchange) or payment at maturity of such New Note may be treated as ordinary income. "Market discount" with respect to a security is, subject to a de minimis exception, the excess of (i) the issue price of the security increased by all previously accrued original issue discount and probably reduced (although the Code does not expressly so provide) by any cash payments in respect of such security over (ii) such Holder's initial tax basis in the security. The amount of market discount treated as having accrued will be determined either on a ratable basis, or, if the Holder so elects, on a constant interest method. Upon any subsequent disposition (including a gift or payment at maturity) of such New Note (other than in connection with certain nonrecognition transactions), the lesser of any gain on such disposition (or appreciation, in the case of a gift) or the portion of the market discount that accrued while the New Note was held by such Holder will be treated as ordinary interest income at the time of the disposition. In lieu of including accrued market discount in income at the time of disposition, a Holder may elect to include market discount in income currently. Unless a New Note Holder so elects, such Holder may be required to defer a portion of any interest expense that may otherwise be deductible on any indebtedness incurred or maintained to purchase or carry such New Note until the Holder disposes of the New Note. The election to include market discount in income currently, once made, is irrevocable and applies to all market discount obligations acquired on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS. ACQUISITION PREMIUM. A subsequent Holder of a Note is generally subject to rules for accruing OID described above. However, if such Holder's purchase price for the Note exceeds the "revised issue price" (the sum of the issue price of the Note and the aggregate amount of the OID includible in the gross income of all Holders for periods before the acquisition of the Note by such Holder and probably reduced (although the Code does not expressly so provide) by any cash payment in respect of such security), the excess (referred to as "acquisition premium") is offset ratably against the amount of OID otherwise includable in such Holder's taxable income (i.e., such Holder may reduce the daily portions of OID by a fraction, the numerator of which is the excess of such Holder's purchase price 165 for the Note over the revised issue price, and the denominator of which is the excess of the sum of all amounts payable on the Note after the purchase date over the Note's revised issue price). DISPOSITION OF NEW NOTES. A Holder of New Notes will recognize gain or loss upon the sale, redemption, retirement or other disposition of such New Notes; such gain or loss will generally be equal to the difference between (i) the amount of cash and the fair market value of property received and (ii) the Holder's adjusted tax basis (increased by any accrued OID or market discount previously included in income by the Holder and reduced by any previous payments with respect to the New Notes) in such New Notes. Subject to the market discount rules discussed above, gain or loss recognized will be capital gain or loss, provided such New Notes are held as capital assets by the Holder, and will be long term capital gain or loss if the Holder has held such New Notes (or is treated as having held such New Notes) for longer than one year. Under current law, capital gains recognized by corporations are currently taxed at a maximum rate of 35% and the maximum rate on net capital gains (i.e., the excess of net long-term capital gains over net short-term capital losses) in the case of individuals is currently 20% for New Notes held for more than 18 months (28% if held more than 12 months but not more than 18 months). Under the Code, an individual Holder's net capital losses are currently deductible only to the extent of $3,000 per year. REPORTING REQUIREMENTS. The Company will provide annual information statements to Holders of the New Notes and to the Internal Revenue Service, setting forth the amount of original issue discount determined to be attributable to the New Notes for that year. THE NEW EXCHANGEABLE PREFERRED STOCK THE EXCHANGE. U.S. Holders who exchange their Old Exchangeable Preferred Stock for New Exchangeable Preferred Stock will not recognize any income, gain or loss for federal income tax purposes. A U.S. Holder will have the same issue price, adjusted basis and holding period in the New Exchangeable Preferred Stock immediately after the exchange as it had in the Old Exchangeable Preferred Stock immediately before the exchange. DISTRIBUTIONS ON THE NEW EXCHANGEABLE PREFERRED STOCK. Distributions on the New Exchangeable Preferred Stock paid in cash will be taxable to the Holder as ordinary income and treated as a dividend to the extent of the Company's current and accumulated earnings and profits (as determined for Federal income tax purposes). A distribution on the New Exchangeable Preferred Stock made in the form of additional shares of New Exchangeable Preferred Stock ("PIK Shares") will be treated as being in an amount equal to the fair market value of the PIK Shares and will be a taxable distribution treated as a dividend to the extent of the Company's current and accumulated earnings and profits (as determined for Federal income tax purposes). The holding period of any such PIK Shares will commence on the date of their distribution. To the extent that the amount of any distribution paid on the New Exchangeable Preferred Stock (including distributions made in the form of PIK Shares) exceeds the Company's current and accumulated earnings and profits allocable to such distributions (as determined for Federal income tax purposes), such distribution will be treated as a return of capital, thus reducing the Holder's adjusted tax basis in such New Exchangeable Preferred Stock. Any such excess distribution that is greater than the Holder's adjusted basis in the New Exchangeable Preferred Stock will be taxed as capital gain and will be long-term capital gain if the Holder's holding period for such New Exchangeable Preferred Stock exceeds one year. For purposes of the remainder of this discussion, the term "dividend" refers to a distribution paid out of the Company's allocable earnings and profits, unless the context indicates otherwise. It is anticipated that the mandatory redemption price of the New Exchangeable Preferred Stock will exceed such stock's issue price by more than a de minimis amount. As a result, such excess (a "redemption premium") will be required, pursuant to section 305(c) of the Code, to be accrued by the Holder as a constructive distribution of additional New Exchangeable Preferred Stock over the term of the New Exchangeable Preferred Stock in a manner similar to the accrual of original issue discount as described below in the discussion "-- Taxation of Stated Interest 166 and Original Issue Discount on Exchange Debentures." The Company determined the issue price of the Exchangeable Preferred Stock by allocating the aggregate issue price of each Unit between the Exchangeable Preferred Stock and associated Warrants comprising such Unit based upon their relative fair market values. The Company intends to allocate $946 of the aggregate issue price of a Unit to the Exchangeable Preferred Stock and $54 of the aggregate issue price to the associated Warrants as set forth in the Private Placement offering circular. That allocation by the Company will be binding on each holder, unless the holder explicitly discloses (on a statement attached to the holder's timely filed United States Federal income tax return for the year that includes the acquisition date of the Unit) that its allocation of the Unit's issue price between the Exchangeable Preferred Stock and the Warrants is different from the Company's allocation. The Company's allocation, however, is not binding on the IRS, and therefore, there can be no assurance that the IRS will respect such allocation. If a holder purchases a Unit as part of the initial issuance at a price that is lower than the aggregate issue price assumed in computing the dollar amounts set forth above, then the issue price of such Unit will be allocated between the Exchangeable Preferred Stock and the associated Warrants in proportion to the allocation described above. A Holder's initial tax basis in each security comprising a Unit will be the issue price allocated thereto. Constructive distributions (including those arising from a redemption premium) are taxable to the Holder as dividends to the extent of the Company's current or accumulated earnings and profits. If the size of the constructive dividend is greater than the Company's current or accumulated earnings and profits, the excess is treated as a tax-free recovery of basis in the New Exchangeable Preferred Stock until such Holder's basis is equal to zero, and then as capital gain from the sale or exchange of the New Exchangeable Preferred Stock. If the fair market value of any PIK Shares at the time of distribution is less than the redemption price of such PIK Shares by more than a statutorily defined de minimis amount, then the resulting redemption premium will be required, pursuant to section 305(c) of the Code, to be accrued by the Holder as a constructive distribution of additional PIK Shares over the term of the PIK Shares in a manner similar to the accrual of original issue discount as described below in the discussion "--Taxation of Stated Interest and Original Issue Discount on Exchange Debentures." PIK Shares issued on different dates will very likely have different amounts of redemption premium. A Holder would be treated as having received constructive distributions on its PIK Shares in differing amounts depending on the issue price of each PIK Share and PIK Shares would not be interchangeable with each other or with New Exchangeable Preferred Stock due to their differing United States Federal income tax characteristics. Dividends received by corporate Holders generally will be eligible for the 70% dividends-received deduction available under Section 243 of the Code. The availability of such dividends-received deduction is subject to numerous exceptions and restrictions, including those relating to (i) the holding period of the stock, (ii) stock treated as "debt-financed portfolio stock" within the meaning of Section 246A of the Code, (iii) dividends treated as "extraordinary dividends" for purposes of Section 1059 of the Code and (iv) Holders who pay alternative minimum tax. A recent amendment made by the Taxpayer Relief Act of 1997 requires a corporate Holder to satisfy a separate 46-day holding period requirement with respect to each dividend (91 days in the case of preferred stock dividends with respect to periods aggregating more than 366 days) in order to be eligible for such dividends-received deduction. Corporate shareholders should consult their own tax advisors regarding the extent, if any, to which such exceptions and restrictions may apply to their particular factual situations. The Company does not now have any current or accumulated earnings and profits and is unable to predict whether or when it will have sufficient earnings and profits for distributions with respect to the New Exchangeable Preferred Stock to be treated as dividends. Until such time, if any, as such distributions are treated as dividends, corporate Holders of the New Exchangeable Preferred Stock will not be eligible for the dividends-received deduction described above. SALE, REDEMPTION AND EXCHANGE OF EXCHANGEABLE PREFERRED STOCK. A redemption of shares of New Exchangeable Preferred Stock for cash or in exchange for Exchange Debentures would be a taxable event. 167 A redemption of shares of New Exchangeable Preferred Stock for cash will generally be treated as a sale or exchange if the Holder does not own, actually or constructively within the meaning of Section 318 of the Code, any stock of the Company other than the New Exchangeable Preferred Stock. For this purpose, a Holder that holds Warrants will be treated as constructively owning shares of Common Stock that it can acquire upon exercise of the Warrants. In addition, under Section 318 of the Code, a person generally will be treated as the owner of stock of the Company owned by certain related parties or certain entities in which the person owns an interest. If a Holder does own, actually or constructively, other stock of the Company, a redemption of New Exchangeable Preferred Stock may be treated as a dividend to the extent of the Company's current and accumulated earnings and profits (as determined for Federal income tax purposes). Dividend treatment would not apply, however, if the redemption is "not essentially equivalent to a dividend" with respect to the Holder under Section 302(b)(1) of the Code. A distribution to a Holder will be "not essentially equivalent to a dividend" if it results in a "meaningful reduction" in the Holder's stock interest in the Company. For this purpose, a redemption of New Exchangeable Preferred Stock that results in a reduction in the proportionate interest in the Company (taking into account any actual ownership of Common Stock of the Company and any stock constructively owned) of a Holder whose relative stock interest in the Company is minimal should be regarded as a meaningful reduction in the Holder's stock interest in the Company. If a redemption of the New Exchangeable Preferred Stock for cash is not treated as a distribution taxable as a dividend, the redemption would result in capital gain or loss equal to the difference between the amount of cash received and the Holder's adjusted tax basis in the New Exchangeable Preferred Stock redeemed, except to the extent that the redemption price includes dividends which have been declared by the Board of Directors of the Company prior to the redemption. Similarly, upon the sale of the New Exchangeable Preferred Stock (other than in a redemption or in exchange for the Exchange Debentures), the difference between the sum of the amount of cash and the fair market value of other property received and the Holder's adjusted basis in the New Exchangeable Preferred Stock would result in capital gain or loss. This gain or loss would be long-term capital gain or loss if the Holder's holding period for the New Exchangeable Preferred Stock exceeds one year. Under current law, capital gains recognized by corporations are currently taxed at a maximum rate of 35% and the maximum rate on net capital gains in the case of individuals is currently 20% for property held for more than 18 months (28% if held more than 12 months but not more than 18 months). A redemption of New Exchangeable Preferred Stock in exchange for Exchange Debentures will be subject to the same general rules as a redemption for cash, except that any gain or loss generally will be determined based upon the issue price of the Exchange Debentures (as determined for purposes of computing the original issue discount on such Exchange Debentures). See the discussion below under "--Original Issue Discount." If a redemption of the New Exchangeable Preferred Stock is treated as a distribution that is taxable as a dividend, the amount of the distribution will be measured by the amount of cash or the issue price of the Exchange Debentures, as the case may be, received by the Holder. It is possible, however, that the fair market value of the Exchange Debentures (if different from their issue price) may constitute the amount of the distribution. The Holder's adjusted tax basis in the redeemed New Exchangeable Preferred Stock will be transferred to any remaining stock holdings in the Company, subject to reduction or possible gain recognition under Section 1059 of the Code in respect of the nontaxed portion of such dividend. If the Holder does not retain any actual stock ownership in the Company (i.e., such Holder is treated as having received a dividend because he constructively owns stock in the Company but such Holder does not actually own any Company Stock), such Holder may lose the benefit of his basis in the New Exchangeable Preferred Stock. However, such basis may be transferred to the person or entity whose ownership of New Exchangeable Preferred Stock was attributed to the Holder. ORIGINAL ISSUE DISCOUNT. In the event that the New Exchangeable Preferred Stock is exchanged for Exchange Debentures and the "stated redemption price at maturity" of the Exchange Debentures exceeds their "issue price" by more than a de minimis amount, the Exchange Debentures will be treated as having OID equal to the amount of such excess. 168 If the Exchange Debentures are traded on an established securities market within the 60-day period ending thirty days after the Exchange Date, the issue price of the Exchange Debentures will be their fair market value as of their issue date. Subject to certain limitations described in the Treasury Regulations, the Exchange Debentures will be deemed to be traded on an established securities market if, at a minimum, price quotations will be readily available from dealers, brokers or traders. If the New Exchangeable Preferred Stock, but not the Exchange Debentures issued in exchange therefor, is traded on an established securities market within the 60-day period ending thirty days after the Exchange Date, then the issue price of each Exchange Debenture should be the fair market value of the New Exchangeable Preferred Stock exchanged therefor at the time of the exchange. The New Exchangeable Preferred Stock generally will be deemed to be traded on an established securities market if, at a minimum, it appears on a system of general circulation that provides a reasonable basis to determine fair market value based either on recent price quotations or recent sales transactions. In the event that neither the New Exchangeable Preferred Stock nor the Exchange Debentures are traded on an established securities market within the applicable period, the issue price of the Exchange Debentures will be their stated principal amount (i.e., their face value) unless either (i) the Exchange Debentures do not bear "adequate stated interest" within the meaning of Section 1274 of the Code, which is unlikely or (ii) the Exchange Debentures are issued in a so-called "potentially abusive situation" as defined in the Treasury Regulations under Section 1274 of the Code (including a situation involving a recent sales transaction), which is unlikely, in which case the issue price of such Exchange Debentures generally will be the fair market value of the New Exchangeable Preferred Stock surrendered in exchange therefor. The "stated redemption price at maturity" of the Exchange Debentures should equal the total of all payments under the Exchange Debentures. The "stated redemption price at maturity" would include any optional redemption premium on the Exchange Debentures if assuming that such optional redemption will occur would result in a lower yield to maturity on the Exchange Debentures. TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON EXCHANGE DEBENTURES. Each Holder of an Exchange Debenture with OID will be required to include in gross income an amount equal to the sum of the "daily portions" of the OID for all days during the taxable year in which such Holder holds the Exchange Debenture. The daily portions of OID required to be included in a Holder's gross income in a taxable year will be determined under a constant yield method by allocating to each day during the taxable year in which the Holder holds the Exchange Debenture a pro rata portion of the OID thereon which is attributable to the "accrual period" in which such day is included. The amount of the OID attributable to each accrual period will be the product of the "adjusted issue price" of the Exchange Debenture at the beginning of such accrual period multiplied by the "yield to maturity" of the Exchange Debenture (properly adjusted for the length of the accrual period). The adjusted issue price of an Exchange Debenture at the beginning of an accrual period is the original issue price of the Exchange Debenture plus the aggregate amount of OID that accrued in all prior accrual periods, and less any cash payments. The "yield to maturity" is the discount rate that, when used in computing the present value of all principal and interest payments to be made under the Exchange Debenture, produces an amount equal to the issue price of the Exchange Debenture. An "accrual period" may be of any length and may vary in length over the term of the debt instrument, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs either on the final day or the first day of an accrual period. In the event that the Exchange Debentures are issued on or before February 15, 2003, the Company will have the option to pay interest thereon in PIK Debentures. The issuance of PIK Debentures in lieu of cash interest is not treated as a payment of interest. Instead, the underlying Exchange Debenture and any PIK Debenture that may be issued thereon are treated as a single debt instrument under the OID rules. Moreover, because the terms of the PIK Debentures and the underlying Exchange Debentures are identical so that the two are fungible in all respects, the issuance of a PIK Debenture should be treated simply as a division of the underlying Exchange Debenture, so that the Holder's tax basis and adjusted issue price in the underlying Exchange Debenture should be allocated between the underlying Exchange Debenture and the PIK Debenture in proportion to their relative principal amounts. For purposes of determining the stated redemption price at maturity and the rate at which OID accrues on an Exchange Debenture issued on or before February 15, 2003, applicable regulations require that it be assumed that 169 the Company will pay interest in the form of PIK Debentures to the maximum extent permitted under the terms of the Exchange Debentures if doing so would reduce the yield to maturity on such Exchange Debentures. In such a case, if the Company elects to pay in cash an interest payment on such Exchange Debentures payable in cash or in PIK Debentures, the cash payment will be treated as a pro rata prepayment on the Exchange Debentures. As a result, the Holder would realize gain in an amount equal to the excess of the cash payment over the portion of the Holder's tax basis that would have been allocated to such PIK Debentures, and the Holder's tax basis in the Exchange Debentures held would be reduced by such allocated portion of the Holder's tax basis. For purposes of determining the stated redemption price at maturity and the rate at which OID accrues on an Exchange Debenture issued on or before February 15, 2003, applicable regulations require that it be assumed that the Company will pay interest in cash and not in the form of PIK Debentures if paying interest in the form of PIK Debentures would not reduce the yield to maturity on such Exchange Debentures. In such a case, if the Company elects to pay in the form of PIK Debentures an interest payment on such Exchange Debentures payable in cash or in PIK Debentures, the future accruals of OID will be calculated based on a redetermination of the stated redemption price at maturity and yield to maturity made by treating the Exchange Debenture as if it were retired and reissued on such payment date at a price equal to the adjusted issue price of the Exchange Debentures at such time. In the event that Exchange Debentures are issued after February 15, 2003 when the Company does not have the option to pay interest thereon in PIK Debentures, stated interest would be included in income by a Holder in accordance with such Holder's usual method of accounting. In all other cases, all stated interest paid will be treated as payments on Exchange Debentures under the rules discussed above. BOND PREMIUM ON EXCHANGE DEBENTURES. If the Holder's basis in the Exchange Debentures exceeds the sum of all amounts payable on the Exchange Debentures after the date on which Holder acquires them (computed by applying certain provisions of the Treasury Regulations regarding the determination of the amounts of future payments), such excess will be deductible by the Holder of the Exchange Debentures as amortizable bond premium over the term of the Exchange Debentures (or the period ending on such earlier call date) under a yield-to- maturity formula, if an election by the Holder under Section 171 of the Code is made or is already in effect. This election is revocable only with the consent of the IRS and applies to all obligations owned or acquired by the Holder on or after the first day of the taxable year to which the election applies. To the extent the excess is deducted as amortizable bond premium, the Holder's adjusted tax basis in the Exchange Debentures is reduced. Except as may otherwise be provided in future Treasury Regulations, the amortizable bond premium will be treated as an offset to interest income on the Exchange Debentures rather than as a separate deduction item. ACQUISITION PREMIUM ON EXCHANGE DEBENTURES. A Holder of an Exchange Debenture issued with OID who purchases such Exchange Debenture for an amount that is greater than its then adjusted issue price but equal to or less than the sum of all amounts payable on the Exchange Debenture after the purchase date will be considered to have purchased such Exchange Debenture at an "acquisition premium." Under the acquisition premium rules, the amount of OID that such Holder must include in income with respect to such Exchange Debenture for any taxable year will be reduced by the portion of such acquisition premium properly allocable to such year. MARKET DISCOUNT ON EXCHANGE DEBENTURES. Holders of shares of Old Exchangeable Preferred Stock who tender such shares for shares of New Exchangeable Preferred Stock should be aware that the disposition of Exchange Debentures may be affected by the market discount provisions of the Code. The market discount rules generally provide that if a Holder of a debt instrument purchases it at a "market discount" and thereafter realizes gain upon a disposition or a retirement of the debt instrument, the lesser of such gain or the portion of the market discount that has accrued on a straight-line basis (or, if the Holder so elects under Section 1276(b) of the Code, on a constant interest rate basis) while the debt instrument was held by such Holder will be taxed as ordinary income at the time of such disposition. "Market discount" with respect to the Exchange Debentures is the amount, if any, by which the "revised issue price" of an Exchange Debenture (or its stated redemption price at maturity if the Exchange Debenture does not have any OID) exceeds the Holder's basis in the Exchange Debenture immediately after such Holder's acquisition, subject to a de minimis exception. The "revised issue price" of an Exchange Debenture is its issue price increased by the portion of OID previously includible in the gross income of prior holders for periods 170 prior to the acquisition of the Exchange Debenture by the Holder (without regard to any acquisition premium exclusion) and reduced by prior payments with respect to the Exchange Debentures. A Holder who acquires an Exchange Debenture at a market discount also may be required to defer a portion of any interest expense that otherwise may be deductible on any indebtedness incurred or maintained to purchase or carry such Exchange Debenture until the Holder disposes of the Exchange Debenture in a taxable transaction. Moreover, any partial principal payment with respect to Exchange Debentures will be includible as ordinary income to the extent of any accrued market discount on such Exchange Debentures. Such accrued market discount will also generally be includible as ordinary income upon the occurrence of certain otherwise non-taxable transfers (such as gifts). A Holder of Exchange Debentures acquired at a market discount may elect for Federal income tax purposes to include market discount in gross income as the discount accrues, either on a straight-line basis or on a constant interest rate basis. This current inclusion election, once made, applies to all market discount obligations acquired on or after the first day of the first taxable year to which the election applies, and may not be revoked without the consent of the IRS. If a Holder of Exchange Debentures makes such an election, the foregoing rules with respect to the recognition of ordinary income on sales and other dispositions of such debt instruments, and with respect to the deferral of interest deductions on indebtedness incurred or maintained to purchase or carry such debt instruments, would not apply. REDEMPTION OR SALE OF EXCHANGE DEBENTURES. Generally, any redemption or sale of Exchange Debentures by a Holder would result in taxable gain or loss equal to the difference between the sum of the amount of cash and the fair market value of other property received (except to the extent that cash received is attributable to accrued but previously untaxed interest, which portion of the consideration would be taxed as ordinary income) and the Holder's adjusted tax basis in the Exchange Debentures. The adjusted tax basis of a Holder who receives an Exchange Debenture in exchange for New Exchangeable Preferred Stock will generally be equal to the issue price of the Exchange Debenture increased by any OID or market discount with respect to the Exchange Debenture included in the Holder's income prior to sale or redemption of the Exchange Debenture, reduced by any amortizable bond premium applied against the Holder's income prior to sale or redemption of the Exchange Debenture and by payments on the Exchange Debentures. Subject to the above discussion of market discount, such gain or loss would be long-term capital gain or loss if the Holder's holding period for the Exchange Debentures exceeds one year. The same principles with respect to acquisition premium affect the Exchange Debentures as described in "--Acquisition Premium" discussion with respect to the New Notes. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO CORPORATE HOLDERS. It is possible that the Exchange Debentures will be treated as AHYDOs for Federal income tax purposes, especially if the Exchange Debentures are issued on or before February 15, 2003. The Exchange Debentures will constitute AHYDOs if they (i) have a term of more than five years, (ii) have a yield to maturity equal to or greater than the sum of the applicable Federal rate (the "AFR") at the time of issuance of the Exchange Debentures plus 500 basis points and (iii) have "significant OID." The AFR is an interest rate, announced monthly by the IRS, that is based on the yield of debt obligations issued by the United States Treasury. A debt instrument is treated as having "significant OID" if the aggregate amount that would be includible in gross income with respect to such debt instrument for periods before the close of any accrual period ending after the date five years after the date of issue exceeds the sum of (i) the aggregate amount of interest to be paid in cash under the debt instrument before the close of such accrual period and (ii) the product of the initial issue price of such debt instrument and its yield to maturity. In determining whether any Exchange Debentures issued on or prior to February 15, 2003 are AHYDOs, it will be presumed that interest will be paid in the form of PIK Debentures to the maximum extent permitted under the terms of the Exchange Debentures. Because the amount of OID, if any, attributable to the Exchange Debentures will be determined at the time such Exchange Debentures are issued and the AFR at that point in time is not predictable, it is impossible currently to determine whether Exchange Debentures will be treated as AHYDOs. If the Exchange Debentures are treated as AHYDOs, (i) as described in the following paragraph, a portion of the OID that accrues on the Exchange Debentures may be treated as a dividend generally eligible for the dividends- received deduction in the case of corporate Holders, (ii) the Company would not be entitled to deduct the 170 "disqualified portion" of the OID that accrues on the Exchange Debentures and (iii) the Company would be allowed to deduct the remainder of the OID only when it pays amounts attributable to such OID in cash. (In particular, in the case of a payment in cash of an interest payment payable on or before February 15, 2003 on an Exchange Debenture issued on or prior to February 15, 2003 and interest on which (for purposes of accruing OID under applicable regulations) is presumed to be paid in the form of PIK Debentures to the maximum extent permitted under the terms of the Exchange Debentures, the Company may be able to deduct only a small portion of such cash payment attributable to OID because the payment as a whole would be treated as a prepayment of a ratable portion of the Exchange Debentures.) If an Exchange Debenture is treated as an AHYDO, a corporate Holder would be treated as receiving dividend income to the extent of the lesser of (i) an allocable portion of the Company's current and accumulated earnings and profits and (ii) the "disqualified portion" of the OID of such AHYDO. The "disqualified portion" of the OID is equal to the lesser of (x) the amount of OID or (y) the portion of the "total return" (i.e., the excess of all payments to be made with respect to the Exchange Debenture over its issue price) with respect to the Exchange Debenture in excess of the AFR at issuance plus 600 basis points per annum. BACKUP WITHHOLDING AND INFORMATION REPORTING A Holder may be subject to backup withholding at the rate of 31 percent with respect to interest on the New Notes, distributions (actual or constructive) on the New Exchangeable Preferred Stock interest (including OID) on the Exchange Debentures or sales proceeds of any of the foregoing, unless such Holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates its exempt status or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A Holder who does not provide the Company with the Holder's correct taxpayer identification number may be subject to penalties imposed by the IRS. Any amount paid as backup withholding would be creditable against the Holder's Federal income tax liability. The Company will furnish annually to the IRS and to record Holders of the New Exchangeable Preferred Stock (other than with respect to certain exempt holders) information relating to dividends paid during the calendar year. In the case of New Exchangeable Preferred Stock or PIK Shares subject to Section 305(c) of the Code, such information may be based upon dividends accruing to the record Holder of such New Exchangeable Preferred Stock or PIK Shares at the time of issuance. The Company will furnish annually to the IRS and to record Holders of the New Notes and Exchange Debentures (other than with respect to certain exempt holders) information relating to the stated interest and the OID, if any, accruing during the calendar year. Such information will be based on the amount of OID that would have accrued to a Holder who acquired the New Note or the Exchange Debenture on original issue. Accordingly, other Holders will be required to determine for themselves whether they are eligible to report a reduced amount of OID for Federal income tax purposes. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NEW NOTES, NEW EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES IN LIGHT OF HIS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF NEW NOTES, NEW EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE OWNERSHIP AND DISPOSITION OF THE NEW NOTES, NEW EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, OR SUBSEQUENT VERSIONS THEREOF. 172 PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes or shares of New Exchangeable Preferred Stock for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes or shares of Exchangeable Preferred Stock. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker- dealer in connection with the resale of New Notes or shares of New Exchangeable Preferred Stock received in exchange for Old Notes or shares of Old Exchangeable Preferred Stock where such Old Notes or shares of Old Exchangeable Preferred Stock were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. Each broker-dealer that acquired Old Securities directly from the Company, and not as a result of market-making or trading activities, must, in the absence of an exemption, comply with the registration and prospectus delivery requirements of the Securities Act in connection with the secondary resale of the New Securities and cannot rely on the position of the staff of the Commission enunciated in no-action letters issued to third parties. In addition, until [________, 1998] (90 days after the date of this Prospectus), all dealers effecting transactions in the New Notes or shares of New Exchangeable Preferred Stock may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of New Notes or shares of New Exchangeable Preferred Stock by broker-dealers. New Notes and shares of New Exchangeable Preferred Stock received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or New Exchangeable Preferred Stock or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such New Notes or shares of New Exchangeable Preferred Stock. Any broker-dealer that resells New Notes or shares of New Exchangeable Preferred Stock that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes or shares of New Exchangeable Preferred Stock may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of New Notes or shares of New Exchangeable Preferred Stock and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letters of Transmittal state that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in a Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the reasonable fees and expenses, if any, of one counsel for the Initial Purchasers of the Old Notes and the Old Exchangeable Preferred Stock) other than commissions or concessions of any brokers or dealers and will indemnify the Holders of the Notes and the Exchangeable Preferred Stock (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The legality of the Notes and Exchange Debentures offered hereby is being passed upon for the Company by the Piper & Marbury L.L.P., Washington, D.C., special counsel for the Company. The legality of the Exchangeable Preferred Stock offered hereby is being passed upon for the Company by Neal, Gerber & Eisenberg, Chicago, Illinois, counsel for the Company. Mark Tauber, a partner of Piper & Marbury L.L.P., owns 68,056.0 shares of the Company's Common Stock and options to acquire 34,730.4 shares of the Company's Common Stock. In addition, in January 1998, Mr. Tauber acquired beneficial ownership of 6.3 shares of Class A Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share, and warrants to purchase up to 5,327.0 shares of Common Stock at a price of $.000001 per share. The Percent of Aggregate Voting Rights excludes 2,250.261 shares of non-voting Common Stock beneficially owned by Mr. Tauber which the Company has agreed to issue. 173 EXPERTS The balance sheets of 21st Century Telecom Group, Inc. as of March 31, 1996 and 1997 and the related statements of income, shareowner's equity and cash flows for each of the three years in the period ended March 31, 1997 and for the period from inception (October 29, 1992 to March 31, 1997) included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as stated in their report appearing herein. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-4 (including all amendments thereto, the "Registration Statement") under the Securities Act of 1933, with respect to the New Notes and New Exchangeable Preferred Stock offered in connection with the Exchange Offer. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information contained in the Registration Statement. For further information with respect to the Company and the New Notes and New Exchangeable Preferred Stock offered in connection with the Exchange Offer, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus concerning the contents of any contract or any other document referred to are not necessarily complete; reference is made in each instance to the copy of such contract or document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by such reference to such exhibits. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from such office after payment of fees prescribed by the Commission. The Commission also maintains a Web site that contains reports, proxy statements and other information regarding registrants, including the Company, that file such information electronically with the Commission. The address of the Commission's Web site is http://www.sec.gov. 174 GLOSSARY ADI Area of Dominant Influence. ADSL Asymmetrical Digital Subscriber Line. A modem technology that enhances copper telephone wiring allowing for high-speed data transmission over ordinary telephone lines. ANSI American National Standards Institute. A standards-setting, non- government organization founded in 1918, which develops and publishes standards for "voluntary" use in the United States. CLASS Custom Local Area Signalling Services. Consists of number translation services, such as call-forwarding and caller identification as well as services including automatic callback, distinctive ringing, call-waiting and selective call rejection. CLEC Competitive Local Exchange Carrier. A term coined for the deregulated, competitive telecommunications environment envisioned by the Telecommunications Act of 1996. The CLECs compete for local and long distance service. CPS Cable Program Service. DBS Direct Broadcast Satellite. A term for a satellite which sends relatively powerful signals to small dishes at homes. DRS NETWORK Distributed Ring-Star Network. An advanced integrated fiber optic network designed by the Company to provide voice, video and high- speed data services. Key attributes of the network include (i) distributive switching and traffic routing mechanics at specific locations throughout the network (rather than being concentrated at one point as in conventional networks), (ii) SONET-based, self-healing ring architecture possessing both circuit and route diversity and (iii) a large fiber capacity permitting delivery of advanced two-way, fully interactive broadband and narrowband services. DTH Direct-to-home Satellite TV. DOC Data Operations Center. The location for housing the equipment necessary to provide subscribers with high-speed data and Internet access. ESMR Enhanced Specialized Mobile Radio. Two-way dispatch service with the capability to provide wireless voice telephone service to compete against cellular. HFC Hybrid Fiber Coaxial. An outside plant distribution cabling concept employing both fiber optic and coaxial cable. Fiber is deployed as the backbone distribution medium, terminating in a remote unit where optoelectric conversion takes place. At that remote unit, the signal then is passed on to coaxial cables which carry the data to the individual business or residence. ILEC Incumbent Local Exchange Carrier. The existing local telephone company in a market, which can be either a RBOC or an independent telephone company that provides local transmission service. ISDN Integrated Services Digital Network. Connections that use ordinary phone lines to transmit digital instead of analog signals, allowing data to be transmitted at a much faster rate than with a traditional modem. ISP Internet Service Provider. A vendor who provides direct access to the Internet and a core group of Internet utilities like E-mail, News Group Readers and sometimes weather reports and local restaurant reviews. The user reaches the ISP by dialing-up over normal phone lines with its own computer and modems. IXC Interexchange Carriers. A telephone company that provides long- distance telephone service between LATAs. KBPS Kilobits per second. Used to refer to data transmission speeds. LATA Local Access and Transport Area. One of the 161 local geographical areas in the United States within which a LEC may offer local telecommunications services. LEC Local Exchange Carrier. A local phone company which provides local access and transmission. LMDS Local Multipoint Distribution Services. The use of broadcast microwave signals to contact dishes typically located on the top of apartment buildings. The signal is then distributed to individual units in the building. MBPS Megabits per second. Used to refer to data transmission speeds. One Mbps equals 1,000 Kbps. MDU Multiple Dwelling Units. High-rise residential buildings. MHZ Megahertz. Used to measure band and bandwidth. MMDS Microwave Multipoint Distribution System. A means of distributing cable television programming, through microwave, from a single transmission point to multiple receiving points. MTSO Mobile Telephone Switching Office. This central office houses the field monitoring and relay stations for switching calls between the cellular and wire-based (land-line) central office. It is a sophisticated computer that monitors all cellular calls, keeps track of the location of all cellular-equipped vehicles traveling in the system, arranges handoffs and keeps track of billing information. MVPD Multichannel Video Programming Distribution. NOC Network Operations Center. The location for housing the equipment necessary to provide subscribers with voice, video and high-speed data services and to monitor system performance. PCS Personal Communications Service. A new, lower powered, higher- frequency competitive technology to cellular that will consist primarily of enhanced voice, two-way data and text messaging services directed at the mass consumer wireless communications market. PEG Public, Educational or Government access. The local public access channels. POP Point of Presence. The place where a long-distance carrier terminates long distance lines just before those lines are connected to the local phone company's lines or a direct connection to a targeted user. POTS Plain Old Telephone Services. Basic single line telephone service. RBOC Regional Bell Operating Company. SBS Small Business Services. SMATV Satellite Master Antenna Television. A distribution system that feeds satellite signals to hotels, apartments, etc. SONET Synchronous Optical NETwork. A family of fiber-optic transmission rates from 51.84 Mbps to 13.22 Gbps, created to provide the flexibility needed to transport many digital signals with different capacities, and to provide a standard for which manufacturers design. SONET is an optical interface standard that allows interworking of transmission products from multiple vendors. STS Shared Tenant Services. Providing centralized telecommunications services to tenants in a building or a complex. VLAN Virtual Local Area Network. Work stations connected to an intelligent device which provides the capabilities to define LAN membership. INDEX TO FINANCIAL STATEMENTS
Page ------ AUDITED FINANCIAL STATEMENTS Report of Independent Public Accountants F-2 Balance Sheets as of March 31, 1996 and 1997 F-3 Statements of Income for the years ended March 31, 1995, 1996, and 1997 and for the period from inception (October 29, 1992) to March 31, 1997 F-4 Statements of Changes in Shareholders' Equity for the years ended March 31, 1995, 1996 and 1997 and for the period from inception (October 29, 1992) to March 31, 1997 F-5 Statements of Cash Flows for the years ended March 31, 1995, 1996 and 1997 and for the period from inception (October 29, 1992) to March 31, 1997 F-6 Notes to Financial Statements for the years ended March 31, 1995, 1996 and 1997 and for the period from inception (October 29, 1992) to March 31, 1997 F-7 UNAUDITED INTERIM FINANCIAL STATEMENTS Balance Sheet as of December 31, 1997 F-15 Condensed Statements of Income for the nine months ended December 31, 1996 and 1997 and for the period from inception (October 29, 1992) to December 31, 1997 F-16 Statements of Changes in Shareholders' Equity for the nine months ended December 31, 1997 and for the period from inception (October 29, 1992) to December 31, 1997 Condensed Statements of Cash Flows for the nine months ended December 31, 1996 and 1997 and for the period from inception (October 29, 1992) to December 31, 1997 F-17 Notes to Financial Statements for the nine months ended December 31, 1996 and 1997 and for the period from inception (October 29, 1992) to December 31, 1997 F-18
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of 21st Century Telecom Group, Inc.: We have audited the accompanying balance sheets of 21st Century Telecom Group, Inc. (an Illinois corporation in the development stage) as of March 31, 1997 and 1996, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1997, and for the period from inception (October 29, 1992) to March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 21st Century Telecom Group, Inc. as of March 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, and for the period from inception to March 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois February 9, 1998 F-2 21ST CENTURY TELECOM GROUP, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS AS OF MARCH 31, 1996 AND 1997
ASSETS 1996 1997 ------ --------------- --------------- CURRENT ASSETS: Cash and cash equivalents $ 956 $ 8,230,942 Accounts receivable from shareholders 153,660 86,000 Accounts receivable from subscribers -- 27,480 Prepayments -- 149,250 ----------- ----------- Total current assets 154,616 8,493,672 PROPERTY, PLANT AND EQUIPMENT: Leasehold improvements -- 177,526 Vehicles and computer equipment -- 69,337 Less--Accumulated depreciation -- (6,934) ----------- ----------- -- 239,929 OTHER ASSETS: Restricted cash collateral reserve -- 1,796,880 Accounts receivable from associated company 1,058,723 1,156,780 Prepaid franchise fees -- 3,216,575 Deferred franchise costs, net of amortization of $158,875 and $309,641, respectively 451,538 587,615 Deferred mapping and design, net of amortization of $12,407 -- 62,037 ----------- ----------- Total other assets 1,510,261 6,819,887 ----------- ----------- Total assets $ 1,664,877 $15,553,488 =========== =========== LIABILITIES AND PREFERRED AND COMMON EQUITY ------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 358,482 $ 238,775 Debentures payable 805,303 -- Interest payable 299,212 -- Accounts payable to associated company 1,569,622 1,294,860 Notes payable 226,930 -- ----------- ----------- Total current liabilities 3,259,549 1,533,635 NONCURRENT LIABILITIES: Debentures payable 81,551 81,551 Interest payable 68,333 103,676 ----------- ----------- Total noncurrent liabilities 149,884 185,227 REDEEMABLE PREFERRED STOCK: Class A convertible 8% cumulative preferred stock, no par value, 1,380.3 shares outstanding -- 16,794,963 COMMON SHAREHOLDERS' EQUITY: Common stock, no par value, 1,683,000 and 2,374,343.6 shares outstanding, respectively, 1,161,307.6 secondary common share warrants outstanding and 1,000,966.8 initial and debt common share warrants converted to voting and non-voting common stock in 1998 488,001 5,946,904 Deficit accumulated during development stage (2,226,557) (5,522,830) Related party purchase, in excess of cost -- (3,381,300) Unearned compensation (6,000) (3,111) ----------- ----------- Total common shareholders' equity (1,744,556) (2,960,337) ----------- ----------- Total liabilities and equity $ 1,664,877 $15,553,488 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-3 21ST CENTURY TELECOM GROUP, INC (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF INCOME FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO MARCH 31, 1997
OCT. 29, 1992 Year Ended YEAR ENDED YEAR ENDED TO MARCH 31, 1995 MARCH 31,1996 MARCH 31,1997 MARCH 31,1997 ----------------- ----------------- --------------- --------------- Subscriber revenues $ -- $ -- $ 27,480 $ 27,480 Operating expenses -- 9,617 200,911 210,528 Selling, general and administrative expenses 624,963 694,122 2,337,534 4,027,428 Depreciation and amortization 38,923 108,182 170,108 328,983 ---------- ----------- ----------- ----------- Operating loss (663,886) (811,921) (2,681,073) (4,539,459) Interest income -- -- 301,624 301,624 Interest expense 115,428 214,688 437,843 806,014 ---------- ----------- ----------- ----------- Loss before income taxes (779,314) (1,026,609) (2,817,292) (5,043,849) PROVISION (CREDIT) for INCOME TAXES -- -- -- -- ---------- ----------- ----------- ----------- NET LOSS (779,314) (1,026,609) (2,817,292) (5,043,849) Preferred stock requirements -- -- (478,981) (478,981) ---------- ----------- ----------- ----------- NET LOSS ATTRIBUTABLE to COMMON SHARES $ (779,314) $(1,026,609) $(3,296,273) $(5,522,830) ========== =========== =========== =========== Weighted average common shares outstanding 1,508,000 1,609,129 1,988,365 1,624,895 LOSS PER COMMON SHARE $(.52) $(.64) $(1.66) $(3.40) ========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-4 21ST CENTURY TELECOM GROUP, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO MARCH 31, 1997
DEFICIT ACCUMULATED DURING RELATED COMMON DEVELOPMENT PARTY TOTAL STOCK STAGE PURCHASE ------------ ----------- ------------ ------------ Balances, October 29, 1992 $ -- $ -- $ -- $ -- Net loss (420,634) -- (420,634) -- Stock issuances 138,001 138,001 -- -- Unearned compensation (16,000) -- -- -- Amortization of unearned compensation 11,600 -- -- -- ----------- ---------- ----------- ------------ Balances, March 31, 1994 (287,033) 138,001 (420,634) -- Net loss (779,314) -- (779,314) -- Amortization of unearned compensation 3,226 -- -- -- ----------- ---------- ----------- ------------ Balances, March 31, 1995 (1,063,121) 138,001 (1,199,948) -- Net loss (1,026,609) -- (1,026,609) -- Stock issuances 350,000 350,000 -- -- Unearned compensation (8,000) -- -- -- Amortization of unearned compensation 3,174 -- -- -- ----------- ---------- ----------- ------------ Balances, March 31, 1996 (1,744,556) 488,001 (2,226,557) -- Net loss (2,817,292) -- (2,817,292) -- Stock issuances 1,421,281 1,421,281 -- -- Accrued preferred stock dividend (280,795) -- (280,795) -- Class A preferred stock proceeds allocated to related common share warrants 4,324,549 4,324,549 Class A preferred stock issuance costs allocated to related common share warrants (286,927) (286,927) Preferred stock accretion (198,186) (198,186) Amortization of unearned compensation 2,889 -- -- -- Related party purchase, in excess of cost (3,381,300) -- -- (3,381,300) ----------- ---------- ----------- ------------ Balances, March 31, 1997 $(2,960,337) $5,946,904 $(5,522,830) $(3,381,300) =========== ========== =========== ============
COMMON UNEARNED COMMON SHARES COMPENSATION SHARES WARRANTS ------------- ----------- ----------- Balances, October 29, 1992 $ -- -- -- Net loss -- -- -- Stock issuances -- 1,508,000 -- Unearned compensation (16,000) -- -- Amortization of unearned compensation 11,600 -- -- -------- ----------- ----------- Balances, March 31, 1994 (4,400) 1,508,000 -- Net loss -- -- -- Amortization of unearned compensation 3,226 -- -- -------- ----------- ----------- Balances, March 31, 1995 (1,174) 1,508,000 -- Net loss -- -- -- Stock issuances -- 175,000 -- Unearned compensation (8,000) -- -- Amortization of unearned compensation 3,174 -- -- -------- ----------- ----------- Balances, March 31, 1996 (6,000) 1,683,000 -- Net loss -- -- -- Stock issuances -- 691,343.6 -- Accrued preferred stock dividend -- -- -- Class A preferred stock proceeds allocated to related common share warrants -- -- 1,161,307.6 Class A preferred stock issuance costs allocated to related common share warrants -- -- -- Preferred Stock accretion -- -- -- Amortization of unearned compensation 2,889 -- -- Related party purchase, in excess of cost -- -- -- -------- ----------- ----------- Balances, March 31, 1997 $ (3,111) 2,374,343.6 1,161,307.6 ======== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-5 21ST CENTURY TELECOM GROUP, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO MARCH 31, 1997
OCT. 29, 1992 Year Ended YEAR ENDED YEAR ENDED TO MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1997 ---------------- ---------------- ---------------- ---------------- Net loss $(779,314) $(1,026,609) $(2,817,292) $(5,043,849) Adjustments to reconcile net loss to net cash provided by operating activities-- Amortization and depreciation 38,923 108,182 170,108 328,983 Compensation for professional services through the issuance of common stock -- -- 44,190 44,190 Interest expense related to debenture conversions -- 168,762 147,533 427,257 Increase in accounts receivable -- -- (27,480) (27,480) Increase in prepayments -- -- (3,365,825) (3,365,825) Increase in deferred charges (153,825) (338,887) (361,287) (971,700) Change in intercompany receivable and payable, net 347,019 114,964 (372,819) 138,080 Increase in interest payable 115,428 45,926 15,612 103,676 (Decrease)/Increase in accounts payable 38,856 201,926 (119,707) 238,775 (Decrease)/Increase in notes payable 114,969 111,961 (226,930) -- Other 13,728 2,548 3,131 20,889 --------- ----------- ----------- ----------- Net cash used by operating activities (264,216) (611,227) (6,910,766) (8,107,004) Net cash used in investing activities-- Purchase of subscribers from affiliate -- -- (3,381,300) (3,381,300) Capital expenditures -- -- (246,863) (246,863) --------- ----------- ----------- ----------- Net cash used in investing activities -- -- (3,628,163) (3,628,163) Cash flows from financing activities-- Cash paid for letters of credit -- -- (1,796,880) (1,796,880) Proceeds from issuance of debentures 266,429 266,765 153,660 886,854 Proceeds from issuance of preferred stock, net of issuance costs -- -- 20,267,604 20,267,604 Proceeds from issuance of common stock -- 342,000 144,531 608,531 --------- ----------- ----------- ----------- Net cash provided by financing activities 266,429 608,765 18,768,915 19,966,109 --------- ----------- ----------- ----------- Net increase/(decrease) in cash 2,213 (2,462) 8,229,986 8,230,942 Cash at beginning of period 1,205 3,418 956 -- --------- ----------- ----------- ----------- Cash at end of period $ 3,418 $ 956 $ 8,230,942 $ 8,230,942 ========= =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-6 21ST CENTURY TELECOM GROUP, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997 AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO MARCH 31, 1997 1. DESCRIPTION OF BUSINESS: 21st Century Telecom Group, Inc. (the Company) is a Chicago-based company, formed by shareholders of 21st Century Technology Group, Inc. (Technology) on October 29, 1992. The Company was originally incorporated as 21st Century Cable TV, Inc. and its name was subsequently changed to 21st Century Telecom Group, Inc. on January 5, 1998. The Company was formed for the purpose of building a cable and communication network in the Area 1 franchise of the City of Chicago. Area 1 is the populous downtown and near downtown commercial and residential districts. As part of its business plan, the Company intends to become a full service communications provider via its installation of a state-of-the-art fiber optic cable network. This distribution system is designed to provide a barrier- free information super highway that can accommodate a wide range of communication services, including interactive video, teleconferencing, business- to-business connectivity, and 24-hour on-line computer interconnects, in addition to basic telephony and an extensive selection of cable programming options. On March 26, 1996, the Company was awarded a non-exclusive franchise from the City of Chicago to construct, install, maintain and operate a cable television system within franchise Area 1. The franchise is for a period of 15 years. The Company will be required to pay the City a franchise fee of 5% of the annual gross revenues received, which it will pass through to its customers. The Company was required to prepay $3,000,000 of franchise fees within 120 days of being awarded the franchise. The payment was made in two equal installments, the first payment was made on June 24, 1996, and the second payment was made on July 24, 1996. The Company has reached an agreement with the Chicago Transit Authority (CTA) for a 15-year license to attach its 15-mile fiber-optic trunk to the CTA's overhead rail structures. Financing the construction and initial start-up of the Company's system remains an ongoing activity. On January 30, 1997, the Company sold $21.8 million of convertible preferred stock. On November 25, 1997, the Company obtained a $15 million interim financing facility. The Company repaid this interim financing facility upon the execution of a concurrent preferred equity and high yield debt offering on February 9, 1998. These offerings resulted in gross proceeds of $200 million from the issuance of 12 1/4% Senior Discount Notes Due 2008 and $50 million from the issuance of 50,000 Units of 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010 and Warrants to purchase 438,870 shares of Common Stock. The net proceeds from these offerings will be used to assist the Company in meeting its construction, development and working capital needs. Although the Company has been successful in attracting the necessary financing to complete the buildout of the franchise, the Company still needs to generate sufficient revenues to service its debt and realize its investments in fixed assets in future periods. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company's accounting and reporting principles conform to generally accepted accounting principles. Cash and Cash Equivalents Cash and cash equivalents at March 31, 1997, consist of cash on hand at certain banks as well as commercial paper investments. The commercial paper is stated at cost, which approximates market value, and all mature within F-7 seven days of purchase. At March 31, 1996, cash and cash equivalents consist solely of cash on hand at certain banks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Property, Plant and Equipment The Company has recorded vehicle and computer equipment purchases at their original cost. The purchases are being depreciated on a straight-line basis over five years. The Company capitalized leasehold improvements incurred as of March 31, 1997. However, as the associated lease begins July 1, 1997, no related depreciation was recognized for the year ended March 31, 1997. Beginning in fiscal 1998, leasehold improvements will be depreciated on a straight-line basis over the term of the lease, fifteen years. Deferred Franchise Costs The Company has deferred franchise costs, including legal costs, associated with the organization of its business and obtaining the franchise from the City. Deferred franchise costs are being amortized over five years. Deferred Mapping and Design Costs The Company has deferred certain mapping and design costs associated with strand mapping the Area 1 region within the City. Deferred mapping and design costs are being amortized over three years. Revenue Recognition The Company recognizes cable television revenues as services are provided to subscribers. Operating Expenses Other than Interest and Amortization From inception to March 31, 1996, operating expenses, except interest and amortization, had been allocated from Technology, a related party through some common ownership and common management, based on estimates of time spent by management and employees of Technology on Company activities. The Company's Board of Directors approved these allocations. Technology's Board of Directors did not formally approve these allocations. However, at the time the allocations were made, the Company's and Technology's Boards contained substantially the same individuals. For the years ended March 31, 1995 and 1996, the Company also recognized 100% of expenses paid by Technology on behalf of the Company, as well as 100% of expenses incurred by the Company. As these expenses were allocated, an affiliate payable was recognized. Effective April 1, 1996, the Company began recognizing and paying substantially all of its own expenses. Therefore, for the year ended March 31, 1997, there were no significant allocations from Technology or payments made by Technology on the Company's behalf. Cash Flow Information From inception to March 31, 1997, the Company has not paid any income taxes. From inception to March 31, 1996, no interest was paid. For the year ending March 31, 1997, the Company paid $274,993 in interest. F-8 Earnings Per Share For the twelve months ended March 31, 1995, 1996 and 1997, and the period from inception to March 31, 1997, per share amounts were based on weighted average common shares outstanding of 1,508,000, 1,609,129, 1,988,365 and 1,624,895 shares, respectively. Effective for the nine months ended December 31, 1997, the Company adopted FAS No. 128, "Earnings per Share" (see Note 5 in the interim financial statements). The retroactive adoption of this standard for March 31, 1995, 1996 and 1997 did not have an impact on the denominator of the basic loss per common share given the anti-dilutive effects of including potential common shares in the denominator of the diluted earnings per share calculation. At March 31, 1997 these potential common shares included the following: (1) 1,161,307.6 common share warrants related to the Class A Convertible 8% Cumulative Preferred Stock, (2) 1,000,966.8 shares of voting and non-voting common stock which replaced the initial and debt warrants associated with the Class A Convertible 8% Cumulative Preferred Stock as discussed in Note 4, (3) 1,250,000 options issued in connection with certain Directors' guarantee of a loan, and (4) 18,994.7 stock warrants issued to a financial advisor. At March 31, 1996 these potential common shares included 627,199.5 shares related to the convertible debenture. At March 31, 1995 these potential common shares included 321,741.5 shares related to the convertible debentures. The net loss attributable to common shares on which the basic earnings per share calculation is based, reflects the net loss increased by the amount of preferred dividends and accretion related to the Class A Convertible 8% Cumulative Preferred Stock. Accounting for Stock-Based Compensation In fiscal 1998, when the Company adopts Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," it intends to continue to recognize compensation cost based on Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The fair value disclosures required by Statement of Financial Accounting Standard 123 will be supplementely shown. 3. INCOME TAXES: The Company uses an asset and liability approach to account for income taxes. Deferred income taxes (credit) reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. These temporary differences are determined in accordance with Statement of Financial Accounting Standards (FAS) No. 109, ''Accounting for Income Taxes.'' The temporary difference and net operating loss carryforward, which give rise to deferred tax assets at March 31, 1996 and 1997, are as follows:
March 31, 1996 MARCH 31, 1997 DEFERRED DEFERRED TAX ASSET TAX ASSET ----------------- ----------------- Net operating loss carryforward $ 871,270 $ 1,969,962 Valuation allowance (871,270) (1,969,962) --------- ----------- $ -- $ -- ========= ===========
The provision (credit) for income taxes is summarized as follows:
Year Ended YEAR ENDED YEAR ENDED INCEPTION TO MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1997 ----------------- ----------------- ----------------- ----------------- Current-- Federal $ -- $ -- $ -- $ -- State -- -- -- -- Deferred-- Federal (249,502) (327,033) (896,666) (1,607,966) State (56,026) (73,683) (202,026) (361,996) --------- --------- ----------- ----------- (305,528) (400,716) (1,098,692) (1,969,962) Valuation allowance 305,528 400,716 1,098,692 1,969,962 --------- --------- ----------- ----------- $ -- $ -- $ -- $ -- ========= ========= =========== ===========
The income tax provision (credit) differs from amounts at the statutory federal income tax rate as follows:
Year Ended YEAR ENDED YEAR ENDED INCEPTION TO MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1997 ----------------- ----------------- ----------------- ----------------- Income tax provision (credit) at statutory rate $(272,760) $(359,313) $ (986,052) $(1,765,347) Meals and entertainment 3,649 6,642 19,210 31,437 State income taxes (36,417) (48,045) (131,850) (236,052) Valuation allowance 305,528 400,716 1,098,692 1,969,962 --------- --------- ---------- ----------- Income tax provision (credit) as reported $ -- $ -- $ -- $ -- ========= ========= ========== ===========
At March 31, 1997, the Company has cumulative net operating loss carryforwards aggregating $4,865,397 expiring between 2009 and 2012. At March 31, 1997, the Company has recorded a valuation allowance related to its deferred tax assets aggregating $1,969,962. F-9 4. DEBT: A summary of debt outstanding at March 31, 1996 and 1997, is as follows:
March 31, 1996 MARCH 31, 1997 -------------- -------------- Convertible Subordinated Debentures, Series 1, 25%, due 1998 $200,000 $52,702 Convertible Subordinated Debentures, Series 2, 25%, due 1999 140,000 28,849 Convertible Subordinated Debentures, Series 3, 25%, due 1998 150,000 -- Convertible Subordinated Debentures, Series 4, 25%, due 1999 200,000 -- Convertible Subordinated Debentures, Series 5, 25%, due 2000 196,854 -- -------- ------- Total $886,854 $81,551 ======== =======
All debentures are convertible to common stock based on a conversion ratio of $2 to 1 share of common stock. Conversion of $147,298 of the Series 1 convertible debentures occurred on May 17, 1996. Conversion of $111,151 of the Series 2 convertible debentures occurred on April 28, 1996. Conversion of $150,000 of the Series 3 convertible debentures occurred on November 14, 1996. Conversion of $200,000 of the Series 4 convertible debentures and $196,854 of the Series 5 convertible debentures occurred on January 31, 1997. Total debenture conversions to common stock for Series 1 through 5 convertible debentures resulted in the issuance of 616,280 additional shares of common stock between April 1996 and January 1997. (See ''Common Shares'' footnote for conversion effects on common shares outstanding.) During the period August 1994 to March 1996, the Company signed a series of promissory notes aggregating $226,930 at March 31, 1996, with Kubasiak, Cremieux, Flystra & Reigers, P.C. (Kubasiak). These notes accrued interest at a rate of 9% and were due between February 1, 1995, and September 1, 1996. At March 31, 1996, none of these promissory notes had been repaid and had accrued interest aggregating $19,730. On July 1, 1996, Kubasiak canceled its notes that were outstanding as of March 31, 1996, along with additional notes issued through June 1996, and consolidated them into a single note, due January 2, 1997. This new note was paid in full on December 31, 1996. 5. COMMON SHARES: On January 9, 1998, the common shareholders approved an amendment to the Articles of Incorporation to increase the number of authorized common shares to 50,000,000 from 1,000,000. On the same date, the directors of the Company declared a 1,000 for 1 share split of the Company's issued and outstanding common shares. All common share amounts and per share amounts have been restated to reflect this amendment and related split. At March 31, 1996 and 1997, the Company has 50,000,000 shares of no par common stock authorized, of which 1,683,000 and 2,374,343.6 are issued and outstanding, respectively. Changes in the Company's common shares and related amounts from the Company's inception date through March 31, 1997, are as follows:
COMMON SHARES AMOUNT ------------- ------------- October 29, 1992 1,439,000.0 $ 1 January 4, 1993 8,000.0 16,000 August 29, 1993 15,000.0 30,000 December 6, 1993 46,000.0 92,000 ----------- ---------- March 31, 1994 1,508,000.0 138,001 March 31, 1995 1,508,000.0 138,001 September 20, 1995 171,000.0 342,000 October 17, 1995 4,000.0 8,000 ----------- ---------- March 31, 1996 1,683,000.0 488,001 April 28, 1996 84,490.0 168,980 May 17, 1996 146,540.0 293,080 November 14, 1996 115,410.0 230,820 January 28, 1997 75,063.6 188,721 January 30, 1997 -- 4,037,622 January 31, 1997 269,840.0 539,680 ----------- ---------- March 31, 1997 2,374,343.6 $5,946,904 =========== ==========
F-10 On October 29, 1992, the Company sold 1,439,000 shares to the shareholders of 21st Century Technology for an aggregate purchase price of $1. On January 4, 1993, the Company issued 8,000 shares of restricted stock, to officers of the Company, at an estimated fair value of $2 per share. On August 29, 1993, the Company exchanged 15,000 shares of common stock with an estimated fair value of $2 per share for $30,000 of personal loans made to the Company by certain directors of the Company. On December 6, 1993, the Company sold 46,000 shares of common stock to certain shareholders of the Company at an estimated fair value of $2 per share. On September 20, 1995, the Company sold 171,000 shares of common stock to various third-party investors for $342,000 at an estimated fair value of $2 per share. On October 17, 1995, the Company issued 4,000 shares of restricted stock, to an officer of the Company, at an estimated fair value of $2 per share. As discussed earlier, Series 1 through 5 of the Company's convertible debentures were converted to common stock throughout the year ended March 31, 1997. On April 28, 1996, debenture conversions of $111,151 in principal and $57,829 in related interest resulted in the issuance of 84,490 shares of common stock. On May 17, 1996, debenture conversions of $147,298 in principal and $145,782 in related interest resulted in the issuance of 146,540 shares of common stock. On November 14, 1996, debenture conversions of $150,000 in principal and $80,820 in related interest resulted in the issuance of 115,410 shares of common stock. On January 31, 1997, debenture conversions of $396,854 in principal and $142,826 in related interest resulted in the issuance of 269,840 shares of common stock. The impacts of these noncash financing activities are not included in the net cash provided or used by operating or financing activities in the statements of cash flows. The Company also had an arrangement with a law firm to compensate it for its professional services by issuing 2,797.9 shares of common stock to it at a per share price of $15.79, which was based upon the offering price of the Company's preferred stock offering discussed below. The shares were issued on January 28, 1997. Also on January 28, 1997, certain shareholders of Technology (a related party) were allowed to purchase shares of the Company's common stock with the proceeds from their loan repayment from Technology. This transaction resulted in the issuance of 72,265.7 shares of additional common stock, at $2 per share. As discussed in Note 6, portions of the proceeds and issuance costs associated with the January 30, 1997 sale of Class A Convertible 8% Cumulative Preferred Stock were allocated to the related common share warrants. This allocation resulted in a net amount of $4,037,622 being recorded as common equity at March 31, 1997 (see Note 6 for additional discussion related to the allocation of the proceeds and issuance costs). In order to prepay the City's franchise fees, mentioned above, the Company requested and received a $5 million Loan and Security Agreement on June 21, 1996, with LaSalle Northwest National Bank which expired on January 1, 1997. The Company paid the loan including interest on January 31, 1997. Certain members of the Company's Board of Directors had individually guaranteed the full line of credit. The Company, in return for the Directors' guarantees, issued to the Directors options to acquire 1,250,000 additional common shares of the Company, at a price of $4 per share, exercisable until the expiration date of June 30, 2006. As of March 31, 1997, all options are outstanding. In February 1997, the Company issued stock warrants representing 18,994.7 shares to its financial advisor at an exercise price of $15.79, aggregating $300,000. The exercise price was based upon the offering price of the Company's preferred stock offering discussed below. As of March 31, 1997, all warrants are outstanding. 6. REDEEMABLE PREFERRED SHARES:
PREFERRED SHARES AMOUNT --------- --------------- March 31, 1996 -- -- January 30, 1997 Proceeds 1,380.3 $17,475,451 Issuance costs -- (1,159,469) Accrued dividends -- 280,795 Accretion -- 198,186 ------- ----------- March 31, 1997 1,380.3 $16,794,963 ======= ===========
On January 30, 1997 several investors contracted with the Company to purchase 1,380.3 shares of the Company's Class A Convertible 8% Cumulative Preferred Stock and initial, secondary and debt warrants for an aggregate purchase price of $15,793.84 per share, totaling $21.8 million. A portion of the initial purchase price was allocated to the common share warrants. The allocation was based on the fair market value of the common stock at the date of the sale of the Class A Convertible 8% Cumulative Preferred Stock and the number of related secondary warrants, initial warrants and debt warrants associated with such preferred stock. The fair market value of the common stock at the date of the sale was estimated to be $2 per share. The number of secondary warrants associated with the initial purchase amounted to 1,161,307.6. The number of initial and debt warrants associated with the initial purchase was based on the number of voting and non-voting common shares that these warrants were replaced with as a result of the subsequent amendment to the related stock purchase agreement as discussed in Note 11, "Subsequent Events." These initial and debt warrants were replaced with 1,000,967 shares of voting and non-voting common stock in January 1998. This allocation resulted in $4,324,549 and $17,475,451 being recorded as common stock and redeemable preferred stock, respectively, at March 31, 1997. Issuance costs of $1,446,396 were incurred in conjunction with the sale of the Class A Convertible 8% Cumulative Preferred Stock. These issuance costs were allocated between the Class A Convertible 8% Cumulative Preferred Stock and the related warrants based on the relative portions of the proceeds allocated to each. The carrying value of the Class A Convertible 8% Cumulative Preferred Stock is being accreted to its redemption value (using the effective interest method) over the four year period from the date of the original preferred stock purchase agreement to the date the stock becomes mandatorily redeemable, January 30, 2001. The Class A Convertible 8% Cumulative Preferred Stock is recorded on the balance sheet at the allocated portion of the purchase price paid by the investors, less the allocated portion of the issuance costs, plus accrued and unpaid preferred stock dividends, plus accretion. Certain of the provisions of the agreement are summarized below: - -- Each preferred share is convertible into one thousand common shares. - -- Dividends accrue daily on the aggregate amount paid at an annual rate of 8%. Unpaid dividends compound on a semi-annual basis on June 30 and December 31. At the consummation of a qualified public offering, all accrued and unpaid dividends would be converted into common stock without the issuance of additional shares. A qualified public offering is one in which (1) the public purchases at least $25 million of common stock, (2) the price per share paid is at least twice the liquidation value per share of the Class A Convertible 8% Cumulative Preferred Stock, (3) the common stock is traded on a national exchange or The Nasdaq Stock Market, and (4) the shares issued and sold represent at least 20% of the common stock outstanding after the public offering. - -- Upon consummation of a qualified public offering, all preferred shares are required to be converted into common shares. - -- At any time after the fourth anniversary of the date of the purchase and before the earlier of the date of the consummation of a qualified public offering or the seventh anniversary of the date of the purchase, each holder of the stock has the right from time to time to require the Company to repurchase all, but not less than all, of their shares held (the put arrangement). The shares would be repurchased by the Company for the greater of: (1) the purchase price paid by the holder of the stock, plus all accrued and unpaid dividends, or (2) the market value of the shares. - -- "Initial Warrants" were granted to the investors who may increase their ownership percentage up to another 12%. These warrants expire on May 31, 2008. The warrants are exercisable at $.000001 per share of common stock only if the Company does not meet certain pre-established performance indicators. The Company has until May 31, 1998 to meet these performance indicators. - -- "Secondary Warrants" to purchase up to 1,331,774.8 shares of common stock at $.000001 per share of common stock were also granted to the investors. These secondary warrants expire on January 30, 2007. - -- "Debt Warrants", in addition to the initial and secondary warrants discussed above, will vest to the new investors if the Company does not receive Board of Director approval by July 31, 1997, for a $50 million senior debt financing arrangement. Under this provision the Company is to issue warrants to purchase shares representing 2% of the outstanding common stock on the first day of each month until the definitive document with respect to such debt is in place. Any such warrants issued would expire ten years from the date of issue. Any debt warrants would also be exercisable at $.000001 per share of common stock. F-11 Of the $21.8 million, $21.7 million was received by March 31, 1997, with the remainder received by April 22, 1997. The purchase resulted in the preferred shareholders having an approximate 37% ownership interest in the Company on a fully diluted basis excluding the contingently issuable common shares from the exercise of the initial warrants and the debt warrants. The proceeds from this preferred stock offering were used to (1) repay a $5 million revolving credit note to LaSalle Northwest National Bank, (2) purchase the subscriber base of Technology located in the Chicago franchise area for $3,381,000, (3) retire existing Company debt and accounts payable in the amount of $541,166, and (4) pay transaction costs of $1,446,396. The balance of the proceeds will be used for working capital and capital expenditures to build the network, operating center and network infrastructure. The holders of the Class A Convertible 8% Cumulative Preferred Stock are collectively in a position to control the taking of many significant corporate actions by the Company, including the making of any significant capital commitments, the incurrence of any significant indebtedness, mergers and the payment of dividends on the Common Stock, pursuant to agreements which provide that prior to taking such actions, the Company will need to obtain the approval of the nominees to the Board of Directors of the holders of the Class A Convertible 8% Cumulative Preferred Stock. These restrictions terminate upon the consummation of a qualified public offering. 7. RESTRICTED STOCK AWARDS: The Company has awarded restricted stock to certain officers. The restricted shares vest over a 33-month period. Vested shares are subject to certain transfer restrictions and forfeiture under certain circumstances. Unearned compensation, representing the fair value of the stock on the date of award (estimated at $2 by management), is amortized to salary expense over the vesting period. During the period from inception to March 31, 1994, 8,000 shares of restricted stock were issued and were fully vested at March 31, 1996. In October 1995, an additional 4,000 shares of restricted stock were awarded. 8. PREPAID FRANCHISE FEES: As mentioned earlier, the Company was required to prepay $3,000,000 of franchise fees within 120 days of being awarded the franchise by the City. In accordance with the franchise agreement, the prepaid franchise fees earn interest for the period outstanding at a rate equal to the Company's cost of borrowed funds. The rate on the Company's $5 million loan with LaSalle Northwest National Bank of approximately 10% was used to compute the interest earned on the prepaid franchise fees. The interest accrued on the prepaid franchise fees for the year ended March 31, 1997, amounted to $216,575. These prepaid franchise fees will be reduced over time as revenues are billed to customers. 9. RELATED-PARTY TRANSACTIONS: The Company is related through some common ownership and common management to Technology. Activities pertaining to the Company's development from its inception date to March 31, 1996, have, for the most part, been intermingled with the activities of Technology. As discussed in Note 2, from inception to March 31, 1996, operating expenses, except interest and amortization, have been allocated to the Company based on estimates of time spent on the Company's activities by employees of Technology. In January 1997, the Company purchased Technology's Area 1 subscriber base and related equipment for $3,381,300. As this is considered to be a related party transaction, the Company could only capitalize Technology's book value of the purchased subscribers and the related equipment. As Technology's book value was zero at the time of purchase, the entire purchase price is shown as a reduction to common shareholders' equity. In January 1997, the Company paid approximately $459,000 of accrued legal fees to one of its directors, either individually or to entities controlled by him, for legal services rendered by him to the Company in connection with the Company's cable service offering and its obtaining the Chicago franchise. F-12 10. COMMITMENTS AND CONTINGENCIES: The Company obtained two letters of credit totaling $1,796,880. The first letter, for $500,000, was obtained as part of the franchise agreement mentioned earlier and expires on February 10, 1998. The second letter is for the benefit of the Merchandise Mart totaling $1,296,880 and was obtained in place of a security deposit related to the Merchandise Mart lease. This letter automatically renews on an annual basis for 1/15 less than the initial amount. These letters of credit are fully collateralized by cash, which is reflected as a restricted cash collateral reserve on the balance sheet. The Company invests the cash in commercial paper which matures daily. As of March 31, 1997, the commercial paper investments had earned $11,411 in interest income. On January 31, 1997, the Company entered into a lease agreement with the Merchandise Mart beginning July 1, 1997 for 32,422 square feet, which will increase by 7,975 square feet within four years. The leased space will house all video and head-end equipment, as well as serve as the corporate offices. The term of the lease is fifteen years. As of March 31, 1997, the aggregate minimum rental commitments under the Merchandise Mart lease agreement were as follows:
Year Ending March 31, ----------- 1998 $ 437,697 1999 626,729 2000 676,662 2001 735,152 2002 789,388 Thereafter 10,633,500 ----------- $ 13,899,128 ===========
The Company has contracted with a construction company for the buildout of the leased space, totaling approximately $4.5 million. Of this amount, the Merchandise Mart is responsible for $1,296,880 under the lease agreement. The Company is responsible for the remainder. Rental expense under operating leases was $26,565, $34,266 and $55,152 for the years ended March 31, 1995, 1996 and 1997, respectively 11. SUBSEQUENT EVENTS: On July 1, 1997, the Company entered into an open-ended master fleet lease with Enterprise Leasing Company. The agreement allows the Company to lease vehicles as they are needed. Total lease payments are therefore dependent upon the types and quantities of vehicles leased. Subsequent to March 31, 1997, the Company incurred approximately $15 million in capital expenditures. On September 23, 1997, the Company entered into an agreement for the issuance of additional preferred stock representing 63.3 shares at a purchase price of $15,793.84 per share, aggregating $1 million. The Company incurred issuance costs of $60,000 in conjunction with this transaction. The agreement is based on the same terms as the previously mentioned $21.8 million preferred stock issuance. On November 20, 1997, the Company entered into an agreement for the issuance of additional preferred stock representing 9.5441 shares at a purchase price of $15,793.84 per share, aggregating approximately $150,000. The agreement is based on the same terms as the previously mentioned $21.8 million preferred stock issuance. On November 25, 1997, the Company entered into an agreement with Credit Suisse First Boston Corporation (a Swiss bank), BankBoston, N.A. and Bank of America NT&SA, establishing a $15 million interim credit facility. This interim credit facility and accrued interest was repaid from the proceeds of a concurrent preferred equity and high yield debt offering. The concurrent preferred equity and high yield debt offering, executed on February 9, 1998, consists of $200 million of senior discount notes and $50 million of senior exchangeable preferred stock. The interim credit facility provided for an interest rate based on either (i) 5% plus a rate tied to the prime rate, a certificate-of-deposit rate or the Federal funds rate or (ii) 6% plus the London interbank offered rate. To secure this interim credit facility the Company granted the lender a security interest in substantially all of its properties, and certain holders of the Company's common stock pledged such stock for the benefit of the lenders. This interim credit facility contained restrictive covenants typical for a facility of this type. Effective January 30, 1997, the Company established a common stock option plan. No options were granted under the plan until October 14, 1997. The options expire ten years from the date of grant. The exercise price of each option is $1.12 per share and the Company estimated the fair market value of each option to be $4.50 at the date of grant. As of December 31, 1997, the maximum number of options, 728,667.7, were granted under the terms of the plan. The options vest over 48 months and the vesting period starts from the date of employment. The beginning vesting dates range from November 11, 1992, to December 26, 1997. F-13 During December 1997, the Company and its Class A Convertible 8% Cumulative Preferred Stock shareholders negotiated a number of changes to the original Stock Purchase Agreement. These changes were formally ratified on January 8 and 14, 1998. The original put arrangement as discussed in Note 6 was removed and was replaced by the right of the Class A preferred shareholders to require the sale of the Company. The new provision provides that at any time and from time to time after the fourth anniversary of the date of issuance of the senior discount notes and senior cumulative exchangeable preferred stock (discussed in Note 1) and ending on the earlier to occur of the consummation of a qualified public offering and the seventh anniversary of the date of issuance of the senior discount notes, the Class A preferred shareholders have the right to require the sale of the Company. The liquidation value of the preferred stock is the sum of the original cost plus any accrued and unpaid dividends. The right to obtain additional common shares under the initial warrant and debt warrant provisions as discussed in Note 6 was removed and was replaced by an agreement to increase the Class A preferred shareholders ownership on a fully diluted basis by an additional 8% by issuing additional common stock. One-half of this additional stock is voting and the other half is non-voting. A portion of the proceeds and issuance costs associated with the sale of the Class A Convertible 8% Cumulative Preferred stock were allocated to the initial and debt warrants and reflected in common stock at December 31, 1997. In addition, the holders of the Class A preferred stock are collectively in a position to control the taking of many significant corporate actions by the Company, including the making of any significant capital commitments, the incurrence of any significant indebtedness, merger and the payment of dividends on the common stock, pursuant to agreements which provide that prior to taking such actions, the Company will need to obtain the approval of the nominees to the Board of Directors of the holders of the Class A preferred stock. These restrictions on corporate actions by the Company terminate upon consummation of a qualified public offering. Subsequent to year end, the Company obtained the approval of the common shareholders for an amendment to the Articles of Incorporation to authorize 1,000,000 shares of non-voting common stock. F-14 21ST CENTURY TELECOM GROUP, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET AS OF DECEMBER 31, 1997
ASSETS December 31, 1997 December 31, 1997 ------ ------------------ ------------------ (Unaudited) (Pro Forma) (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,404,975 $ 1,404,975 Accounts receivable from subscribers 19,222 19,222 Prepayments 6,750 6,750 Inventory 678,866 678,866 ------------ ------------ Total current assets 2,109,813 2,109,813 PROPERTY, PLANT AND EQUIPMENT: Leasehold improvements 3,984,541 3,984,541 Other property, plant and equipment 11,270,073 11,270,073 Less--Accumulated depreciation (473,725) (473,725) ------------ ------------ 14,780,889 14,780,889 OTHER ASSETS: Restricted cash collateral reserve 1,796,880 1,796,880 Accounts receivable from associated company 1,156,780 1,156,780 Prepaid franchise fees 3,442,603 3,442,603 Deferred franchise costs, net of amortization of $451,707 445,549 445,549 Deferred mapping and design, net of amortization of $46,977 90,974 90,974 Other deferred costs 12,000 12,000 ------------ ------------ Total other assets 6,944,786 6,944,786 ------------ ------------ Total assets $ 23,835,488 $ 23,835,488 ============ ============ LIABILITIES AND PREFERRED AND COMMON EQUITY ------------------------------------------- CURRENT LIABILITIES: Accounts payable and other accrued liabilities $ 6,352,103 $ 6,352,103 Debentures payable 52,702 52,702 Interest payable 107,677 107,677 Interim credit facility 8,000,000 8,000,000 Accounts payable to associated company 1,294,860 1,294,860 ------------ ------------ Total current liabilities 15,807,342 15,807,342 NONCURRENT LIABILITIES: Debentures payable 28,849 28,849 Interest payable 37,957 37,957 ------------ ------------ Total noncurrent liabilities 66,806 66,806 REDEEMABLE PREFERRED STOCK: Class A convertible 8% cumulative preferred stock, no par value, 1,453.1 shares outstanding 19,974,325 -- SHAREHOLDERS' EQUITY: Class A convertible 8% cumulative preferred stock, no par value, 1,453.1 shares outstanding -- 19,974,325 Voting common stock no par value, 2,388,743.5 shares issued and outstanding, 1,222,569.0 secondary common share warrants outstanding and 1,044,064.6 initial and debt common share warrants converted to voting and non-voting common stock in 1998 at December 31, 1997 and 2,910,776.5 shares of voting common stock outstanding, 1,222,569.0 common share warrants outstanding, and 522,032.3 shares of non-voting common stock outstanding at December 31, 1997 on a pro forma basis 7,023,934 7,023,934 Deficit accumulated during development stage (15,655,619) (15,655,619) Related party purchase, in excess of cost (3,381,300) (3,381,300) ------------ ------------ Total common shareholders' equity (12,012,985) 7,961,340 ------------ ------------ Total liabilities and equity $ 23,835,488 $ 23,835,488 ============ ============
The accompanying notes to financial statements are an integral part of these statements. F-15 21ST CENTURY TELECOM GROUP, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO DECEMBER 31, 1997
OCT. 29, 1992 Nine Months Ended NINE MONTHS ENDED TO DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1997 ---------------------- ------------------- ------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Subscriber revenues $ -- $ 123,532 $ 151,012 Operating expenses 190,817 413,979 624,507 Selling, general and administrative expenses 1,572,936 7,276,439 11,303,867 Depreciation and amortization 114,734 643,427 972,410 ----------- ------------ ------------ Operating loss (1,878,487) (8,210,313) (12,749,772) Interest income 142,603 484,678 786,302 Interest expense 376,828 119,226 925,240 ----------- ------------ ------------ Loss before income taxes (2,112,712) (7,844,861) (12,888,710) PROVISION (CREDIT) for INCOME TAXES -- -- -- ----------- ------------ ------------ NET LOSS (2,112,712) (7,844,861) (12,888,710) Preferred stock requirements -- (2,287,928) (2,766,909) ----------- ------------ ------------ NET LOSS ATTRIBUTABLE to COMMON SHARES $(2,112,712) $(10,132,789) $(15,655,619) =========== ============ ============ Weighted average common shares outstanding 1,900,527 2,380,926 1,735,296 LOSS PER COMMON SHARE $(1.11) $(4.26) $(9.02) =========== ============ ============
The accompanying notes to financial statements are an integral part of these statements. F-16 (a development stage company) --------------------------- STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY --------------------------------------------- FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 ------------------------------------------- AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO DECEMBER 31, 1997 -------------------------------------------------------------------------
DEFICIT ACCUMULATED DURING DEVELOPMENT RELATED PARTY UNEARNED COMMON SHARE TOTAL COMMON STOCK STAGE PURCHASE COMPENSATION COMMON SHARES WARRANTS ------------------------------------------------------------------------------------------------ BALANCES, OCTOBER 29, 1992 $ - $ - $ - $ - $ - - - Net loss (420,634) - (420,634) - - - - Stock issuances 138,001 138,001 - - - 1,508,000.0 - Unearned compensation (16,000) - - - (16,000) - - Amortization of unearned compensation 11,600 - - - 11,600 - - ----------------------------------------------------------------------------------------------- BALANCES, MARCH 31, 1994 (287,033) 138,001 (420,634) - (4,400) 1,508,000.0 - Net loss (779,314) - (779,314) - - - - Stock issuances - - - - - - - Amortization of unearned compensation 3,226 - - - 3,226 - - ----------------------------------------------------------------------------------------------- BALANCES, MARCH 31, 1995 (1,063,121) 138,001 (1,199,948) - (1,174) 1,508,000.0 - Net loss (1,026,609) - (1,026,609) - - - - Stock issuances 350,000 350,000 - - - 175,000.0 - Unearned compensation (8,000) - - - (8,000) - - Amortization of unearned compensation 3,174 - - - 3,174 - - ----------------------------------------------------------------------------------------------- BALANCES, MARCH 31, 1996 (1,744,556) 488,001 (2,226,557) - (6,000) 1,683,000.0 - Net loss (2,817,292) - (2,817,292) - - - - Stock issuances 1,421,281 1,421,281 - - - 691,343.60 - Accrued preferred stock dividend (280,795) - (280,795) - - - - Class A preferred stock proceeds allocated to related common share warrants 4,324,549 4,324,549 - - - - 1,161,307.6 Class A preferred stock issuance costs allocated to related common share warrants (286,927) (286,927) - - - - - Preferred stock accretion (198,186) - (198,186) - - - - Amortization of unearned compensation 2,889 - - - 2,889 - - Related party purchase, in excess of cost (3,381,300) - - (3,381,300) - - - ----------------------------------------------------------------------------------------------- BALANCES, MARCH 31, 1997 (2,960,337) 5,946,904 (5,522,830) (3,381,300) (3,111) 2,374,343.6 1,161,307.6 Net loss (7,844,861) - (7,844,861) - - - - Accrued preferred stock dividend (1,349,934) - (1,349,934) - - - - Class A preferred stock proceeds allocated to related common share warrants 209,364 209,364 - - - - 61,261.4 Class A preferred stock issuance costs allocated to related common share warrants (10,834) (10,834) - - - - - Preferred stock accretion (937,994) - (937,994) - - - - Stock option accrual 849,700 849,700 - - - - - Stock compensation 28,800 28,800 - - - 14,400 - Amortization of unearned compensation 3,111 - - - 3,111 - - ----------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 $(12,012,985) $7,023,934 $(15,655,619) $(3,381,300) $ - 2,388,743.5 1,222,569.0 ===============================================================================================
The accompanying notes to financial statements are an integral part of these statements. F-17 21ST CENTURY TELECOM GROUP, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO DECEMBER 31, 1997
OCT. 29, 1992 Nine Months Ended NINE MONTHS ENDED TO DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1997 -------------------- ------------------- ------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Net cash used by operating activities $(5,006,135) (5,987,369) (14,094,373) Net cash used in investing activities-- Purchase of subscribers from affiliate -- -- (3,381,300) Investment in subsidiaries -- (2,000) (2,000) Investment in franchises -- (10,000) (10,000) Capital expenditures (47,118) (10,002,597) (10,249,460) ----------- ------------ ------------ Net cash used in investing activities (47,118) (10,014,597) (13,642,760) ----------- ------------ ------------ Cash flows from financing activities-- Draw on loan 4,954,762 -- -- Proceeds from interim credit facility -- 8,000,000 8,000,000 Cash paid for letters of credit -- -- (1,796,880) Proceeds from issuance of debentures 153,664 -- 886,854 Proceeds from issuance of preferred stock, net of issuance costs -- 1,175,999 21,443,603 Proceeds from issuance of common stock -- -- 608,531 ----------- ------------ ------------ Net cash provided by financing activities 5,108,426 9,175,999 29,142,108 ----------- ------------ ------------ Net increase (decrease) in cash 55,173 (6,825,967) 1,404,975 Cash at beginning of period 956 8,230,942 -- ----------- ------------ ------------ Cash at end of period $ 56,129 $ 1,404,975 $ 1,404,975 =========== ============ ============
The accompanying notes to financial statements are an integral part of these statements. F-18 21ST CENTURY TELECOM GROUP, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO DECEMBER 31, 1997 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS: The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements include estimates and assumptions that affect the reported amounts of assets and liabilities and the amounts of revenues and expenses. Actual amounts could differ from those estimates. However, in the opinion of management of the Company, the interim financial statements include all adjustments, consisting only of normally recurring adjustments, necessary for a fair statement of results for each period shown. The interim financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended March 31, 1997, included in this Prospectus. 2. LEASING ACTIVITIES: On July 1, 1997, the Company entered into an open-ended master fleet lease with Enterprise Leasing Company. The agreement allows the Company to lease vehicles as they are needed. Total lease payments are therefore dependent upon the types and quantities of vehicles leased. Through December 31, 1997, eleven vehicles had been leased at an annual cost of $130,913 for all eleven vehicles. The respective leases range from three to four years. 3. STOCK OPTION PLAN: Effective January 30, 1997, the Company established a common stock option plan. No options were granted under the plan until October 14, 1997. The options expire ten years from the date of grant. The exercise price of each option is $1.12 per share and the Company estimated the fair market value of each option to be $4.50 at the date of grant. As of December 31, 1997, the maximum number of options, 728,667.7, were granted under the terms of the plan which resulted in deferred compensation of $2,462,897. The options vest over 48 months and the vesting period starts from the date of employment. The beginning vesting dates range from November 11, 1992, to December 26, 1997. The Company recorded $849,700 of compensation expense for the nine months ended December 31, 1997, to reflect the vesting periods for the various individuals in the plan. At December 31, 1997, approximately 251,000 options had vested. 4. CHANGES TO THE PREFERRED STOCK AGREEMENT During December 1997, the Company and its Class A Convertible 8% Cumulative Preferred Stock shareholders negotiated a number of changes to the original Stock Purchase Agreement. These changes were formally ratified on January 8 and 14, 1998. The original put arrangement as discussed in Note 6 was removed and was replaced by the right of the Class A preferred shareholders to require the sale of the Company. The new provision provides that at any time and from time to time after the fourth anniversary of the date of issuance of the senior discount notes and senior cumulative exchangeable preferred stock (discussed in Note 1) and ending on the earlier to occur of the consummation of a qualified public offering and the seventh anniversary of the date of issuance of the senior discount notes, the Class A preferred shareholders have the right to require the sale of the Company. The liquidation value of the preferred stock is the sum of the original cost plus any accrued and unpaid dividends. The right to obtain additional common shares under the initial warrant and debt warrant provisions as discussed in Note 6 was removed and was replaced by an agreement to increase the Class A preferred shareholders ownership on a fully diluted basis by an additional 8% by issuing additional common stock. One-half of the additional stock is voting and the other half is non-voting. A portion of the proceeds and issuance costs associated with the sale of the Class A Convertible 8% Cumulative Preferred Stock were allocated to the initial and debt warrants and reflected as common stock at December 31, 1997. In addition, the holders of the Class A preferred stock are collectively in a position to control the taking of many significant corporate actions by the Company, including the making of any significant capital commitments, the incurrence of any significant indebtedness, merger and the payment of dividends on the common stock, pursuant to agreements which provide that prior to taking such actions, the Company will need to obtain the approval of the nominees to the Board of Directors of the holders of the Class A preferred stock. These restrictions on corporate actions by the Company terminate upon consummation of a qualified public offering. 5. EARNINGS PER SHARE: Effective for the nine months ended December 31, 1997, the Company adopted FAS No. 128, "Earnings per Share". The adoption of this standard did not have an impact on the denominator of the basic loss per common share given the anti- dilutive effects of including potential common shares in the denominator of the diluted earnings per share calculation. At December 31, 1997 these potential common shares included the following: (1) 1,222,569.0 common share warrants related to the Class A Convertible 8% Cumulative Preferred Stock, (2) 1,044,064.6 shares of voting and non-voting common stock which replaced the initial and debt warrants associated with the Class A Convertible 8% Cumulative Preferred Stock, as discussed in Note 4, (3) 1,250,000 options issued in connection with certain Directors' guarantees of a loan, (4) 18,994.7 stock warrants issued to a financial advisor, and (5) 728,667.7 options granted under the terms of the stock option plan. At December 31, 1996 the potential dilutive common shares included the 1,250,000 options issued in connection with certain Directors' guarantees of a loan. The net loss attributable to common shares on which the basic earnings per share calculation is based, reflects the net loss increased by the amount of preferred dividends and accretion related to the Class A Convertible 8% Cumulative Preferred Stock. F-19 6. PREFERRED STOCK TRANSACTIONS: On September 23, 1997 and November 20, 1997, the Company entered into agreements for the issuance of additional Class A Convertible 8% Cumulative Preferred Stock and initial, secondary and debt warrants. The September 23, 1997 and November 20, 1997 sales represented 63.3 and 9.5441 shares of the Class A Convertible 8% Cumulative Preferred Stock, respectively, with purchase prices of $15,793.84 per share, aggregating $1 million and $150,000, respectively. The agreements were based on the same terms as the $21.8 million preferred stock issuance discussed in Note 6 to the March 31, 1997 financial statements. A portion of the purchase prices were allocated to the common share warrants. The allocation was based on the fair market value of the common stock at the date of the sales of the Class A Convertible 8% Cumulative Preferred Stock and the number of related secondary warrants, initial warrants and debt warrants. The fair market value of the common stock at the date of the sales was estimated to be $2 per share. The number of secondary warrants associated with the purchases amounted to 61,261. The number of initial and debt warrants associated with the purchases was based on the number of voting and non-voting common shares that these warrants were replaced with as a result of the subsequent amendment to the related stock purchase agreement as discussed in Note 4, "Changes to the Preferred Stock Agreement." These initial and debt warrants were replaced with 43,098 shares of voting and non-voting common stock. This allocation resulted in $209,364 and $940,636 being recorded as common stock and redeemable preferred stock, respectively, at December 31, 1997. Issuance costs of $60,000 were incurred in conjunction with the September 23, 1997, sale of the Class A Convertible 8% Cumulative Preferred Stock. These issuance costs were allocated between the Class A Convertible 8% Cumulative Preferred Stock and the related warrants based on the relative portions of the proceeds allocated to each. The carrying value of the Class A Convertible 8% Cumulative Preferred Stock is being accreted to its redemption value (using the effective interest method) over the four year period from the date of the original preferred stock purchase agreement to the date the stock becomes mandatorily redeemable, January 30, 2001. The Class A Convertible 8% Cumulative Preferred Stock is recorded on the balance sheet at the allocated portion of the purchase price paid by the investors, less the allocated portion of the issuance costs, plus accrued and unpaid preferred stock dividends, plus accretion. The following is a rollforward of the Class A Convertible 8% Cumulative Preferred Stock from March 31, 1997 to December 31, 1997:
Preferred --------- Shares Amount ------ ------ March 31, 1997 1,380.3 $16,794,963 Sales and allocation of proceeds 72.8 940,635 Issuance costs -- (49,166) Accrued dividends -- 1,349,933 Accretion -- 937,960 ------- ----------- December 31, 1997 1,453.1 $19,974,325 ======= ===========
7. PRO FORMA FINANCIAL INFORMATION: As discussed in Note 4, in January 1998 the Company negotiated a number of changes to the original Class A Convertible 8% Cumulative Preferred Stock Agreement (Preferred Stock Agreement). One change resulted in the removal of a put arrangement. This change would allow for the classification of the Class A Convertible 8% Cumulative Preferred Stock as equity at March 31, 1998. The pro forma impacts of this change on the December 31, 1997 balance sheet have been reflected in the pro forma column on the December 31, 1997 balance sheet. The pro forma change consists of reflecting the Class A Convertible 8% Cumulative Preferred Stock within equity at December 31, 1997. Another change resulted in the replacement of the initial and debt warrant provisions with a provision that provided for the preferred shareholders to receive additional voting and non- voting shares of common stock. The number of voting and non-voting shares of common stock that will be issued in 1998 related to the Class A Convertible 8% Cumulative Preferred Stock outstanding at December 31, 1997, are 522,032.3 and 522,032.3, respectively. The pro forma impacts of this change have been reflected on the December 31, 1997 balance sheet. The pro forma change consists of reflecting the additional shares of voting and non-voting common stock as outstanding at December 31, 1997. 8. SUBSEQUENT EVENTS On February 9, 1998, the Company executed a concurrent preferred equity and high yield debt offering. This offering resulted in gross proceeds of $200 million from the issuance of 12-1/4% Senior Discount Notes Due 2008 and $50 million from the issuance of 50,000 Units of 13-3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010 and Warrants to purchase 438,870 shares of common stock. The net proceeds from these offerings were used to repay the interim financing facility outstanding at that date as well as to assist the Company in meeting its construction, development and working capital needs. The Senior Discount Notes have a maturity value of $363,135,000. No cash interest will accrue on the Notes prior to 2003. Beginning in 2003, cash interest will be payable semi-annually. The Senior Discount Notes are not redeemable at the option of the Company prior to 2003 except that prior to 2001 the Company may redeem in the aggregate up to 35% of the original principal amount at maturity with the proceeds of a public equity offering. The Exchangeable Preferred Stock will accrue dividends at a 13-3/4% rate from date of issuance. Prior to 2003, dividends may be paid, at the Company's option, by the issuance of additional shares of Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. The Exchangeable Preferred Stock is not redeemable prior to 2003 except that prior to 2001 the Company may redeem in whole but not in part the outstanding Exchangeable Preferred Stock with the proceeds of a public equity offering. F-20 No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any Initial Purchasers. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date hereof or that there has been no change in the affairs of the Company since such date. TABLE OF CONTENTS
Page ---- Prospectus Summary................................... 5 Risk Factors......................................... 19 Dividend Policy...................................... 30 Use of Proceeds...................................... 30 Capitalization....................................... 31 Selected Financial Data.............................. 32 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 33 The Exchange Offer................................... 36 Business............................................. 44 Industry Structure and Technology.................... 59 Legislation and Regulation........................... 61 Management........................................... 71 Certain Transactions................................. 77 Principal Shareholders............................... 78 Description of Certain Indebtedness.................. 81 Description of the New Notes......................... 83 Description of the New Exchangeable Preferred Stock....................................112 Description of the Exchange Debentures...............127 Book-Entry, Delivery and Form........................154 Description of Capital Stock.........................157 Certain United States Federal Income Tax Consequences...................................163 Plan of Distribution.................................173 Legal Matters........................................173 Experts..............................................174 Additional Information...............................174 Glossary.............................................175 Index to Financial Statements........................F-1
LOGO 21ST CENTURY TELECOM GROUP, INC. Offer to Exchange (i) 12 1/4% Senior Discount Notes Due 2008, which have been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 12 1/4% Senior Discount Notes Due 2008 and (ii) 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010, which has been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010 ____________ PROSPECTUS ____________ May [__], 1998 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers The Illinois Business Corporation Act (the "Act") empowers the Registrant, subject to certain exceptions, to indemnify officers and directors against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred by reason of the fact that he or she is or was an officer, director, employee or agent of the Registrant, or is or was serving as such at the request of the Registrant with respect to another corporation, partnership, joint venture, trust, or other enterprise. The Act also empowers the Registrant to purchase and maintain insurance on behalf of any such officer or director of the Registrant against any liability asserted against or incurred by him or her in any such capacity, whether or not the Registrant would have power to indemnify such officer or director against such liability under the provisions of the Act. Article X, of the Company's Bylaws provides that the Company shall indemnify, any person made a party to any action, suit or proceeding, by reason of the fact that such person is or was a director, officer or employee of the Company, or is or was serving at the request of the Company as a director, officer or employee of another corporation, from and against all reasonable expenses (including attorneys' fees), actually and necessarily incurred by him in connection with the defense of such action, suit or proceeding or in connection with any appeal therein, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding, or in connection with any appeal therein that such officer, director or employee is liable for negligence or misconduct in performance of his duties. The amount of such indemnification shall be fixed by the Board of Directors, except in the case when there is no disinterested majority of the Board available, that amount shall be fixed by arbitration pursuant to the then existing rules of the American Arbitration Association. The Registrant has purchased and currently maintains liability coverage for its officers and directors insuring them against losses arising from any wrongful act in his or her capacity as an officer and director. Item 21. Exhibits and Financial Statement Schedules (a) Exhibits Exhibit No. Exhibit No. Document 1.1 Purchase Agreement dated as of February 2, 1998 by and among the Company and Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and BancBoston Securities, Inc., as Initial Purchasers. 3.1 Articles of Incorporation of the Company as filed on October 29, 1992 and as amended on February 9, 1998. 3.2 By-laws of the Company. 4.1 Indenture dated February 15, 1998 between the Company, as Issuer, and State Street Bank and Trust, as Trustee, with respect to the 12 1/4 Senior Discount Notes Due 2008. 4.2 Form of the 12 1/4 Senior Discount Notes Due 2008. 4.3 Indenture dated as of February 15, 1998 between the Company and IBJ Schroder Bank & Trust Company, as Trustee, with respect to the Exchange Debenture. 4.4 Form of the 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010. 4.5 Registration Rights Agreement dated as of February 2, 1998 by and among the Company and Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and BancBoston Securities, Inc., as Initial Purchasers. 5.1 Opinion of Neal, Gerber and Eisenberg. 5.2 Opinion of Piper & Marbury LLP. 10.1 Franchise Agreement dated as of June 24, 1996 by and among the City of Chicago and the Company. 10.2 License Agreement dated as of October 27, 1994 by and among the Chicago Transit Authority and the Company. 10.3*+ CSG Master Subscriber Management System Agreement dated as of May 28, 1997 by and among CSG Systems, Inc. and the Company. 10.4*+ Telemarketing Consultation Agreement dated as of August 5, 1997 by and among the Company and ITI Marketing Services, Inc. 10.5*+ Pole Attachment Agreement dated as of April 3, 1996 by and among the Company and Commonwealth Edison Company. 10.6*+ Pole Attachment Agreement dated as of November 14, 1996 by and among the Company and Ameritech--Illinois. 10.7*+ Office Lease dated January 31, 1997 by and among the Company and LaSalle National Bank. 10.8 Franchise Agreement dated as of March 16, 1998 by and between the Village of Skokie, Illinois and 21st Century Cable TV of Illinois, Inc. 10.9 Interconnection Agreement dated as of May 5, 1997 by and between Ameritech Information Industry Services and 21st Century Telecom of Illinois, Inc. 10.10*+ Network Products Purchase Agreement by and between Northern Telecom Inc. and the Company. 12.1 Statement regarding Computation of Earnings Ratio to Fixed Charges. 21.1 Subsidiaries of the Company. 23.1* Consent of Arthur Andersen with Respect to the Company. 23.2 Consent of Piper & Marbury LLP 23.3 Consent of Neal, Gerber and Eisenberg. 24.1 Power of Attorney (included on the signature page of this Registration Statement). 25.1 Statement of Eligibility of State Street Bank and Trust, as Trustee. 99.1 Form of Letter of Transmittal to 12 1/4% Senior Discount Notes Due 2008 of the Company. 99.2 Form of Letter of Transmittal to 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010 of the Company. 99.3 Form of Notice of Guaranteed Delivery for 12-1/4% Senior Discount Notes Due 2008. 99.4 Form of Notice of Guaranteed Delivery for 13-3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010. 99.5 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 12-1/4% Senior Discount Notes Due 2008. 99.6 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 13-3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010. 99.7 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 12-1/4% Senior Discount Notes Due 2008. 99.8 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 13-3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010. 99.9 Form of Instruction from Owner of 12 1/4% Senior Discount Notes Due 2008 of the Company. 99.10 Form of Instruction from Owner of 13 3/4% Senior Cumulative Exchangeable Preferred Stock of the Company. - ------------- * Filed herewith. All other exhibits previously filed. + Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Commission pursuant to the Registration's Application Requesting Confidential Treatment under Rule 406 of the Act. Item 22. UNDERTAKINGS (a) The undersigned Company hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement ; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Chicago, state of Illinois, on May 14, 1998. 21st CENTURY TELECOM GROUP, INC. /s/ Ronald D. Webster ----------------------------------------------------- By: Ronald D. Webster, Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- * Chief Executive Officer and - ----------------------------- Chairman of the Board of Directors May 14, 1998 Glenn W. Milligan (Principal Executive Officer) President, Chief Operating May 14, 1998 * Officer and Director - ----------------------------- Robert J. Currey /s/ Ronald D. Webster Chief Financial Officer May 14, 1998 - ----------------------------- Ronald D. Webster * Chief Technical Officer May 14, 1998 - ----------------------------- Jay E. Carlson * Director May 14, 1998 - ----------------------------- Edward T. Joyce * Director May 14, 1998 - ----------------------------- Dr. Charles E. Kaegi * Director May 14, 1998 - ----------------------------- James H. Lowry * Director May 14, 1998 - ----------------------------- David Kronfeld * Director May 14, 1998 - ----------------------------- Thomas Neustaetter By: /s/ Edwin M. Martin, Jr. May 14, 1998 - ----------------------------- Edwin M. Martin, Jr. Attorney-in-fact
EXHIBIT INDEX Exhibit No. Document 1.1 Purchase Agreement dated as of February 2, 1998 by and among the Company and Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and BancBoston Securities, Inc., as Initial Purchasers. 3.1 Articles of Incorporation of the Company as filed on October 29, 1992 and as amended on February 9, 1998. 3.2 By-laws of the Company. 4.1 Indenture dated February 15, 1998 between the Company, as Issuer, and State Street Bank and Trust, as Trustee, with respect to the 12 1/4 Senior Discount Notes Due 2008. 4.2 Form of the 12 1/4 Senior Discount Notes Due 2008. 4.3 Indenture dated as of February 15, 1998 between the Company and IBJ Schroder Bank & Trust Company, as Trustee, with respect to the Exchange Debenture. 4.4 Form of the 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010. 4.5 Registration Rights Agreement dated as of February 2, 1998 by and among the Company and Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and BancBoston Securities, Inc., as Initial Purchasers. 5.1 Opinion of Neal, Gerber and Eisenberg. 5.2 Opinion of Piper & Marbury LLP. 10.1 Franchise Agreement dated as of June 24, 1996 by and among the City of Chicago and the Company. 10.2 License Agreement dated as of October 27, 1994 by and among the Chicago Transit Authority and the Company. 10.3*+ CSG Master Subscriber Management System Agreement dated as of May 28, 1997 by and among CSG Systems, Inc. and the Company. 10.4*+ Telemarketing Consultation Agreement dated as of August 5, 1997 by and among the Company and ITI Marketing Services, Inc. 10.5*+ Pole Attachment Agreement dated as of April 3, 1996 by and among the Company and Commonwealth Edison Company. 10.6*+ Pole Attachment Agreement dated as of November 14, 1996 by and among the Company and Ameritech--Illinois. 10.7*+ Office Lease dated January 31, 1997 by and among the Company and LaSalle National Bank. 10.8 Franchise Agreement dated as of March 16, 1998 by and between the Village of Skokie, Illinois and 21st Century Cable TV of Illinois, Inc. 10.9 Interconnection Agreement dated as of May 5, 1997 by and between Ameritech Information Industry Services and 21st Century Telecom of Illinois, Inc. 10.10*+ Network Products Purchase Agreement by and between Northern Telecom Inc. and the Company. 12.1 Statement regarding Computation of Earnings Ratio to Fixed Charges. 21.1 Subsidiaries of the Company. 23.1* Consent of Arthur Andersen with Respect to the Company. 23.2 Consent of Piper & Marbury LLP 23.3 Consent of Neal, Gerber and Eisenberg 24.1 Power of Attorney (included on the signature page of this Registration Statement). 25.1 Statement of Eligibility of State Street Bank and Trust, as Trustee. 99.1 Form of Letter of Transmittal to 12 1/4% Senior Discount Notes Due 2008 of the Company. 99.2 Form of Letter of Transmittal to 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010 of the Company. 99.3 Form of Notice of Guaranteed Delivery for 12-1/4% Senior Discount Notes Due 2008. 99.4 Form of Notice of Guaranteed Delivery for 13-3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010. 99.5 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 12-1/4% Senior Discount Notes Due 2008. 99.6 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 13-3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010. 99.7 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 12-1/4% Senior Discount Notes Due 2008. 99.8 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees for 13-3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010. 99.9 Form of Instruction from Owner of 12 1/4% Senior Discount Notes Due 2008 of the Company. 99.10 Form of Instruction from Owner of 13 3/4% Senior Cumulative Exchangeable Preferred Stock of the Company. - ------------- * Filed herewith. All other exhibits previously filed. + Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Commission pursuant to the Registrant's Application Requesting Confidential Treatment under rule 406 of the Act. EX-10.3 2 EXHIBIT 10.3 EXHIBIT 10.3 CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT This CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT (the "Master Agreement") is entered into as of this 28th day of May, 1997, between CSG Systems, Inc., a Delaware corporation with offices at 2525 North 11 7th Avenue, Omaha, Nebraska 68164 ("CSG"), and 21st Century Cable TV, Inc., a Illinois corporation with offices at 350 North Orleans, Suite 600, Chicago, Illinois 60654, (the "Customer"). CSG and Customer agree as follows: Subject to the terms and conditions of this Master Agreement Customer hereby agrees to purchase and/or license from CSG its subscriber management system solution utilizing the CSG services and products which am identified, provided and/or licensed as set forth in the attached Schedules which are hereby incorporated into and made a part of this Master Agreement by this reference, including, but not necessarily limited to: . Schedule A - CSG's CCS system for subscriber (video) billing management ---------- (the "CCS Services'). . Schedule B - CSG technical and consulting services (the "Technical ---------- Services"). . Schedule C - CSG's ACSR/TM/. CIT/TM/. ACSR AOI/TM/ and Computer Based ---------- Training add-on products (the "CCS Products"). . Schedule G - CSG's Print and Mail services (the "Print and Mail Services"). ---------- . Schedule I - Paybill Advantage Electronic Fund Transfer Services (the "EFT ----------- Services"). . Schedule K - CSG.web/TM/ world wide web customer interaction interface ---------- services - service bureau, ("CSG.web Services"). The CCS Services, the Technical Services, the Print and Mail Services the EFT Services, CSG.web Services and any other CSG service subsequently provided in an executed Schedule attached to this Master Agreement am collectively referred to in this Master Agreement as the "Services". CSG's ACSR/TM/ CIT/TM/, ACSR AOI/TM/ and Computer Based Training add-on products, and any other CSG product subsequently licensed to Customer in an executed Schedule attached to this Master Agreement are collectively referred to in this Master Agreement as the "Products". GENERAL TERMS AND CONDITIONS 1. FEES AND EXPENSES. The Products and Services will be provided for the fees set forth on Schedule F. Customer shall also reimburse CSG for ***, incurred by ---------- CSG in connection with CSG's performance of its obligations under this Master Agreement. 2. INVOICES. Unless otherwise provided herein, Customer shall pay amounts due hereunder within thirty (30) days after receipt of invoice therefor. Any amount not paid when due shall thereafter bear interest until paid at a rate equal to the lesser of one and one-half percent (1 1/2%) per month or the maximum rate allowed by applicable law. 3. TAXES. All amounts payable by Customer to CSG under this Master Agreement are exclusive of any applicable value added, use, sales, service, property or other taxes, tariffs or contributions that may be assessable in connection with this Agreement. Customer will pay any applicable value added, use, sales, service, property or other taxes, tariffs or contributions, in addition to the amount due and payable. Customer will promptly furnish CSG with the official receipt of payment of these taxes to the appropriate taxing authority. 4. ADJUSTMENT TO FEES. CSG shall not adjust any of the fees specified in Schedule F or otherwise specified in Schedules hereto prior to the *** of the - ---------- Effective Date (as defined below in Section 16). Thereafter, CSG may from time to time by giving Customer at least *** prior written notice thereof, adjust any or all such fees; provided, however, that the amount of all such increases during any *** shall not on the average exceed *** percent of the percentage increase in the Consumer Price Index, Urban Consumers, All Cities Averaged 1982- 84 Equals 100, during the prior calendar year as published by the U.S. Department of Labor or any successor index. - ------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -1- 5. SHIPMENT. CSG will ship the Products, any Incorporated Third Party Software, and any other third party software from its distribution center, subject to delays beyond CSG's control. CSG will select the method of shipment via tape or by electronic file transfer for Customer's account. The license granted to the Products as set forth in the Schedule(s) commences upon CSG's delivery of the Products to the carrier for shipment to Customer. Upon timely notice by Customer to CSG, CSG will promptly replace, at CSG's expense, any Products that are lost or damaged while in route to Customer. 6. EQUIPMENT PURCHASE. Customer is fully responsible for obtaining and installing all computer hardware, software, peripherals and necessary communications facilities, including, but not limited to printers, servers, power supply, workstations, printers, concentrators, communications equipment and routers (the "Required Equipment") that are necessary at Customer's place of business in order for Customer to utilize the Services and the Products as defined in this Master Agreement Customer shall bear responsibility for the Required Equipment, including, but not limited to, the costs of procuring, installing, operating and maintaining such Required Equipment At Customer's request and subject to the terms and conditions of Schedule B. CSG will consult ---------- with, assist and advise Customer regarding Customer's discharge of its responsibilities with respect to the Required Equipment and CSG will obtain for Customer any Required Equipment at CSG's then-current prices and on terms and conditions set forth in a separately executed purchase agreement 7. PRODUCTS WARRANTEES AND REMEDIES. (a) Limited Warranty. Except as provided in Section 9 and 10, CSG warrants that ---------------- (i) the Products will conform to CSG's published specifications in effect on the date of delivery and (ii) the Products will perform in a certified "Designated Environment' (as defined in the applicable Schedules attached hereto) --------- substantially as described in the accompanying Documentation for a period of ninety (90) days after the date of delivery (the "Warranty Period"). Notwithstanding the foregoing, if Customer modifies VantagePoint by altering any of the source code provided by CSG, this limited warranty will be void as it relates to VantagePoint. Except as set forth in Schedule H CSG provides all ---------- third party software, including the "Incorporated Third Party Software" (as defined below in Section 8), AS IS. Customer acknowledges that (i) the Products and the Incorporated Third Party Software may not satisfy all of Customer's requirements and (ii) the use of the Products and the Incorporated Third Party Software may not be uninterrupted or error-free. Customer further acknowledges that (i) the fees set forth in Schedule F and other charges contemplated under this Master Agreement are based on the limited warranty, disclaimers and limitation of liability specified in this Section and Sections 9, 10, 13, 14, and 15 and (ii) such charges would be substantially higher if any of these provisions were unenforceable. (b) Remedies. In case of breach of warranty or any other duty related to the quality of the Products, CSG or its representative will correct or replace any defective Product or, if not practicable, CSG will accept the return of the defective Product and refund to Customer (i) the amount actually paid to CSG -------- allocable to the defective Product, and (ii) a pro rata share of the maintenance fees that Customer actually paid to CSG for the period that such Product was not usable. Customer acknowledges that this Subsection (b) sets forth Customer's exclusive remedy, and CSG's exclusive liability, for any breach of warranty or other duty related to the quality of the Products. THE REMEDIES SET FORTH IN THIS PARAGRAPH ARE SUBJECT TO THE "LIMITATION OF REMEDIES" SET FORTH BELOW IN SECTION 14. 8. INCORPORATED THIRD PARTY SOFTWARE OR THIRD PARTY RIGHTS. Customer acknowledges that the Products incorporate certain third party computer programs and documentation (the "Incorporated Third Party Software") and/or the Products are licensed and the Services are offered under certain third party patent, copyright or other rights (the "Third Party Rights"), which are subject to the additional or alternative terms and conditions set forth in Schedule H. as ---------- applicable (the "Incorporated Licenses"). In case of any conflict between this Master Agreement and the Incorporated Licenses, the terms of the Incorporated Licenses will prevail with respect to the Incorporated Third Party Software or the Third Party Right Customer will be responsible for paying any fees for the Incorporated Third Party Software that may be due in connection with this Master Agreement CSG will be responsible for paying any fees for the Third Party Rights that may be due in connection with this Master Agreement. Customer will execute the additional documents that such vendors may require to enable CSG to deliver the Incorporated Third Party Software to Customer. Except as otherwise provided in Schedule H. CSG makes no warranty and provides no indemnity with respect to ---------- the Incorporated Third Party Software or the Third Party Rights. 9. OTHER THIRD PARTY SOFTWARE. Customer acknowledges that CSG will deliver the System together with certain third party software other than Incorporated Third Party Software, and that Customer's rights and obligations with respect to such other third party software are subject to the license terms accompanying the specific item of third party software. CSG is not a party to any license between Customer and any licensor of such third party software, and CSG makes no warranty and provides no indemnity with respect thereto. 10. TECHNICAL SERVICES WARRANTY. CSG represents and warrants that (i) CSG will perform the Technical Services in a good workmanlike manner and (ii) the Deliverables as defined in Schedule B will substantially conform to the applicable specifications set forth in any executed Statement of Work attached to Schedule B for a period of ninety days after the date of completion of the Deliverables as set forth on the applicable Statement of Work. In case of breach of this Technical Services' warranty or any other legal duty to Customer for the Technical Services, CSG's exclusive liability, and Customer's exclusive remedy, will be to obtain (i) the reperformance of the Technical -2- Service or the correction or replacement of the Deliverable or (ii) if CSG determines that such remedies are not practicable, a refund of the Project Fees (as defined in Schedule B) allocable to such Technical Service or Deliverable. ALL OTHER WARRANTIES OR CONDITIONS, WHETHER EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE, TITLE OR NONINFRINGEMENT), ARE HEREBY DISCLAIMED. 11. PHOENIX OPTION CSG will offer Customer the option to migrate to the CSG Phoenix/TM/ System, if and when available, during the term of this Master Agreement. The cost of CSG Phoenix (exclusive of client hardware, software, communication lines, migration, and implementation costs) will be based on CSG's then current price or at a mutually agreeable price to be determined upon acceptance of this option. 12. INDEMNITY. (a) Indemnity. Except as provided in Exhibit C- I or in the case of any claim --------- arising from or in connection with the Third Party Rights specified in Exhibit K if an action is brought against Customer claiming that the Products infringe a patent or copyright within the jurisdiction where the "Designated Environment' (as defined in the applicable Schedules, attached hereto) is situated (the --------- "Territory'), CSG. will defend Customer at CSG's expense and, subject to this Section and Section 15, pay the damages and costs finally awarded against Customer in the infringement action, but only if (i) Customer notifies CSG promptly upon learning that the claim might be asserted (ii) CSG has sole control over the defense of the claim and any negotiation for its settlement or compromise and (iii) Customer takes no action that, in CSG's judgment, is contrary to CSG's interest (b) Alternative Remedy. If a claim described in Section 12(a.) may be or has ------------------ been asserted, Customer will permit CSG, at CSG's option and expense, to (i) procure the right to continue using the Product, (ii) replace or modify the Product to eliminate the infringement while providing functionally equivalent performance or (iii) accept the return of the Product and refund to Customer the amount of the fees actually paid to CSG and allocable for such Product, less amortization based on a 5-year straight-line authorization schedule and a pro rata share of any maintenance fees that Customer actually paid to CSG for the period that such Product was not usable. (c) Limitation. CSG shall have no indemnity obligation- to Customer under this ---------- Section if the patent or copyright infringement claim results from (i) a correction or modification of the Product not provided by CSG, (ii) the failure to promptly install an Update or Enhancement provided by CSG (as defined in the applicable Schedules, attached hereto) or (iii) the combination of the Product ------------------- with other items not provided by CSG. 13. PAY-PER-VIEW LIABILITY. Notwithstanding anything to the contrary herein, CSG's total liability with respect to each pay-per-view event for any and all claims, damages, losses or expenses incurred by Customer arising directly or indirectly out of CSG's processing of pay-per-view information shall be limited to the amount of fees actually received by CSG from Customer applicable to such pay-per-view processing services related to the specific event giving rise to such liability. 14. LIMITATION OF REMEDIES. EXCEPT AS EXPRESSLY PROVIDED IN THIS MASTER AGREEMENT, ALL WARRANTIES, CONDITIONS, REPRESENTATIONS, INDEMNITIES AND GUARANTEES WITH RESPECT TO THE PRODUCTS, THE INCORPORATED THIRD PARTY SOFTWARE, OTHER THIRD PARTY SOFTWARE, AND THE SERVICES, WHETHER EXPRESS OR IMPLIED, ARISING BY LAW, CUSTOM PRIOR ORAL OR WRITTEN STATE S BY CSG, ITS AGENTS OR OTHERWISE (INCLUDING, BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY, SATISFACTION, FITNESS FOR PARTICULAR PURPOSE, TITLE OR NON-INFRINGEMENT) ARE HEREBY OVERRIDDEN, EXCLUDED AND DISCLAIMED. CUSTOMER ACKNOWLEDGES THAT THE PRODUCTS AND SERVICES BEING PROVIDED AS AGREED TO HEREIN ENTAIL THE LIKELIHOOD OF SOME HUMAN AND MACHINE ERRORS, OMISSIONS, DELAYS AND LOSSES, INCLUDING, BUT NOT LIMITED TO, INADVERTENT MUTILATION OF DOCUMENTS AND LOSS OF DATA, WHICH MAY GIVE RISE TO LOSS OR DAMAGE. CUSTOMER AGREES THAT CSG SHALL NOT BE LIABLE DUE TO SUCH ERRORS, OMISSIONS, DELAYS AND LOSSES UNLESS CAUSED BY CSG'S GROSS NEGLIGENCE OR WILLFUL AND INTENTIONAL MISCONDUCT. 15. NO CONSEQUENTIAL DAMAGES. UNDER NO CIRCUMSTANCES WILL CSG OR ITS RELATED PERSONS BE LIABLE TO CUSTOMER OR CSG'S LICENSORS BE LIABLE TO CUSTOMER FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL, PUNITIVE OR INCIDENTAL DAMAGES OR LOST PROFITS, WHETHER FORESEEABLE OR UNFORESEEABLE, BASED ON CUSTOMER'S CLAIMS OR THOSE OF ITS CUSTOMERS (INCLUDING, BUT NOT LIMITED TO, CLAIMS FOR LOSS OF DATA, GOODWILL, USE OF MONEY OR USE OF THE PRODUCTS, THE INCORPORATED PARTY SOFTWARE, OR OTHER THIRD PARTY SOFTWARE, RESULTING REPORTS, THEIR ACCURACY OR THEIR INTERPRETATION, INTERRUPTION IN USE OR AVAILABILITY OF DATA, STOPPAGE OF OTHER WORK OR IMPAIRMENT OF OTHER ASSETS), ARISING OUT OF BREACH OR FAILURE OF EXPRESS OR IMPLIED WARRANTY, BREACH OF CONTRACT, MISREPRESENTATION, NEGLIGENCE, STRICT LIABILITY IN TORT OR OTHERWISE. IN NO EVENT WILL THE AGGREGATE LIABILITY WHICH CSG OR ITS LICENSORS MAY INCUR IN ANY ACTION OR PROCEEDING EXCEED THE AMOUNT ACTUALLY PAID BY CUSTOMER ALLOCABLE TO THE SPECIFIC ITEM OR SERVICE THAT DIRECTLY CAUSED THE DAMAGE. DESPITE THE FOREGOING -3- EXCLUSION AND LIMITATION, THIS SECTION WILL NOT APPLY TO THE EXTENT THAT APPLICABLE LAW SPECIFICALLY REQUIRES LIABILITY. 16. TERM. This Master Agreement shall be effective on the date of execution and acceptance by CSG (the "Effective Date"). Unless terminated pursuant to Section 17, this Master Agreement shall continue for a period of three (3) years from the Effective Date (the "Initial Term") and shall automatically be extended for additional one-year terms (the "Additional Terms") unless either party gives the other party at least six (6) months prior written notice of such party's intent not to extend, but in any case the term of this Master Agreement shall extend for the term of any license granted under an executed Schedule hereto. The term of any specific license for the Products and the term for any specific Services to be provided shall be set forth in the Schedules attached hereto and shall be effective from the date set forth therein and continue as provided for therein, unless terminated pursuant to Section 17 of this Master Agreement. 17. TERMINATION. This Master Agreement or any one or more of the Schedules attached hereto may be terminated for cause as follows: (a) If either party materially or repeatedly defaults in the performance of their respective obligations hem-under, except for Customer's obligation to pay fees, and fails either to substantially cure such default within thirty (30) days after receiving written notice specifying the default or, for those defaults which cannot reasonably be cured within thirty (30) days, promptly commence curing such default and thereafter proceed with all due diligence to substantially cure such default then the party not in default may, by giving written notice to the defaulting party, terminate this Master Agreement or any one or more of its Schedules as of a date specified in such notice of termination. (b) If Customer fails to pay when due any amounts owed hereunder, then CSG may, by giving written notice thereof to Customer, terminate this Master Agreement or at CSG's option, CSG may terminate any one or more of the Schedules attached hereto, as of a date specified in such notice of termination. (c) In the event that either party hereto becomes or is declared insolvent or bankrupt is the subject of any proceedings related to its liquidation, insolvency or for the appointment of a receiver or similar officer for it makes an assignment for the benefit of all or substantially all of its. creditors, or esters into an agreement for the composition, on or readjustment of all or substantially all of its obligations, then the other party hereto may, by giving written notice thereof to such party, terminate this Master Agreement as of the date specified in such notice of termination. (d) If Customer or any of Customer's employees or consultants breach any term or condition of any Schedule attached hereto for the license of software or products distributed by or through CSG, including the Incorporated Third Party Software, CSG may, at CSG's option, the Master Agreement or any one or more of the Schedules attached hereto upon 30 days advance written notice and without judicial or administrative resolution. Upon the termination of the Master Agreement or any one or more of the Schedules attached hereto, for any reason, all rights granted to Customer under this Master Agreement or the terminated Schedule(s) will cease, and Customer will promptly (i) purge all the Products from the Designated Environment and all of Customer's other computer systems, storage media and other files; (ii) destroy the Products and all copies thereof, (iii) deliver to CSG an affidavit which certifies that Customer has complied with these termination obligations; and (iv) pay to CSG all fees that are due pursuant to this Master Agreement Notwithstanding the foregoing, if only one or more of the Schedules are terminated, Customer must comply with the requirements of this paragraph only with respect to the specific Products set forth in the terminated Schedule(s). 18. TERMINATION ASSISTANCE. Upon expiration or earlier termination of this Master Agreement or termination of Schedule A by either party for any reason, ----------- CSG will provide Customer, reasonable termination assistance for up to ninety (90) days relating to the transition to another vendor. This termination assistance will be provided to Customer at CSG's then standard rates unless CSG has materially defaulted under the terms of this Master Agreement. If this Master Agreement expires or is terminated earlier by CSG, then Customer will pay CSG, in advance, on the first day of each calendar month and as a condition to CSG's obligation to provide termination assistance to Customer during that month, an amount equal to CSG's reasonable estimate of the total amount payable to CSG for such termination assistance for that month. 19. CONFIDENTIALITY. (a) Definition. Customer and CSG will provide to each other or will come into ---------- possession information relating to each other's business, CSG's Products and Services and the Incorporated Third Party Software which is considered confidential (the "Confidential Information"). Customer acknowledges that confidentiality restrictions are imposed by CSG's licensors or vendors. Confidential Information shall include, without limitation, all of Customer's and CSG's trade secrets, and all know-how, design, invention, plan or process and Customer's data and information relating to Customers and CSG's respective business operations, services, products, research and development, CSG's vendors' -4- or licensors' information and products, and all other information that is marked "confidential" or "proprietary" prior to or upon disclosure, or which, if disclosed orally, is identified by the disclosing party at the time as being confidential or proprietary and is confirmed by the disclosing party as being Confidential Information in writing within thirty (30) days after its initial disclosure. (b) Restrictions. Each party shall use its reasonable best efforts to maintain ------------ the confidentiality of such Confidential Information and not show or otherwise disclose such Confidential Information to any third parties, including, but not limited to, independent contractors and consultants, without the prior written consent of the disclosing party. Each party shall use the Confidential Information solely for purposes of performing its obligations under this Master Agreement Each party shall indemnify the other for any loss or damage the other party may sustain as a result of the wrongful use or disclosure by such party (or any employee, agent, licensee, contractor, assignee or delegate of the other party) of its Confidential Information. Customer will not allow the removal or defacement of any confidentiality or proprietary notice placed on any CSG documentation or products. The placement of copyright notices on these items will not constitute publication or otherwise impair their confidential nature. (c) Disclosure. Neither party shall have any obligation to maintain the ---------- confidentiality of any Confidential Information which: (i) is or becomes publicly available by other than unauthorized disclosure by the receiving party; (ii) is independently developed by the receiving party; or (iii) is received from a third parry who has lawfully obtained such Confidential Information without a confidentiality restriction. If required by any court of competent jurisdiction or other governmental authority, the receiving party may disclose to such authority, data, information or materials involving or pertaining to Confidential Information to the extent required by such order or authority, provided that the receiving party shall first have used its best efforts to obtain a protective order or other protection reasonably satisfactory to the disclosing party sufficient to maintain the confidentiality of such data information or materials. If an unauthorized use or disclosure of Confidential Information occurs, the parties will take all steps which may be available to recover the documentation and/or products and to prevent their subsequent unauthorized use or dissemination. (d) Limited Access. Each party shall limit the use and access of Confidential -------------- Information to such party's bona fide employees or agents, including independent auditors and required governmental agencies, who have a need to know such information for purposes of conducting the receiving party's business and who agree to comply with the use and nondisclosure restrictions applicable to the products and documentation under this Master Agreement. If requested, receiving party shall cause such individuals to execute appropriate confidentiality agreements in favor of the disclosing party. Each party shall notify all employees and agents who have access to Confidential Information or to whom disclosure is made that the Confidential Information is the confidential, proprietary property of the disclosing party and shall instruct such employees and agents to maintain the Confidential Information in confidence. 20. SURVIVAL. Termination of this Master Agreement shall not impair either party's then accrued rights, obligations, liabilities or remedies. Notwithstanding any other provisions of this Master Agreement to the contrary, the terms and conditions of Sections 7, 8, 9, 10, 13, 14, 15, 17, 18, 19, 20, 23, and 30 shall survive the termination of this Master Agreement 21. EXCLUSIVITY. Customer agrees that while Schedule A is in effect, CSG shall ---------- be Customer's sole and exclusive provider of CCS Services for Customer with respect to all System Sites and that Customer shall not perform any of the services contemplated by Schedule A for itself. In addition, Customer agrees ---------- that while Schedule G is in effect, CSG shall be Customer's sole and exclusive ---------- provider of the Print and Mail Services for Customer with respect to all System Sites and that Customer shall not perform any of the services contemplated by Schedule G for itself. - ---------- 22. NATURE OF RELATIONSHIP. CSG, in furnishing Services and licensing Products to Customer hereunder, is acting only as an independent contractor. CSG does not undertake by this Master Agreement or otherwise to perform any obligation of Customer, whether regulatory or contractual, or to assume any responsibility for Customer's business or operations. Customer understands and agrees that CSG may perform similar services for third parties and license same or similar products to third parties. Nothing in this Master Agreement shall be deemed to constitute a partnership or joint venture between CSG and Customer. Neither party shall hold itself out as having any authority to enter into any contract or create any obligation or liability on behalf of or binding upon the other party. 23. OWNERSHIP. All trademarks, service marks, patents, copyrights, trade secrets and other proprietary rights in or related to the Products, the "Deliverables" as defined under Schedule B, the Incorporated Third Party ---------- Software and other third party software (collectively the "Software Products") are and will remain the exclusive property of CSG or its licensors, whether or not specifically recognized or perfected under applicable law. Customer will not take any action that jeopardizes CSG's or its licensor's proprietary rights or acquire any right in the Software Products, except the limited use rights specified in the Schedules to this Master Agreement. CSG or its licensor will own all rights in any copy, translation, modification, adaptation or derivation of the Software Products, including any improvement or development thereof Customer will obtain, at CSG's request, the execution of any instrument that may be appropriate to assign these rights to CSG or its designee or perfect these rights in CSG's or its licensor's name. -5- 24. RESTRICTED RIGHTS. Use, duplication or disclosure by the U.S. Government or any of its agencies is subject to restrictions set forth in the Commercial Computer Software and Commercial Computer Software Documentation clause at FAR 227.7202 and/or the Commercial Computer Software Restricted Rights clause at FAR 52.227.19(c) CSG Systems, Inc., 2525 North 117th Street, Omaha, Nebraska 68164. 25. INSPECTION. During the term of this Master Agreement and for twelve (12) months after its termination or expiration for any reason, CSG or its representative may, upon prior notice to Customer, inspect the files, computer processors, equipment and facilities of Customer during normal working hours to verify Customer's compliance with this Master Agreement While conducting such inspection, CSG or its representative will be entitled to copy any item that Customer may possess in violation of this Master Agreement. 26. FORCE MAJEURE. Neither party will be liable for any failure or delay in performing an obligation under this Master Agreement that is due to causes beyond its reasonable control, including, but not limited to, fire, explosion, epidemics, earthquake, lightening, failures or fluctuations in electrical power or telecommunications equipment, accidents, floods, acts of God, the elements, war, civil disturbances, acts of civil or military authorities or the public enemy, fuel or energy shortages, acts or omissions of any common carrier, strikes, labor disputes, regulatory restrictions, restraining orders or decrees of any court, changes in law or regulation or other acts of governmental, transportation stoppages or slowdowns or the inability to procure parts or materials. These causes will not excuse Customer from paying accrued amounts due to CSG through any available lawful means acceptable to CSG. 27. ASSIGNMENT. Neither party may assign, delegate or otherwise transfer this Master Agreement or any of its rights or obligations hereunder without the other party's prior approval. Any attempt to do so without such approval will be void. Notwithstanding the foregoing, CSG may assign this Master Agreement, upon notice to Customer, to a related or unrelated person in connection with a sale, on of CSG's business, in whole or in part, and Customer hereby consents to such acquisition, consolidation or other assignment in advance. 28. NOTICES. Any notice or approval required or permitted under this Master Agreement will be given in writing and will be sent by telefax, courier or mail postage prepaid, to the address specified below or to any other address that may be designated by prior written notice. Any notice or approval delivered by telefax (with answer back) will be deemed to have been received the day it is sent. Any notice or approval sent by courier will be deemed received one day after its date of posting. Any notice or approval sent by mail will be deemed to have been received on the 5th business day after its date of posting. If to Customer: If to CSG: 21st Century Cable TV, Inc. CSG Systems Inc. 350 North Orleans, Suite 600 2525 N. 11 7th Ave. Chicago, Illinois 60654 Omaha, NE 68164 Tel: (312)470-2100 Fax: (312 470-2111 Tel: (402) 431-7000 Fax: (402)431-7278 Attn: Richard Wiegand-Moss Attn: President and copy to Chief Operating Officer Corporate Counsel
29. ARBITRATION. (a) General. Any controversy or claim arising out of or relating to this Master ------- Agreement or the existence, validity, breach or termination thereof, whether during or after its term, will be finally settled by compulsory arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA'), as modified or supplemented under this Section. (b) Proceeding. To initiate arbitration, either party will file the appropriate ---------- notice at the Regional Office of the AAA in Omaha, Nebraska. The arbitration proceeding will take place in Omaha, Nebraska. The parties will in good faith agree on a sole arbitrator. If the parties are unable to agree on an arbitrator, the arbitration panel will consist of three (3) arbitrators, one arbitrator appointed by each party and a third neutral arbitrator appointed by the two arbitrators designated by the parties. Any communication between a party and any arbitrator will be directed to the AAA for transmittal to the arbitrator. The parties expressly agree that the arbitrators will be empowered to, at either party's request, grant injunctive relief. (c) Award. The arbitral award will be the exclusive remedy of the parties for ----- all claims, counterclaims, issues or accountings presented or plead to the arbitrators. The award will (i) be granted and paid in U.S. dollars exclusive of any tax, deduction or offset and (ii) include interest from the date of that the award is rendered until it is fully paid, computed at the maximum rate allowed by applicable law. Judgment upon the arbitral award may be entered in any court that has jurisdiction thereof. Any additional costs, fees or expenses incurred in enforcing the arbitral award will be charged against the party that resists its enforcement. (d) Legal Actions. Nothing in this Section will prevent either party from seeking interim injunctive relief against the other party in the courts having jurisdiction over the other party. Nothing in this Section will prevent CSG from filing any debt collection action against Customer in the local courts. -6- 30. MISCELLANEOUS. All notices or approvals required or permitted under this Master Agreement must be given in writing. Any waiver or modification of this Master Agreement will not be effective unless executed in writing and signed by CSG. This Master Agreement will bind Customer's successors-in-interest. This Master Agreement will be governed by and interpreted in accordance with the laws of Nebraska, U.S.A., to the exclusion of its conflict of laws provisions. If any provision of this Master Agreement is held to be unenforceable, in whole or in part, such holding will not affect the validity of the other provisions of this Master Agreement unless CSG in good faith deems the unenforceable provision to be essential in which case CSG may terminate this Master Agreement effective immediately upon notice to Customer. This Master Agreement together with the Schedules, Exhibits and attachments hereto which are hereby incorporated into this Master Agreement constitutes the complete and entire statement of all conditions and representations of the agreement between CSG and Customer with respect to its subject matter and supersedes all prior writings or understandings. THIS AGREEMENT IS NOT EFFECTIVE UNTIL SIGNED ON BEHALF OF BOTH PARTIES. IN WITNESS WHEREOF, the parties have executed this Master Agreement the day and year first above written. CSG Systems, Inc. ("CSG") 21ST CENTURY CABLE TV, INC. ("Customer") By: /s/ George F. Haddix By: /s/ Richard Wiegand-Moss --------------------- --------------------------- Name: George F. Haddix Name: Richard Wiegand-Moss ------------------- ------------------------- Title: President Title: Chief Operating Officer ------------------ ------------------------ -7- SCHEDULE A CCS SUBSCRIBER BILLING SERVICES 1. CCS SERVICES. Subject to the terms and conditions of the Master Agreement and for the fees described in Schedule F, CSG will provide to Customer, and ---------- Customer will purchase from CSG, all of Customer's requirements for the data processing services, applications and other cable and video services (the "CCS Services") for all of Customer's subscriber accounts using CSG's CCS system. The CCS Services will provide Customer with an on-line terminal facility (not the terminals themselves), service bureau access to CCS processing software, adequate computer time and other mechanical data processing services as more specifically described in the user documents: the User Guide, User Data File Manual, User Training Manual, Conversion Manual, Operations Guide, and Customer Bulletins issued by CSG (the "Documentation"). Customer's personnel shall enter all payments and non-monetary changes on terminal(s) located at Customer's offices, or provide CSG payment information on magnetic tape or electronic record in CSG's format. CSG and Customer acknowledge and agree that the Documentation describing the CCS Services is subject to ongoing review and modification from time to time. 2. COMMUNICATIONS SERVICES AND FEES. CSG shall provide, at Customer's expense, a data communications line from the CSG data processing center to each of Customer's system site locations identified in Exhibit A- I attached hereto (the "System Sites"). Customer shall pay all fees and charges in connection with the installation and use of and peripheral equipment related to the data communications line in accordance with the fees described in Schedule F attached ---------- hereto. 3. IMPLEMENTATION/CONVERSION SERVICES AND FEES. CSG shall provide services as described on Exhibit A-2 attached hereto in connection with Customer's conversion of each System Site and for those added by mutual agreement of the parties to CSG's data processing system subsequent to the execution of this Master Agreement (the "Implementation/Conversion Services'). For System Sites added to Exhibit A- I subsequent to the Effective Date of the Master Agreement, Customer shall pay CSG the fees set forth in Schedule F for the performance of ----------- the Implementation/Conversion Services. 4. DECONVERSION SERVICES AND FEES. If Customer sells, transfers, assigns or disposes of any of the assets of or any ownership or management interest in any System Site (the "Disposed Site(s)"), Customer agrees to pay CSG *** which amounts shall be due and ***. CSG shall be under no obligation or liability to provide any deconversion tapes or records until all amounts due hereunder, and as otherwise provided in the Master Agreement shall have been paid in full. 5. OPTIONAL AND ANCILLARY SERVICES. At Customer's request, CSG shall provide optional and ancillary services, including but not limited to any described on Schedule F at CSG's then-current prices, or as may otherwise be set forth in Schedule F. and where applicable on the terms and conditions set forth in - ---------- separately executed Schedules to the Master Agreement. 6. CUSTOMER INFORMATION. Any original documents, data and files provided to CSG hereunder by Customer ('Customer Data") are and shall remain Customer's property, and upon termination of this Master Agreement for any reason or deconversion of any System Site, such Customer Data shall be returned to Customer by CSG, subject to the payment of CSG's then-current rates for processing and delivering the Customer Data, any applicable deconversion fees required under Section 4 hereof and all unpaid charges for services and equipment if any, including late charges incurred by Customer. Customer Data will not be utilized by CSG for any purpose other than those purposes related to rendering the services to Customer under the Master Agreement. Data to be returned to Customer includes: Subscriber Master File (including Work Orders, Converters and General Ledger), Computer-Produced Reports (reflecting activity during period of 90 days immediately prior to Schedule A termination), House Master File, Any other related data or files held by CSG on behalf of Customer. 7. PROCESSING MINIMUM. If at any time the fees and charges for the CCS Services incurred as computed pursuant to Schedule F are less than a minimum of *** in processing fees *** (the "Minimum"), Customer agrees to pay the Minimum for each System Site. 8. DISCONTINUANCE FEE. CSG has determined the fees for the CCS Services hereunder based upon certain assumed volumes of processing activity for the System Sites and the length of the term of this Schedule A- Customer acknowledges that, without the certainty of revenue promised by the commitments set forth in this Master Agreement, CSG would have been unwilling to provide the CCS Services at the fees set forth in Schedule F. Because of the difficulty in ascertaining CSG's actual damages for a termination or other breach of this Master Agreement or Schedule A by Customer resulting in a termination of this -------- Master Agreement or Schedule A before the expiration of the then-current term with respect to one or more System Sites, Customer agrees that prior to such termination and in addition to all other amounts then due and owing to CSG, Customer will pay to CSG (as a contract discontinuance fee and not as a penalty) an amount equal to ***. If this Schedule A is terminated with respect to less -------------- than all of the System Sites, the ***. Customer acknowledges and agrees that - --------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -8- the Discontinuance Fee is a reasonable estimation of the actual damages which CSG would suffer if CSG were to fail to receive the amount of processing business contemplated by this Schedule A. ---------- 9. TERM. The first day of the calendar month in which the CCS Services commence shall be referred to as the "Commencement Date." The CCS Services shall continue from the Commencement Date for a period of three (3) years. Agreed and accepted this ____ day of _________, 1997, by: CSG SYSTEMS, INC. ("CSG") 21ST CENTURY CABLE TV, INC. ("Customer") By: /s/ George F. Haddix By: /s/ Richard Wiegand-Moss ------------------------- -------------------------- -9- EXHIBIT A-1 SYSTEMS SITES ESTIMATED IMPLEMENTATION CONVERSION DATE Chicago, Illinois -10- EXHIBIT A-2 CCS Implementation and Conversion THE FOLLOWING CABLE CONVERSION SERVICES ARE AVAILABLE FOR THE FEES SET FORTH ON SCHEDULE F: - ----------- I) FOR SITE CONVERSIONS WITH SUBSCRIBER COUNTS OF LESS THAN 20,000_____________ Manual conversions are recommended on all sites with less than 20K subscribers. Clients are responsible for data entry. Includes: . 2 Set of CCS Documentation . File Set-Up . 1 Year's Access to CBT . 1 Week's Management Training in Omaha . 1 Week training in Chicago (travel and related expenses are extra) . Manual Data Base Instructions/Procedures . CSG Support - Fees plus Travel Expenses On Data Bases Over 10K Subs, CSG will offer the following: . Programmatic Load of House Data . Programmatic Load of Converter Data II) 20,000 - 29,999 SUBSCRIBERS and 30,000 - 59,999 SUBSCRIBERS CATEGORIES CONVERSION INCLUDES: - -------------------- A) Training Aids and Documentation - I Set - -- --------------------------------------- MANUALS AND JOB AIDS FOR YOUR CABLE SYSTEM STAFF. These manuals and job aids are used to complement your CBT courses. Each employee would be provided the necessary job aids and manuals. JOB AIDS: Logon/Sign On, Logoff/Sign Off, CBT Training System, House File, Sales Support Adjustment Transactions, Adjustment Practice Sheet, Converter Inventory/Addressability Transactions, Converter Sample Invoices, Select System Additional copies: $50 for the Job Aids and $5 for the Manual. ONE FOUR VOLUME SET OF THE "CABLE SOURCE" CABLE CONTROL SYSTEM USER GUIDES. This system documentation explains all reports and transactions of the Cable Control System. Additional copies: $200 per set or $50 per volume. ONE CCS CONVERSION MANUAL. This manual describes the major components necessary for set-up and conversion/implementation to the CCS system. ADDITIONAL COPIES: CSG's then-current prices ONE "CABLESOURCE USER DATA FILE" MANUAL. This manual describes the 300 plus parameters provided to allow you flexibility in establishing your processing requirements. This manual will be primarily reviewed by the Conversion Specialist during your first visit. ADDITIONAL COPIES: CSG's then-current prices A TEST SYSTEM that provides for the opportunity to practice "hands on" training without impacting your actual data base. (Deassesd after conversion) RMS MANUAL. This manual describes all functionality and commands of the CSG print package. Additional copies: CSG's then-current prices B) RECOMMENDED SITE VISITS -------------------------- INITIAL VISIT . Overview of the conversion/implementation process. This incorporates reviewing conversion tasks, timeline and responsible parties. . Establish and/or review of corporate standards, as they relate to User Data File, Code Tables, Service Codes and Report settings. . Define Conversion Specifications. This process defines fields, values and variables used on current billing processor and how that will be converted to CCS. CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS -11- NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES -12- Ex. A-2 (page 2 of 3) ---------------------- Pre-Conversion Review . Review set up of User Data File, Code Tables and reports. . Review pricing and taxing structure of cable site. . Review and approve Conversion/Implementation Specifications. . Train office personnel on use of the CCS system as it pertains to their job function using CBT and a preestablished test system. . Review statement file settings. . Assist the site with defining new procedures for policies that pertain to the billing system. Post Conversion . Audit converted data the morning after merge. . Coordinate input of accumulated backlog (work orders, payments, adjustments and PPV) . Review exceptions created through conversion/implementation process and take necessary action. . Review pricing and taxing structure. . Balance cash. . Review reports and assist with determining needs for daily distribution. . Review and release first cycle of generated statements. Third Week . Review reports. . Assist with month-end financial balancing. . Provide potential solutions for day to day procedural issues. (i.e. work order printing, routing, dispatch, converter inventory). C) DATABASE CLEAN-UP ----------------- HOMES PASSED. All addresses that currently reside on your database will be compared against the Group One Zip + 4 files. The following items will occur: . Street names, suffixes (street, avenue) will be standardized in accordance With U.S.P.S. records. . Nine digit zip code established - normally from 90-98% of address will be assigned the 4 digit add-on list of addresses that did not meet U.S.P.S. standards will be provided. Rural areas may have lower percentages. . Bar-coding of Zip + 4 statement will be performed by CSG. . Re-zip of your data base occur every quarter - this allows CSG to continue to qualify for the highest postal discounts. . List of duplicate address records will be provided for cleanup purposes. CONVERTER DATA BASE. All converters will be passed through CCS edit programs, the following items will occur: . Listing of duplicate serial numbers including the location of the box will be provided. . If you are addressable, a listing of duplicate terminal address (prom number) will be provided. . Invalid model numbers, invalid serial number formats will be identified. SUBSCRIBER DATA BASE. Standard CCS edits requirements will be performed along with any specific site requested information. The following items are provided as examples: . Site requested service codes, discount codes. . Site requested campaign codes. . Subscribers receiving free services. . Invalid phone numbers. . Any specific site requested data. D) MANAGEMENT TRAINING IN OMAHA - -- ---------------------------- . In depth lecture seminar designed for managers and supervisors. . Covers all aspects of the Cable Control system. . Includes a detailed training manual and all additional training materials. . Opportunity to tour the CSG Mail Facility. CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OURS[DE THEIR RESPECTIVE COMPANIES -13- Ex. A-2 (page 3 of 3) ---------------------- III) 60,000 - 89,999 SUBSCRIBERS CATEGORY________________________ Includes everything as listed above in Section U, except regarding: RECOMMENDED SITE VISITS - ----------------------- TRAINING . CSG training will be on-site to conduct "Train the Trainer" courses for site's training staff. . CSG trainers will train site staff on CCS facets and functionality, based upon agenda and needs by Cable site management. IV) 90,000 -149,999 SUBSCRIBERS AND 150,000 + SUBSCRIBERS CATEGORIES Includes everything as listed above in Section III, except: RECOMMENDED SITE VISITS - ----------------------- Specialty Trips . Addressability Specialist - I trip . Financial Analyst - I trip . Conversion Specialist - I trip to review output with site . Conversion Specialist - I trip to define new procedures for policies that pertain to the billing system. MANAGEMENT TRAINING (This training is usually on-site of the volume of managers to be trained.) . In depth lecture seminar designed for managers and supervisors. . Covers all aspects of the Cable Control system. . Includes a detailed training manual and all additional training materials. CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE: COMPANIES -14- SCHEDULE B CSG TECHNICAL AND CONSULTING SERVICES ------------------------------------- 1. GENERAL. Subject to the terms and conditions of the Master Agreement and for the fees and expenses described below, Customer hereby hires CSG, and CSG hereby agrees, to provide the design, development and/or other consulting services described in the statement of Works contemplated under Section 2, which may include services by CSG's Advanced Business Solutions division (collectively, the "Technical Services') to Customer as its independent contractor. 2. TECHNICAL SERVICES. (a) Reasonable Efforts. CSG will use its reasonable commercial efforts to ------------------ perform all Technical Services in a timely and professional manner satisfactory to Customer and in accordance with the applicable Statement of Work. (b) Projects Schedules. CSG and Customer will execute a schedule substantially ------------------ similar to Exhibit B-1 (the "Statement of Work") for each design, development and/or other consulting service that Customer wants CSG to undertake. CSG and Customer acknowledge that all Statement of Works will form an integral part of this Schedule B. ---------- (c) Location and Access. CSG may perform the Technical Services at Customer's ------------------- premises, CSG's premises or such other premises that Customer and CSG may deem appropriate. Customer will permit CSG to have reasonable access to Customer's premises, personnel and computer equipment for the purposes of performing the Technical Services at, Customer's premises. (d) Insurance. CSG will be solely responsible for obtaining and maintaining --------- appropriate insurance coverage for its activities under this Schedule B, ---------- including, but not limited to, comprehensive general liability (bodily injury and property damage) insurance and professional liability insurance. 3. CONSIDERATION. (a) Project Fees. In consideration for performing the Technical Services, ------------ Customer will pay CSG the fee that may be contemplated under the Statement of Works (the "Project Fees"). (b) Reimbursable Expenses. Unless otherwise contemplated under the Statement --------------------- of Work, Customer will ***. (c) Payment. Customer will pay the Project Fees to CSG according to the applicable terms set forth in the Statement of Work. Unless otherwise contemplated in the Statement of Work, Customer will pay CSG the Reimbursable Expenses within *** after the receipt of CSGs invoice and supporting receipts. ***. 4. CSG RIGHTS. Customer acknowledges that all patents, copyrights, trade secrets or other proprietary rights in or to the work product that CSG may create for Customer under this Schedule B (the 'Deliverables"), including, but not limited to, any ideas, concepts, inventions or techniques that CSG may use, conceive or first reduce to practice in connection with the Technical Services, are and will be the exclusive property of CSG, except as and to the extent otherwise specified in the applicable Statement of Work. During and after the term of this Schedule B. CSG and Customer will execute the instruments that may ---------- be appropriate or n to give full legal effect to this Section 4. 5. DELIVERY OF ITEMS. Upon the expiration or termination of this Schedule B for any reason, Customer will promptly pay CSG the Project Fees and Reimbursable Expenses that may be due and outstanding for the Technical Services and Deliverables that CSG has performed, and CSG will deliver to Customer all notebooks, documentation and other items that contain, in whole or in part any Confidential Information that Customer disclosed to CSG in performance of the Technical Services under this Schedule B. ---------- 6. TERM. The term of this Schedule B shall be for a period of three (3) years, but in any case will extend for the term of any executed Statement of Work. Agreed and accepted this 28th day of May, 1997, by: CSG SYSTEMS, INC. ("CSG") 21ST CENTURY CABLE TV, INC. (Customer") By: /s/ George F. Haddix By: /s/ Richard Wiegand-Moss --------------------------- ------------------------------ EXHIBIT B-1.........SAMPLE STATEMENT OF WORK - ----------------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -15- EXHIBIT B-1 STATEMENT OF WORK (sample form) THIS STATEMENT OF WORK is made as of 1997, between CSG Systems, Inc. ('CSG"), and 21st Century Cable TV, Inc. ("Customer"), pursuant to Schedule B of the Master Agreement that CSG and Customer executed as of _________________, 1997, and of which this Statement of Work forms an integral part. OBJECTIVE: - ---------- PROCEDURES: - ----------- TIMETABLE: Commencement Date: ____________________ - ---------- Completion Date: ______________________ DELIVERABLES: - ------------- PROJECT FEES AND PAYMENT TERMS: - ------------------------------- IN WITNESS WHEREOF, CSG and Customer cause this Statement of Work to be duly executed below. CSG SYSTEMS, INC. ("CSG") 21ST CENTURY CABLE TV, INC. ("Customer") By: ________________________________ By: ____________________________________ Name: ______________________________ Name: __________________________________ Tide: _______________________________ Title: __________________________________ Date: _______________________________ Date: __________________________________ -16- SCHEDULE C CCS PRODUCTS SOFTWARE LICENSE ------------------------------ ACSR/TM/, CIT/TM/ and Computer Based Training 1. LICENSE. If during the original term of the Master Agreement, Customer provides written notice to CSG of its intent to license the software products known as ASCR CIT, ACSR AOI software and Computer Based Training, then CSG hereby grants Customer, and Customer hereby accepts from CSG, a non-exclusive and non-transferable perpetual right to use ACSR, CIT, ACSR AOI software and Computer Based Training, for use with the CCS Services described in Section 2 below (the "CCS Products") at the System Sites in the United States in the designated environment described in Section 3 below (the "Designated Environment"), for the fees set forth in Schedule F and subject to the terms and ---------- conditions specified below and in the Master Agreement 2. CCS PRODUCTS. "CCS Products" as described in the Product Schedule attached hereto as Exhibit C-1 includes (i) the machine-readable object code version of ACSR, CIT, ACSR AOI software and Computer Based Training (collectively, the "Software"), whether embedded on disc, tape or other media; (ii) the published user manuals and documentation that CSG may make generally available for the Software (the "Documentation") (iii) the fixes, , updates, upgrades or new versions of the Software or Documentation that CSG may provide to Customer under this Schedule C (the "Enhancements") and (iv) any copy of the Software, Documentation or Enhancements. Nothing in this Schedule C will entitle Customer to receive the source code of the Software or Enhancements, in whole or in part. 3. DESIGNATED ENVIRONMENT. "Designated Environment' means the combination of the other computer programs and hardware equipment CSG specified for use with the CCS Products as set forth in Exhibit C-2, or otherwise approved by CSG in writing for Customer's use with the CCS Products at the system sites set forth on Exhibit C-1 (the "System Sites"). Customer may use the CCS Products only in the Designated Environment and will be solely responsible for upgrading the Designated Environment to the specifications that CSG may provide from time to time. If Customer fails to do so, CSG will have no obligation to continue maintaining and supporting the CCS Products. CSG shall certify die Designated Environment prior to the commencement of CSG's obligations under this Schedule C, including its obligations to maintain and support the CCS Products. Any other use or transfer of the CCS Products will require CSG's prior approval, which may be subject to additional charges. 4. USE. Customer may use the CCS Products only in object code form on the workstations set forth on Exhibit C-1 and in the Designated Environment and at the System Sites in the United States, and only for the term set forth below, and only for Customer's own internal purposes and business operations with the CCS Services for providing accounting and billing services to its cable subscribers. In addition to the Incorporated Third Party Software, if third party products are provided to Customer as part of the CCS Products, by opening the package containing the third party product or downloading it, Customer agrees to be bound by the terms of the third party's standard license. Customer will not use the CCS Products to provide any such service to or on behalf of any third patties in a service bureau capacity and will not permit any other person to use the CCS Products, whether on a time-sharing, remote job entry or other multiple user arrangement. Customer will not install the Software, Enhancements or Customization on a network or other multi-user computer system unless otherwise specified in the Exhibits to this Schedule, in which case the Designated Environment may be used to provide database or file services to other of Customer's computers across the network, up to the number of workstations specified in Exhibit C-1. Backup and recovery plans or backup and recovery software is not included with the CCS Products. Any Customer documents, data and files are and shall remain Customer's property; and therefore, Customer is solely responsible for its own backup and recovery plan(s) for its data stored within the Designated Environment or utilized within the CCS Products licensed hereunder. Customer may make only one back-up archival copy of the Software, Enhancements or Customization. Customer will reproduce all confidentiality and proprietary notices on each of these copies and maintain an accurate record of the location of each of these copies. Customer will not otherwise copy, translate, modify, adapt, decompile, disassemble or reverse engineer the CCS Products, except as and to the extent expressly authorized by applicable law. 5. MAINTENANCE AND SUPPORT. (a) Standard Support Services. Following expiration of the Warranty Period, CSG ---------------- will provide Customer the support and maintenance of the then-current version of each licensed CCS Product as described on Exhibit C-3 (the "Support Services"). Included in the Support Services is support of the then-current version of the licensed CCS Products via CSG's Product Support Center, Account Management, publication updates, and the fixes and updates that CSG may make generally available as part of its maintenance and support packages (the "Updates"). The Support Services do not include maintenance and support of the Incorporated Third Party Software, if any, or any other third party software. The maintenance and support for third party products is provided by the licensor of those products. Although CSG may assist in this maintenance and support with front- line support, CSG will have no liability with respect thereto and Customer must look solely to the licensor. CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES -17- (b) Additional Support. At Customer's request, CSG may agree to provide at its ------------------- then current rates additional Support Services or other support, including but not limited to, the optional support services listed on Exhibit C-3. If Customer is not utilizing the CCS Products in a certified Designated Environment or Customer has added third party applications through ACSR AOI or otherwise, the Updates may not operate with the third party applications connected or introduced by Customer, including those for use with ACSR AOI, and therefore, additional Technical Services as may be necessary to modify ASCR AOI or the Customer's third party applications. At Customer's request, CSG may provide Customer with such Technical Services at CSG's then-current rates and subject to terms and conditions set forth in a separately executed Statement Of Work incorporated into Schedule B. ---------- (c) Limitation. Updates or Enhancements in this Schedule C will not include ---------- any upgrade or new version of the CCS Products that CSG decides, in its sole discretion, to make generally available as a separately priced item. This Schedule C will not require CSG to (i) develop and release Updates or Enhancements (ii) customize the Updates or Enhancements to satisfy Customer's particular requests or (iii) obtain Updates or Enhancements to any third party product. If an Update or Enhancement replaces the prior version of the CCS Product, Customer will destroy such prior version and all archival copies upon installing the Update or Enhancement. 6. TERM. This Schedule C shall be effective from the Effective Date as defined in the Master Agreement and will remain in effect thereafter indefinitely, unless terminated pursuant to Sections 17 of the Master Agreement.. CSG SYSTEMS, INC. ("CSG") 21ST CENTURY CABLE TV, INC. ("Customer") By: /s/ George F. Haddix By: /s/ Richard Wiegand-Moss ----------------------------- ------------------------------- EXHIBIT C-I PRODUCT SCHEDULE EXHIBIT C-2 DESIGNATED ENVIRONMENT EXHIBIT C-3 INSTALLATION, MAINTENANCE AND SUPPORT -18- EXHIBIT C-1 ACSR/CIT/COMPUTER BASED TRAINING -------------------------------- LICENSED SOFTWARE: - ------------------ ADVANCED CUSTOMER SERVICE REPRESENTATIVE (ACSR) - ACSR is a graphical user interface for CSG's CCS service bureau subscriber management system. ACSR significantly reduces training time and eliminates the need for CSR's to memorize transactions and codes. CSRs instead are allowed easily to access reference tools, help screens and customer data. As companies consolidate and cluster disparate systems with different codes and procedures, ACSR ensures the accounts can be serviced by the same CSR. ACSR also enables CSR's to communicate with one another through a self contained messaging system. ACSR is designed so that module based functionality such as CIT can be added as needed. CUSTOMER INTERACTION TRACKING (CIT) - CIT is a module offered with ACSR that provides enhanced methods for tracking the interaction with the customer base. It provides note taking functionality as well as an interaction history feature that allows specific actions to be recorded in a transaction history log. CIT also allows for the scheduling of customer call backs. These call backs can be reviewed by management as well as moved between CSR'S. ACSR AOI - An application object interface that allows third party applications to be used in conjunction with ACSR. COMPUTER BASED TRAINING (CBT) - Computer Based Training ("CBT-) is Software which may be downloaded onto Customer's workstation to provide training and instruction on use of various CCS Products. Notwithstanding Section 12 of the Master Agreement, due to the nature of CBT, CSG is unable to provide any intellectual property infringement indemnification for CBT. SYSTEM SITE(S): - --------------- 350 North Orleans, Suite 600, Chicago, Illinois 60654 NUMBER OF WORKSTATIONS. - ----------------------- 10 workstations CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OUR OUTSIDE THEIR RESPECTIVE COMPANIES -19- EXHIBIT C-2 (page 1 of 2) DESIGNATED ENVIRONMENT FOR THE CCS PRODUCTS ------------------------------------------- NOTE: THE FOLLOWING APPLIES ONLY IN REGARDS TO THE CCS PRODUCTS ACTUALLY LICENSED BY CUSTOMER UNDER SCHEDULE C AND MAY BE SUBJECT TO CHANGE AS THE ---------- SPECIFIC HARDWARE CONFIGURATION CANNOT BE COMPLETELY IDENTIFIED AND CERTIFIED UNTIL AFTER THE BUSINESS REQUIREMENTS OF CUSTOMER ARE DETERMINED DURING THE PRE- INSTALL VISIT. ACSR/CIT/TELEPHONY/CBT/AOI: - --------------------------- Product Compatibility (Yes indicates product is available on indicated - ---------------------------------------------------------------------- workstation platform; date indicates estimated date available) - --------------------------------------------------------------
Win 3.1 1 Win NT Apple MAC SUN Solaris Win 95 ACSR (1) Yes (4) Yes Yes CIT (1) Yes (2) (4) Feb 97 (3) Yes Telephony No Yes No No No ACSR CBT (1) Yes No Yes Yes CIT CBT (1) Yes No Yes Yes Telephony CBT N/A No N/A N/A N/A AOI w/DDE (1) May 97 (3) N/A N/A May 97 (3) AOI w/TCPIP No Yes May 97 (3) (4) Yes Yes
(1) - Supported at existing sites only until Nov. 15, 1997,- cannot be used after that date. (2) - Currently not available with Telephony. (3) - Estimated availability contact PMfor beta test availability. (4) - Available under existing contracts only. Workstation - ----------- Compaq Prolinea 5166 (minimum) IBM PC350 133 Mhz Pentium (minimum) SparcStation 4, Solaris V2.4 SparcStation 5/70Mhz Solaris V2.3 Apple 7600 Power MAC Ultra Sparc 1, model 170, Solaris 2.5.1 Workstation Minimum Memory (RAM - ------------------------------- 32MB for Solaris, Windows NIT, and Apple MAC Workstation Minimum Hard Drive Space - ------------------------------------ 1.2GB Workstation Minimum Video Requirements - ------------ ------------ Minimum video resolution supported 1024 x 768 x 256 colors, small font Minimum 15" SVGA monitor (I 7" for Apple MAC) Workstation Software - -------------------- Microsoft Windows NT V4.0 for ACSR/ CIT Microsoft Windows NT V3.51 with service pack 3 applied for ACSR/Telephony Solaris V2.3, V2.4 or V2.5.1 (see above) Netmanage Chameleon Hostlink V6.0 (with Windows NT or 95) Open windows or Motif (with SUN Solaris) Brixton 3270 client for Solaris V2.3.0.10 (with SUN Solaris) Samba V 1.9.15 p8 (with NT or 95) Additional Workstation Software to Support Telephony - ---------------------------------------------------- Oracle SQL*NET V2.1.4.1.4 for NT runtime (with Windows NT) Oracle SQL Forms V4.5.6.5.5 for NIT runtime (with Windows NT) Forest & Trees 3. lb (with Windows NT or 95) (For PCs running reports) CONFIDENTIAL AND PROPRIETARY INFORPAATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECNVE COMPANIES -20- Ex. C-2 (page 2 of 2) Additional Workstation Software to Support CIT - ---------------------------------------------- Oracle SQL*NET V2.1.4.1.4 runtime (with NT or 95) (For PCs with Forest & Trees) Forest & Trees 3. lb (with Windows NT or 95) (For PCs running reports) Servers - ------- Ultra Sparc I - model 170 only Ultra Sparc 2 Ultra Sparc 3000 (Server model, number of CPUs, memory, and disk storage are based on individual customer requirements) Server Software - --------------- Solaris V2.5.1 Samba V1.9.15 p8 (with NT or 95) Brixton Server PU2.1 for Solaris (Version 3.0.5-1) running in 2.3.2 mode Brixton 3270 Client for Solaris (Version 2.3.0. 1 0) (1 copy for trouble shoo(mg) Hewlett Packard Unix Jet Direct interface software Additional Server Software to Support CIT - ----------------------------------------- Oracle V7.1.6 runtime Platinum EPM Agent V3. 1.0 Tuxedo V 6. I.(With NT or 95) Additional Server Software to Support Telephony - ----------------------------------------------- Oracle V7.3.2.1 runtime Tuxedo V 6. I.(With NT or 95) Platinum EPM agent V3. 1.0 Platinum Autosys agent V3.3 release 5 Hylafax freeware v4.0 Postalsoft V 5.00b Concentrators - ------------- BayNetworks (Synoptics) 2813-04 (managed 16-port ethernet hub) BayNetworks (Synoptics) 2803 (passive 16-port ethernet hub) BayNetworks (Synoptics) 800 (passive 8-port ethernet hub) BayNetworks (Synoptics) 2712B-04 (managed 16-port token ring hub) BayNetworks (Synoptics) 2702B-C (passive 16-port token ring hub) Network Cards/Devices - --------------------- 3Com Etherlink III 3C509 SUN Quad Ethernet card Hewlett Packard Jet Direct EX Aurora Technologies Multiport 400S A/Sync Series Printers - -------- Lexmark IBM 4226 (533 cps) Lexmark 4227 (533 cps) IBM 6408 (800 LPM) Hewlett Packard LaserJet5 Routers - ------- Cisco 2501, 2509, 2511, 2514, 4500 Rockwell NetHopper Cisco software supported.- AU versions NetHopper software supported Version 4.03 -21- EXHIBIT C-3 (page 1 of 3) CCS PRODUCTS INSTALLATION AND SUPPORT SERVICES ---------------------------------------------- ACSR ONLY INSTALLATION & STARTUP) --------------------------------- INCLUDED Project Implementation Support (34 month duration) Assigned project manager and product consultant (shared resources) Requirements definition and project planning meeting on site Project plan and customer specifications document Ongoing project coordination, mw reporting and post project review Engineering 1 day visit survey (single location) Server and network configuration and sizing (single server) Site network requirements documentation and diagram Field services Single IBM 40.30 installation Single server/disk array assembly, software installation, and configuration at CSG site - 4 days Single server @g at CSG site - I day Customer site prep, server installation, and pre-production system check/support - 5 days on site Training (an instructor day is I instructor, for I full day, for up to 8 students) Software download and systems administration training at customer site - 2 instructor days ACSR User Training - 2 instructor days 1 copy of User Guide and Systems Administration Guide NOT INCLUDED (CUSTOMER RESPONSIBILITIES AND/OR SERVICES AVAILABLE FOR ADDITIONAL FEW INCLUDED UNDER OPTIONAL SERVICES) Customer completes agreed to project requirements as defined and scheduled LAN cabling Workstation installation LAN hub installation Router installation Modem installation Replacement or additional circuit(s) installation by Advantis IBM 4030 installation by CSG Additional server(s) field services Remote site engineering services CIT INSTALLATION & STARTUP (IN ADDITION TO ACSR) - ------------------------------------------------ INCLUDED (AS APPLICABLE) Engineering for CIT data base product(s) Project implementation support User training for product(s) selected (an instructor day is I instructor, for I full day, for up to 8 students) CIT User Training - I instructor day 1 copy of User Guide for each licensed product Field services (if installation is required and is separate from basic ACSR product) Single server/disk array assembly, software installation, and configuration at CSG site Single server testing at CSG site Server/disk army installation, and pre-production system check/support - 2 days on site CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES -22- EXHIBIT C-3 (PAGE 2 OF 3) SUPPORT SERVICES FOR THE CCS PRODUCTS ------------------------------------- PRODUCT SUPPORT CENTER The customer Product Support Center provides Customer with advice consultation and assistance to use CCS Products and diagnose and correct problems that Customer may encounter with the then-current version of CCS Products. CSG will offer the Product Support Center remotely by telephone, fax or other electronic communication twenty-four hours a day, seven days a week. Customer will bear all telephone and other expenses that it may incur in connection with the Product Support Center. Every customer problem is assigned a tracking number and a priority. Problems are resolved according to their assigned priority. See attached list detailing "Priority Levels'. ACCOUNT MANAGEMENT CSG will provide an account manager which is shared resource which will serve as Customer's liaison to all other CSG support services and will be responsible for ensuring customer satisfaction. Through periodic status reports and occasional on-site visits when necessary, the account manager will assist Customer with their use of CCS Products and keep them abreast of new developments in CSG's products and services. UPDATES Subject to the terms set forth in this Schedule C. Product Updates include ---------- software corrections, the fixes and updates that CSG may make generally available. These Updates are delivered to Customer accompanied by bulletins describing the updates and installation instructions. CSG will not provide Updates due to changes or new releases in Customer's vendor products. Custom software modifications are NOT included under the Basic Support Package as Updates but rather are covered as Technical Services under Schedule B. ---------- PUBLICATIONS The customer will receive updates to all published documentation for CCS Products. THIRD PARTY SOFTWARE The maintenance and support for third party software is provided by the licensor of those products. Although CSG may assist in this maintenance and support with front-line support, CSG will have no liability with respect thereto and Customer must look solely to the licensor. ________________________________________________________________________________ CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES -23- EXHIBIT C-3 (PAGE 3 OF 3) PRODUCT SUPPORT CENTER FOR THE CCS PRODUCTS - PRIORITY LEVELS ------------------------------------------------------------- When contacting the PRODUCT SUPPORT CENTER, the caller should be prepared to provide detailed information regarding the problem and the impact on the operation and the end user. Each problem or question is assigned a tracking number and a priority. The priority is set to correspond with the urgency of the problem. It is very important that the customer describe the urgency of the problem when it is reported. The priority levels are described below: . CRITICAL (PRIORITY 1): Complete loss of functionality, system outage or down production system. Customers cannot access the system, cannot perform any function due to the hardware being down, are experiencing network control or communication problems, or are unable to process. The customer will receive immediate response and prioritized at the highest level. Once control has been regained, efforts are then made to determine the "root cause" of the problem. Considering the nature of the cause, the problem is adjusted to one of the other priorities and processed accordingly. While a Critical (Priority 1) problem exists, the Product Support Center commitment is to provide around-the-clock support until customers system/network/application is restored to operational status. . SERIOUS (PRIORITY 2): Partial loss of functionality, pr loss of critical functionality. The Customer's production/processing system is not down but there is an impact within the system network. The Customer will receive immediate response. If the problem persists, the control of the network may be lost and/or end-user impacts may become serious. The Customer will receive immediate response. The Product Support Center's goal is to ensure that control of the system is not jeopardized and to work with Customer to gather information in order to resolve the issue. The Product Support Center allocates resources during normal business hours until a permanent solution is found. . OPERATIONAL (PRIORITY 3): Partial loss of functionality loss of non-critical functionality, or loss of critical functionality for which a work around exists. The problem is within the customers' operations environment. The user is attempting to utilize a CSG product and is having difficulty completing the process. A user may be a CSR, subscriber, or the Customer's operation staff running the system. CSG's Product Support Center goal is to respond the next business days. . INCONVENIENCE OR ENHANCEMENT (PRIORITY 4): Inconvenience or loss of functionality for which a work-around solution exists, or enhancement request is required. The problem is an operator inconvenience, an enhancement, or the Customer have requested information. There is no serious impact to the end user of the system. The problem can be avoided by proper operator action, internal training by the customer, or a work-around solution. There is no apparent danger of losing control of the system, network, application or data because of this type of problem. A suggestion or request for enhancement is based upon the problem, concern or business need. The Product Support Center's goal is to provide a correction through internal software control procedures. CSG's Product Support Center goal is to respond within (3) business days. . INFORMATIONAL (PRIORITY 5): This category also includes questions. The Product Support Center is committed to responding with the requested information within (5) business days. Software correction notification may be sent to the customer shortly after the correction has been made by our development engineers. At times, a work-around may be suggested if- . Its delivery is more timely . Its implementation is less complex . Its reliability is more certain However, a work around must be mutually acceptable to our Customers, and it must have the effect of reducing the concern until a permanent resolution can be determined. Should the Customer wish to check the status of a problem they may contact the Product Support Center desk representatives or their Account Manager. In either case, the customer should reference the tracking number. Customer may request to have the priority of Customer's call upgraded. Customer may check on the status of such request at any time by calling the Product Support Center or contacting Customer's account manager. The account manager is responsible for problem escalation to the appropriate level of management if Customer is not satisfied with a response. ________________________________________________________________________________ Note: The maintenance and support for third party software is provided by the licensor of those products. Although CSG may assist in this maintenance and support with front-line support, CSG will have no liability with respect thereto and Customer must look solely to the licensor. -24- SCHEDULE F FEE SCHEDULE ------------ *** 1. CCS VIDEO SERVICES FEES - --------------------------- [5 sequential pages of confidential information under this heading have been omitted and filed separately with the Securities and Exchange Commission.] 2. TECHNICAL SERVICES FEES - --------------------------- [6 lines of confidential information under this heading have been omitted and filed separately with the Securities and Exchange Commission.] 3. ACRS/CIT - VIDEO - -------------------- [4 sequential pages of confidential information under this heading have been omitted and filed separately with the Securities and Exchange Commission.] 4. BUNDLED CCS PRINT AND MAIL SERVICES FEES - -------------------------------------------- [2 sequential pages of confidential information under this heading have been omitted and filed separately with the Securities and Exchange Commission.] 5. DATA COMMUNICATIONS PRICING - ------------------------------- [1 page of confidential information under this heading has been omitted and filed separately with the Securities and Exchange Commission.] 6. FINANCIAL SERVICES' FEES - ---------------------------- [2 sequential pages of confidential information under this heading have been omitted and filed separately with the Securities and Exchange Commission.] 7. CSG.WEB PRODUCT - ------------------- [2 sequential pages of confidential information under this heading have been omitted and filed separately with the Securities and Exchange Commission.] - --------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -25- SCHEDULE G Print and Mail Services 1. SERVICES. Subject to the terms and conditions of the Master Agreement CSG will provide to Customer, and Customer will purchase from CSG,all of Customer's requirements for Print and Mail Services set set forth in this Schedule G for ---------- all of Customer's subscriber accounts. 2. POSTAGE. CSG agrees to purchase the postage required to mail statements to Customer's subscribers ("Subscriber Statements"), notification letters generated by CSG, past due notices and other materials mailed by CSG on behalf of Customer. Customer shall reimburse CSG for all postage expenses incurred in the performance of the Print and Mail Services based on the then current first class postal rate for each item of first class mail p by CSG on behalf of Customer. 3. COMMUNICATIONS SERVICES. CSG shall provide, at Customer's expense, a data communications line from the CSG data processing center to each of Customer's system site locations identified in Exhibit G- I attached hereto (the "System Sites"). Customer shall pay all fees and charges incurred by CSG in connection with the installation and use of and peripheral equipment related to the data communications line in accordance with the fees described in Schedule F attached ---------- hereto. Customer shall electronically it all data to CSG in a format approved by CSG. Customer shall, at its expense, obtain all software and equipment necessary for the transmission of data to CSG, and Customer shall be responsible for retransmission of data if any errors occur during transmission. 4. ANCILLARY SERVICES. At Customer's request, CSG shall provide the ancillary services described in Schedule F attached hereto (the "Ancillary Services") at ---------- the rates described in Schedule F. ------------- 5. ENHANCED STATEMENT. Presentation Services. If during the original term of the Master Agreement, Customer provides written notice to CSG of its intent to utilize CSG's customized billing statement processing for its Print and Mail Services, then for the fees set forth in Schedule F. CSG shall develop a ---------- customized billing statement (the "ESP Statement") for Customer's subscribers utilizing CSG's enhanced statement presentation services. Once utilizing CSG's enhanced t presentation services, Customer agrees that CSG's enhanced statement presentation services shall be Customer's sole and exclusive method of mailing Subscriber Statements. The ESP Statements may include CSG's or Customer's intellectual property. "Customer's Intellectual Property" means the trademarks, service marks, other indicia of origin, copyrighted material and art work owned or licensed by Customer that CSG may use in connection with designing, producing and mailing ESP Statements and performing its other obligations pursuant to this Agreement. "CSG Intellectual Property" means trademarks, service marks, other indicia of origin, copyrighted material and art work owned or licensed by CSG and maintained in CSG's public library that may be used in connection with designing, producing and mailing ESP Statements. (a) Development and Production of ESP Statements. CSG will perform the design, -------------------------------------------- development and programming services related to design and use of the ESP Statements (the "Work") and create the work product deliverables (the "Work Product") set forth in a separately executed and mutually agreed upon ESP Work Order (the "Work Order") after the effective date set forth on the Work Order. The ESP Statement will contain the CSG Intellectual Property set forth on the Work Order. Customer shall pay CSG the Development Fee for the Work and the Work Product set forth on the Work Order upon acceptance of the ESP Statements in accordance with the Work Order. Except with respect to Customer's Intellectual Property, Customer agrees that the Work and Work Product shall be the sole and exclusive property of CSG. Customer shall have no proprietary interest in the Work Product or in CSGs billing and management information software and technology and agrees that the Work Product is not a work specially ordered and commissioned for use as a contribution to a collective work and is not a work made for hire pursuant to United States copyright law. After CSG has completed the Work and the Work Product, CSG will produce *** for Customer. (b) Supplies. CSG will suggest and Customer will select the type and quality of -------- the paper stock, carrier envelopes and remittance envelopes for the ESP Statements (the "Supplies"). CSG shall purchase Customer's requirements of Supplies necessary for production and mailing of the ESP Statements. CSG shall charge Customer the rates set forth in Schedule F for purchase of Supplies. ---------- (c) License of Customer's Intellectual Property. Customer licenses to CSG to ------------------------------------------- use all of Customer's Intellectual Property necessary to design, produce and mail the ESP Statements and perform CSG's other rights and obligations pursuant to Section 5(a) of this Schedule G, including, but not limited to, the ---------- Intellectual Property listed in the Work Order. CSG shall have the right by notice to Customer to cease use of any of Customer's Intellectual Property on ESP Statements at any time. Customer represents and warrants that it owns or has licensed all Customer's Intellectual Property and has full power and authority to grant CSG the license set forth herein and that CSG's use of Customer's Intellectual Property on the ESP Statements will not constitute a misuse or infringement of the Customer's Intellectual - ---------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -26- Property or an infringement of the rights of any third party. Customer will use best efforts to maintain its rights to use and license Customer's Intellectual Property and will immediately advise CSG of the loss of Customer's right to use any Customer's Intellectual Property and will advise CSG of all copyright and other notices that must be used in connection with Customer's Intellectual Property and of any restrictions on use of Customer's Intellectual Property relevant to CSG. (d) Indemnification Relating to ESP Statements. Customer shall indemnify, ------------------------------------------ defend and hold CSG harmless from any claims, demands, liabilities, losses, damages, judgments or settlements, including all reasonable costs and expenses related thereto (including attorneys' fees), directly or indirectly resulting from Customer's breach of any representation or warranty under this Section 5, Customer's Intellectual Property, the Work Product, and the printing and mailing of ESP Statements, except for those arising out of CSG Intellectual Property. 6. PER CYCLE MINIMUM. As of the Commencement Date as defined in Section 9 below, for each month that this Agreement is in effect, Customer will maintain per each billing cycle a minimum of *** on the CSG System. Per System Site, Customer will have a minimum of ***. 7. DISCONTINUANCE FEE. CSG has determined the fees for the CCS Services hereunder based upon certain assumed volumes of processing activity for the System Sites and the length of the term of this Schedule A. Customer ---------- acknowledges that, without the certainty of revenue promised by the commitments set forth in this Master Agreement CSG would have been unwilling to provide the CCS Services at the fees set forth in Schedule F. Because of the difficulty in ascertaining CSG's actual damages for a termination or other breach of this Master Agreement or Schedule A by Customer resulting in a termination of this -------- Master Agreement or Schedule A before the expiration of the then-current term with respect to one or more System Sites, Customer agrees that prior to such termination and in addition to all other amounts then due and owing to CSG, Customer will pay to CSG (as a contract discontinuance fee and not as a penalty) an amount equal to ***. If this Schedule A is terminated with respect to less ---------- than all of the System Sites, ***. Customer acknowledges and agrees that the Discontinuance Fee is a reasonable estimation of the actual damages which CSG would suffer if CSG were to fail to receive the amount of processing business contemplated by this Schedule A. ---------- 8. DEPOSIT. At least seven (7) days prior to the Commencement Date of the Print and Mail Services set forth in Section 9 below, Customer shall pay CSG a security deposit (the "Deposit") for the payment of the expenses described in Sections 2 and 3 of this Schedule G (the "Disbursements'). The Deposit will --------------- equal the estimated amount of Disbursements for one (1) month as determined by CSG based upon the project volume of applicable services to be performed monthly by CSG. If Customer incurs Disbursements greater than the Deposit for any month, Customer shall, within thirty (30) days of receipt of a request from CSG to increase the Deposit, pay CSG the additional amount to be added to the Deposit. If Customer fails to pay the additional amount requested within such 30-day period, CSG may terminate this Master Agreement as provided for in Section 17. Upon written request from Customer, CSG will return to Customer a portion of the Deposit if the Disbursements incurred by Customer on a monthly basis are less than the Deposit for three (3) consecutive months. In addition to the foregoing, CSG shall have the right to apply the Deposit to the payment of any invoice from CSG which remains unpaid during the term of this Agreement, and Customer agrees to replenish any such Deposit amount as set forth above. Any portion of the Deposit that remains after the payment of all amounts due to CSG following the termination or expiration of this Master Agreement will be returned to Customer. Customer shall not be entitled to receive interest on the Deposit while it is maintained by CSG. 9. TERM. The first day of the calendar month in which the Print and Mail Services commence shall be referred to as the Commencement Date." The Print and Mail Services shall continue for a period of three (3) years from the Commencement Date. Agreed and accepted this ____ day of ______, 1997, by: CSG SYSTEMS, INC. ("CSG") 21ST CENTURY CABLE TV, INC. ('Customer") By: /s/ George F. Haddix By: /s/ Richard Wiegand-Moss ------------------------ ---------------------------- - ------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -27- Exhibit G-1 ----------- System Sites Chicago, Illinois -28- SCHEDULE H INCORPORATED THIRD PARTY SOFTWARE AND LICENSES AND THIRD PARTY RIGHTS ADDITIONAL TERMS AND CONDITIONS A. INCORPORATED THIRD PARTY SOFTWARE - ------------------------------------ The following terms and conditions supplement, and where in conflict, supersede the terms and conditions contained in the Agreement but solely with respect to the identified item of Incorporated Third Party Software. There is no Incorporated Third Party Software in the CCS Products. B. THIRD PARTY RIGHTS - --------------------- The following terms and conditions supplement, and where in conflict supersede the terms and conditions contained in the Master Agreement and any Schedule, but solely with respect to the Third Party Rights described below. CSG may provide Customer with Products, Incorporated Third Party Software and Services subject to patent or copyright licenses that third parties, including Ronald A. Katz Technology Licensing, L.P., have granted to CSG (the "Third Party Licenses"). Customer acknowledges that Customer receives no express or implied license under the Third Party Licenses other than the right to use the Products, Incorporated Third Party Software and Services, as provided by CSG, in the cable system operator industry. Any modification of or addition to the Products, Incorporated Third Party Software or Services or combination with other software, hardware or services not made or provided by CSG is not licensed under the Third Party Rights, expressly or implicitly, and may subject Customer and any third party supplier or service provider to an infringement claim. Neither Customer nor any third party will have any express or implied rights under the Third Party Licenses with respect to (i) any software, hardware or services not provided by CSG or (ii) any product or service provided by Customer other than through the authorized use of the Products, Incorporated Third Party Software or Services as provided by CSG. Agreed and accepted this _____ day of _______________1997, by: CSG SYSTEMS, INC. (-CSG") 21ST CENTURY CABLE TV, INC. ("Customer") By: /s/ George F. Haddix By: /s/ Richard Wiegand-Moss ------------------------ ---------------------------- -29- SCHEDULE I Paybill Advantage ELECTRONIC BILL PAYMENT SERVICES 1. EFT SERVICES. Subject to the terms and conditions of the Master Agreement for the term set forth in Section 10 below and for the fees set forth in Schedule F, subsequent to the Effective Date of the Master Agreement once - ---------- Customer provides CSG with written notice of its desire to obtain the EFT Services, CSG will provide to Customer and Customer will purchase from CSG, all Customer's requirements for the data processing services, including reasonable backup security for Customer's data, to support electronic bill paying services as defined on Exhibit I-1 attached hereto (the "Basic Services") for all of Customer's subscriber accounts that elect to utilize customer's electronic bill payments services (the "Subscribers"). 2. ADDITIONAL SERVICES. In the event Customer desires for CSG to provide other services in addition to the Basic Services set forth in Section 1, the parties agree to negotiate in good faith with respect to the terms and conditions (including without limitation, pricing) on which such services shall be provided. Such services include, but are not limited to (i) special computer runs or reports, special accounting and information applications; and (ii) data processing and related forms and supplies and equipment other than those provided as standard pursuant to this Agreement (die "Additional Services'). The description of any such additional services, and any other terms and conditions related thereto, shall be set forth in an amendment to , this Agreement signed and dated by both parties. Unless otherwise agreed in writing by the parties in such amendment any such additional services shall be subject to the terms of this Schedule 1. ---------- 3. DATA COMMUNICATIONS. To obtain the EFT Services, Customer shall provide or CSG shall provide, at Customer's expense, data communications lines: (i) from Customer's data processing center to the CSG data processing center, and (ii) from the CSG data processing center to Customer's designated production facility. If CSG provides the lines, Customer shall pay all fees andcharges in connection with the installation and use of and peripheral equipment related to the data communications line in accordance with the fees described in Schedule F ---------- attached hereto. However, if Customer already has in place a data communications line available for the transmission of the data for the utilization of the Refund Services, then no additional line with be required and no additional fees will be due and owning. 4. SUBSCRIBER AUTHORIZATION. Customer shall obtain from each Subscriber the proper documents authorizing automatic transfers to and from such Subscriber's savings account, checking account or bank card account, and provide a copy of the authorization to each Subscriber. Customer will provide only valid authorizations for processing. 5. REVIEW OF REPORTS. To maintain system integrity, Customer will inspect and review all reports and output created from information transferred or delivered by CSG and reject all incorrect reports within one (1) business day after receipt thereof for daily reports and within three (3) business days after receipt thereof for other than daily reports. Failure to timely reject any report or output shall constitute acceptance thereof, and Customer shall be deemed to have waived its rights and assumed all risks with respect thereto. 6. COMPLIANCE WITH LAWS. Customer will comply in all material respects with all federal state or local km and regulations pertaining to electronic payment processing. In the event of clear evidence of significant fraudulent activity by Customer, the Basic Services and any Additional Services will be discontinued immediately and any funds on the way to Customer will be impounded immediately. 7. COLLECTION DATA. Customer shall update subscriber account balance information to provide necessary data for the Basic Services and any Additional Services and shall ensure through periodic checks and updates that the data is current and accurate at all times. 8. SETTLEMENT OF RETURNS. Customer is ultimately responsible (a) for adequately funding the reserve account when using the weekly or monthly settlement process as described in Schedule A herein, and (b) when using the daily settlement process as described in Exhibit 1-1 herein, to cover on a daily basis all return debits incurred by Vendor (as defined in Exhibit I-1) and in the event collections have ceased, Customer shall be obligated to pay within ten (10) days any unfunded return amounts not funded to cover all remaining return debits. 9. INDEMNIFICATION BY CUSTOMER. Customer shall indemnify. defend and hold CSG, its Vendors (as defined in Exhibit 1-1), shareholders, directors, officers and employees harmless from any and all third party claims, losses, actions, suits, proceedings or judgments, including, without limitation, costs and reasonable attorneys' fees, incurred by or assessed against CSG resulting, in whole or in part, from (i) any and all acts or omissions of Customer, its officers, directors, shareholders, employees and agents, (ii) any action or failure to act by CSG in reliance on any Customer instruction, approval, election, decision, action, inaction, omission or nonperformance relating to the Services, or (iii) any information or data provided to CSG by Customer, provided, however, Customer shall not be required to indemnify CSG if such claims arise out of, relates to, or results from the gross negligence or intentional misconduct of CSG. -30- 10. RELIANCE ON INFORMATION. CSG shall be entitled to rely upon and act in accordance with any instructions, guidelines or information provided to CSG by Customer, which are given by such persons as have actual or apparent authority to provide such instructions, guidelines or information and shall incur no liability in doing so. 11. TERM . This Schedule I shall be effective on the date of commencement of the EFT Services and continue for a period three (3) years. Agreed and accepted this _____ day of _____________, 1997, by: CSG SYSTEMS, INC. ("CSG") 21ST CENTURY CABLE TV, INC. ("Customer") By: /s/ George F. Haddix By: /s/ Richard Wiegand-Moss ----------------------------- ----------------------------------- EXHIBIT 1-1......Basic Services -31- EXHIBIT 1-1 BASIC SERVICES CONSUMER DEBITS Each subscriber of Customer will have the option to preauthorize a debit to either their checking account or savings account for a predetermined date of their choosing each month, CSG or, if applicable, its third party provider of the Basic Services or Additional Services (the "Vendor') will be responsible for the disbursement remittance and settlement of all funds. Vendor will create and submit a preauthorized payment disbursement ("Debit"') according to the standards of the National Automated Clearing House Association ("NACHA') containing a debit record for subscribers who have preauthorized monthly Debits to be made from checking or savings accounts on a designated day each month. Vendor will submit to an automated clearing house, through an originating depository financial institution, data in the required form for the collection of the monthly payments from subscribers bank accounts, which will be effected on the collection date, or if that date is not a banking day, the first banking day after such date. Each Debit will be submitted so as to effect the payment on the designated date. CREDIT OF REMITTANCES Vendor will prepare a lockbox file reporting each processing subscriber payment between 6:00 am. and 8:00 p.m. on the day the payments settle to the Customer account. This file will be used to post the subscriber payments to the subscriber accounts. ENROLLMENT PROCESS Each Customer subscriber will be required to complete a registration card which authorizes their respective bank to post Vendor Debit transactions to their respective bank checking account or savings account. Each subscriber will also enclose a voided copy of his or her personal check and mail the enrollment and check to either Vendor or the Customer directly based on the Customer's requirements. If the form is sent to the Customer, then the Customer will be responsible for sending it to the Vendor. Vendor will enter the enrollment information into its database within 2 business days of receipt by Vendor. Vendor will attempt to contact the Customer twice and the subscriber once regarding any input that cannot be p . A report stating add/update/delete of subscribers will be generated for the Customer each business day for which input is processed and sent to CSG and the Customer. An ACH prenote will be initiated the day the form is processed or the day after the form is processed. The firm Debit will be initiated on the appropriate date to effect the Debit on the subscriber selected Debit date. AUTOMATIC PREAUTHORIZED PAYMENTS Vendor shall provide automatic payment deduction which will occur monthly on a date predetermined by the subscriber. Vendor will query the CSG system after 8:00 p.m. Central Standard Time three days prior to the date the deduction is scheduled to take place to determine the proper Debit amount If the statement balance is less than the current balance, the statement balance will be used. If the statement balance is greater than the current balance, then the current balance will be used. If the designated date for deduction falls on either a weekend and/or holiday, the deduction will not occur until the next scheduled banking day. SETTLEMENT Vendor will credit the Customer's designated account ("Customer's Settlement Account") for the gross ACH collection to provide available funds at opening of business on the first banking day after the Customer's subscribers actual payment date. ACH payments will settle each banking day that has been selected by Customer's subscriber. Debits to Corporate Customer Return Account for returns and reserve adjustments as described below will be made separately from credit for payments processed from Customer's subscribers. A record of returns will be maintained on-line for 12 months. Customer may establish reasonable parameters for revoking subscribers' automatic privileges. Vendor will automatically suspend any accounts that exceed the established parameters and report such actions to the Customer on a daily basis. SETTLEMENT OF RETURNS Vendor will settle daily returns against a Vendor account. Settlement with Customer may be processed in one of two ways, at the Customer's option. One option is for settlement with Customer to be done daily and a reserve account will not be required by Vendor. Each day for which there are returns, Vendor will initiate a Debit to the Customer's specified account for the total amount of Debits received by vendor that day. This Debit will settle into the Customer's specified account within two days, but no later, after the day the returns settle against the Vendor account. First time NSF returns that are deposited by Vendor will not be debited to the Customer's specified account. CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES -32- EXHIBIT I-1 (page 2 of 2) Alternatively, settlement will be done periodically, on either a weekly or monthly basis. A reserve account ("Reserve Account") will be created with Vendor which will be used to compensate Vendor for the return of uncollectible Debits from Customer's accounts (the "Returns") on either a weekly or monthly basis dependent on Customer's requirements. [Each week or month, depending on which is applicable, is a "Collection Cycle" for purposes of this section] Vendor will monitor the amount of the Returns during the first Collection Cycle. Of such amount Vendor will apply for Vendor's benefit the amount n to cover the first Collection Cycle Return and deposit an equal amount in the Reserve Account to cover the Return for the Second Collection Cycle. For example, if the Returns for the first Collection Cycle equal S500, Vendor will withdraw $1000 (2 x $500) from Customer's Settlement Account, apply $500 to cover the first Collection Cycle R and deposit $500 in the Reserve Account. Pursuant to Customer's direction, Customer will establish a Corporate Customer Return Account which will be funded as required by the Vendor. At the conclusion of each subsequent Collection Cycle, an amount will either be withdrawn from or credited to the Corporate Customer Return Account by Vendor to ensure that (1) the immediately preceding Collection Cycle's Returns are paid from the Reserve Account and (2) after such payment the Reserve Account contains an amount equal to the preceding Collection Cycle's Returns . For example, if at the end of the first Collection Cycle $500 was in the Reserve Account and the Returns for the second Collection Cycle totaled $100.00: $100 from the Reserve Account would be applied by Vendor to cover the Returns, leaving a Reserve Account balance of S400; $300 from the Reserve Account would be credited to Customer's Settlement Account leaving a Reserve Account balance of $100; $100, the amount equal to the Returns for the second Collection Cycle, would be carried over in the Reserve Account. Customer will ultimately be solely responsible for paying to Vendor the entire amount of the Returns, whether by contributing adequate funds to its Reserve Account or otherwise, and will indemnify CSG should CSG have to pay said portion of the Returns. Any Returns not paid by Customer through the process described in this section may in the discretion of and at the direction of CSG be paid from future gross payment settlement(s). In the event collections have ceased and there are no future gross payment statement(s) available to cover remaining return Debits, Customer shall pay to CSG upon demand by CSG by wire transfer an amount equal to one and one half times the Returns which were not paid. SUBSCRIBER DEPOSITORY TRUST Vendor shall utilize its Vendor subscriber depository trust settlement account for all transfers of funds relating to the Vendor Services performed by the Vendor on behalf of Customer and its subscribers. Funds relating to Vendor Services performed by Vendor on behalf of Customer and its subscribers under this Agreement shall be segregated from operational funds of Vendor in accordance with the terms and conditions of the Vendor Subscriber Depository Trust Agreement. RECORD KEEPING Vendor will maintain records of all subscribers' bill payment activity and on billing costs. On-line transactions include scheduled transactions, 90 days of payment history and Customer's subscribers personal data. Billing information will be on a monthly basis to CSG or on demand by Customer. Miscellaneous records pertaining to inquiries, other than inquiries pursuant to Federal Reserve Regulation E, will be maintained by Vendor. Records of all bill payment activity shall be retained for a period of at least seven years following the date of any bill payment or any other action of other applicable regulatory requirement whichever is greater. Upon written request Vendor shall make such records available for examination by CSG or Customer and/or federal or state regulatory authorities. CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES -33- SCHEDULE K CSG.WEB/TM/SERVICES 1. CSG.WEB SERVICES. If during the original term of the Master Agreement Customer provides written notice to CSG of its intent to utilize CSG's CSG.web Services, then for the fees set forth in Schedule F of the Master Agreement, CSG will develop a world wide web customer interaction interface with customized web pages for Customer's subscribers or customers as described in Exhibit K- I attached hereto ("CSG.web"). 2. DEFINITIONS RELATING TO INTELLECTUAL PROPERTY. "Customer's Intellectual Property" means the trademarks, service marks, other indicia of origin, copyrighted material and art work owned or licensed by Customer that CSG may use in connection with designing, producing and operating CSG.web and performing its other obligations pursuant to this Agreement 'CSG Intellectual Property" means trademarks, servicemarks, other indicia of origin, copyrighted material and art work owned or licensed by CSG and maintained in CSG's public library that may be used in connection with designing, producing and operating CSG.web. 3. DEVELOPMENT AND PRODUCTION OF CSG.WEB. CSG will perform the design, development and programming services related to design and use of CSG.web and create the work product deliverables (the "Work Product, ) set forth in a separately executed and mutually agreed upon CSG.web work order in the form set forth in Exhibit K-3 attached hereto (the "Work Order") after the Effective Date set forth on the Work Order. CSG.web will contain the CSG Intellectual Property and the Customer Intellectual Property set forth on the Work Order. Customer shall pay CSG the development fee for the Work Product set forth on the Work Order. After CSG has completed the Work Product CSG will produce and operate CSG.web for Customer. 4. OWNERSHIP OF CSG.WEB. Except with respect to Customer Intellectual Property, Customer agrees that all patents, copyrights, trade secrets and other proprietary rights in or to the Work Product shall be the sole and exclusive property of CSG, whether or not specifically recognized or perfected under applicable law. Customer shall not have or acquire any proprietary interest in the Work Product, including the actual format or layout for Customer or in CSG's billing and management information software and technology (the "CCS System"). Customer agrees that the Work Product are not works specially ordered and commissioned for use as a contribution to a collective work and are not works made for hire pursuant to U.S. Copyright Law. CSG hereby grants to Customer, and Customer accepts from CSG, a non-exclusive, non-transferable, paid up, royalty fee and perpetual right to use, reproduce, copy and display the design and format of the completed Work Product. 5. CUSTOMER'S INTELLECTUAL PROPERTY REPRESENTATIONS. Customer acknowledges that CSG may use all of Customer's Intellectual Property necessary to design, produce and operate CSG.web and perform CSG's other rights and obligations pursuant to Schedule K of this Master Agreement CSG shall have the fight to cease use of any of Customer's Intellectual Property on CSG.web at any time, upon notice to Customer. Customer represents and warrants that it owns or has licensed all Customer's Intellectual Property, and that CSG's use of Customer's Intellectual Property on CSG.web Pages will not constitute a misuse or infringement of the Customer's Intellectual Property, or an infringement of the rights of any third party. Customer will use best efforts to maintain its rights to use and license Customer's Intellectual Property, will immediately advise CSG of the loss of Customer's right to use any Customer's Intellectual Property, and will advise CSG of all copyright and other notices that must be used in connection with Customer's Intellectual Property and of any restrictions on use of Customer's Intellectual Property relevant to CSG. 6. INDEMNIFICATION RELATING TO CSG.WEB. Notwithstanding anything to the contrary set forth in this Master Agreement Customer shall indemnify, defend and hold CSG harmless from any claims, demands, liabilities, losses, damages, judgments or settlements, including all reasonable costs and expenses related thereto (including attorneys' fees), directly or indirectly resulting from Customer's breach of any representation or warranty under Section 5 of this Schedule K. and from any claim arising from CSG's actions on behalf of Customer - ---------- in designing the Work Product producing and operating of CSG.web or otherwise relating to this Schedule K, except for those claims arising from CSG ---------- Intellectual Property. 7. TERM. The day this Schedule K is executed as set forth below shall be referred to as the "Commencement Date." This Schedule K shall continue from the Commencement Date for a period of three (3) years. Agreed and accepted this ______ day of ____________, 1997, by: CSG SYSTEMS, INC., ("CSG") 21ST CENTURY CABLE TV, INC. ("Customer") By: __________________________ By: ____________________________________ EXHIBIT K-1........CSG.web Description of Service Service Bureau -34- EXHIBIT K-2........Word Order (sample format) CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES -35- EXHIBIT K-1 CSG.WEB - DESCRIPTION OF SERVICE - SERVICE BUREAU ------------------------------------------------- CSG.WEB IS A WEB SITE ON THE INTERNET'S WORLD WIDE WEB WHICH CAN BE ACCESSED BY ANY USER ACCESSING THE WORLD WIDE WEB THROUGH ANY COMMERCIALLY AVAILABLE WEB BROWSER. THE USER MUST ENTER THE UNIFORM RESOURCE LOCATOR, URL, DESIGNATED BY THE CLIENT IN ORDER TO ACCESS THE WEB SITE, CSG.web contains multiple CSG customer management and billing software interface components: . Display most recent customer billing statement information . Pay balance via credit card using N's Secure Sockets Layer . Display scheduled pay per view movies and events . Process pay per view movie and event orders . Display customers current services and pending PPV movies and events. . Display channel lineup and premium services: . Process service upgrade orders: . Web administration screens for minor CSG.web modifications maintained by Client for: Use and placement of graphical images; Use and placement of text and descriptions; URL and URL positioning; Background color selection CONFIDENTIAL AND PROPRIETARY INFORMATION - FOR USE BY AUTHORIZED EMPLOYEES FOR THE PARTIES HERETO ONLY AND IS NOT FOR GENERAL DISTRIBUTION WITHIN OR OUTSIDE THEIR RESPECTIVE COMPANIES -36- EXHIBIT K-2 WORK ORDER (SAMPLE FORMAT) THIS WORK ORDER is made as of __________________. between CSG Systems, Inc., ("CSG"), and ________________ ("Customer"), pursuant to the CSG.web Services Agreement that CSG and Customer executed as of ________________, 1997, and of which this Work Order forms an integral part. 1. SPECIFICATIONS, PROCEDURES and DELIVERABLES: ------------------------------------------- WHERE APPLICABLE, THE FOLLOWING DETAIL MUST BE PROVIDED IN THIS WORK ORDER PRIOR TO EXECUTION: Inclusion or exclusion of standard features Web site domain name registration Web server configuration Set-up of Customer-defined web service codes and descriptions Set-up of channel line-up and descriptions Define length of pay per view schedule to display Define e-mail addressees) for feedback, subscription requests, and credit card transactions Scan in Customer logo(s) and arrange in available, Customer-defined positions Define/select other images and arrange in available positions Input of Customer-defined company information page ("WHO WE ARE") Input of Customer-defined "WHAT'S NEW' page Select background color Establish text descriptions based on customer requirements Build code table PN to allow for PIN numbers to be added to subscriber accounts Define cable office phone number for subscribers to call to select their PIN Establish upgrade work order default fields: work order reason, work order type, campaign code, sales representative, and technician Input images, descriptions, and prices of merchandise offered for sale Define desired dynamic content(images or text) to display when subscribers access their billing statement and services information 2. TIMETABLE: Estimated Commencement Date: --------- Estimated Completion Date: 3. FEES: *** ----- IN WITNESS WHEREOF, CSG and Customer cause thoe Work Order to be duly executed below. CSG SYSTEMS, INC. ("CSG") ("Customer") By:__________________ By:__________________ Name:___________________ Name:___________________ Title:__________________ Title:__________________ Date:___________________ Date:___________________ - --------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -37- EX-10.4 3 EXHIBIT 10.4 EXHIBIT 10.4 JUNE 26, 1997 ------------- REVISED JULY 14,1997 PRESENTED TO 21/ST/ CENTURY Thank You --------- for giving us the opportunity to present our capabilities to you. This Proposal was assembled after research and consideration of how to best meet your stated goals. In Marketing Services, Inc. believes we can make a substantial contribution to your sales and marketing program. We work hard to determine the best, most cost-effective way to match our capabilities with your needs. We are pleased to present our recommendations to you today. ITI Delivers. GUARANTEED. ITI marketing Services . 902 North 91st Plaza . Omaha, Nebraska 68114 . Phone 800-562-5000 Contents -------- 1 Executive Summary 2 Program Overview 3 Critical Success Factors 5 Service Plan 7 Account Management 8 Recruitment & Training 9 Operations 10 Quality Assurance 11 Systems 12 Disaster Recovery 13 Commitment 14 Price Quotation/ Acceptance/Terms ITI MARKETING SERVICES The Teleservices Solution ITI MARKETING SERVICES The Teleservices Solution Michael J. Lee Systems Consultant July 14, 1997 Richard Wiegand-Moss Chief Operating Officer 21/st/ CENTURY 350 N. Orleans Suite 737 Chicago, IL 60654 Dear Richard, Thank you for your continued interest in ITI Marketing Services, Inc. I am certain you will find ITI to be a true strategic partner you can rely upon for telemarketing advice and program consultation in helping you achieve your goals on this customer care project. We are pleased to present the attached Revised Proposal for your consideration. Please review the enclosure at your earliest convenience. Upon approval, sign both originals, forward one to Amy Schumacher at 902 N. 91/st/ Plaza Omaha, NE 68114, and retain the other for your files. Upon receipt of the signed Proposal and initial setup fee, we will promptly begin implementation and execution of your inbound dedicated program. We are very excited about the customer service opportunity and look forward to a mutually beneficial relationship. Please contact me with any questions you may have at (800) 562-5000, or directly at (402) 392-9222. Thank you again for your consideration. Sincerely, ITI MARKETING SERVICES, INC. Michael J. Lee ML:acs enclosures 902 North 91/st/ Plaza Omaha, Nebraska 68114-2467 PHONE 402-393-8000 TOLL-FEE 800-562-5000 FAX 402-393-5814 www.itimarketing.com EXECUTIVE SUMMARY - -------------------------------------------------------------------------------- Since our incorporation in 1986, ITI Marketing Services, Inc. (ITI) has grown to become one of the nation's leading telemarketing service agencies, providing Inbound, Outbound, Bilingual (Hispanic) and Interactive services to many of the Fortune 1000 companies. With over 3,400 Inbound and Outbound workstations and more than 9,000 talented employees processing over 150 million calls annually, ITI is consistently listed in the top 10 of the "Top 50 Service Agencies," as listed annually in Telemarketing and Call Center Solutions magazine. ITI's market focus is to support customized programs. We are experienced in a wide range of applications ranging from basic lead generation and order processing, to dealer/locator, to the implementation of sophisticated, dedicated programs and customer service support. ITI is dedicated to not only working for you, but also with you in achieving your goals. We believe in establishing partner-like relationships with our clients based upon mutual understanding and communication supported through shared dedication and trust. 21/st/ Century: Proposal July 14, 1997 Page 1 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL PROGRAM OVERVIEW - -------------------------------------------------------------------------------- 21/st/ Century has requested ITI to present a comprehensive Proposal for inbound customer care services. 21/st/ Century is developing a bundled offering with a cable television service, Internet access, high-speed date transmission, long distance telephone service, cellular, paging and security services. These services with be offered to some 300,000 residential houses, and 500,000 hotel rooms along Chicago's lakefront area. Other areas that might be targeted include Michigan, Illinois and Indiana. ITI would utilize the Cable Control Systems (CCS) through CSG Systems, Inc. to provide the customer care services utilizing ITI Customer Service Sales Representatives (CSSRs). If actual call volumes do not meet or exceed minimum projections, both 21/st/ Century and ITI will in good faith discuss future program development's and direction of ongoing customer service work. FOR ITI TO BE PREPARED FOR YOUR PROGRAM LAUNCH, YOUR START DATE IS DEPENDENT UPON RECEIPT OF ALL REQUIRED INFORMATION THREE WEEKS IN ADVANCE OF THE START DATE. Required information includes, but is not limited to: finalized input and output requirements, file formats, transmission protocols and specifications, magnetic media specifications, data editing/formatting rules, scripts, answers, responses, reporting requirements including samples or drafts of reports, test files (reference databases), volume projections and media and development schedules. 21/st/ Century: Proposal July 14, 1997 Page 2 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL CRITICAL SUCCESS FACTORS - -------------------------------------------------------------------------------- At ITI, we believe the results of your telemarketing initiative are contingent upon focused, consistent attention to the following critical success factors. ITI is dedicated to addressing these fundamentals which will be integrated as part of an overall service plan: Call Quality ITI requires all CSSRs conduct themselves in a professional, competent, and courteous manner to portray a sense of integrity. Every call must create a favorable impression and a seamless service plan. ITI is committed to the uncompromising quality of our CSSR staff. A Quality Assurance Plan, which includes service standards, will be developed for your program. Those components include: call monitoring, accuracy, script adherence, test calling and on-the-floor observation, coaching and counseling. Data Accuracy ITI believes it is imperative that the data collected on your and Reporting program be and Reporting be accurately recorded and reported. ITI consistently monitors the information gathered for accuracy and incorporates a verification system for all data collected. ITI has the technical expertise to report and transmit data in a wide variety of formats and within the timeframes required. Volume Capacity ITI has experience with programs that produce wide volume fluctuations and constantly monitors programs to determine needs for realignment of volume coverage. ITI will work closely with you to develop anticipated call volume coverage requirements and create alternative staffing plans for timely implementation as required. 21/st/ Century: Proposal July 14, 1997 Page 3 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL Critical Success Factors - continued... - -------------------------------------------------------------------------------- Account Management ITI assigns an Account Team consisting of a Sales Executive, Team Account Manager, Quality Assurance Manager, Systems Manager, Operations Manager and Training Coordinator to each program. These members hold the responsibility for analyzing business plans and developing detailed agendas for implementation and on-going maintenance. Additionally, an Account Executive from the Vice Presidential level or higher is assigned to serve and provide valuable insight. Cost Effectiveness ITI believes a superior service plan is able to balance costs and the quality of service. ITI has years of experience in handling a wide variety of programs. Our goal is to provide you with cost-effective services and, whenever possible, recommend ways to reduce costs while still maintaining the level of service our clients require. 21/st/ Century: Proposal July 14, 1997 Page 4 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL SERVICE PLAN - INBOUND - -------------------------------------------------------------------------------- ITI will provide the following inbound services to support the 21/st/ Century program: Service Availability Inbound call handling services are available 24 hours a day, 7 days a week. On a monthly average, we manage to an 80 percent service level of all calls within our Shared Group. Toll-Free Number ITI will assign exclusive toll-free numbers if necessary Assignment for the entire length of the program. Clients may also elect to transfer their preferred numbers to ITI for the entire length of the promotion. Customized Greeting Your specifically preferred greeting is delivered on programs utilizing exclusive toll-free numbers. Script Design Working in conjunction with you and your organization, ITI will develop automated call scripting. Script revisions may be made as needed to introduce new products or services, or to improve the efficiency or effectiveness of the call. Program-specific resource materials can also be made available for on-line reference. Training A Training Supervisor will be assigned to coordinate the introduction of the program as well as the CSG/CCS System Training. This individual develops both the implementation training material and enhancement training as required. All representatives will be required to pass a product knowledge examination prior to handling your calls. Quality Assurance A comprehensive Quality Assurance Plan, including program standards, will be implemented. Components of this plan typically include call monitoring, accuracy, script adherence, test calling and on-the-floor observations. 21/st/ Century: Proposal July 14, 1997 Page 5 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL SERVICE PLAN - INBOUND - CONTINUED... - -------------------------------------------------------------------------------- Reporting Detailed call summary reports, including incomplete call summaries, are available on a daily basis. In our Shared Services Group, client specific reporting relative to the number of calls which are busied or other ACD reporting is not available. ACD reports will be e-mailed on a daily basis with a month end report sent two business days after the end of the month. Account Team members assigned to your program will include a Sales Management Team Executive, Quality Assurance Manager, Account Manager, Systems Manager, Operations Manager, Training Coordinator and Senior Account Executive. Quarterly Business Quality Business Reviews (QBRS) include an analysis of call Reviews handling, overall performance, and results achieved relative to goals and objectives. Future objectives and strategies, as well as service requirements to support them, are also addressed. These reviews may involve client visits to ITI's facility, although business reviews conducted via conference call have been successful as well. 21/st/ Century: Proposal July 14, 1997 Page 6 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL PENALTIES FOR NON PERFORMANCE - -------------------------------------------------------------------------------- As long as actual call volume fall within ***% of client supplied projections and service level requirements are based on ***% of the calls answered within 30 seconds; ITI will reduce price of dedicated staffed station $*** per hour for every 2.5 seconds we exceed 30 seconds. This will be looked at on a weekly basis to determine the actual average speed of answer. If ITI exceeds client's goal of ***% of the customer calling in receiving a busy signal in the dedicated environment, ITI will deduct $*** per hour for every one percent over three percent. 21/st/ Century: Proposal July 14, 1997 Page 7 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL _________________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. ACCOUNT MANAGEMENT - -------------------------------------------------------------------------------- Upon receipt of a signed contract, your Sales Executive will formally transition the bulk of the day-to-day communications regarding the account to your Account Manager. The Account Manager is the primary point of contract and will coordinate the setup and execution of your account. Within ITI, the Account Manager interacts with Department Heads to coordinate the launch of your program. The Account Manager serves as the central point of contact and your advocate to ensure your goals are being achieved. The Account Manager will work with you, the client, and our internal departments to develop and maximize critical performance factors to include, but not be limited to: . Develop Scripting . Test Data . Performance Objectives . Analyze and Interpret Results . Forecast Staffing Needs . Plan Strategies To Meet Performance Objectives ITI has a track record of establishing mutually profit-able, long-lasting relationships with our clientele. We believe our approach to Account Management and our commitment to partnerships have been the cornerstones to our success. 21/st/ Century: Proposal July 14, 1997 Page 8 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL RECRUITMENT AND TRAINING - -------------------------------------------------------------------------------- ITI recruits qualified individuals who not only meet specific standards of performance and possess the necessary skills, but also people with a dedication to quality and drive for success. Skills include: sales and communication abilities, spelling, speech, grammar, reading comprehension, typing and, in some cases, mathematical aptitude. All potential CSSRs must initially pass a telephone interview, which determines voice quality and speech proficiency. The second step involves a group interview which includes an overview of the position, introduction to ITI, as well as a script reading by each candidate. Typing, spelling and abbreviation tests are then administered, and those who qualify move on to a personal interview-. Through our in-depth recruiting analysis, ITI's clients are assured high quality call center representation (only 17 percent of those people interviewed become CSSRS). ITI is recognized for offering compensation packages which exceed those of any competitors within the cities in which we operate. Additionally, M offers a full benefits package, including medical coverage, a 401k Plan and profit sharing to both full-time and part-time employees. These factors allow ITI to recruit the most qualified individuals and to retain these valuable employees longer than our competition. In fact, ITI's turnover is just one quarter of the industry average. ITI's commitment to providing industry-leading compensation packages enables us to provide our clients with representatives, as well as reduced turnover and training costs. Upon acceptance, CSSRs begin a five to ten day classroom training program. Initial training involves a corporate orientation and an overview of policies and procedures with an emphasis on ITI's standards of quality and performance. Training includes a comprehensive introduction to ITI's clients and their programs as well as intensive product knowledge education. The class is also educated, in depth, on our automated system, followed by group and individual role-play exercises. Product knowledge/system examinations are conducted and each new employee must pass with a minimum score of 90 percent. As the CSSRs move from the classroom environment to the call center, they begin on-the-job training (OJT). During the OJT period, Team Sales Supervisors are assigned to small, manageable teams of CSSRS. The trainer may also work with each team, providing one-on-one education through call coaching, demonstration and side-by- side call monitoring. ITI maintains the highest standards while hiring and training quality sales representatives who will master your program, capture the information required and ensure your company s image is maintained. 21/st/ Century: Proposal July 14, 1997 Page 9 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL OPERATIONS - -------------------------------------------------------------------------------- The ITI Inbound Operations Management Team is responsible for managing all aspects of the Inbound Calling Center. This team consists of a Director of Operations, Operations Managers, Program Managers, Program Supervisors and Team Supervisors. The Director of Operations and Operations Managers are responsible for managing the call centers on a global basis. They oversee all hiring, training, performance, quality, call flow and all administrative aspects of the call center. Operations Managers, Program Managers, and Program Supervisors are responsible for managing the day-to-day activities of the CSSRs. The primary objective of this group is to ensure all personnel are handling each call in accordance with the agreed-upon client standards and objectives. To ensure adherence to our client's objectives, ITI provides extensive training to all Supervisory Personnel. Typically, an ITI Supervisor will have spent at least six months taking inbound calls prior to being eligible for promotion to Supervisor. This training affords an ITI Supervisor the ability to have a greater understanding of the demands of the CSSR position. The ratio of Supervisory Personnel to CSSRs vary to program requirements, but will approximate 1 Management Person to 9.4 Representatives. Maintaining ratios at these levels ensures each client that the individuals taking their calls are being given the necessary attention to properly execute each phone call. 21/st/ Century: Proposal July 14, 1997 Page 10 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL QUALITY ASSURANCE - -------------------------------------------------------------------------------- The key component to ITI's industry-leading level of call quality is our commitment to a structured quality assurance process which involves systematically monitoring each CSSR on a daily basis. During each shift a CSSR works, the ITI Quality Assurance Team monitors a minimum of two calls per CSSR per shift, to ensure adherence to both internal and claim specific standards, and to provide each individual feedback for improvement. This process is executed by both a Quality Assurance Representative (QAR) and Floor Supervisory Personnel. In an effort to make this subjective process more objective, ITI extensively trains each QAR and has developed monitoring sheets which allow for evaluation on specific elements of each phone call. Once the call has been critiqued, the QAR quickly communicates with the Floor Supervisor giving feedback about the call. The Floor Supervisor then provides this feedback to the CSSR during his or her work shift. To further ensure call quality, ITI Account Management Personnel frequently conduct test calls and provide feedback to Operation Personnel. This multi-faced approach to quality assurance in Inbound Operations has earned ITI a leadership position within the telemarketing industry. 21/st/ Century: Proposal July 14, 1997 Page 11 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL SYSTEMS - -------------------------------------------------------------------------------- ITI -utilizes both a Northern Telecom ACD and a Tandem Himalaya K1000 as inbound calling processing systems. The Northern Telecom system, with dual common control, has full ACD capability with Dialed Number Identification Service (DNIS), as well as Direct Terminal Interface (DTI) capabilities, connecting the Tandem Himalaya K1000 and the Northern Telecom through an ISDN (two-way) gateway. This facilitates an automated presentation of the script to the CSSR screen and may include your customized greeting. The Tandem Himalaya K1000 is supported by our custom-developed software and provides our clients with sophisticated scripting and branching capabilities. The Tandem is a specialized fault-tolerant system which is non-stop and utilizes redundant mirrored discs, enhancing data protection. The system requires no daily downtime for maintenance and processing. Via the Northern Telecom's Call Management System, ITI Inbound Services can provide many detailed management reports relating to service levels and statistical call data. All ITI software programs are developed internally and are proprietary. Our expertise in specialized, flexible script development has helped to make us an industry leader. 21/st/ Century: Proposal July 14, 1997 Page 12 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL DISASTER RECOVERY/BACK-UP SYSTEMS - -------------------------------------------------------------------------------- ITI understands the critical need to ensure our Inbound Operations are fully functional at all times. The following steps have been taken to ensure uninterrupted service to our clients, 24 hours a day, 7 days a week: . Tandem mainframe system is a fault-tolerant central processing unit which offers dual processing functionality at all times. We also have the ability to access the development system for back-up purposes and for remote processing. . ITI subscribes to 24-hour maintenance with Tandem and. is connected to Tandem's National Secure Center, which automatically receives warning calls from the Tandem processor if trouble is detected. The Northern Telecom ACD system also has maintenance available 24 hours a day in addition to an internal alarm system. . All software is duplicated and all data files are backed up daily with copies stored onsite and in an off-site controlled warehouse facility which specializes in records and data back-up storage. . ITI utilizes an Exide UPS (Uninterrupted Power Supply) which is also on-line with a Cummins diesel generator to supply a consistent flow of power to all phone stations, as well as to all critical support staff departments. Should a loss of power occur, standard operating procedures are supported by the back-up systems for the required duration. Both back-up systems are tested and maintained on a regular basis. 21/st/ Century: Proposal July 14, 1997 Page 13 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL COMMITMENT - -------------------------------------------------------------------------------- The cornerstones of ITI are knowledge, leadership, intensity, dedication and a commitment to accountability. Our goal is to redefine the standards by which all direct marketing companies are judged. You can trust that you have our unconditional commitment to excellence in achieving your goals. We welcome the opportunity to provide you with the services outlined within this Proposal, and are confident we are effectively deliver the quality service you deserve. More importantly, we are certain we can attain this in a cost- effective manner by utilizing our experiences, our economies of scale, our commitment to quality and our sales expertise. ITI welcomes the opportunity to establish a long-term working relationship with 21/st/ Century. Thank you for your time and consideration. 21/st/ Century: Proposal July 14, 1997 Page 14 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL ITI MARKETING SERVICES PRICE QUOTATION INBOUND PRICING - DEDICATED SERVICE GROUP ================================================================================ ITI Price Quotation: This price quotation is valid for 30 days from the date shown below. Please read the back of this form for terms and conditions on the services we provide. /***/ NOTE: Setup will be determined by script complexity, transmission format, transfer options and transmission protocol. 21/st/ CENTURY DATE ITI MARKETING SERVICES, INC. DATE /s/ Richard Weigand-Moss /s/ Daniel S. Hicks - ---------------------------------- ------------------------------------------ Daniel S. Hicks Vice President, Inbound Account Management 21/st/ Century: Proposal July 14, 1997 Page 15 pub/mikelee/proposals PROPRIETARY AND CONFIDENTIAL _____________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. ADDITIONAL TERMS 1. Payment Terms; Conditions. -------------------------- (a) Invoices; Finance Charge. Client shall be invoiced weekly in ------------------------ accordance with the prices set forth on the front of this agreement. Payment of invoices is due ten (10) days from the date of invoice. Invoices remaining after the due date shall be subject to a finance charge of one and one-half percent (1.5%) per month. (b) Nonpayment; Withholding Data. If ITI has not received payment of an ---------------------------- invoice within ten (10) days from the invoice date. ITI may, at its sole and absolute discretion, with prior notice to Client, (i) withhold all call data in the possession of ITI at that time, (ii) refuse to furnish same to Client until said account is brought current, (iii) cancel any and all services being provided to Client, and (iv) refuse to deliver any and all information in the possession of ITI until Client's account is brought current. (c) Price Change. ITI may change the price of its services quoted in this ------------ Agreement for just cause shown or because of an increase in the service supplied to or by ITI or because of governmental increases not controlled by ITI, as long as written notice of the increase is given to Client prior to the change taking effect. (d) Drag Calls. Upon termination of this Agreement. Client agrees to ---------- compensate ITI for any drag calls that may occur at the stated per call rate, as set forth in the pricing schedule. (e) Taxes. Client shall pay all service, sales, use and valued-added ----- taxes, duties, assessments and any other taxes or fees which may be assessed or levied by any governmental or regulatory authority with respect to the services provided by ITI to the Client pursuant to this Agreement. (f) Credit Approval; Deposits. ITI's acceptance of this Agreement is ------------------------- subject to satisfactory credit investigation and approval of Client. Upon such credit approval, Client may be required, in ITI's sole discretion, to place a security deposit with ITI in an amount to be determined by ITI to guarantee payment of all obligations owed to ITI hereunder. Upon termination of this Agreement, ITI will return such deposit to Client after deducting any amounts payable to or otherwise owed to ITI hereunder. 2. Changes to Project Agreements. ITI and Client further agree that it is ----------------------------- understood between the parties hereto that due to the nature of this business: (a) Service Change. Changes made in the scope of service specified in the -------------- service description after the terms of the same have been agreed to or any changes made by date changes, media requirements, additions or deletions, may result in additional charges to Client and will be governed by paragraph 1(c) above. (b) Oral Change. ITI shall not be held liable for errors to Client's ----------- project caused by oral changes, additions or deletions. All oral changes may be subsequently verified and approved in writing between Client and ITI to be valid. 3. Warranties; Representations. Client represents and warrants to ITI that: --------------------------- (a) Authorization; Compliance with Laws. Client is fully authorized to ----------------------------------- provide the products and/or services being offered to the prospects pursuant to the solicitations to be made by ITI under this Agreement. Client further represents and warrants to ITI that all products and/or services and the offering of all products and/or services to be provided by ____ to the prospects will fully comply with all applicable federal, state and local laws, _____ and regulations, including, but not limited to, the Telephone Consumer Protection Act of 1991, the Telemarketing and Consumer Fraud and Abuse Prevention Act (the "TCFAPA") and any similar federal and state legislation regarding telephone marketing. (b) Scripts; FTC's Rule. Client has provided ITI with all necessary ------------------- information concerning the products and/or services to be marketed pursuant to this Agreement to enable ITI to assist in the development of telephone marketing scripts containing the disclosures required by Section 310.3 of the Federal Trade Commission's Telemarketing Sales Rule (the "Rule") and any other regulation or law specifically applicable to such products and/or services. All such information is true and correct and, if applicable, consistent with representations made by or on behalf of Client in the marketing of such products and/or services in other media. Client will immediately inform ITI of any changes in its policies or practices or in the description of such products and/or services that may require a change in such disclosures. If applicable, Client further represents and warrants that product labeling, packaging and instructions comply with applicable law. (c) Disclosure. Client has disclosed the existence of any decrees, orders ---------- or consent agreements, and of any pending formal or informal governmental investigations, regarding the products and/or services that are the subject of this Agreement or Client's business practices based upon the Rule or any other consumer protection law and Client will immediately inform ITI of any change in the status of such matters or the institution of other or further investigations under such laws as soon as it becomes aware of them. 4. Performance in Accordance with Accepted Standards. ITI shall perform all ------------------------------------------------- duties and obligations required of it pursuant to this Agreement in accordance with accepted telemarketing industry standards. ITI represents to Client that it will comply with all applicable federal, state and local laws, rules and regulations, including the TCFAPA. Except as set forth in the immediately preceding sentence, ITI makes no express or implied warranties (whether implied in fact or in law). ITI has made no affirmations of fact or other representations to the Client other than those expressly set forth in this Agreement and Client hereby agrees that it has not relied on any affirmation of fact or other representation from ITI in entering into this Agreement other than those expressly set forth in this Agreement. 5. Intellectual Property; Call Data. ITI and Client agree that all software -------------------------------- programs developed by ITI for Client are owned by ITI and remain the exclusive property of ITI and shall be retained by ITI at the termination of this Agreement. ITI and Client further agree that all call data and all customer information generated by this contract belong to Client, subject to the terms of this Agreement. 6. Identification; Limitation of Damages ------------------------------------- (a) Indemnification. Subject to the limitations set forth in this --------------- Agreement, each party (the 'Identifying Party") agrees to indemnify and hold harmless the other party, its officers, directors, shareholders, employees or agents (the "Indemnified Party") from any and all liabilities, losses, damages, claims, suits, judgments, costs and expenses (including reasonable attorneys' fees and costs of any investigation of action related thereto) ("Losses") suffered or incurred by the Indemnified Party, its officers, directors, shareholders, employees or agents, arising out of any error, omission, misconduct or negligence of the Indemnifying Party. Further, Client shall indemnify and hold ITI harmless from any Losses arising out of any scripts and/or support materials provided or approved by Client, and hereby releases ITI from any Losses in connection herewith. (b) Consequential; Total Damages. In no event shall ITI be liable to ---------------------------- Client for any incidental or consequential damages of any kind (including, without limitation, lost profits) which result from one or more of the following: (i) a breach by ITI of the terms of this Agreement or of any agreement implied in law arising by reason of the transactions contemplated by this Agreement; or (ii) any negligent actions or omissions of ITI. In no event shall either party be liable to the other for any punitive damages arising by virtue of any dealings between the parties. In no event shall ITI be liable for any claims or demands against Client by a third party arising out of, or connected with the services provided hereunder. ITI's entire liability to Client for damages (other than consequential and incidental damages and damages arising by virtue of third-party claims and demands for which ITI has no liability as provided above) in connection with the services provided to Client, or provided by Client to its Clients, shall not exceed in the aggregate the total contract price due ITI under this Agreement. 7. Diversion of Employees. During the term of this Agreement and for a period ---------------------- of two (2) years following the expiration or termination of this Agreement, Client will not, directly or indirectly: (a) induce or attempt to influence any employee of ITI to terminate his or her employment with ITI; (b) employ or recommend for employment any employee of ITI; or (c) identify for employment any employee of ITI. 8. Term; Termination. ----------------- (a) Minimum Term. The minimum term of this Agreement shall be one (1) -------------- year. Client or ITI, has the right to terminate this agreement in writing, if total number of seats average 49 or less per day, with a ninety (90) day ramp down period from receipt of termination in writing. If total number of seats average more than 49 seats per day, Client or ITI will provide a six (6) month ramp down period. This Agreement will continue thereafter unless either party hereto notifies the other party of their intention to terminate, in writing, at least thirty (30) days prior to the termination date. (b) Termination for Cause. Notwithstanding any other provision in this --------------------- paragraph, either party hereto may terminate this Agreement with ten (10) days advanced written notice of the termination date to the other party hereto, if: (1) The other party hereto has falsified information that led to this Agreement: (2) The other party hereto is found to not be conducting its business in a proper manner; (3) The other party is unable to pay its debts generally as they come due or is declared insolvent or bankrupt, is the subject of any proceeding relating to its liquidation, insolvency or the appointment of a receiver or similar officer, or makes an assignment for the benefit of all, or substantially all of its creditors, or enters into an agreement for the composition, extension, or readjustment of all or substantially all of its obligations. (c) Termination for Changed Laws. Either Party shall have the right to ---------------------------- terminate this Agreement, without liability to the other, in the event of any judicial, regulatory or legislative change rendering performance of this Agreement impossible, illegal or impractical. Such Party shall provide the other with written notice of such termination as promptly as possible, but in no event less than ten (10) days prior to the termination date. 9. Entire Agreement. This Agreement constitutes the complete Agreement between ---------------- ITI and Client and no other verbal representations or written representations will supersede this Agreement, except that additions and changes properly documented and authorized and referred to for the purpose of this Agreement as an amendment will become part of this original Agreement as if fully rewritten herein. 10. Waiver. The waiver by either Party, or the failure by either Party to ------ claim a breach of any provision of this Agreement or to give notice with respect thereto, shall not be held to be a waiver of any subsequent breach of such provision or any other provision. 11. Severability. In the event any provision of this Agreement is held to be ------------ illegal, invalid or unenforceable to any extent, the legality, validity and enforceability of the remainder of this Agreement shall not be affected thereby and this Agreement shall continue in fully force and effect as modified and shall be enforced to the fullest extent permitted by law. 12. Assignment. Neither this Agreement, nor any of the rights, duties or ---------- obligations hereunder, may be assigned (whether by operation of law or otherwise) or otherwise delegated by either Party without the prior written consent of the Non-Assigning Party and any attempted assignment which is not in conformity herewith shall be voidable at the option of the Non-Assigning Party. If such an assignment is approved, this Agreement shall be binding upon, and inure to the benefit of and be enforceable by, the parties hereto and their respective successors and permitted assigns. 13. Force Majeure. Each party hereto (other than the obligation of Client to ------------- make payments for any services rendered hereunder) shall be excused from performing any obligations under this Agreement, in whole or in part, as a result of delays or interference caused by the other party or by an act of God, war, labor disputes, strikes, floods, lightning, severe weather, shortage of materials, failures or fluctuations in electrical power, heat, light, air conditioning, disruption of a line, service or program by a common carrier or billing services provider, disruption or malfunction of any data processing or telecommunications network, facility or equipment, third-party nonperformance, or other cause beyond a party's reasonable control, and such nonperformance shall not be a default hereunder or a basis for termination hereof. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the local laws of the State of Nebraska. EX-10.5 4 EXHIBIT 10.5 EXHIBIT 10.5 POLE ATTACHMENT AGREEMENT This POLE ATTACHMENT AGREEMENT (the "Agreement") is dated this 3rd day of April, 1996 by COMMONWEALTH EDISON COMPANY ("ComEd"), an Illinois corporation, and 21ST CENTURY CABLE TV, INC. ("21st Century"), an Illinois corporation. In consideration of the mutual covenants,, terms and conditions herein contained, the parties agree as follows: 1.0. PURPOSE AND CONSTRUCTION OF AGREEMENT 1.1 21st Century provides or intends to provide certain telecommunication services to residents of the portions of ComEd's service territory set forth in Exhibit A to this Agreement. Exhibit A may be amended at any time during the Term. of this Agreement by the mutual written consent of the parties. In order to expedite construction and otherwise save costs in providing such services, 21st Century desires to attach fiber optic-strands and/or cable wire, strand hardware and other associated equipment, hardware and power supplies to utility poles that are owned in whole or in part by ComEd within such service area. 1.2 ComEd owns, both wholly and jointly with others, valuable pole plant, which it acquired and maintains at considerable cost and expense. ComEd is willing to permit the placement of the fiber optic strands and/or cable wire, strand hardware and other associated equipment, hardware and power supplies referred to above on certain of its poles that it owns in whole or in part, provided that (i) it receives appropriate compensation as set forth in this Agreement, (ii) it is protected from all liability that may result therefrom as set forth in this Agreement, and (iii) such attachments do not materially interfere with its own service and operating requirements, including considerations of economy and safety. 1.3 This Agreement is not intended, and shall not be construed, to authorize any action by 21st Century that would adversely affect the quality or reliability of the electric service provided by ComEd. Nor shall it be construed so as to preclude ComEd from taking any action that it considers necessary to maintain the reliability or quality of such electric service or to ensure the safety of its employees or the public. 1.4 The parties agree that it would serve their mutual economic and other interests for 21st Century, under the conditions set out herein and to the extent it may lawfully do so, to attach its fiber optic strands and/or cable wire, strand hardware and other associated equipment, hardware and power supplies to the pole plant owned by ComEd, pursuant to the conditions set forth below and in return for payment to ComEd of the fees set forth in this Agreement, where such attachment will not materially interfere with ComEd's service and operating requirements. Through this Agreement, ComEd intends to give 21st Century licenses to use particular poles in the manner and for the purpose set forth herein. No easement rights, interest in real estate or other interest in property is granted or intended to be granted by this Agreement. No use, however extended, of ComEd poles under this Agreement shall create or vest in 21st Century any ownership or property rights in ComEd's poles. 1.5 21st Century acknowledges that this Agreement was negotiated between ComEd and 21st Century, that 21st Century has had an adequate opportunity to review the Agreement and to suggest or request changes thereto, that it has made an independent assessment of the business risks and benefits of entering into this Agreement, that based on this evaluation 21st Century desires to enter into this Agreement, and that the Agreement is, as a whole, just and reasonable. 2.0 DEFINITIONS. 2.1 "Attachment" means the fiber optic strand or cable wire, strand or wire hardware or equipment mounted on the strand or wire, including but not limited to the cable, amplifiers, and splice boxes that are used in providing 21st Century Service. An Attachment is placed "on," or is "attached to," a ComEd Pole if any portion of it is physically located on the ComEd Pole, if any portion of it is located within 10 feet of the ComEd Pole, or if any portion of it precludes the use of the adjacent ComEd Pole space by others. 2.2 "21st Century Service" means the broad band telecommunication services provided by 21st Century to its customers, including community antenna television service which is operated to perform for hire the service of receiving and distributing video and audio program signals by wire, cable or other means to members of the public who subscribe to such service. 2.3 "ComEd Poles" means wooden poles included in ComEd Account 364 that ComEd owns in whole or in part. -2- 2.4 "Effective Date" means the date ComEd executes this Agreement. 2.5 "Facility" or "Facilities" means equipment and hardware other than, and incidental to, the Attachment or Power Supply, such as, but not limited to, vertical risers and grounding wires, that are used in providing 21st Century Service and that are placed on ComEd Poles in conjunction with placement of the Attachment or Power Supply. A facility is placed "on," or is "attached to," a ComEd Pole if it is physically located on the pole, if it is located within 10 feet of the ComEd Pole, or if it precludes the use of the adjacent ComEd Pole space by others. 2.6 "Power Supply" means the 21st Century power supply mounted on or by a ComEd Pole. A power supply is placed "on," or is "by" a ComEd Pole if it is physically located on the pole, if it is located within 10 feet of the ComEd Pole, or if it precludes the use of the adjacent ComEd Pole space by others. 3.0 AUTHORITY FOR ATTACHMENTS. 3.1 21st Century agrees that it will, at its own expense, procure and maintain any and all easements, licenses, consents, franchises, certifications, permits, approvals or authorizations .that it may require to engage in business and to use public streets and thoroughfares in the area served, or for the placement of its Attachments, Facilities or Power Supplies by any property owners or by any municipal, state or governmental agency having jurisdiction. ComEd may, at its discretion, request evidence that all such approvals or authorizations have been obtained and are in full force and effect. 3.2 21st Century shall not place any Attachment, Facility, or Power Supply on ComEd Poles until after the Effective Date of this Agreement and shall not place any Attachment, Facility, or Power Supply on ComEd Poles until written permission has been requested and granted as provided in Section 4 of this Agreement, all conditions of such permission have been satisfied, and all necessary licenses, easements, consents, franchises, certifications and permits have been obtained by 21st Century. -3- 3.3 21st Century agrees to not place any Attachment, Facility, or Power Supply on ComEd Poles until all necessary makeready work, as set forth in Section 5 of this Agreement, has been performed by ComEd. 4.0 APPLICATIONS FOR PERMISSION TO PLACE ATTACHMENTS. 4.1 21st Century shall submit a written Application for Permission to Make Attachment("Application"), to ComEd, substantially in the form of attached Exhibit B-1, for the placement of each proposed Attachment, Facility, or Power Supply, specifying the location of the ComEd Pole, the nature of the placement sought, and the date proposed for such placement. 4.2 ComEd will indicate on the Application the replacements, changes and rearrangements to the facilities, equipment or plant of ComEd or other joint owners or users of the ComEd Pole that will be necessary to accommodate the proposed placement of 21st Century's Attachments, Facilities or Power Supplies and the estimated cost of such replacements, changes or rearrangements to be charged to 21st Century ("Marked Application"). Such estimates shall be based on fully allocated costs and will include all direct and indirect costs for labor, time, service and applicable administrative overheads, and will be made in accordance with ComEd's General Order 25, as that order may be amended from time to time. Within thirty (30) days of receipt of the Application, ComEd will return the Marked Application to 21st Century. 4.3 If after receiving the Marked Application, 21st Century still desires to place the identified Attachments, Facilities or Power Supplies on ComEd Poles under the conditions indicated, and to pay the costs estimated, 21st Century shall return the Marked Application to ComEd to indicate acceptance. 4.4 ComEd reserves the right to deny any Application when it believes that the proposed placement of an Attachment, Facility or Power Supply would adversely affect current or proposed utilization of the ComEd Poles by ComEd or other owners, or would otherwise adversely affect ComEd's service or operations. ComEd further reserves the right to specify conditions under which the placement of an Attachment, Facility or Power Supply that would otherwise be denied will be permitted. -4- 4.5 When an Application is granted as provided herein, a permit will be issued by ComEd substantially in the form of attached Exhibit B-2. 5.0 MAKEREADY. 5.1 21st Century agrees to pay in advance the estimated cost of replacements, changes and rearrangements necessary to accommodate the placement of 21st Century's Attachments, Facilities or Power Supplies, as shown on the Application. ComEd shall make such replacements, changes and rearrangements upon receipt of such payment in due course and pursuant to a schedule which will not interfere with ComEd's other responsibilities and duties, unless 21st Century requests, and ComEd agrees to, an expedited makeready schedule as set forth in this Section. 5.2 21st Century may request in writing that all or part of the makeready work be performed on an expedited schedule. If 21st Century makes a request, ComEd may, in its discretion, accept or deny such request. If ComEd agrees to undertake such expedited makeready, ComEd and 21st Century will negotiate a schedule acceptable to both, which schedule will be confirmed in writing. 21st Century agrees to pay ComEd 1.5 times its costs as estimated pursuant to Paragraph 5.1 (including overtime labor costs) for all work performed according to any such expedited schedule. 5.3 21st Century agrees to also pay the costs (to the extent not paid pursuant to Paragraphs 5.1 or 5.2 above), when billed, for any engineering work performed by ComEd, including any analysis, survey or inspection of the proposed route of 21st Century's Attachments, Facilities or Power-Supplies, or the preparation of engineering documentation or work orders and drawings for any replacements, changes and rearrangements of ComEd Poles and facilities or the facilities of other users, that may be necessary to accommodate 21st Century's Attachments, Facilities or Power Supplies, whether occurring prior or subsequent to the placement of any Attachments, Facilities or Power Supplies. 21st Century shall be entitled to reimbursement of such costs actually paid by 21st Century to the extent that ComEd receives reimbursement of such costs from other users. -5- 5.4 21st Century agrees to pay when billed the cost of any additional guying required to accommodate 21st Century's Attachments, Facilities or Power Supplies to the extent such costs are not paid pursuant to Paragraphs 5.1, 5.2, or 5.3 of this Section. 6.0 PROCEDURES FOR ATTACHMENT. 6.1 21st Century agrees to make its Attachments, and place its Facilities and Power Supplies, in a safe and workmanlike manner, in accordance with ComEd's rules and regulations and in compliance with all applicable laws, rules and regulations imposed by any governmental unit or agency having jurisdiction. In particular, all placements of Attachments, Facilities, and Power Supplies coveted by this Agreement shall meet the requirements and specifications of 83 Ill. Admin. Code Part 305, as it may be amended from time to time, and all 21st Century workers shall be equipped for and conform to OSHA safety regulations. 6.2 21st Century shall bond its Attachments at the first, last and tenth poles in each of its cable runs. 21st Century's cable shall be bonded to ComEd's multi-grounded neutral systems in accordance with ComEd's instructions. At ComEd's discretion, ComEd may bond 21st Century's cable to ComEd's systems. If ComEd chooses to perform the bonding, 21st Century agrees to pay when billed ComEd's costs for bonding 21st Century's cable to ComEd's systems. 6.3 21st Century agrees that it will not place any Attachments on a ComEd Pole at more than one level without the express, written permission of ComEd. 6.4 All cables shall be attached flush with the ComEd Pole except where otherwise indicated by ComEd in writing. 6.5 Each Attachment and Power Supply shall be clearly labeled with 21st Century's name and a phone number where a representative of 21st Century can be reached, twenty-four (24) hours a day, to receive reports of problems with 21st Century's Attachments, Facilities or Power Supplies. 21st Century shall investigate all such reports in a timely manner. 7.0 MAINTENANCE, REPAIR, RELOCATION, REMOVAL AND INSPECTION. -6- 7.1 ComEd will maintain the ComEd Poles and repair or replace ComEd Poles as necessary to fulfill its own service requirements. ComEd is not required to maintain any ComEd Poles for a period longer than demanded by its own service requirements. In the event that ComEd determines that it will no longer maintain a ComEd Pole on which 21st Century has placed an Attachment, Facility, or Power Supply, ComEd will send written notice to 21st Century that it will no longer maintain the ComEd Pole and may, at ComEd's discretion, offer 21st Century alternative pole space or the right to purchase the subject ComEd Pole pursuant to terms and conditions set forth in the offer. 7.2 21st Century will at its oft expanse maintain its Attachments, Facilities, and Power Supplies placed on a ComEd Pole in a safe condition, in thorough repair, and in accordance with ComEd's rules and regulations and in compliance with all applicable laws, rules and regulations imposed by any governmental unit or agency having jurisdiction. In particular, all placements of Attachments, Facilities, and Power Supplies covered by this Agreement shall at all times meet the requirements and specifications of 83 Ill. Admin. Code Part 305, as it may be .amended from time to time, and all 21st Century workers shall be equipped for and conform to OSHA safety regulations. 21st Century agrees to maintain its Attachments, Facilities, and Power Supplies in such a manner as will not interfere with the use of any ComEd Pole or facilities placed thereon by ComEd or other users and shall exercise special precautions to avoid damaging ComEd's property and facilities or the property and facilities of other parties on the ComEd Poles. Upon notice by ComEd that any Attachment, Facility, or Power Supply is interfering with or endangering equipment, property or facilities of ComEd or other pole users, 21st Century agrees that it will, at its own expense, immediately take all steps necessary to remedy such interference or dangerous condition. 7.3 21st Century may at any time remove its Attachments, Facilities or Power Supplies but shall immediately give ComEd written notice of such removal. No refund of fees or charges previously billed will be made upon such removal. 7.4 Upon notice from ComEd to 21st Century that the use of any ComEd Pole is forbidden by municipal or public authorities or property owners, the license granted by this Agreement covering the use of such ComEd Pole shall immediately terminate. 21st Century agrees to remove all of its Attachments, Facilities, and Power Supplies from such ComEd Pole at -7- its own expense within thirty (30) days of receipt of such notice. However, if the municipal or public authority or property owner requires removal within less than thirty (30) days, then 21st Century agrees to remove all of its Attachments, Facilities, and Power Supplies from such ComEd Pole at its own expense within the time set by the municipal or public authority or property owner. No refund of fees or charges previously billed will be made upon such removal. If 21st Century fails to remove all of its Attachments, Facilities, and Power Supplies within the time set forth above, ComEd may, at its option, effect the removal and 21st Century agrees to pay, when billed, the costs of such removal. 7.5 21st Century shall, at its own expense, upon notice from ComEd, relocate, replace or remove its Attachments, Facilities or Power Supplies, or transfer the Attachments, Facilities or Power Supplies to substitute poles, or perform any other work in connection with their relocation, replacement or removal that may be required by ComEd to accommodate the service or operating requirements of ComEd or any joint owner of a ComEd Pole. If 21st Century fails to perform any act or work pursuant to this Paragraph in a timely manner as set forth in ComEd's notice to 21st Century, ComEd may, at its option perform such act or work and 21st Century agrees to pay, when billed, ComEd's costs and expenses. 21st Century may request in writing that ComEd relocate, replace or renew 21st Century's Attachments, Facilities or Power Supplies, or transfer the Attachments, Facilities or Power Supplies to substitute poles, or perform any other work in connection with their relocation, replacement or removal. ComEd may, in its sole discretion, accept or reject 21st Century's written request. If ComEd accepts 21st Century's written request, 21st Century will pay ComEd its costs and expenses within thirty (30) days from the date that a bill for such costs and expenses is rendered by ComEd. ComEd's decision to reject 21st Century's request that ComEd perform work pursuant to this Paragraph shall not relieve 21st Century of its duties and obligations under this Paragraph. 7.6 If 21st Century places any Attachments, Facilities or Power Supplies on ComEd Poles in violation of Section 3 of this Agreement, or fails to remove all Attachments, Facilities, and Power Supplies following termination of this Agreement, ComEd may remove such Attachments, Facilities or Power Supplies without incurring any liability and without any duty to account to 21st Century for the removed property. ComEd will bill 21st Century for the expense of removal and 21st Century will pay ComEd such expenses within thirty (30) days from the date of each such bill rendered by ComEd. The rights contained in this Paragraph are in addition to all -8- other rights ComEd has under this Agreement including, but not limited to, ComEd's right to terminate the Agreement and ComEd's right to collect charges for unauthorized placement of Attachments, Facilities or Power Supplies. 7.7 If ComEd determines that its own service or operating requirements, including but not limited to considerations of economy and safety, require the immediate relocation, replacement, removal or disconnection of any-of the Attachments, Facilities or Power Supplies located on any ComEd Pole, ComEd may, without notice and at its own expense, affect such relocation, replacement, removal or disconnection, and may, but need not, transfer the facilities to substitute poles, or perform any other work that may be required in the maintenance, replacement, removal or relocation of poles, or facilities located thereon, or that may be otherwise required to meet the service or operating needs of ComEd. ComEd shall give 21st Century notice of any such change in 21st Century's facilities that requires subsequent attention by 21st Century. 7.8 ComEd also reserves the right to make periodic inspections of the entire plant of 21st Century located within ComEd's service area, or a portion of that plant, as often as conditions warrant. The cost of such inspection will be borne by 21st Century. ComEd will bill 21st Century for the cost of such inspection and 21st Century will pay ComEd such cost within thirty (30) days from the date of each such bill rendered by ComEd. If ComEd determines that corrections or changes need to be made to any of 21st Century's Attachments, Facilities or Power Supplies in order to ensure ComEd's service or operating requirements, including considerations of economy and safety, 21st Century will make such corrections or changes at its own expense, in a timely manner. 7.9 Neither the occurrence nor the nonoccurrence of any inspection will relieve 21st Century of any responsibility, obligation or liability assumed under this Agreement. 8.0 CHARGES. 21st Century agrees to pay ComEd all fees and charges set forth in this Section within thirty (30) days from the date of each bill rendered by ComEd. 8.1 Annual Fee. ---------- -9- 8.1.1 Century agrees to pay *** per year for each Attachment or Power Supply for which 21st Century has been issued a permit to attach to or place on a ComEd Pole. Such Annual Fee shall be paid in the year that ComEd grants a permit for the placement of such Attachment or Power Supply and thereafter will be payable on or before the first day of January of each year during which this Agreement remains in effect. 8.1.2 Payment of the Annual Fee to ComEd shall not in ,-any way affect 21st Century's obligations or duties to pay monies, whether in the form of fees, charges, or otherwise, to any joint owner of a ComEd Pole. 8.2 Charge for Unauthorized Attachment: 21st Century recognizes that ---------------------------------- ComEd incurs administrative and other expenses when an unauthorized placement is made on a ComEd Pole. Accordingly, 21st Century agrees to pay ComEd *** per ComEd Pole for each Attachment or other placement made by 21st Century in violation of Section 3, or any other Section, of this Agreement. This charge will be paid in addition, and without prejudice, to any of the other rights and remedies ComEd may have under this Agreement in the event of 21st Century's violation of the terms and conditions of this Agreement, including but not limited to ComEd's right to collect an Annual Fee for the ComEd Pole on which the unauthorized placement is made, ComEd's right to remove or relocate the Attachment, Facility, or Power Supply, and ComEd's rights to terminate this Agreement. 8.3 Interest. 21st Century agrees to pay interest at *** on all rates and -------- charges not timely paid, on and from the date that payment is due. 8.4 Taxes. Each party will be solely responsible for any taxes or ----- assessments levied on any of its wires, cables, equipment or facilities. 9.0 RESOLUTION OF DISPUTES. - ---------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -10- 9.1 The parties agree to address disagreements and disputes relating to technical fee and billing issues arising in the implementation of this Agreement through the procedures set forth in this Section before resorting to legal proceedings. 9.2 Each party shall designate an employee who will be the "Dispute Coordinator" for purposes of this Section and a more senior employee who will be the "Review Manager" for purposes of this Section. The employees initially designated by each party as their Dispute Coordinators and Review Managers are set forth in Exhibit C to this Agreement. Parties may change such designation by giving notice of such change pursuant to Section 18 of this Agreement. 9.3 Each party shall raise any questions, disagreements or disputes, of the type described in Paragraph 9.1, arising in the implementation of this Agreement with the Dispute Coordinator. 9.4 Where the Dispute Coordinators have been unable to resolve any such disagreement or dispute, within thirty (30) days of notice of such dispute, the parties will refer such disagreement or dispute to the Review Managers for the respective parties who will work together to resolve the relevant issue in a manner that meets the interests of both parties. 9.5 If the parties, after complying with the provisions of Paragraphs 9.3 and 9.4, are unable to resolve the disagreement or dispute within sixty (60) days, and the dispute involves more than One Hundred Thousand Dollars ($100,000.00), they agree to submit such disagreement or dispute to a neutral independent mediator for non-binding mediation. If a mediator cannot be agreed upon, one will be selected by the CPR Institute for Dispute Resolution. 9.6 The parties agree that the following timetable shall apply to the resolution of all matters, unless an extension is agreed to by the parties: (i) for all billing matters, the mediation shall be completed within thirty (30) days of the date that the aggrieved party provides notice to the other party that mediation is required; and (ii) for all other matters, mediation shall be completed within sixty (60) days of the date the aggrieved party provides notice to the other party that mediation is required. -11- 10.0 LIABILITY AND INDEMNIFICATION. 10.1 ComEd has the right to maintain, replace, relocate, and remove ComEd Poles and to maintain, replace, relocate, remove, and operate its facilities in such manner as will enable it to fulfill its own service requirements. ComEd shall not be liable to 21st Century, or any customer of 21st Century, or any other person, for any interruption of service or for any interference with the operation of 21st Century's Attachments, Facilities, Power Supplies, or other equipment arising in any way out of such maintenance, replacement, relocation, removal or operation. 10.2 ComEd will not be liable for any noise, induced voltages, currents or other interference in the facilities owned by 21st Century. 10.3 21st Century agrees to indemnify, hold harmless and defend ComEd from and against any and all claims and demands for damages to property, or for injury or death to persons, that are related to, arise out of, or are caused by, the placement of 21st Century's Attachments, Facilities, and Power Supplies, including claims arising out of or related to repair and maintenance work performed by 21st Century, its employees, agents, contractors or subcontractors. This indemnification shall include, but not be limited to, claims made under any workman's compensation law or under any plan for employee's disability and death benefits (including, without limitation, claims and demands that may be asserted by employees, agents, contractors, and subcontractors). 21st Century shall immediately notify ComEd of any such claims, demands, damages, injuries or deaths, and shall provide a written report, or other pertinent material or information if requested. 10.4 21st Century agrees to indemnify ComEd, its successors and assigns, against any and all claims and demands for damages or losses resulting from any interruption of 21st Century's or ComEd's service, or the service of ComEd's or 21st Century's customers, if such interruption in service arises out of or is in any way related to the exercise by 21st Century of rights granted under this Agreement. 10.5 21st Century agrees to be liable for and promptly reimburse ComEd or other ComEd Pole users for expenses incurred in repairing or replacing ComEd Poles or facilities damaged or destroyed if such damage or destruction is caused, in whole or in part, by the -12- presence on ComEd Poles of 21st Century's Attachments, Facilities or Power Supplies, or by an act, acts or failure to act on the part of 21st Century, its agents, employees, contractors, sub-contractors or customers. 10.6 21st Century's duties and obligations to indemnify ComEd shall survive termination of this Agreement. 11.0 REPRESENTATIONS AND WARRANTIES. 11.1 Power and Authority. Each party represents and warrants that it is a ------------------- corporation duly organized, validly existing, in good standing under the laws of the State in which it is incorporated and has full power and authority to execute this Agreement and undertake the responsibilities and obligations contemplated by it. 11.2 Enforceability. Each of the parties represents and warrants that the -------------- execution and performance of this Agreement have been duly authorized by all necessary corporate actions, that the Agreement constitutes a valid and binding obligation of each of them, enforceable against each of them in accordance with its terms, and that they have independently reviewed the Agreement, including the charges set forth in Section 8, and concluded that the Agreement is just and reasonable. 11.3 Insurance. 21st Century represents and warrants that it maintains and --------- will continue to maintain policies of insurance to protect the parties to this Agreement and other users from and against any and all claims, demands, actions, judgments, costs, expenses and liabilities that may arise or result, directly or indirectly, from or by reason of any loss, injury, or damage due to 21st century's placement of its Attachments, Facilities, or Power supplies on ComEd Poles so long as this Agreement is in effect. 21st Century represents and warrants that during the entire Term of this Agreement it will carry Workman's Compensation Insurance and each of the following types of insurance in amounts acceptable to ComEd, but, in no event, less than *** as to any one person and *** as to any one occurrence: (i) property liability insurance, (ii) personal injury liability insurance, and (iii) general liability insurance. 21st century represents and warrants that ComEd shall be named as an additional insured on each such policy of insurance. 21st Century - ------------------------ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -13- agrees to submit to ComEd certificates from each insurance company stating the named insureds and the type, amount and term of the insurance and further stating that the insurance company will not cancel or change any policy of insurance issued to 21st Century except after thirty (30) days' written notice to ComEd. 11.4 Bond. 21st Century represents and warrants that during the entire Term ---- of this Agreement it will maintain a bond to guarantee the payment of all sums that may become due from 21st Century to ComEd under the terms of this Agreement. At the time this Agreement becomes effective, 21st Century agrees to furnish a bond to ComEd in the amount shown on the Bond Schedule attached as Exhibit D for the number of ComEd Poles being used throughout the term of this Agreement. The bond shall be in a form and with a surety acceptable to ComEd. If 21st Century's use of ComEd Poles at any time exceeds the number of poles covered by the bond, 21st Century represents and warrants that it will immediately raise the total bond amount to the level which satisfies the requirement set forth in the Bond Schedule. 12.0 DEFAULT, TERMINATION AND OTHER REMEDIES. 12.1 Either party may terminate this Agreement upon the discovery of a breach of the other party of one of the representations or warranties set forth in this Agreement and upon written notification to the other party. 12.2 Either party may terminate this Agreement upon the default of the other party if the default is not timely cured after written notification. 12.3 If 21st Century fails to comply with any of the provisions of this Agreement, it shall be in default and ComEd shall provide written notification of the default. If 21st Century fails to correct the default within thirty (30) days after receiving written notice of such default, then ComEd may, at its discretion, terminate this entire Agreement or terminate a permit or permits granted pursuant to Section 4 this Agreement to place Attachments, Facilities or Power Supplies on any particular ComEd Poles. These remedies are not exclusive, but are in addition to all other rights and remedies that ComEd may have. -14- 12.4 If at any time 21st Century loses a franchise to use the public streets and highways in any area included in Exhibit A to this Agreement, ComEd may terminate this entire Agreement or terminate a permit or permits granted pursuant to Section 4 of this Agreement. 12.5 Upon termination of any permit to use ComEd Poles granted pursuant to this Agreement, or upon termination of the entire Agreement, 21st century agrees to immediately remove all Attachments, Facilities, and Power Supplies from all ComEd Poles affected by the termination at its own cost. If 21st Century fails to do so, ComEd may remove the Attachments, Facilities or Power Supplies without incurring any liability and without any duty to account to 21st Century for the removed property. ComEd will bill 21st Century for the expense of removal and 21st Century will pay ComEd such expenses when billed by ComEd. 12.6 In the event that 21st Century defaults under this Agreement and ComEd elects to terminate this Agreement, or upon termination of this Agreement, 21st Century shall not be relieved of its duties or obligations under this Agreement so long as any 21st Century Attachment, Facility, or Power Supply remains on any ComEd Pole. 12.7 Unless this Agreement is otherwise terminated in its entirety, this Agreement shall automatically terminate on the last day of the Term of this Agreement as defined in Section 19'. 13.0 ASSIGNMENT. 13.1 21st Century agrees that it will not assign or transfer the privileges granted by this Agreement without the prior written consent of ComEd, which consent will not be unreasonably withheld. 21st Century recognizes that ComEd will incur administrative and other expenses when it investigates a request to assign or transfer the privileges granted by this Agreement and 21st Century agrees to pay all such reasonable costs when billed. 13.2 An unauthorized assignment or transfer of this Agreement includes, but is not limited to, 21st Century explicitly granting permission or otherwise allowing, explicitly or implicitly, any party other than 21st Century to use 21st Century Attachments, Facilities or Power supplies, or any portion thereof, which are placed on a ComEd Pole. -15- 13.3 This Agreement shall extend to and be binding upon any successors or assigns of 21st Century, whether or not written permission for assignment or transfer has been granted, and on ComEd's successors and assigns. 13.4 21st Century will not be released of any of its duties or obligations under this Agreement, including, but not limited to 21st Century's duties and obligations to indemnify ComEd as set forth in Section 10 of this Agreement, except by the express written consent of ComEd. ComEd's consent to the assignment or transfer of all or part of this Agreement shall not constitute consent to release 21st Century of any of its duties or obligations under this Agreement unless such intent is explicitly set forth by ComEd in writing. 13.5 21st Century recognizes and agrees that ComEd will incur extra administrative and other expenses if 21st Century makes an unauthorized assignment or transfer of this Agreement. Accordingly, to cover such administrative costs, 21st Century agrees to pay ComEd *** for each unauthorized assignment or transfer of this Agreement. These charges will be made in addition, and without prejudice, to any of the other rights and remedies ComEd may have under this Agreement in the event of 21st Century's violation of the terms and conditions of this Agreement, including but not limited to ComEd's right to collect Annual Fees, ComEd's right to remove or relocate unauthorized placements of Attachments, Facilities or Power Supplies, and ComEd's right to terminate this Agreement. 14.0 OTHER USERS. This Agreement does not limit the right of ComEd to make additional contracts with other persons, firms, corporations, or associations for use of ComEd Poles or facilities placed thereon, nor is it intended to limit the rights or privileges previously conferred by ComEd to others. 15.0 WAIVER OF TERMS OR CONDITIONS. 15.1 The failure of ComEd to enforce or insist on compliance with any of the terms and conditions of this Agreement shall not constitute a waiver or relinquishment of any such terms or conditions. - ----------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -16- 15.2 The acceptance of payment by ComEd of any of the fees or charges set forth in this Agreement shall not constitute a waiver of any breach or violation of the terms of this Agreement. 16.0 COMPLIANCE WITH APPLICABLE LAWS. 21st Century agrees to comply with all applicable laws, rules and regulations relating to the installation, maintenance and use of its Attachments, Facilities, and Power Supplies. 21st Century is solely responsible for identifying and complying with all such rules and regulations. 17.0 REGULATORY APPROVAL. 17.1 This Agreement may be filed with, and may be subject to the approval of, the Illinois Commerce Commission. If this Agreement is subject to the approval of the Illinois Commerce Commission, the parties agree to jointly seek such approval; if the Commission does not then grant such approval, this Agreement shall terminate as of the day such approval is denied. 17.2 If the Annual Fee, or any other fee, charge or expense set forth in this Agreement is subject to the approval of the Illinois Commerce Commission, or any other administrative, judicial, or legislative body, and the Annual Fee or other fee, charge or expense is not approved by the Illinois Commerce commission or other administrative, judicial, or legislative body, this Agreement shall terminate as of the day such approval is denied. 18.0 NOTICE. Except where otherwise indicated, notices required under this Agreement shall be sufficient if sent by certified mail return receipt requested, postage prepaid, to the parties at the -17- addresses set forth below, or to such other addresses as the parties may hereafter substitute by written notice given in the manner prescribed in this Paragraph. If to Commonwealth Edison Company: Chris Patchaouras Commonwealth Edison Company 1319 South First Avenue Maywood, Illinois 60153 With a copy to: Commonwealth Edison Company Office of the General Counsel 125 South Clark Street, Suite 1535 Chicago, Illinois 60603 If to 21st Century Cable TV, Inc.: (insert name) 21st Century Cable TV, Inc. North Pier Terminal 401 East Illinois Street Suite 535 Chicago, Illinois 60611 19.0 TERM OF AGREEMENT This Agreement shall become effective as of the Effective Date and shall remain in affect for a period of five (5) years unless otherwise terminated pursuant to this Agreement. 19.1 Option To Renew. 21st Century shall have an option to renew this --------------- Agreement for one additional five (5) year term provided that 21st Century is not in default under the terms and conditions of this Agreement and provided 21st Century agrees to pay the fee indicated on Exhibit E attached hereto and all other fees stated herein. 20.0 AMENDMENT. -18- Neither this Agreement nor any of the provisions hereof can be amended, changed, waived, discharged or terminated, except by an instrument in writing signed by both parties. 21.0 ATTORNEYS' FEES, WAIVER OF JURY TRIAL. If either party institutes an action or proceeding against the other relating to the provisions of this Agreement or any default hereunder, the unsuccessful party to such action or proceeding will reimburse the successful party therein for the .reasonable expenses of attorneys fees, disbursements and costs, and litigation expenses incurred by the successful party, in an amount awarded by a court. The parties each hereby waive the right (if any) to trial by jury in any such action or proceeding. 22.0 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between ComEd and 21st Century. -- This Agreement supersedes, in all respects, all prior written or oral agreements, if any, between the parties and there are no agreements, understandings, warranties or representations between ComEd and 21st Century except as set forth herein. 23.0 CONSTRUCTION OF AGREEMENT. ComEd and 21st Century have each read and fully understand the terms of this Agreement; each has had the opportunity to have this Agreement reviewed by counsel. The rule of construction providing that ambiguities in a contract shall be construed against the drafter shall not apply. 24.0 ATTACHMENTS. All schedules or attachments annexed hereto are incorporated herein for all purposes as though set forth herein in full. 25.0 APPLICABLE LAW. -19- The laws of the State of Illinois shall govern the construction of this Agreement. IN WITNESS WHEREOF, the parties to this Agreement by their duly authorized representatives have executed this Agreement. COMMONWEALTH EDISON COMPANY By: /s/ Paul D. McCoy ------------------ Printed Name: Paul D. McCoy -------------- Title: Vice President -------------- Date: 4/3/96 ------ 21ST CENTURY CABLE TV, INC. By: /s/ Glenn W. Milligan ---------------------- Printed Name: Glenn W. Milligan ----------------- Title: President & CEO --------------- Date: 3/26/96 ------- -20- Exhibit A [SURVEY MAP] Exhibit B [B-1 Application for Permission to Make Attachment B-2 Permit granting permission to make attachment] Exhibit C Commonwealth Edison Company - --------------------------- Dispute Coordinator: Chris Patchaouras Commonwealth Edison Company 1319 South First Avenue Maywood, Illinois 60153 Review Manager: Gregory V. Welch Commonwealth Edison Company 1319 South First Avenue Maywood, Illinois 60153 21st Century Cable TV, Inc. - -------------------------- Dispute Coordinator: [insert name, address and telephone number] Review Manager: [insert name, address and telephone number] EXHIBIT D BOND SCHEDULE -------------
AMOUNT OF BOND REQUIRED NUMBER OF POLES EDISON POLES - --------------- ------------ 0-100 *** 101-200 *** 201-300 *** 301-400 *** 401-500 *** 501-600 *** 601-700 *** 701-800 *** 801-900 *** 901-1000 *** 1001-2200 *** 2200 - up ***
In the event that Licensee has executed more than one Pole Lease Agreement, Licensee may, with Licensor's written permission, in lieu of furnishing a single bond for each such agreement, furnish either (1) a single bond which covers the obligations under all such Agreements, or (2) two or more bonds, each of which is written in an amount called for under this Bond Schedule for the total number of poles for which permits for pole attachments have been granted in the areas ------- to which the Agreements covered by any such bond relate. * Plus $*** for each 100 poles in excess of 1,000 poles. The amount of bond required, up to a maximum of $***, shall be equal to or in excess of the amount thus determined for the number of Edison poles covered by approved permits. In ---------------- order to minimize the need for frequent change in the Bond amount, it is recommended the amount be such that it cover proposed expansion by the COMM ---- Company within the succeeding six to twelve months. - ---------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. COMMUNICATION (COMM) GUY REQUIREMENTS ------------------------------------- POLES SOLELY OWNED BY EDISON OR ------------------------------- JOINTLY OWNED WITH A TELEPHONE CO --------------------------------- 1. Guy strain due to COMM shall be calculated for heavy ice loading conditions specified in 83 Ill. Admin. Code Part 305. 2. COMM may provide its own guy, rod and anchor to hold its unbalanced strain or may utilize Edison and telephone company anchor and rod providing COMM specifies its strain in down guy an permit application sent to Edison and the telephone company and providing Edison and the telephone company approve the installation or upon telephone company approval may utilize solely owned telephone company guying facilities. 3. COMM shall provide for guying under one of the following plans to hold unbalanced strain due to facilities. a. COMM may install its anchor, rod and down guy, providing sufficient space exists to avoid interference with present guys and anchors --- during and following installation. b. COMM may attach to an existing or replaced Edison anchor rod (requires Edison approval only). c. COMM may utilizing, replaced or new solely owned telephone company anchors, rods and guys, or attach COMM guy to sale telephone company rod and anchor (requires telephone company approval only). d. COMM may utilize existing or replaced telephone. company guy and jointly owned Edison and telephone company rod and anchor (Edison and telephone company approval required). [**CHART GRAPHICS ARE OMITTED WHICH SHOW THE PLACEMENT OF THE EDISON GUY, COMM GUY AND THE TELEPHONE GUY] POLE MOUNTED COMMUNICATION (COMM)) CABINET ON JOINT EDISON & TELEPHONE CO POLE (ONLY 1-CABINET PER POLE) [**CHART A DIAGRAM IS OMITTED WHICH SHOWS THE MOUNTED COMMUNICATIONS SYSTEM ON THE JOINT EDISON AND TELEPHONE CO. POLE. THIS DIAGRAM SHOWS THE PLACEMENT OF THE FOLLOWING STARTING FROM THE TOP OF THE POLE: 1. EDISON'S FACILITIES; 2. CENTER OF COMM'S HIGHEST ATTACHMENT; 3. TELEPHONE CO. EQUIPMENT; 4. TELEPHONE CO. TERMINAL; 5. POWER SOURCE; AND 6. POLE MOUNTED COMM CABINET] Notes: 1. COMM shall not place power supply or other pole mounted equipment cabinets on: (a) Corner poles (b) Transformer poles (c) Capacitor poles (d) Disconnect and/or fuse poles (e) Recloser poles (f) Primary-cable terminal poles (g) Other equipment poles so designed by local forces (h) Any joint pole so designated by telephone co. (i) Any pole with a telephone co. 2. The COMM System shall be designed in such a way that no power supply can be electronically backed from another power supply through the COMM Systems. MINIMUM CLEARANCE BETWEEN EDISON & COMMUNICATION (COMM) FACILITIES [**CHART A DIAGRAM HAS BEEN OMITTED SHOWING THE MINIMUM CLEARANCES BETWEEN PARTS OF THE EDISON POLE AND COMMUNICATION FACILITIES.] Notes: 1. Telephone company will specify clearances between telephone and Communication facilities. 2. On each jointly used pole, standard or special space assigned to Edison and uppermost height of communication facility attachment in telephone space varies with height of pole, and mutual agreement between Edison and each telephone company. 3. Vertical separation shall be a minimum of 48" between pole attachments and a minimum of 40" between bottom of supply conductors and top of communication equipment. 4. On solely owned Edison poles, Edison will specify maximum attachment height for Communication facilities. MINIMUM MID SPAN CLEARANCES [**CHART A DIAGRAM HAS BEEN OMITTED DISPLAYING THAT 30" IS THE MINIMUM MID-SPAN CLEARANCE BETWEEN THE BOTTOM OF THE LOWEST EDISON CONDUCTOR AND THE TOP OF THE COMM HIGHEST CONDUCTOR.] Commonwealth Edison Company Technical Center 1319 South First Avenue Maywood, IL 60653-2496 COMED April 19, 1996 21st Century Cable TV, Inc. c/o Mrs. Yolanda Rodriguez NBC Tower, 455 N. City Front Plaza Drive Suite #2950 Chicago, IL 60611 Dear Ms. Rodriguez: Enclosed is a fully executed Poly Attachment Agreement between ComEd and 21st Century Cable TV, Inc. The following items are necessary for our files, in conjunction with this agreement and must be received before any attachment permits will be issued: 1. Certificates of Insurance as stated in Section 11.3 of the agreement. 2. Articles of Incorporation of your company, certified by the State of Illinois, if you are an Illinois Corporation; or Certificate of Authority to do business in Illinois, if you are a foreign (other than Illinois) corporation. 3. The names and residential addresses of the officers, directors and principal shareholders of your company. 4. Pole Attachment Bond Certificates as required in the bond schedule (Exhibit D) of the agreement. Sincerely, Les Sherwood CATV Coordinator (708) 410-5233 LS/ss Enclosure cc: C. Patchouras 21ST CENTURY CABLE TV., INC. August 7, 1996 Mr. Chris Patchouras Joint Utility Coordinator Commonwealth Edison 1319 South First Avenue Maywood, Illinois 60153 Dear Mr. Patchouras: I have enclosed per the request of Commonwealth Edison, an original copy of our insurance certificate and bond certificate. I understand that all other requirements have been fulfilled by Frank Butler. If there is necessary information which has not been provided, please do not hesitate to contact me. I can be reached at (312) 836-1950. Sincerely, John J. Gronke Director of Purchasing and Contracts Date (MM/DD/YY) ACCORD(TM) CERTIFICATE OF LIABILITY INSURANCE Page 1 of 1 28-June-1996 --------------------------------------------- Producer 7134 THIS CERTIFICATE IS ISSUED AS A MATTER OF Willis Corroon Corporation of Illinois INFORMATION ONLY AND CONFERS NO RIGHTS UPON 1717 Park Place THE CERTIFICATE HOLDER. THIS CERTIFICATE Suite #200 DOES NOT AMEND. EXTEND OR ALTER THE _____, Illinois 60563 COVERAGE AFFORDED BY THE POLICIES BELOW. --------------------------------------------- INSURED COMPANIES AFFORDING COVERAGE - ----------------------------------------------------------------------------------------------------------------------------------- COMPANY HARTFORD INSURANCE CO. OF THE MIDWEST A --------------------------------------------- COMPANY HARTFORD CASUALTY INSURANCE CO. 21st Century Cable TV, Inc. B NBC Towers, Suite 2950 --------------------------------------------- 455 N. Cityfront Plaza COMPANY HARTFORD INSURANCE COMPANY OF ILLINOIS Chicago, Illinois 60611 C --------------------------------------------- COMPANY D -------------------------------------------- ==================================================================================================================================== COVERAGES ====================================================================================================================================
THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN HAVE BEEN REDUCED BY PAID CLAIMS. CO TYPE OF INSURANCE POLICY NUMBER POLICY EFFECTIVE POLICY LIMITES LTR DATE (MM/DD/YY) EXPIRATION X GENERAL LIABILITY - A X COMMERCIAL GENERAL 83UUCNP5797 20-OCT-1995 20-OCT-1996 GENERAL AGGREGATE $2,000,000 LIABILITY PRODUCTS-COM/OP AGG $ INCLUDED Claims Made X Occur PERSONAL & ADV INJURY $1,000,000 -- - EACH OCCURRENCE $1,000,000 Owner's & Contractors Prof FIRE DAMAGE (any one fire) $ 300,000 MED HELP (Any one person) $ 10,000 AUTOMOBILE LIABILITY ___ ANY AUTO 83UUCNP5797 20-OCT-1995 20-OCT-1996 COMBINED SINGLE LIMIT $1,000,000 ___ ALL OWNED AUTOS BODILY INSURY $ A X ___ SCHEDULED AUTOS (Per Person) Xx ___ NON-OWNED AUTOS BODILY INSURY $ (Per Accident) PROPERTY DAMAGE $ EXCESS LIABILITY EACH OCCURRENCE 5,000,000 B X UMBRELLA FORM 83RHUYW2550 2-OCT-1996 AGGREGATE 5,000,000 OTHER THAN UMBRELLA FORM WORKERS COMPENSATION AND x WC STATUTORY OTHER C EMPLOYMENT LIABILITY 20-OCT-1996 LIMITS THE PROPRIETOR ____ INCL. 83WECAU2728 20-OCT-1995 EL EACH ACCIDENT 500,000 PARTNERS/EXECUTIVE ____EXCL. EL DISEASE-EA EMPLOYEE 500,000 OFFICE ARE OTHER Marine Floater - A COMMERCIAL PROPERTY 83UUCNP5797 20-OCT-1995 20-OCT-1996 All Risk Misc. Coverage $ 50,000 Description of Operations/locations/Vehicles/Special Items Re: Attachments, Facilities or Power Supplies on ComEd Poles Pole Lease Agreement Commonwealth Edison is an ADDITIONAL INSURED pertaining to general liability. ====================================================================================================================================
CERTIFICATE HOLDER CANCELLATION ==================================================================================================================================== SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE EXPIERATION Commonwealth Edison Company DATE THEREOF, THE ISSUING COMPANY WILL ENDEAVOR COMPANY WILL ENDEAVOR TO MAR. P.O. Box 767 30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO THE LEFT. BUT Chicago, IL 60690 FAILURE TO MAIL SUCH NOTICE SHALL IMPOSE NO OBLIGATION ON LIABILITY OF ANY KIND UPON THE COMPANY, ITS AGENTS OR REPRESENTATIVES. ---------------------------------------------------------------------------------- AUTHORIZED REPRESENTATIVE OF WILLIS CORROON CORPORATION OF ILLINOIS ACORD 25-S (1/95) ACORD CORPORATION 1988 ====================================================================================================================================
POLE ATTACHMENT BOND #SB0039752 KNOW ALL MEN BY THESE PRESENTS, That we, 21st Century Cable TV, Inc., as Principal, and the General Accident Insurance Company of America, a corporation of the State of Pennsylvania, as Surety, are held and firmly bound unto Commonwealth Edison Company as Obligee, in the sum of $25,000 lawful money of the United States of America, to be paid to said Obligee, its successors and assigns, jointly and severally, firmly by these presents. WHEREAS, The above bound Principal has entered into a written agreement with the said Obligee, dated April 3, 1996, for the use of its poles in connection with the furnishing of television cable antenna service. The above-mentioned agreement sets forth the terms and conditions which govern the use of such poles and said agreement is hereby specifically referred to and made part of this bond, with like force and effect as if herein at length set forth. NOW, THEREFORE, THE CONDITION OF THE ABOVE OBLIGATION IS SUCH, That if the above-named Principal, its successors or assigns, does and shall well and truly observe, perform, fulfill and keep its obligations as set forth in the above- mentioned agreement, for which a bond must be posted, then the above obligation to be void; otherwise to remain in full force and effect. The bond is subject, however, to the following express conditions: FIRST: That in the event of a default on the part of the Principal, its successors or assigns, a written statement of such default with full details thereof shall be given to Surety promptly, and in any event, within thirty (30) days after the Obligee shall lean of such default, such notice to be delivered personally or by registered mail to Surety at its Home Office at Philadelphia, Pennsylvania. SECOND: That no claim, suit or action under this bond by reason of any such default shall be brought against Surety unless asserted or commenced within twelve (12) months after the effective date of any termination or cancellation of this bond. THIRD: That this bond may be terminated or cancelled by Surety by thirty (30) days prior notice in writing from Surety to Principal and to Obligee, such notice to be given by certified mail. Such termination or cancellation shall not affect any liability incurred or accrued under this bond prior to the effective date of such termination or cancellation. The liability of the Surety shall be limited to the amount set forth above and is not cumulative. FOURTH: That no right of action shall accrue under this bond to or for the use of any person other than the Obligee, its successors and assigns. IN WITNESS WHEREOF, The above bound Principal and the above bound Surety have hereunto set their hand and seals, on the 30th day of July, 1996. 21ST CENTURY CABLE TV, INC. BY: /s/ -------------------------- GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA BY: /s/ -------------------------- Gregory K. Kessler, Attorney-in-fact GA\Power of Attorney GA 0051187 ____ Walnut Street, Philadelphia, Pennsylvania 19106 KNOW ALL MEN BY THESE PRESENTS, that the GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, a Pennsylvania corporation having its principal office in Philadelphia, Pennsylvania does hereby make, constitute and appoint Edward L. Hart, John J. Moriarty, Janet B. Heckinger, Patricia M. Stein, Marcia A. Ritter, Gregory K. Kessler, all of the City of Naperville, State of Illinois -------------------- each individually if there be more than one named, its true and lawful Attorney- in-Fact, to make, execute, seal and deliver as surety for and on its behalf, and as its act and deed any and all bonds and undertakings of suretyship, and to bind the GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA hereby as fully and to the same extent as if such bonds and undertakings and other writings obligatory in the nature thereof were signed by an Executive Officer of the GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA and sealed and attested by one other of such officers, and hereby ratifies and confirms all that its said Attorney(s)- in-Fact may do in pursuance hereof; provided that no bond or undertaking of suretyship executed under this authority shall exceed in the amount the sum of: Twenty Five Million Dollars ($25,000,000). This power of attorney is granted under and by authority of Subsection 5.1(b) of Article V of the by-laws of GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA which became effective February 20, 1992 and which provisions are in full force and effect, reading as follows: "5.1(b) The Board of Directors or President, Vice, President, or other officer designated by them or either of them shall have power to appoint Attorneys-in-Fact and to authorize them to execute on behalf of the Company bonds and undertakings, recognizances, contracts of indemnity and other writings obligatory in the nature thereof, and to attach the seal of the Company thereto; and shall also have power to remove any such Attorney-in- Fact at any time and revoke the power and authority given to him. Any instrument executed by any such Attorney-in-Fact shall be as binding upon the Company as if signed by an Executive Officer, and sealed and attested by the Secretary." This power of attorney is signed and sealed by facsimile under and by authority of the following resolution adopted by the board of directors of GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, at a meeting held on the 20th day of February, 1992, at which a quorum was present, and said resolution has not been amended or repealed: "Resolved, that in granting powers of attorney pursuant to subsection 5.1(b) of the by-laws of the Company the signature of such directors and officers and the seal of the Company may be affixed to any such power of attorney or any certificate relating thereto by facsimile, and any such power of attorney or certificate bearing such facsimile signatures or facsimile seal shall be valid and binding upon the Company in the future with respect to any bond or undertaking to which it is attached." IN WITNESS WHEREOF, GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA has caused these presents to be signed by Dennis S. Perler, its Vice President, and its corporate seal to be hereto affixed, this 18 day of November, 1994. GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA /s/ ---------------------------------------------- Dennis S. Perler, Vice President Commonwealth of Pennsylvania Philadelphia County On this 18 day of November, 1994, personally appeared Dennis S. Perler to me known to be the Vice President of the GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, and acknowledged that he executed and attested the foregoing instrument and affixed the seal of said corporation thereto and that the seal affixed to said instrument is the corporate seal of said Company, that said corporate seal and his signature were duly affixed pursuant to the by-laws and the resolution of the board of directors of said Company. [NOTARIAL SEAL OF LISA EDLING, Notary Public City of Philadelphia, Phila. County /s/ ----------------------------------------------- My Commission Expires Notary Public in and for the Commonwealth Nov. 18, 1996] of Pennsylvania I, James E. Carroll, Assistant Secretary of the GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, do hereby certify that the above and foregoing is a true and correct copy of a power of attorney executed by GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, which is still in full force and effect, and that Article V, Subsection 5.1(b) of the by-laws of the Company and the resolution set forth above are still in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of said Company this 30th day of July, 1996. [COMPANY SEAL] /s/ ----------------------------------------------- James E. Carroll, Assistant Secretary SB-0025 3.92 This Power of Attorney may not be used to execute any bond with an inception date after November 18, 1996 - -------------------------------------------------------------------------------- For verification of the authenticity of this Power of Attorney you may call 1- 800-288-2360 and ask for the Power of Attorney supervisor. Please refer to the Power of Attorney number, the above-named individual(s) and details of the bond to which the power is attached. In Pennsylvania, Dial 215-625-3081. SB-0027 3.92 STATE OF ILLINOIS COUNTY OF DUPAGE On this 30th day of July, 1996, before me personally came Gregory K. Kessler to me know, who being by so duly sworn, did depose and says: that he/she is Attorney-in-Fact of General Accident Insurance Company of America the Corporation described in and which executed the foregoing instrument; that he/she knows the seal of said Corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority granted to him/her in accordance with the By-Laws of the said Corporation, and that he/she signed his/her name thereto by like authority. /s/ --------------------------------------- NOTARY PUBLIC My Commission Expires [OFFICIAL SEAL of Julie A. Sarkauskas Notary Public, State of Illinois My Commission Expires 11-3-97] EX-10.6 5 EXHIBIT 10.6 Exhibit 10.6 AMERITECH - ILLINOIS Structure License Agreement This Agreement, effective the 14th day of November, 1996 between Ameritech, hereinafter called Licensor, and 21st Century Cable TV, Inc., located at 455 N. Cityfront Plaza Drive, #2950 in Chicago, Illinois hereinafter called Licensee. WITNESSETH: Whereas, Licensee proposes to furnish communication services in the municipality of Chicago, Illinois. Whereas, Licensee will need to place and maintain aerial and/or underground communications facilities within the area described above and desires to place such communications facilities on poles and/or in the conduit system of Licensor; and, Whereas, Licensor is willing to permit to the extent it may lawfully do so, the placement of said communications facilities on or within Licensor's facilities where reasonably available and where such use will not interfere with Licensor's service requirements or the use of its facilities by others. Now therefore, in consideration of the mutual covenants, terms and conditions herein contained, the parties do hereby mutually covenant and agree as follows: ARTICLE I DEFINITIONS As used in this Agreement: A. ANCHOR ROD A metal rod connected to an anchor and to which a guy strand is attached. Also known as, a "guy rod". B. AMERITECH As used herein "AMERITECH" means Illinois Bell Telephone Company aka Ameritech - Illinois, a corporation organized and existing under the laws of the State of Illinois, having its principal office in the City of Chicago, Illinois. C. CONDUIT A structure containing one or more ducts. D. CONDUIT SYSTEM Any combination of ducts, conduit(s), and manholes joined to form any integrated system but not including cable vaults or buildings owned or controlled by Licensor or in the Licensor's remote terminals or controlled environmental vaults.. E. DUCT A single enclosed raceway for communications cables. F. GUY STRAND A metal cable of high tensile strength which is attached to a pole and anchor rod (or another pole) for the purpose of reducing pole stress. G. INNERDUCT Normally a 1 - 1/4" or 1" duct placed in groups of 2 or 3 inside a larger duct. -2- H. JOINT OWNER A person, firm or corporation having an ownership interest in a pole and/or anchor rod with Licensor. I. JOINT USER A party who owns poles or anchor rods to which Licensor is extended or may hereafter be extended joint use privileges or to whom Licensor has extended or may hereafter extend joint use privileges of Licensor's poles or anchor rods. J. LICENSEE A person, firm, corporation or entity which is a telecommunications carrier, as defined in 220 ILCS 5/13-202 or the owners of a cable television system as defined in 47 U.S.C. sec 522(5). K. LICENSEE'S COMMUNICATIONS FACILITIES The cables and associated equipment and hardware utilized by Licensee in providing communications service and located between Licensee-provided terminal equipment and/or patron-provided terminal equipment. L. LICENSOR'S POLES Poles owned by Licensor in whole or in part. M. MANHOLE An opening in a conduit system which persons may enter for the purpose of installing and maintaining communications facilities. N. MAKE-READY WORK The work required (including field survey, rearrangement and/or transfer of existing facilities on a pole or in a conduit system, replacement of a pole or any other changes) to -3- accommodate Licensee's communication facilities on Licensor's poles or in Licensors conduit system. O. OTHER LICENSEE Any entity, other than Licensee herein or a Joint User, to whom Licensor has or hereafter shall extend the privilege of attaching communications facilities to Licensor's poles or occupying Licensor's conduit system. P. PATRON A person, firm or corporation who receives Licensee's communications service. Q. POLE ATTACHMENT Any item of Licensee's communication facilities in direct contact with Licensors pole. R. SUSPENSION STRAND A metal cable of high tensile strength attached to pole and used to support communications facilities. Also known as "messenger". Article II Scope of Agreement A. Subject to the provisions of this Agreement, Licensor agrees to issue to Licensee for any lawful communications purpose, revocable, non-exclusive permits authorizing the attachment of Licensee's communications facilities to Licensor's poles. B. Subject to the provisions of this Agreement, Licensor agrees to issue to Licensee for any lawful communications purpose, revocable, non-exclusive Permits authorizing the placing of Licensee's communications facilities in Licensors conduit system. -4- C. Nothing contained in this Agreement shall be construed to compel Licensor to construct, retain, extend, place or maintain any pole, or other facilities not needed for Licensor's own service requirements. D. Nothing contained in this Agreement shall be construed as a limitation, restriction, or prohibition against Licensor with respect to any agreement and/or arrangement which Licensor has heretofore entered into, or may in the future enter into, with others not parties to this Agreement regarding the poles and conduit systems covered by this Agreement. The rights of Licensees shall at all times be subject to any such existing agreement and/or arrangement. E. This Agreement may be subject to approval by the Illinois Commerce Commission. Article III Fees and Charges A. Licensee agrees to pay to Licensor the fees and charges as specified herein and in accordance with the terms and conditions of Appendix 1, attached hereto and made a part hereof. B. Nonpayment of any amount due under this Agreement shall constitute a default of this Agreement. C. Licensee shall furnish bond in a form of satisfactory to Licensor or other satisfactory evidence of financial security in such amount as Licensor from time to time may require, in an initial amount of $*** for each municipality to guarantee the performance of all of Licensee's obligations hereunder. The amount of the bond or financial security shall not operate as a limitation upon the obligations of the Licensee hereunder. D. At the expiration of one year from the date of this agreement, and at the end of every six month period thereafter, changes in the amount of the fees and charges specified in Appendix I may be made by Licensor upon one month prior written notice to Licensee, and Licensee agrees to pay such changed fees and charges. - -------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -5- Notwithstanding any other provision of this Agreement, Licensee may terminate this agreement at the end of such notice period if the change in fees and charges is not acceptable to Licensee, by giving Licensor written notice of its election to terminate this Agreement at least 15 days prior to the end of such notice period. E. Changes or amendments to Appendix I shall be effected by the separate execution of Appendix I as so modified. The separately executed Appendix I shall become a part of and be governed by the terms and conditions of this Agreement. Article IV Advance Payment A. Licensee shall make an advance payment to the Licensor unless alternative methods have been negotiated prior to: 1. any undertaking by Licensor of a field survey in an amount specified by Licensor sufficient to cover the estimated charges for completing such field survey. 2. any performance by Licensor of any make-ready work required in an amount specified by Licensor sufficient to cover the estimated charges for completing the required make-ready work. B. The amount of the advance payment required will be credited against the charge for such field survey and/or make-ready work. C. Where the advance payment made by Licensee to Licensor for field survey or make ready work is less than the charge for such work, Licensee agrees to pay Licensor all sums due in excess of the amount of the advance payment. D. Where the advance payment made by Licensee to Licensor for field survey or make ready work exceeds the charge for such work, Licensor shall refund the difference to Licensee. Article V -6- Specifications A. Licensee's communications facilities shall be placed and maintained in accordance with the requirements and specifications of the latest edition of the Bell System Manual of Construction Procedures (Blue Book), the National Electrical Code (NEC), the National Electrical Safety Code (NESC), the rules and regulations of the Occupational Safety and Health Act (OSHA) and General Order 160 of the Illinois Commerce Commission or any governing authority having jurisdiction over the subject matter. Where a difference in specifications may exist, the more stringent shall apply. B. If any part of Licensee's communications facilities is not so placed and maintained and Licensee has not corrected the violation within 15 days from the date of written notice thereof from Licensor, Licensor may in addition to any other remedies Licensor may have hereunder, remove Licensee's communications facilities from any or all of Licensor's poles or perform such other work and take such other action in connection with said communications facilities that Licensor's employees or performance of Licensor's service obligations at the cost and expense to Licensee in accordance with Appendix I and without any liability on the part of Licensor, provided, however, that when in the sole judgment of Licensor such a condition may endanger the safety of Licensor's employees or interfere with the performance of Licensor's service obligations, Licensor may take such action without prior notice to Licensee. Article VI Legal Requirements A. Licensee shall be responsible for obtaining from the appropriate public and/or private authority any required authorization to construct, operate and/or maintain its communications facilities on public and private property at the location of Licensor's pole and conduit system which Licensee uses. Licensor reserves the right to terminate an existing Permit or refuse to grant a new Permit where such evidence is unsatisfactory. -7- B. The parties hereto shall at all times observe and comply with, and the provisions of the Agreement are subject to, all laws, ordinances, regulations and use restrictions which in any manner affect the rights and obligations of the parties hereto under this Agreement, so long as such laws, ordinances, regulations, or restrictions remain in effect. C. No Permit granted under this Agreement shall extend to any of the Licensor's poles or conduit system where the placement of Licensee's communications facilities would result in a forfeiture of the rights of Licensor, Joint Owners or Joint Users, to occupy the property on which such poles or conduit system are located. If the existence of Licensee's communications facilities on Licensor's pole or in Licensor's conduit system would cause a forfeiture of the right of the Licensor, Joint Owners or Joint Users, or all to occupy such property, Licensee agrees to remove its communications facilities forthwith upon notification by Licensor. If said communications facilities are not so removed, Licensor may perform and/or have performed such removal without liability on the part of Licensor and Licensee agrees to pay Licensor, Joint Owners or Joint User or all, the cost thereof and for all losses and damages that may result. Article VII Issuance of Permits A. Before Licensee shall attach to any pole and/or occupy any duct of Licensor. Licensee shall make Application for and have received an appropriate permit. (Appendix III, Forms P-1 and P-2 and/or C-1 through C- 2). B. Licensee agrees to limit filing of Applications for Pole Attachment Permits (Appendix III, Forms Pl and P2) to include not more than 300 poles on any one Application and 1500 poles on all Applications which are pending approval by Licensor at any one time. Such limitations will apply to Licensor's poles located within a single plant construction district of Licensor. Licensee further agrees to designate a desired priority of completion of the field survey and make-ready work for each Application relative to all other of its Applications on file with Licensor at the same time. -8- Article VIII Make-Ready Requirements A. Pole 1. When an Application for Pole Attachment Permit is submitted by Licensee a field survey will be required for each pole for which attachment is requested to determine the adequacy of the pole to accommodate Licensee's communications facilities. Licensor will advise the Licensee will advise the Licensee in writing of the estimated charges that will apply for such field survey. (Appendix III, Form A-1, Authorization for Field Survey/Make-Ready Work). 2. The field survey may be performed jointly by representatives of Licensor, Joint Owner and/or Joint User and Licensee. 3. Licensor reserves the right to refuse to grant a Pole Attachment Permit for attachment to a pole when Licensor determines that the communications space on such pole is required for its exclusive use or that of a governmental entity with pole attachment rights and that the pole may not reasonably be rearranged or replaced to accommodate Licensee's communications facilities. 4. In the event Licensor determines that a pole to which Licensee desires to attach is inadequate or otherwise needs rearrangement of the existing facilities thereon to accommodate the Licensee's communications facilities. Licensor will advise the Licensee in writing of the estimated make-ready charges that will apply (Appendix III, Form A-1, Authorization for Field Survey/Make-Ready Work). Licensee shall have 30 days from the date of said Form A-1 to indicate its authorization for completion of the required make-ready work and acceptance of the resulting charges. 5. Any required make-ready work will be performed following receipt by Licensor of completed Form A-1. Licensee shall pay Licensor for all make-ready work completed in accordance with the provisions of this Agreement and shall also reimburse the owner(s) of other facilities attached to said poles for any expense incurred by it or them in transferring or rearranging the facilities -9- of such other owners to accommodate Licensee's pole attachment. Licensee shall not be entitled to reimbursement of any amounts paid to Licensor for pole replacements or for rearrangement of facilities on Licensor's poles by reason of the use by the Licensor or other authorized user(s) of any additional capacity resulting from such replacement or rearrangement. 6. Should Licensor, a Joint Owner or a Joint User or a governmental entity with pole attachment rights, for its own service requirements, need to attach additional facilities to any of Licensor's poles, to which Licensee is attached, Licensee's will either rearrange its communications facilities on the pole or transfer them to a replacement pole as determined by Licensor so that the additional facilities of Licensor, Joint Owner or Joint User [or governmental entity] may be attached. The rearrangement or transfer of Licensee's communications facilities will be made at Licensee's sole expense. 10. Permit Applications received by Licensor from two or more Licensees for accommodations on the same pole will be processed by Licensor in attachment accordance with the procedures detailed in Appendix II attached hereto. 11. Whenever it is necessary for Licensor to replace its pole to accommodate Licensee's communications facilities, Licensor may grant Licensee the option. where possible and acceptable to Joint Owner or Joint User, to become the owner of the pole upon payment of all replacement costs on a fully installed basis. This option is subject to the further conditions that: a. Licensee grants Licensor and any Joint Owner or Joint User the right to attach their respective facilities to such replacement pole upon the same terms and conditions as set forth in this Agreement and b. that any governmental entity having attachment rights to Licensor's pole shall be granted similar attachment rights under the same terms and conditions as apply to the pole being replaced. -10- 12. Should Licensee exercise these options and become the pole owner, it agrees to maintain the pole in a safe and serviceable condition for all attachees to the pole for as long as Licensee owns an interest in the pole. B. Anchor Rod 1. Licensee may attach its guy strand to Licensor's existing anchor rod at no charge where Licensor determines that adequate capacity is available; provided that Licensee agrees to secure any necessary right-of-way therefore from the appropriate property owner. 2. Should Licensor, Joint Owner or Joint User attached to the anchor rod, need for its own service requirements to increase its load on the anchor rod to which Licensee's guy is attached, Licensee will either rearrange its guy strand on the anchor rod or transfer it to a replacement anchor as determined by Licensor. The cost of such rearrangement and/or transfer, and the placement of a hew or replacing anchor will be at the sole expense of Licensee agrees to pay. 3. If Licensee does not rearrange or transfer its guy strand within 15 days following the date of written notice from Licensor regarding such requirement, Licensor, Joint Owner or Joint User may perform, or have performed, the work involved and Licensee agrees to pay the full costs thereof. C. Conduit System 1. When an Application for Conduit Occupancy Permit (Appendix III, Form C- l) is submitted by Licensee a record check by the Licensor will be required to determined the availability of the conduit system to accommodate Licensee's communications facilities. Licensor will advise the Licensee in writing of the estimated charges that will apply for field verification and make ready work required. (Appendix III, Form A- 1, Authorization for Field Survey/Make-Ready Work). 2. The Licensor retains the right, in its sole judgment, to determine whether such requested space is or is not available. The Licensor will notify the Licensee if the requested space is not available. -11- 3. If, in the Licensor's sole discretion, the requested space may be made available by rearrangement of the existing communications facilities therein, Licensor will advise the Licensee in writing of the estimated make-ready charges that will apply (Appendix III, Form A-1, Authorization for Field Survey Make-Ready Work). Licensee shall have 30 days from the date of said Form A-1 to indicate its authorization for completion of the required make-ready work and acceptance of the resulting charges. 4. Should Licensor [or governmental entity with whom Licensor has an agreement granting such entity priority access to and occupancy of Licensor's conduit system] need, for its own service requirements, any of the space occupied by Licensee's communications facilities in Licensor's conduit system and, if Licensor advises Licensee that Licensee's communications facilities can be accommodated otherwise in Licensor's conduit system, Licensee shall be required to rearrange its communications facilities in the manner designed by the Licensor and at the expense of Licensee. If Licensee has not so rearranged its communications facilities within 15 days of the date of written notice from Licensor requesting such rearrangement, Licensor may perform to have performed such rearrangement without any liability on the part of the Licensor and Licensee agrees to pay the costs thereof. D. In performing all make-ready work to accommodate Licensee's communications facilities. Licensor will endeavor to include such work in its normal work load schedule. Article IX CONSTRUCTION, MAINTENANCE AND REMOVAL OF COMMUNICATIONS FACILITIES A. Licensee may attach to the poles of the Licensor or place in the conduit systems of the Licensor, only those Licensee communication facilities authorized to be attached or placed in the Permit issued under Article VII, above. Licensee shall not attach to the poles of the Licensor or place in the conduit or trench systems of the Licensor, any Licensee communications facilities not authorized to be attached or placed in a Permit issued under Article VII. Licensee shall not modify, -12- supplement, add to or rearrange any Licensee communications facilities attached to the poles of the Licensor, or placed in the conduit of the Licensor, without having first been issued a Permit by the Licensor under Article VII. B. Licensee shall, at its own expense, construct and maintain its communications facilities on Licensor's poles and in Licensor's conduit system in a safe condition and in a manner acceptable to Licensor, so as not to conflict with the use of the Licensor's poles or conduit system by Licensor or other authorized user's facilities attached thereon or placed therein. Licensee shall include in its installation of facilities appropriate permanent labels or other identification to all cables and equipment placed on Licensor's poles and in Licensor's conduit system. C. Licensor shall specify the point of attachment on each of Licensor's poles to be occupied by Licensee's communications facilities. Where multiple Licensee's attachments are involved, Licensor will attempt to the extent practical, to designate the same relative position on each pole for each Licensee's communications facilities. D. Licensee shall provide written notification to Licensor and obtain specific written authorization from Licensor before relocating or replacing its communication facilities on Licensor's poles. E. Licensee's communications facilities shall be placed in, maintained, removed from, relocated or replaced in Licensor's conduit system only when specified authorization for the work to be performed and approval of the party to perform such work has been obtained in advance from Licensor. Licensor retains the right to specify what, if any, work shall be performed by Licensor at Licensee's expense. F. In each instance where Licensee's communications facilities are to be placed in Licensor's conduit system, Licensor shall designate the particular duct the cable will occupy, the location where and manner in which Licensee's cables will enter and exit Licensor's conduit system, the racking of cables in the manhole and the specific location for any associated equipment to be located in the conduit system, Licensor reserves the right to include or limit the type, number and size of Licensee's communications facilities which may be placed in Licensor's conduit system. -13- G. Licensor's manholes shall be opened only at permitted by Licensor's authorized employees or agents. Licensee shall be responsible for obtaining any necessary permits from appropriate authorities to open manholes and conduct work operations. Licensee's employees, agents or contractors will be permitted to enter or work in Licensor's manholes only when an authorized agent or employee of Licensor is present. Licensor's said agent or employee shall have the authority to suspend Licensee's work operations in and around Licensor's manholes if, in the sole discretion of said agent or employee, any hazardous conditions arise or any unsafe practices are being followed by Licensee's employees, agents or contractors. Licensee agrees to pay Licensor the charges, as determined, in accordance with the terms and conditions of Appendix 1, for having Licensor's agent or employee present when Licensee's work is being done in and around Licensor's manholes. The presence of Licensor's authorized agent or employee shall not relieve Licensee of its responsibility to conduct all of its work operations in and around Licensor's manholes in a safe and workman like manner, in accordance with the terms of Article V. H. Licensor may when it deems an emergency to exist, rearrange, transfer or remove Licensee's communications facilities attached to Licensor's poles or occupying Licensors conduit system without incurring any liability on the part of the Licensor. As soon as practicable thereafter, Licensor will endeavor to arrange for reacommodation of Licensee's communication facilities so affected. Licensee agrees to pay Licensor for all expense incurred by Licensor in connection with such rearrangement, transfer, removal and reacommodation. I. If necessary to accommodate the facilities of a subsequent Licensee, Licensee shall, at Licensor's direction but at the expense of the subsequent Licensee, rearrange its facilities on a pole, or transfer its facilities to a replacement pole. J. Licensee shall be liable for and shall pay for any rearrangements or transfers of the facilities of the Licensor, a Joint Owner or Joint User, a governmental entity or other Licensee which is required due to a violation by Licensee of one or more of the requirements or specifications identified in Section A of Article V. K. Licensor may, but is not required to, transfer, or have transferred, Licensee's facilities from poles on which such facilities are attached to poles requiring replacement. Licensor shall have no liability to Licensee for any such transfer. If the Licensor elects not to transfer Licensee's facilities due to safety considerations, -14- Licensor shall notify Licensee in writing and Licensee shall transfer such facilities, at its sole costs and without any abatement of the Facility Transfer Fee. L. If Licensee shall fail to complete any rearrangement or transfer required hereunder within 15 days after the date of written notice from Licensor requesting such rearrangement or transfer, Licensor, or a Joint Owner or Joint User, may perform or have performed such rearrangement or transfer without liability on the part of Licensor or the Joint User or Joint- Owner and Licensee agrees to pay the cost thereof. M. Licensee, at is expense will remove its communications facilities from Licensor's pole(s) or duct(s) within 30 days after 1 termination of the Permit covering such pole attachment or conduit occupancy or 2. the date Licensee substitutes for communications facilities in one duct with facilities in another duct or ducts. If Licensee falls to remove its communications facilities within such periods as specified preceding, Licensor shall have the right to remove such facilities at Licensee's expense and without any liability on the part of the Licensor. Licensee shall advise Licensor in writing as to the date on which the removal of its communications facilities from each Licensor pole and/or portion of conduit system has been completed. ARTICLE X Termination of Licenses A. Any Permit issued under this Agreement shall automatically terminate when Licensee or Licensor ceases to have authority to construct and operate its communications facilities on public or private property at the location of the particular pole or duct covered by the Permit. -15- B. Licensee may at any time surrender its Permit and remove its communications facilities from a pole or portion of a conduit system by giving Licensor written notice of such intention (Appendix III, Form E and F). Once Licensee's communications have been removed they shall not again be attached to such pole or be placed in the same portion of the conduit system until Licensee has complied with all provisions of this Agreement as though no previous Permit has been issued. ARTICLE XI Inspection of Licensee's Communications Facilities A. Licensor reserves the right to make periodic inspections of any part of Licensee's communications facilities and guying attached to Licensor's poles or occupying Licensor's conduit system, and Licensee shall reimburse Licensor for the expense of such inspections. Any charge imposed by Licensor for such inspections shall be in addition to any other sums due to payable by Licensee under this Agreement. B. The frequency and extend to such inspections by Licensor will depend primarily upon Licensee's performance in relation to the requirements of Articles V, VII and IX herein. C. Licensor will give Licensee advance written notice of such inspections, except in those instances where, in the sole judgment of Licensor, safety considerations justify the need for such an inspection without the delay of waiting until a written notice has been forwarded to Licensee. D. The making of periodic inspections or the failure to do so shall not operate to relieve Licensee of any responsibility, obligation or liability assumed under this Agreement. ARTICLE XII Unauthorized Attachment or Occupancy -16- A. If any of Licensee's communications facilities shall be found attached to Licensor's poles or in Licensor's conduit system for which no Permit is outstanding, Licensor, without prejudice to its other rights or remedies under this Agreement (including termination) or otherwise, may Impose a charge and require Licensee to submit in writing, within 15 days after the date of written notification from Licensor or the unauthorized attachment or occupancy, a pole attachment or Conduit occupancy Permit Application. If such Application is not received by the Licensor within the specified time period, Licensee shall remove its unauthorized attachment or occupancy with 15 days of the final date for submitting the required Application, or Licensor may remove Licensee's communications facilities without liability, and the expense of such removal shall be borne by Licensee. B. For the purpose of determining the applicable charge, absent satisfactory evidence to the contrary, the unauthorized pole attachment or conduit occupancy shall be treated as having existed for a period of two year(s) prior to its discovery or for the period beginning with the date on which Licensee was initially authorized to attach facilities of the same communications system to poles or occupy the conduit system, whichever period shall be the shorter; and the fees and charges as specified in Appendix 1, shall be due and payable forthwith whether or not Licensee is permitted to continue the pole attachment or conduit occupancy. C. No act or failure to act by Licensor with regard to said unlicensed use shall be deemed as a ratification or the licensing of the unlicensed use; and if any Permit should be subsequently issued, said Permit shall not operate retroactively or constitute a waiver by Licensor of any of its rights of privileges under this Agreement or otherwise; provided, however, that Licensee shall be subject to all liabilities, obligations and responsibilities of this Agreement in regard to said unauthorized use from its inception. ARTICLE XIII Licensor's Lien Should Licensor under any applicable Article of this Agreement remove Licensee's communications facilities from Licensor's poles or conduit system, Licensor will deliver to Licensee the communications facilities so removed upon payment by Licensee of the cost of removal, storage and delivery and all other amounts due Licensor hereunder. -17- In the event Licensor terminates this Agreement in accordance with Article XIX, Subparagraph B, then Licensor is granted a lien on Licensee's communications facilities occupying Licensor's conduit system or attached to Licensor's poles or removed therefrom, with power of public or private sale, to cover any amounts due Licensor under the provisions of this Agreement. Such liens shall not operate to prevent Licensor from pursuing, at its option, any other remedy in law, equity or otherwise including any other remedy provided for in this Agreement. ARTICLE XIV Liability and Damages A. Licensor reserves to itself, its successors and assigns, the right to locate and maintain its poles and conduit system and to operate its facilities in conjunction therewith in such a manner as will best enable it to fulfill its own service requirements. Licensor shall not be liable to Licensee for any interruption of Licensee's service or for interference with the operation of Licensee's communications facilities, or for any special, indirect, or consequential damages arising in any manner, including Licensor's negligence, out of the use of Licensor's pole or conduit systems or Licensor's actions or omissions in regard thereto and Licensee shall indemnify and save harmless Licensor from and against any and all claims, demands, causes of action, costs and attorneys fees of whatever kind resulting therefrom. Licensor shall exercise precaution to avoid damaging the communications facilities of the Licensee; make an immediate report to the Licensee of the occurrence of any such damage caused by Licensor's employees, agents or contracts and agrees to reimburse the Licensee for all costs incurred by the Licensee to repair such damaged facilities. B. Licensee shall exercise precaution to avoid damaging the facilities of Licensor and of others attached to Licensors pole or placed in Licensor's conduit system, and Licensee assumes all responsibility for any and all loss from such damage caused by Licensee's employees, agents or contractors. -18- Licensee shall make an immediate report to Licensor and any others attached to Licensor's poles or conduit system occupant of the occurrence of any such damage and agrees to reimburse the respective parties for all costs incurred in making repairs. C. Licensee shall indemnify, protect and save harmless Licensor from and against any and all claims, demands, causes of action and costs (including attorney fees) for damages to property and injury or death to persons, including payments made under any Workman's Compensation Law or under any plan for employee's disability and death benefits, which may arise out of or be caused by the erection, maintenance, presence, use of removal of Licensee's communications facilities or by their proximity to the facilities of the parties attached to Licensors poles or placed in Licensors conduit system, or by any act or omission of Licensee's employees, agents or contractors on or in the vicinity of Licensor's poles or conduit system. D. Licensees shall indemnify, protect and save harmless Licensor from any and all claims, demands, causes of action, costs (including attorney fees) of whatever kind which arise directly or indirectly from the construction and operation of Licensee's communications facilities, including taxes, special charges by others, claims and demands for damages or loss for infringement of copyright, for libel and slander, for unauthorized use to television broadcast programs and other program material, and from and against all claims and demands for infringement of patents with respect to the manufacture, use and operation of Licensee's communications facilities in combination with Licensor's poles, conduit system or otherwise. E. In the event Licensor is named as a party in any legal or quasi legal proceeding wherein Licensee's occupation of property is disputed or challenged, Licensee agrees to reimburse Licensor its full cost of participation therein including attorney's fees. F. In those circumstances where a property owner demands that Licensor relocate facilities located on property and such demand for relocation is precipitated, in whole or in part, by the activities of the Licensee on the owner's property or by the attachment of Licensee's communication facilities to the Licensor's poles or placement of Licensee's communication facilities in Licensee's conduit (or trench system), and Licensor, in ------------------ response to such demand, relocates such facilities to avoid the owners property, Licensee shall pay the Licensor's costs of such relocation. -19- ARTICLE XV Insurance A Licensee shall carry insurance (including contractual liability coverage) issued by an insurance carrier satisfactory to Licensor to protect the parties hereto from and against any and all claims, demands, causes of actions, judgments, cost (including attorneys fees), expenses and liabilities of every kind and nature which may arise or covered in Article XIV preceding. B. The amounts of such insurance: 1 against liability due to damage to property shall be not less than *** as to any one occurrence and *** aggregate, and 2. against liability due to injury to or death of persons shall not be not less than *** as to any one person and ***, aggregate. C. Licensee shall also carry such insurance as will protect it from all claims under any Workman's Compensation Law in effect that may be applicable to it. D. Licensee shall submit to Licensor certificates by each company insuring Licensee to the effect that it has insured Licensee for all Liabilities of Licensee covered by the Agreement and that it will not cancel or change any such policy of insurance Licensee except after 60 days' written notice to Licensor. E. All insurance must be effective before Licensor will authorize Licensee to attach its communications facilities in Licensor's conduit system and shall remain in force until such communications facilities have been removed from all such poles and/or conduit systems. ARTICLE XVI Authorization not Exclusive - --------------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -20- Nothing herein contained shall be construed as a grant of any exclusive authorization, right or privilege to Licensee. Licensor shall have the right to grant, renew and extend rights and privileges to others not parties to this Agreement, by contract or otherwise, to use any pole or conduit system covered by this Agreement. ARTICLE XVII Assignment of Rights A. Licensee shall not assign or transfer this Agreement or any authorization granted hereunder, and this Agreement shall not inure to the benefit of Licensee's successors, without the prior written consent of Licensor. B. In the event such consent or consents are granted by Licensor, then this Agreement shall extend to and bind the successors and assigns of the parties hereto. ARTICLE VIII Failure to Enforce Failure of Licensor to enforce or insist upon compliance-with any of the terms or conditions of this Agreement or to give notice or declare this Agreement or any authorization granted hereunder terminated shall not constitute a general waiver or relinquishment of any term or condition of this Agreement, but the same shall be and remain at all times in full force and effect. ARTICLE XIX Termination of Agreement A. Subject to provisions of Article XVII, hereof, should Licensee cease to provide its communications services in the area(s) covered by this Agreement, then all of Licensee's rights, privileges and authorizations under this Agreement, including all -21- Permits issued hereunder, shall automatically terminate as of the date following the final day that such communications services are provided. B. If Licensee shall fail to comply with any of the terms or conditions of this Agreement or default in any of its obligations under this Agreement and shall fail within thirty (30) days after the date of written notice from Licensor to correct such default or noncompliance, Licensor may at its option, forthwith terminate this Agreement and all authorizations granted hereunder, or the authorizations covering the poles or conduit system as to which such default or noncompliance shall have occurred. C. Licensor shall have the right to forthwith terminate this entire Agreement, or any Permit issued hereunder, without prior notice to Licensee: 1 If Licensee's communications facilities are used or maintained in violation of any law or in aid of any unlawful act or undertaking; or 2. If Licensee defaults under Article V of this Agreement; or 3. If Licensee attaches to any of Licensor's poles or occupies Licensor's conduit system without having first been issued a Permit therefore. D. If the insurance carrier shall at any time notify Licensor that the policy or policies of insurance, required under Article XV hereof, will be canceled or changed so that the requirements of Article XV will no longer be satisfied, then this Agreement terminates upon the effective date of such cancellation or change. E. In the event of termination of this Agreement or any of Licensee's rights, privileges or authorizations hereunder, Licensee shall remove its communications facilities from Licensor's poles and conduit system within six months from the date of termination; provided, however, that Licensee shall be liable for and pay all fees and charges pursuant to terms of this Agreement to Licensor until Licensee's communications facilities are actually removed from Licensor's poles and conduit system. F. If Licensee does not remove its communications facilities from Licensor's poles and conduit system within the applicable time periods specified in this Agreement, -22- Licensor shall have the right to remove them at the expense of Licensee and without any liability on the part of Licensor to Licensee therefore. ARTICLE XX Term of Agreement A. Unless sooner terminated as herein provided, this Agreement shall continue in effect for a term of one year(s) from the date hereof, and thereafter until either party hereto terminates this Agreement by giving the other party at least six months prior written notice thereof. Such six month's of termination may be given to take effect at the end of the original one year period or thereafter. B. Termination of this Agreement or any Permits issued hereunder shall not affect Licensee's liabilities andobligations incurred hereunder prior to the effective date of such termination. ARTICLE XXI Notices All written notices required under this Agreement shall be given by posting the same in certified first class mail, return receipt requested or overnight carrier, with all fees prepaid, to Licensee as follows: Glenn W. Milligan, President & CEO 21st Century Cable TV, Inc. 455 N. Cityfront Plaza Drive, #2950 Chicago, IL 60611 and to Licensor as follows: Ameritech - Illinois ATTN: Structure Leasing Coordinator 54 Mill Street Box 32 -23- Pontiac, MI 48342 or to such address as the parties hereto may from time to time specify. ARTICLE XXII Supersedure of Previous Agreement(s) This Agreement supersedes all previous agreements, whether written or oral, between Licensee and Licensor for placement and maintenance of Licensee's communications facilities on Licensor's poles and in Licensor's conduit system within the geographical area covered by this Agreement; and there are no other provisions, terms, conditions to this Agreement except as expressed herein. All currently effective Permits heretofore granted to Licensee pursuant to such previous agreements shall be subject to the terms and conditions of this Agreement. In Witness Whereof, the parties hereto have executed this Agreement in duplicate on the day and year first above written. Witness (Attest) Illinois Bell Telephone Company a.k.a. Ameritech - Illinois _________________________ By: ___________________________ Secretary Title: ________________________ 21st Century Cable TV, Inc. ------------------------------------ Company Name Witness (Attest) By: ________________________ ______________________ Title: ______________________ Secretary President & CEO -24- APPENDIX I Schedule of Fees and Charges This Appendix I, effective as of _____________, is an integral part of the Structure License Agreement between AMERITECH (Licensor) and 21st Century Cable TV, Inc. dated _____________ and contains the fees and charges governing the use of Licensor's poles and conduit system by Licensee's communications facilities. POLE ATTACHMENTS AND CONDUIT OCCUPANCY A. ATTACHMENT AND OCCUPANCY FEES 1. General a. Attachment and occupancy fees commence on the day the Permit is issued. Such fees cease as of the final day of the semi-annual billing period in which the removal of the communications facilities is completed by the Licensee or by the Licensor. b. Fees shall be payable semi-annually in advance on the first day of January and July, without proration. c. For the purpose of computing the total attachment and conduit occupancy fees due hereunder, the total fee shall be based upon the number of poles and duct feet of conduit for which Permits have been issued before the first day of June and the first day of December each year. The first advance payment of the semi- annual fee for Permits issued under this Agreement shall include a proration from the first day of the month following the date the Permit was issued to the first regular semi-annual payment date. d. Attachment or occupancy fees for initial issuance of a Permit for attachment or occupancy are due at the time of Permit issuance for the semi-annual billing period in which the Permit is issued. The attachment or occupancy fees for initial issuance of a Permit made in December or June shall also include prepayment for the subsequent semi-annual billing period. -25- APPENDIX I SCHEDULE OF FEES AND CHARGES 2. Fees Pole Attachments Yearly Annual Fee ---------------- ----------------- (a) Suspension strand, each, per pole = *** *** (b) Drive hook, drops, power supplies or guy strand, per pole = (See note below) Note: Fee applies only where such hardware is the sole attachment to a pole or bracket. Facility Transfer Fee *** --------------------- The Facility transfer fee shall be calculated annually and shall be the product of ***% (the percentage of poles Ameritech replaces annually is ***%) of the total poles multiplied by $*** to which Licensee is attached as of December 31 of the previous year. Conduit Occupancy ----------------- (a) Per foot of duct occupied by *** (within Chicago City Limits) Licensee's communications *** (outside Chicago City Limits) facilities (b) For the purpose of computing the total fee due hereunder, the length of duct considered occupied shall be measured from the center to *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -26- center of manholes, or from the center of a manhole to the end of Licensor's duct occupied by Licensee's communications facilities. -27- APPENDIX I SCHEDULE OF FEES AND CHARGES B. Charges 1. Computation All charges for field survey, make-ready work, inspections, removal of Licensee's facilities from Licensor's poles and conduit system and other work performed for Licensee shall be based upon the full cost and expense to Licensor of such work or for having such work performed by an authorized representative of the Licensor. 2. Pole Replacements The charge for replacement of a pole required to accommodate Licensee's attachment, in accordance with Article VIII, a, 3, shall be based on Licensor's fully installed costs less salvage value, if any. In such cases, Licensee shall have the option, where possible and acceptable to any Joint User or owner to become the owner of the replacement pole in accordance with Article VIII, a, 8. C. Payment Date Failure to pay all fees and charges within 30 days after presentment of the bill therefore or on the specified payment date, whichever is later, shall constitute a default of this Agreement and shall result in the imposition of a late charge of 1 1/2% per month or part thereof, of the unpaid balance. Illinois Bell Telephone Company a.k.a. Ameritech - Illinois By: ___________________________ Title: __________________________ By: ____________________________ -28- Title: ___________________________ President & CEO Appendix II Multiple Pole Attachment Permit Applications This Appendix, effective as of ___________ is an integral part of the Structure License Agreement between AMERITECH Company (Licensor), and 21st Century Cable TV, Inc. (Licensee), dated __________________ and contains the procedure for processing multiple Pole Attachment Permit Applications governing the use of Licensor's poles. PROCEDURE FOR PROCESSING MULTIPLE POLE ATTACHMENT PERMIT APPLICATIONS The following procedure shall be adhered to in processing Applications to attach to Licensor's poles by multiple Licensees. A. Definitions Simultaneous Permit Applications -------------------------------- Properly completed Pole Permit Applications relative to the same pole which are received by the Licensor from multiple applicants on the same business day. Non-Simultaneous Permit Applications ------------------------------------ Properly completed Pole Permit Applications relative to the same pole which are received by the Licensor from multiple applicants on different business days. Initial applicant ----------------- The applicant filing the first properly completed Permit Applications (nonsimultaneous) for attachment to a specific pole. Additional applicant -------------------- Each applicant filing a properly completed Permit Application (non- simultaneous) for attachment to a specific pole for which a prior Permit Application has been received by the Licensor. -29- Make-Ready Work --------------- The work required (including field survey, rearrangement and/or transfer of existing facilities on a pole, replacement of a pole or any other changes) in connection with the accommodation of the Licensee's communications facilities on Licensor's pole. Option 1 -------- An arrangement whereby Licensor will process the Permit Application of initial applicant as if there is no other Permit Application on file for the same pole. Option 2 -------- An arrangement whereby Licensor will process Permit Applications of initial and additional applicant in accordance with the procedure applicable for simultaneous multiple Permit Applications. B. MULTIPLE PERMIT APPLICATIONS PROCESSING --------------------------------------- Both simultaneous and non-simultaneous multiple Permit Applications for the same pole will be processed by the Licensor in accordance with the procedures set forth in the flow chart which comprises pages 4 to 6 inclusive, of this Appendix. C. OPTION ARRANGEMENTS ------------------- 1. Upon being offered Options 1 and 2, the initial applicant will be advised that he may make an immediate selection of the option desired or may delay selection until the required make-ready survey work has been completed and the estimate or make-ready charges are quoted by the Licensor. An initial applicant electing to delay its decision, shall indicate the option desired within 15 days after the Licensor has quoted the estimate of the make-ready charges that will apply, otherwise, the Licensor will deem the initial applicant to have selected Option 1. 2. The Permit Application processing procedure to be adhered to in accordance with Option 2 will be subject to acceptance by all of the multiple applicants involved. The additional applicant(s) will have 15 days from the date of notification by the Licensor that the initial applicant has selected Option 2 to accept or reject the conditions applicable under Option -30- 2, otherwise, the Licensor will deem the additional applicant(s) to have rejected such conditions. 3. All work in progress on the initial applicant's Permit Application involving multiple pole attachments will be suspended by the Licensor from the time that the initial applicant is offered Options 1 and 2 until the Licensor receives notification of the initial applicant option selection in accordance with C.l. above. D. MAKE-READY SURVEY REQUIREMENT 1. Where required make-ready survey is to be completed on two bases, the multiple applicants shall be so advised before such survey is Commenced. 2. The make-ready survey required to develop the estimated charges applicable for Options 1 and 2 will include a determination of the work requirements necessary to: a. issue Permits simultaneously to the multiple applicants and, b. issue a Permit to the initial applicant before commencing the required make-ready work necessary to accommodate the additional applicant(s). 3. Licensor will consider any Permit Application involving simultaneous multiple attachments as canceled upon the failure of an applicant to notify the Licensor in writing of his acceptance of the estimate of make-ready charges and accompany such acceptance with the advance payment within 30 days of receipt of such estimate from the Licensor. 4. Licensor or Licensor's authorized representative will perform the make- ready survey in all situations involving simultaneous Permit Applications. 5. Where an initial applicant has been authorized by Licensor to perform its own make-ready survey, and properly completed pole Applications are received from an additional applicant(s), establishing a non- simultaneous Permit Application situation, the conditions of Option 1 will automatically apply and -31- the option arrangements, detailed in Section C of this Appendix, will not be applicable. E. MAKE-READY WORK SCHEDULE Any simultaneous multiple applicant who does not agree with the alternative arrangement that provides for the Licensor to complete ALL make-ready work before simultaneously granting Permits to all multiple applicants will be deemed by the Licensor to have canceled his Application. F. CHANGES IN APPENDIX This Appendix may be changed in whole or in part at any time during the term of this Agreement at the sole option of the Licensor upon the giving of not less than 30 days written notice thereof of the Licensee(s) and to substitute in place thereof such other provisions as the Licensor may deem necessary as relative to multiple attachments to poles of the Licensor. -32- PROCEDURE FOR PROCESSING MULTIPLE POLE ATTACHMENT PERMIT APPLICATIONS WHERE NO MAKE-READY SURVEY EXPENSE HAS BEEN INCURRED BY LICENSOR
Make-Ready Survey Make-Ready Survey Make-Ready Work Make-Ready Cost Requirement Cost Allocation Schedule Cost Allocation To be done on two bases to Multiple applicants determine accommodation must develop mutually requirements for: agreeable 1. attachment by Total cost to be Total cost shared A Simultaneous single licensee shared equally 1. order of pole equally by multiple Applications 2. attachment by by multiple availability applicants multiple applicants. and - If only one licensees 2. overall completion applicant agrees to (a) simultaneously schedule estimated shared (b) non- - where multiple portion of total simultaneously applicants cost that applicant within 15 days from will be quoted the receipt of estimate cost applicable to from Licensor, accommodate a Licensor, will single licensee. offer as an (see 1, under alternative, to Make-Ready complete all make-ready Survey work involved before Requirement) simultaneously granting permits to multiple applicants.
-33- B. Non-Simultaneous Applications Options Available Initial Applicant Initial Applicant to Initial Applicant Licensor will treat as Is charged the cost non-multiple applicant. attributable to the Option 1 - any change of work involved to priority of pole accommodate (Licensor will process availability or overall attachment by one as if no multiple permit To be done on two bases to completion schedule licensee. applications exist) determine accommodation that is desired after requirements for: either has been initially 1. attachment by single agreed upon with the licensee Licensor is subject to 2. attachment by Licensor's ability to multiple licensees Total cost to be accommodate in its (a) simultaneously shared equally by established work Additional Applicant (b) non-simultaneously multiple applicants schedule. Is charged the cost attributable to the work involved to Additional Applicant accommodate Required make-ready attachment by an work will not be additional licensee performed until on a pole attached permits have been by initial licensee. granted to initial applicant unless the performance of such work will not delay the completion of make-ready work required to accommodate the initial applicant.
PROCEDURE FOR PROCESSING MULTIPLE POLE ATTACHMENT PERMIT APPLICATIONS WHERE PARTIAL MAKE-READY SURVEY EXPENSE HAS BEEN INCURRED BY LICENSOR
Make-Ready Survey Make-Ready Survey Make-Ready Work Make-Ready Cost Requirement Cost Allocation Schedule Cost Allocation
-34- Options Available to Initial Applicant Option 1 Balance of required survey to be Initial Applicant completed on two bases to (Licensor will process as if determine accommodate Will be charged the cost no multiple permit requirements for: incurred for that portion applications exist) of the survey which has 1. attachment by single already been completed. SAME AS 1 B. SAME AS 1 B. licensee Additional Applicant 2. attachment by multiple licensees Will be charged the cost (a) simultaneously incurred to resurvey the (b) non-simultaneously completed portion of the survey to determine the Portion of survey already requirements to accommodate completed for initial application attachment by multiple will be resurveyed to determine licensees. the requirements to accommodate an additional licensee. Total cost of the balance of the required survey will be shared equally by the multiple applicants.
PROCEDURE FOR PROCESSING MULTIPLE POLE ATTACHMENT PERMIT APPLICATIONS WHERE PARTIAL MAKE-READY SURVEY EXPENSE HAS BEEN INCURRED BY LICENSOR
Make-Ready Survey Make-Ready Survey Make-Ready Work Make-Ready Cost Requirement Cost Allocation Schedule Cost Allocation Option 2 (Licensor will process as simultaneous permit applications) SAME AS 1 A. SAME AS 1 A.
-35- PROCEDURE FOR PROCESSING MULTIPLE POLE ATTACHMENT PERMIT APPLICATIONS WHERE MAKE-READY SURVEY IS COMPLETE BUT MAKE-READY WORK HAS NOT COMMENCED
Make-Ready Survey Make-Ready Survey Make-Ready Work Make-Ready Cost Requirement Cost Allocation Schedule Cost Allocation Options Available to Initial Applicant Option 1 Will be charged the cost of (Licensor will process as if Resurvey required to determine the survey which has already SAME AS 1. B. SAME AS 1. B. no multiple permit accommodate requirements for been completed. applications exist) attachment by multiple licensees. Additional Applicant 1. simultaneously Will be charged the cost to 2. non-simultaneously resurvey to determine the requirements for accommodations multiple licensees. Option 2 (Licensor will process as simultaneous permit SAME AS 1. A. SAME AS 1. A. applications)
-36- ADMINISTRATIVE FORMS AND NOTICES This Appendix, effective as of ______________, is an integral part of the Structure License Agreement between AMERITECH Company (Licensor) and 21st Century Cable TV, Inc. (Licensee), dated ______________ and contains the administrative forms governing the use of Licensor's poles and conduit system by Licensee's communications facilities. INDEX OF ADMINISTRATIVE FORMS Authorization for Field Survey/Make-Ready Work A-1 Application and Duct Occupancy Permit C-1 Application for Conduit Route Planning Services C-lA Cost Request/Duct Permit Application Data Sheet C-2 Notification of Surrender or Modification of Duct Occupancy Permit by Licensee C-3 Application and Pole Attachment Permit P-1 Pole Data Sheet P-2 Notification of Surrender or Modification of Pole Attachment Permit by Licensee P-3
-37- Appendix III Form A-1 AUTHORIZATION FOR FIELD SURVEY/MAKE READY WORK (LICENSEE) The necessary work associated with your Application and Conduit ----------------------- Occupancy Permit. Application and Pole Attachment Permit or Application for - ---------------- -------------------------------------- --------------- Conduit Alternate Route Selection Services. number ____________ in the - ------------------------------------------ municipality of for the placement of communication facilities in Ameritech owned conduit or on Ameritech owned poles has been completed. The results of the record check as well as any necessary Field Survey and Make Ready work and associated estimated charges are indicated on the attached Cost Request/Conduit -------------------- Permit Application Data Sheet or Cost Request/Pole Permit Application Data Sheet - ----------------------------- ----------------------------------------------- and map(s). Following is a summary of the estimated charges which will apply. ---------
Field Survey Make Ready Hours Cost Hours Cost ----------- ---- ------------ ---- Engineering Construction Material Contractor Total
All charges for Field Survey and/or Make Ready work associated with your application shall be based on the actual full cost and expense. including overhead. to the Licensor for performing such work. If the actual Charges exceed the amount of your deposit, a bill for the difference will be issued, unless prior alternate billing methods have been negotiated. Licensor must Inform Licensee of the desired method to proceed below within 30 days of this notification AMERITECH - IL IN MI OH WI (circle one) By: ___________________________ ______________________________ (Signed) (Telephone number) (Title) (Date) -38- Based on information provided to me on these forms. please proceed as indicated: Licensee requests the Licensor to complete the indicated Field Survey work required. Licensee requests the Licensor to complete the indicated Make Ready work required. Licensee requests the Licensor to complete both the indicated Field Survey and Make Ready work concurrently. Licensee requests the Licensor to perform additional Route Record Checks as indicated an the attached revised stick maps or drawings and Cost ---- Request/Conduit Permit Application Data Sheet (form C2). Included is an - ------------------------------------------------------- additional deposit of *** per *** feet increment unless other prior alternate negotiated billing methods have been arranged. Also included are any other application or processing fees as outlined in Appendix I of the General Agreement Licensee requests the Licensor to perform Planning Record Check Services as indicated on the attached revised stick maps or drawings and Cost ---- Request/Conduit Permit Application Data Sheet (form C2). Included is an - ------------------------------------------------------- additional deposit of *** per *** feet increment or fraction thereof unless other prior alternate negotiated billing methods have been arranged. Also included are any other application or processing fees as outlined in Appendix I of the General Agreement. Licensee requests no additional work be done at this time and understands that the information and estimated charges provided remains in effect for only 30 days. The required Field Survey and/or Make Ready work to be incurred by the Licensor associated with my Application And Conduit Occupancy Permit or Application And ---------------------------------------- --------------- Pole Attachment Permit, number ___________ is authorized for the charges as - ---------------------- summarized above. If the actual charges exceed the estimated amount. payment to the Licensor will be made in accordance with the terms described above. LICENSEE. By: __________________________ _______________________ (Signed) (Telephone number) ______________________________ _______________________ (Title) (Date) Top portion to be completed by Licensor. Bottom portion to be completed by Licensee. - --------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -39- APPENDIX III FORM C-1 Application and Conduit Occupancy Permit To Ameritech - IL IN Ml OH WI (Circle one) Customer application (Street address) (City, State & Zip) In accordance with the terms and conditions of the Structure License Agreement between us dated ___________19__, application is hereby made for a Permit to occupy feet of conduit for communications facilities as indicated on the attached stick map and conduit data sheet in the municipality of __________ Licensee has indicated on the attached data sheet the number and type of communication cables, outside diameters and any locations where it wishes to enter and exit manholes and/or place splices or fiber maintenance loops in Licensor's manholes. Enclosed is a deposit of *** per *** increment or fraction thereof in the total sum of $_________for Ameritech to provide a stick map and data sheet detailing the locations of manholes, center to center measurements and conduit availability associated with this application based on a record check (no field visit), unless Alternate Route Selection Services apply or other alternative billing methods have been negotiated, plus any other application or processing fees as outlined in Appendix of the Structure License Agreement. Licensee also understands that there is a *** Structure License Agreement processing fee if an initial issuance or a modification of a Structure License Agreement is required prior to the execution of this conduit occupancy Permit by the Licensor. By: (Name of Licensee) (Signed) (Billing address) (Printed) (City, State & Zip code) (Title) (Telephone Number) (Date) - ---------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -40- Make Ready work has been completed. Conduit occupancy Permit Number is hereby granted to place communication facilities described in this application. Ameritech - IL IN Ml OH WI Inventory of conduit occupied per this Permit (Circle one) by Licensee: By:. Conduit occupied this Permit (Signed) (Title) Previous count per last executed Permit Number (Telephone number) Total conduit footage occupied (Date) Top portion to be filled in by Licensee. Bottom to be ruled in by Licensor. -41- APPENDIX III FORM C-1A APPLICATION FOR CONDUIT ALTERNATE ROUTE SELECTION SERVICES To Ameritech - IL IN Ml OH WI (circle one) Customer Application #_______________ (Street Address) (City, State & Zip) Application is hereby made for Conduit Alternate Route Selection Services of approximately _______________ feet of conduit for communications facilities as indicated on the attached map and data sheet specifying the desired start and termination points. The Licensee has indicated on the attached map and data sheet the number and type of communication cables, outside diameters and any locations where it desires to enter or exit the conduit system. Enclosed is a deposit of *** per *** feet increment of conduit or fraction thereof in the sum of $ for the Licensor to provide Conduit - Alternate Route Selection Services to check the Licensor's records (No field survey ) to identify a primary route and up to two alternative routes (if available). The Licensor will provide a stick map and data sheet by municipality indicating manhole locations, center to center measurements, duct availability, manhole entrance or exit availability and manhole congestion associated with this application. Where conduit is not available, the Licensee may suggest buried or aerial facility alternatives. The Licensee will not be under any obligation to construct conduit facilities if none are available. By: (Name of Licensee) (Signed) (Billing Address) (Printed) (City, State & Zip Code) (Title) (Telephone Number) (Date) - ------------------ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -42- Attached are stick maps by municipality or governing entity prepared by the Licensor suggesting a conduit route based on the information originally provided by the Licensee. Also attached are Cost Request/Conduit Permit Application Data Sheets (Form C2) indicating availability within the route and cost estimates for the necessary Field Survey and Make Ready work required based on the Licenser's record check. Indicated below is how the Licensee desires the Licensor to proceed: ( ) Licensee has attached an Application and Conduit Occupancy Permit by municipality or governing entity for the route selected and the corresponding stick map. Licensee has also attached an executed Authorization For Field Survey/Make Ready Work form. ( ) Licensee requests the Licensor to perform additional Conduit Alternate Route Selection Services as indicated on the attached new maps and Cost Request/Conduit Permit Application data Sheets (Form C2). Enclosed is an additional deposit of *** per *** feet increment or fraction thereof. ( ) Licensee requests no additional work be done at this time and understands that the information and estimated charges provided remain in effect for only 30 days. LICENSEE: By: Date: - --------------------- *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -43- COST REQUEST/CONDUIT PERMIT APPLICATION DATA SHEET [CHART] -44- COST REQUEST/CONDUIT PERMIT APPLICATION DATA SHEET [CHART] -45- COST REQUEST/CONDUIT PERMIT APPLICATION DATA SHEET [CHART] -46- EXPLANATION OF COST REQUEST/CONDUIT PERMIT APPLICATION DATA SHEET (FORM C2) (ONE DATA SHEET REQUIRED PER MUNICIPALITY)
IN ITEM ENTITLED... INFORMATION PROVIDED BY Al CUSTOMER NAME AND ADDRESS Third Party A2 CUSTOMER APPLICATION NUMBER Third Party or Ameritech Structure Leasing Coordinator (ASLC) A3 MUNICIPALITY Third Party A4 NUMBER OF CABLES AND TYPE Third Party A5 OUTSIDE DIAMETER OF CABLE Third Party A6 SHEET 1 OF Third Party or IIP A7 INITIATIVE CODE Third Party or ASLC, if required Bl REQUEST TRACKING NUMBER Third Party or lip B2 A/W UNDERTAKING NUMBER IIP or Design Engineering B3 PLANNING ENGINEER IIP B4 TELEPHONE NUMBER IIP B5 RESPONSIBILITY CODE IIP B6 DESIGN ENGINEER IIP, if known, or Design Engineering B7 TELEPHONE NUMBER IIP, if known, or Design Engineering
-47- B8. RESPONSIBILITY CODE IIP, if known, or Design Engineering B9 CONSTRUCTION FOREMAN IIP or Design Engineering, if known, or Construction B10 TELEPHONE NUMBER IIP or Design Engineering, if known, or Construction B11 RESPONSIBILITY CODE IIP or Design Engineering, if known, or Construction B12 MARKETING REPRESENTATIVE IIP or Design Engineering, if known, or ASLC B13 TELEPHONE NUMBER IIP or Design Engineering, if known, or ASLC C1 FIELD SURVEY ENGINEERING IIP. Verification and update, if HOURS necessary, by Design Engineering C2 FIELD SURVEY ENGINEERING COST IIP. Verification and update, if necessary by Design Engineering. Rates provided by ASLC C3 FIELD SURVEY CONSTRUCTION IIP. Verification and update, if HOURS necessary, by Design Engineering or Construction C4 FIELD SURVEY CONSTRUCTION IIP. Verification and update, if COST necessary by Design Engineering. Rates provided by ASLC. C5 TOTAL ESTIMATED FIELD SURVEY IIP by adding items C2 and COST C4 and entering. Verification and update, if necessary, by
-48- Design Engineering C6 ESTIMATED START DATE IIP. Verification and update, if necessary, by Design Engineering or Construction C7 ESTIMATED COMPLETION DATE IIP. Verification and update, if necessary, by Design Engineering or Construction C8 MAKE - READY ENGINEERING IIP. Verification and update, if HOURS necessary, by Design Engineering C9 MAKE - READY ENGINEERING IIP. Verification and update if COST necessary, by Design Engineering.Rates.provided by ASLC. C10 MAKE - READY CONSTRUCTION IIP. Verification and update, if HOURS necessary, by Design Engineering or Construction C11 MAKE - READY CONSTRUCTION IIP. Verification and update, if COST necessary, by Design Engineering. Rates provided by ASLC. C12 MAKE - READY MATERIAL COST IIP. Verification and update, if necessary, by Design Engineering C13 CONTRACTOR COSTS IIP. Verification and update, if necessary, by Design Engineering or Construction C14 TOTAL ESTIMATED MAKE - READY IIP by adding items C9, C11, COST Cl 2 and C13 and entering. Verification and update, if
-49- necessary, by Design Engineering C15 ESTIMATED START DATE IIP. Verification and update, if necessary, by Design Engineering or Construction C16 ESTIMATED COMPLETION DATE IIP. Verification and update, if necessary, by Design Engineering or Construction D 1 LICENSE NUMBER ASLC D2 TOTAL DUCT FEET AVAILABLE IIP. Verification and update, if TO LEASE THIS PERMIT necessary, by Design Engineering NOTE: Subtract any unavailable section conduit footage from column D4 before filling in item D2. D3 SECTION BEGINNING IIP. Verification and update, if MH/POLE/BLDG necessary, by Design Engineering D4 C.C. MEASUREMENT IIP. Verification and update, if necessary, by Design Engineering. This is the wall to wall measurement on records plus 1/2 beginning manhole length on records and 1/2 ending manhole length on records D5 SECTION ENDING IIP. Verification and update, if MH/POLE/BLDG # necessary, by Design Engineering D6 AVAILABLE DUCT IIP. Yes or NO answer. Verification and update, if necessary, by Design
-50- Engineering or Construction D7 AVAILABLE INNERDUCT IIP. Yes or No answer. If No, provide estimated material and cost of placing maximum interducts in D13 and D14. Verification and update, if necessary, by Design Engineering or Construction D8 FIELD SURVEY REQUIRED IIP. Yes or No answer. Verification and update, if necessary, by Design Engineering D9 KNOCKOUT IIP. Yes or No answer if entrance or exit from MH is requested by Third Party. Verification and update, if necessary, by Design Engineering or Construction D10 LATERAL DUCT IIP. Yes or No answer if entrance or exit from MH is requested by Third Party. Verification and update, if necessary, by Design D11 CONGESTED MH IIP. Yes or No answer if splices or maintenance loops in MH are requested by Third Party. Verification and update, if necessary, by Design Engineering or Construction D12 TERMINATION SPACE IIP. Yes or No answer if entrance or exit from MH is requested by Third Party and
-51- no knockouts or laterals are available. Verification and update, if necessary, by Design Engineering or Construction D13 FIELD SURVEY WORK REQUIRED, IIP or Design Engineering. MAKE READY WORK REQUIRED, Provide detailed explanations AND MATERIAL REQUIRED of any specific work or materials required found during Record Check or Field Survey for each NO* answer in D6-DI2. Also, provide any additional information needed at Field Survey or Make Ready. D14 ESTIMATED COST IIP. Estimated cost to provide labor or material for item D13, if required. Verification and update, if necessary, by Design Engineering D15 CONSTRUCTION COMMENTS Construction. Provide comments as the result of Field Survey or Make Ready work. Examples include: Size of available conduit/innerduct, blockages, duct assignments, location in MH for terminations
-52- Appendix III Form C-3 NOTIFICATION OF SURRENDER OR MODIFICATION OF CONDUIT OCCUPANCY PERMIT BY LICENSEE To Ameritech - IL IN Ml OH WI (Circle one) (Street Address) (City, State & Zip Code) In accordance with the terms and conditions of the Structure License Agreement between us dated __________ 19 __, notice is hereby given that the Permit covering occupancy of the following conduit in the municipality or governing entity of is surrendered or modified as indicated. Permit Number Dated ____________,19___
Conduit Location Facilities Date Facilities Removed - ---------------- ---------- ----------------------- By (Name of Licensee) (Signed) (Billing Address) (Printed) (City, State & Zip Code) (Title) (Telephone Number) (Date)
-53- To be completed by Licensor Date Notice Received _ ____Total Duct Feet Discontinued By ____________________ New Total Duct Feet Occupied -54- EX-10.7 6 EXHIBIT 10.7 EXHIBIT 10.7 OFFICE LEASE THE APPAREL CENTER CHICAGO, ILLINOIS TENANT: 21ST CENTURY CABLE TV, INC., AN ILLINOIS CORPORATION THE APPAREL CENTER THIS LEASE made as of January 31, 1997 between LASALLE NATIONAL BANK, not individually but as Trustee under a Trust Agreement dated March 1, 1967, as extended, and known as Trust No. 36223 ("Landlord") and 21ST CENTURY CABLE TV, INC., an Illinois corporation ("Tenant"). WITNESSETH 1. DEMISED PREMISES; TERM. (A) Landlord does hereby demise and lease to Tenant, and Tenant accepts that certain space shown hatched on Exhibit "A" which is attached hereto and made a part hereof, consisting of approximately 32,422 rentable square feet and commonly described as a portion of the sixth floor ("Premises") of The Apparel Center, a building located on land at 350 North Orleans Street ("Building") (provided, however, the Building does not include the hotel premises [herein "Hotel Premises",] located in the same physical structure as the Building) constructed on the north portion of the property bounded by West Kinzie Street, North Orleans Street, the Chicago River, and a line 352.50 feet south of and parallel with the south line of West Kinzie Street in Chicago, Illinois (such land and Building hereinafter referred to, together with all present and future easements, additions, improvements and other rights appurtenant thereto, as the "Property") , for a term beginning on the Commencement Date (as hereinafter defined) and ending on the last day of the fifteenth (15th) Lease Year (as hereinafter defined) thereafter ("Term"), unless sooner terminated as provided herein, subject to the terms, covenants and agreements herein contained. The Commencement Date shall be the earlier of (a) substantial completion of Tenant's Work (as defined Article 35) or (b) July 1, 1997 (subject to extension in the event of' a Landlord Delay as provided in Article 35(A) or Article 35(B)(3)hereof). For purposes of this Lease, "Lease Year", shall mean a period of twelve (12) consecutive calendar months, the first of which shall commence on the Commencement Date if the Commencement Date shall be the first day of a calendar month, or on the first day of the first calendar month following the Commencement Date if the Commencement Date shall be other than on the first day of a calendar month, and shall end on the last day of the twelfth (12th) calendar month thereafter. Each successive Lease Year shall be a twelve (12) calendar month period commencing on the anniversary of the commencement of the first Lease Year. -1- (B) Landlord and Tenant agree that the rentable area of the Premises initially demised pursuant to this Article 1 and any additional space that at any time may be demised hereunder shall be computed in accordance with Building Owners and Managers Association International Standard Method for Measuring Floor Area in Office Buildings known as American National Standard ANS1 Z65.1- 1996 (approved June 7, 1996) by American National Standards Institute, Inc. ("BOMA Standards"); provided, however, that the rentable area of any space added to the Premises shall be calculated by adding to the usable area of such space a percentage of said usable area equal to fifteen percent (15%), or BOMA Standard, whichever is less. In any event, it is agreed that after the addition of both of the Take-Down Spaces pursuant to Article 36, Tenant shall occupy the /***/ consisting of approximately 40,397 rentable square feet. (C) Upon final approval of the plans and specifications for Tenant's Work, Landlord and Tenant agree to confirm the rentable square footage of the Premises and if the rentable square footage is not 32,422 rentable square feet, then Landlord and Tenant shall amend this Lease to reflect the actual rentable square footage of the Premises and the Base Rent payable pursuant to Article 3, Tenant's Proportionate Share set forth in Article 4 and Landlord's Contribution set forth in Article 34 shall be adjusted to reflect the actual rentable square footage of the Premises. 2. USE. Tenant will use and occupy the Premises for general office purposes and for the transmitting of television, telephone and other telecommunications signals for which Tenant is legally licensed and incidental uses thereto and for no other use or purpose. Tenant will not use or permit upon the Premises anything that will invalidate any policies of insurance now or hereafter carried on the Building or that will increase the rate of insurance on the Premises or on the Building. Tenant will pay all extra insurance premiums on the Building which may be caused by the use which Tenant shall make of the Premises (other than a use stated in the first sentence hereof). Tenant will not (a) use or permit upon the Premises anything that may be dangerous to life or limb; (b) in any manner deface or injure the Building or any part thereof or overload the floors of the Premises; or (c) do anything or permit anything to be done upon the Premises in any way creating a nuisance or disturbing any other tenant in the Building or the occupants of neighboring property, or tending to injure the reputation of the Building. Tenant shall further not carry-on or permit any activities which might: (1) involve the storage, use or disposal of medical or hazardous waste or substances or the creation of an environmental hazard other than such substances in such amounts customarily used in normal office operations; or (2) impair or interfere with (i) the structure of the Building or the operation of Building systems, (ii) the character, reputation or appearance of the Building as a first-class building, (iii) the furnishing of services (including utilities, telephone and communications) to any portion of the Building, or (iv) the enjoyment by any other occupants of the Building or the benefits of such occupancy (for example, free of noise, odors or vibration emanating from the Premises). The ______________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -2- Premises shall not be used for the purposes of any so called "office suites", schools, employment agencies, medical treatment facilities or any retail or wholesale activities, except as incidental to Tenant's permitted use described above. Tenant will fully and promptly comply, and operate the Premises in conformity, with all applicable federal, state and municipal laws, ordinances, codes, regulations and requirements respecting the Premises or Tenant's use or occupancy thereof, and activities therein provided, however, Tenant shall not be responsible for assuring that the "Building Systems" (as defined in Article 7 hereof), other than any Building Systems constructed or installed by Tenant, are in compliance with such laws, ordinances, codes, regulations or requirements. Tenant will not use the Premises for lodging or sleeping purposes, nor conduct or permit to be conducted on the Premises any business or activity which is contrary to the provisions of this Lease or to any applicable governmental laws, ordinances, codes, regulations and requirements. Tenant shall promptly pay all taxes of whatever kind which are imposed upon Tenant but which are to be collected by Landlord. Tenant shall at no time sell food on or from the Premises. Tenant shall at no time sell (within the meaning of the Illinois Liquor Control Act, as now or hereafter amended) alcoholic liquor on or from the Premises, provided, however, that Tenant may occasionally give complimentary food and alcoholic liquor to its guests on the Premises, on condition that Tenant shall comply with all applicable governmental requirements, and on further condition that, prior to the giving of such alcoholic liquor, Tenant shall procure and maintain continuously thereafter (or cause to be procured and maintained continuously thereafter) in force a policy of or endorsement for host liquor liability insurance, as set forth in Article 25 hereof. 3. BASE RENT. Tenant shall pay to Landlord an annual base rent ("Base Rent") for the Premises, (initially based on 32,422 rentable square feet and including adjustments necessary to reflect the addition of the First Take-Down Space and Second Take-Down Space pursuant to Article 36 hereof) as shown below for each respective period in equal monthly installments during each respective period as follows:
ANNUAL MONTHLY BASE RENT PER LEASE YEAR BASE RENT INSTALLMENT RENTABLE SQUARE FOOT ---------- --------- ----------- -------------------- *** *** *** ***
-3- Tenant shall pay each installment of Base Rent in advance on the first day of every calendar month of the Term. All such payments shall be made payable to Landlord or Landlord's agent and shall be made at the office of the Building or at such other places and to such other parties as Landlord shall from time to time by written notice appoint. Base Rent shall be payable without any prior demand therefor and without any deductions or set-offs whatsoever. If the Term commences on a day other than the first day of the calendar month, or ends on a day other than the last day of the, calendar month, the Base Rent for such fractional month shall be prorated on the basis of 1/365th of the annual Base Rent for each day of such fractional month. 4. RENT ADJUSTMENTS. Landlord and Tenant agree that the following rent adjustments shall be made with respect to each calendar year of the Term, or portion thereof, including the calendar year in which the Term of this Lease begins and the calendar year in which the Term of this Lease terminates, after the Base Year (which Base Year for purposes of this Lease shall be the calendar year ending on December 31, 1997). For purposes of such rent adjustments, Tenant's Proportionate Share is agreed to be ***%, calculated by dividing 32,422 rentable square feet, the initial square footage of the Premises by /***/, being the rentable square feet in the Building, and effective on /***/ Tenant's Proportionate Share is increased to ***%. to reflect the addition of the First Take-Down Space of /***/ rentable square feet to the Premises pursuant to Article 36 hereof and effective on /***/, Tenant's Proportionate Share is increased to ***% to reflect the addition of the Second Take of /***/ rentable square feet to the Premises. __________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -4- (A) Tenant shall pay to Landlord as additional rent an amount equal to Tenant's Proportionate Share of the amount by which Ownership Taxes (as hereinafter defined) paid in any calendar year during the Term after the Base Year exceed Ownership Taxes paid in the Base Year. Subject to the provisions below in this Paragraph (A), "Ownership Taxes" shall mean all taxes, assessments, impositions and governmental charges of every kind and nature which Landlord shall pay in a calendar year because of or in any way connected with the ownership, leasing, management, and operation of the Building and the Property. The definition of Ownership Taxes is subject to the following: (1) the amount of ad valorem real and personal property taxes against Landlord's real and personal property to be included in Ownership Taxes shall be the amount shown by the latest available tax bills required to be paid in the calendar year in respect of which ownership Taxes are being determined. The amount of any tax refunds shall be deducted from Ownership Taxes in the calendar year they are received by Landlord; (2) the amount of special taxes and special assessments to be included shall be limited to the amount of the installments (plus any interest, other than penalty interest, payable thereon) of such special tax or special assessment required to be paid during the calendar year in respect of which Ownership Taxes are being determined; (3) there shall be excluded from Ownership Taxes all income taxes [except for a specific tax or excise on rents or other income from the Property (or on the value of leases thereon) or a specific gross receipts tax or excise on rents or other income from the Property (or on the value of leases thereon)], excess profit taxes, franchise, capital stock and inheritance or estate taxes, except to the extent that any such tax is in lieu of, in substitution for, or a supplement to, in whole or in part, any tax included in Ownership Taxes. Ownership Taxes shall also exclude all taxes, assessments, charges, costs and disbursements paid in connection with the portion of the Building used for hotel purposes, and provided Tenant has timely paid Tenant's Share of Ownership Taxes, ownership Taxes shall exclude any penalties imposed in connection with any failure of Landlord to timely pay any Ownership Taxes; and (4) Ownership Taxes shall also include, in the calendar year paid, any actual out-of-pocket fees, costs and expenses (including reasonable attorneys' fees) incurred by Landlord in contesting or attempting to reduce or limit any ownership Taxes, regardless of whether any such reduction or limitation is obtained. -5- (B) Tenant shall also pay to Landlord as additional rent an amount equal to Tenant's Proportionate Share of the amount by which Operating Expenses for any calendar year during the Term after the Base Year exceed Operating Expenses for the Base Year. Subject to the provisions below in this Paragraph (B) , Operating Expenses shall mean all expenses, costs and disbursements of every kind and nature paid, incurred, or otherwise arising in respect of a calendar year because of or in connection with the ownership, management, maintenance, repair, and operation of the Building and the Property. The definition of Operating Expenses is subject to the following: (i) There shall be excluded from Operating Expenses: (1) costs of alterations of tenant spaces; (2) depreciation and amortization except as specifically provided herein; (3) principal and interest payments on mortgages, and financing or refinancing expenses; (4) return on investment; (5) Ownership Taxes with the respect to which Tenant is liable for its Proportionate Share pursuant to the preceding paragraph (A); (6) the cost of capital improvements, capital repairs in the nature of capital replacements, and capital equipment, except as provided in clause (ii) below with respect to capital items resulting in a reduction or limitation in Operating Expenses or required to comply with governmental requirements; (7) ground lease or master lease rents or costs in connection therewith; (8) real estate brokers, leasing commissions or compensation and any other expenses incurred in leasing space or procuring tenants; (9) any costs for which Landlord has received reimbursement (other than reimbursements from tenants under operating expense escalation clauses), whether from insurance or condemnation proceeds or clockwise; (10) attorneys, fees, costs and disbursements and other expenses incurred in connection with negotiation or enforcement of leases with tenants or prospective tenants of the Building; (11) expenses in connection with any service or other benefits of a type which are not provided to Tenant but which are Provided to another tenant or occupant of the Building; (12) overhead and profit increment paid to parents, subsidiaries or affiliates of Landlord or its beneficiary for services on or to the Building to the extent only that the costs of such services exceed the competitive costs of such services were they not so rendered by such parent, subsidiary or affiliate (subject, however, to the provision in clause (15) below as to management fees); (13) any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord or Landlord's beneficiary or any affiliate of either; (14) advertising, marketing and promotional expenditures; (15) management fees to the extent such fees exceed similar costs incurred in comparable office buildings in the area; provided, however, that in any event Tenant agrees that there may be included in Operating Expenses a management fee, whether paid to an affiliate of Landlord's beneficiary or an unrelated third party, in an amount up to 3% of gross revenues derived from the Building; (16) wages, salaries or other compensation paid to any employees of Landlord or Landlord's beneficiary or management agent above the grade of building manager; (17) penalties or fines incurred in connection with Landlord's failure to comply with laws unless caused by the act or omission of Tenant, its agents or employees, and (18) all charges, costs and disbursements properly allocable to the Hotel Premises. -6- (ii) In the event Landlord makes any capital improvement or any capital repair in the nature of a capital replacement or installs any capital equipment during the Term hereof which (a) results in a reduction or limitation in Operating Expenses, or (b) is required to comply with any governmental rules, regulations or requirements applicable from time to time to the Building or to the Property and enacted or initially enforced after the date of execution hereof, the costs thereof, as amortized in each case on a straight-line basis (unless otherwise required by generally accepted accounting principles) over the useful life of the item so capitalized, may be included in Operating Expenses; provided, however, that the amount paid by Tenant for any calendar year or portion thereof which falls within the Term of this Lease on account of a capital item described in clause (a) above shall not exceed the actual reduction in Tenant's Proportionate Share of Operating Expenses with respect to such calendar year or portion thereof by reason of such capital item. If the Building shall not have been fully occupied by tenants at any time during the Base Year or any succeeding calendar year, the Operating Expenses for such year may be equitably adjusted to reflect the Operating Expenses which vary with occupancy as though the Building had been fully occupied throughout such year. (C) [Intentionally Deleted] (D) In order to provide for current payments on account of increases in Ownership Taxes and Operating Expenses over the Base Year, Tenant agrees, at Landlord's request, to pay on account to Landlord for each calendar year of the Term or portion thereof following the Base Year, Tenant's share of adjustments due for such ensuing calendar year or portion thereof, as reasonably estimated by Landlord from time to time, in equal monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount of such estimated rent adjustments or revisions thereto. The installments of estimated rent adjustments payable for each month of the current calendar year prior to the date of receipt of Landlord's estimate shall be due and payable within thirty (30) days after the receipt of such estimate. If, as finally determined (whether in the succeeding calendar year at the time of delivery of the statement provided for in paragraph (E) hereof, or in the current calendar year when the final amount of any portion of Ownership Taxes becomes known to Landlord), such rent adjustments shall be greater than or less than the aggregate of all installments so paid on account to Landlord prior to receipt of an invoice from Landlord, then Tenant upon receipt of such invoice shall pay to Landlord within twenty (20) days immediately following such notification the amount of such underpayment, or, provided Tenant is not in default hereunder, Landlord shall credit Tenant against the rent next coming due for the amount of such overpayment, as the case may be. It is the intention hereunder to estimate from time to time the amount of increases in Ownership Taxes and Operating Expenses for each calendar year over Ownership Taxes and Operating Expenses for the Base Year, and then to finally determine such rent adjustments at the end of such calendar year or as soon thereafter as possible based upon actual increases in Ownership Taxes and Operating Expenses for such calendar year. -7- (E) Landlord agrees to keep books and records showing the Ownership Taxes and operating Expenses in accordance with a system of accounts and generally accepted accounting principles consistently maintained on a year-to-year basis in compliance with -such provisions of this Lease as may affect such accounts. Landlord agrees that any cost included in Operating Expenses or Ownership Taxes shall not be included in more than one category of costs comprising Operating Expenses or ownership Taxes. Landlord shall deliver to Tenant within one hundred fifty (150) days after the close of each calendar year (including the calendar year in which this Lease begins and the calendar year in which this Lease terminates), a statement certified by an officer of Landlord Is agent substantially in the form of the sample statement attached hereto and made a part hereof as Exhibit "B". Failure or delay in delivering any such statement or accompanying invoice, or failure or delay in computing the rent adjustments pursuant to this Article 4, shall not be deemed a waiver by Landlord of its right to deliver such items nor shall any such failure or delay be deemed a release of Tenant's obligations with respect to any such statement or invoice, or constitute a default hereunder. All rent adjustments payable hereunder shall be made without any deductions or set-offs whatsoever. (F) The obligation of Tenant with respect to the payment of Base Rent and rent adjustments due hereunder shall survive the expiration or termination of this Lease. Any payment, refund, or credit made pursuant to this Article shall be made without prejudice to any right of Tenant to dispute, or of Landlord to correct, any items as billed pursuant to the provisions hereof. In the event that the Term of this Lease shall have been in effect for less than the full calendar year immediately preceding Tenant's receipt of the invoices provided for in paragraphs (D) and (E) hereof or if the Term shall end on a day other than the last day of a calendar year, the rent adjustment shall be pro rata on a per diem basis. In no event shall any rent adjustment result in a decrease in the Base Rent payable from time to time hereunder. Notwithstanding anything contained herein to the contrary, Landlord shall not have the right to make demand upon Tenant for additional amounts due with respect to, Operating Expenses and Ownership Taxes for any calendar year and Tenant shall not have to right to dispute or contest the amounts due or paid with respect to Operating Expenses and Ownership Taxes for any calendar year more than three (3) full years after the end of said calendar year. (G) In the event that Tenant disputes the accuracy of the statement, or the information therein contained, furnished by Landlord to Tenant pursuant to Paragraph (E) above, Tenant may require upon delivering notice in writing within sixty (60) days after submission of such statement that Ownership Taxes and Operating Expenses be audited by an independent, nationally recognized public accounting firm selected by Tenant and satisfactory to Landlord, at Tenant's expense, except as hereinafter provided. If as finally determined Tenant's Proportionate Share of actual Operating Expenses and Ownership Taxes for any calendar year is ninety-five percent (95%) or less of Tenant's Proportionate Share of Operating Expenses and Ownership Taxes as shown in the statement furnished by Landlord to Tenant pursuant to Paragraph (E), -8- Landlord shall pay the reasonable costs and expenses incurred by Tenant in engaging such public accounting firm to render such statement and if it is finally determined that Tenant has overpaid for Tenant's Proportionate Share of Operating Expenses or Ownership Taxes as a result of an error by Landlord, Landlord shall credit to tenant the amount of such overpayment in the manner provided above in Paragraph (D); provided, further, that if as finally determined Tenant's Proportionate Share of actual Operating Expenses or actual Ownership Taxes for any calendar year is greater than Tenant's Proportionate Share of Operating Expenses or ownership Taxes as shown in such statement furnished by Landlord to Tenant, Landlord in such instance reserves the right to issue to Tenant an amended invoice adjusting the amount of Tenant's Proportionate Share payable by Tenant to Landlord for such year. The statement rendered by such public accounting firm shall be final, binding and conclusive upon Landlord and Tenant. (H) In the event Tenant selects such firm of nationally recognized certified public accountants to examine Landlord's books and records for any calendar year, such firm shall promptly conduct such examination in accordance with generally accepted accounting principles consistently applied and, as soon as practicable, render to Landlord and Tenant a report stating such accountants, determination of the Operating Expense and Ownership Tax increase or decrease for such year over the Base Year and, if such determination is inconsistent with Landlord's statement of Operating Expense or Ownership Tax increase furnished to Tenant by Landlord, a reasonably-detailed basis for the determination and explanation of each discrepancy. Such accountants engaged by Tenant may inspect, audit, review, copy and examine (and Landlord agrees to make the same available for such purposes) in Chicago, Illinois only such of Landlord's books and records as are directly related to the preparation of Landlord's statement of Operating Expense and Ownership Tax increase, and such accountants engaged by Tenant may examine none of Landlord's books and records with respect to any property other than the Property. Landlord shall not be obligated to permit any individual to examine Landlord's books and records unless such individual and such individuals employer first execute and deliver to Landlord a written acknowledgment affirming that (i) such individuals examinations of Landlord's books and records shall be strictly confidential, and (ii) the results thereof and information derived therefrom or obtained in the course thereof shall not be (a) disclosed by such parties to any. person other than such individual's direct supervisor and Tenant's employees who have a position within Tenant requiring them to know such information and other individuals to whom disclosure is required by law or governmental rule or regulation, or (b) used by such parties for any purpose other than in preparing the report to be rendered to Landlord and Tenant; provided, however, such results and information from the accountant's examination may be used by Landlord and Tenant in enforcing their respective rights and obligations hereunder. -9- Tenant hereby covenants and agrees with Landlord that any examination of any information relating to Operating Expenses or Ownership Taxes furnished by Landlord to Tenant and any examination of Landlord's books and records by Tenant, its employees or agents shall be confidential in accordance with the provisions of this Paragraph (H) and the results of such examinations and information derived therefrom or obtained in the course thereof shall not be disclosed to anyone or used for any purpose other than as permitted pursuant to this Article 4. 5. CONDITION OF PREMISES. Tenant's entry into possession of all or any part of the Premises shall be conclusive evidence as against Tenant that such part of the Premises was in good order and satisfactory condition when Tenant took possession, except for (a) any latent defects in the structure of the Building (including the exterior of the Building and exterior windows of the Building), or (b) any latent defects in the Shell and Core Work constructed for Tenant's occupancy pursuant to Article 35(A) or in the electrical, plumbing, HVAC or other common systems of the Building, excluding items of damage caused by Tenant, its agents, contractors and suppliers, or (c) any incomplete Shell and Core Work which shall be identified by Landlord and Tenant prior to 14 Tenant's entering into possession of the Premises for the purpose of conducting its business therein, or (d) any latent defects in any Tenant's Work furnished by Landlord pursuant to Article 35.B, and any punchlist items in such Tenant's Work identified by Landlord and Tenant prior to Tenant's entering into possession of the Premises for the purpose of conducting its business therein. Tenant acknowledges that no promise of Landlord or its agents to alter, remodel or improve the Premises or the Building and no representation respecting the condition of the Premises or the Building have been made by Landlord or its agents to Tenant other than as may be contained herein. 6. POSSESSION. (A) In the event that possession of the Premises shall not be delivered to Tenant on the date above fixed for the commencement of the Term, this Lease shall nevertheless continue in full force and effect, and no liability shall arise against Landlord out of any such delay beyond the abatement of rent as provided in Article 35(A). (B) Tenant shall have the right from time to time to enter into possession of all or any part of the Premises prior to the Commencement Date for the purpose of conducting its business therein. All of the covenants and conditions of this Lease (including, without limitation, Landlord's provision of services as described in Article 9 hereof) shall be binding upon the parties hereto in respect of such pre-Term possession the same as if the first day of the Term had been fixed as of the date when tenant entered such possession, except that Tenant shall not be obligated to pay any Base Rent or any rent adjustments pursuant to Article 4 hereof for the period prior to the Commencement Date, but Tenant shall be responsible for the payment of electricity pursuant to Article 9(C) and for the payment of all costs incurred for janitorial and -10- cleaning services for the Premises from and after the date that Tenant so enters into possession for purposes of conducting business therein. 7. REPAIRS. Subject to Force Majeure events (as defined in Article 35(A)), Tenant will, at its own expense and subject to the provisions of Article 8 of this Lease, keep the "Tenant Responsible Premises" (as defined below in this Article 7) in good repair and tenantable condition at all times during the Term of this Lease, and Tenant shall promptly and adequately repair all damages to the Tenant Responsible Premises (except reasonable wear and tear and as otherwise provided in Article 25 of this Lease) and replace or repair all damages or broken interior glass (including any glass demishing walls and signs thereon, fixtures and appurtences, under the cited supervision and with the approval of Landlord, and within any reasonable period of time specified by Landlord. If Tenant does not do so, ten (10) days after written notice from Landlord (or sooner in an emergency situation or other situation giving or threatening to give rise to damage to person or property exists), Landlord may, but need not, make such repairs or replacements and the amount paid by Landlord for such repairs and replacements (including Landlord's overhead and profit and the cost of general conditions at Landlord's then published rates) shall be deemed additional rent reserved under this Lease due and payable within thirty (30) days after delivery of a bill therefor by Landlord. Landlord may, but shall not be required so to do, enter the Premises at all reasonable times to make such repairs or alterations, improvements and additions, including but not limited to ducts and all other facilities for air conditioning service, as Landlord shall deem necessary or appropriate for the safety, preservation or improvement of the Premises or the Building or any equipment located in the Building, or as Landlord may be required to do by the City of Chicago or by the order or decree of any court or by any other governmental authority, provided that Landlord gives Tenant prior notice (except in cases of an emergency) of any such repairs, alterations, improvements and additions in the Premises, and (except in cases of an emergency) so long as the performance of such work during ordinary business hours does not unreasonably interfere with Tenant's ability to conduct its business in the Premises. In the event Landlord or its agents or contractors shall elect or be required, in accordance with the preceding grammatical paragraph, to make repairs, alterations, improvements or additions to the Premises or the Building or any equipment located in the Building, Landlord shall be allowed to take into and upon the Premises all material that may be required to make such repairs, alterations, improvements or additions and, during the continuance of any said work, to temporarily close doors, entryways, public space and corridors in the Building and to interrupt or temporarily suspend Building services and facilities without being deemed or held guilty of eviction of Tenant or for damages for Tenant's property, business or person, and the rent reserved herein shall in no way abate while said repairs, alterations, improvements or additions are being made, and Tenant shall not be entitled to maintain any off-set or counterclaim for damages of any kind against Landlord by reason thereof. Landlord may, at its option, make all repairs, alterations, improvements and additions in and about the Building and the Premises -11- during ordinary business hours, so long as (except in case of an emergency) the performance of such work during ordinary business hours does not materially interfere with Tenant's access to the Premises or Tenant's ability to conduct its business in the Premises, and if such work during ordinary business hours is not of an emergency nature and does not materially interfere with Tenant's access to the Premises or Tenant's ability to conduct its business in the Premises and Tenant nonetheless desires to have the same done during any other hours Tenant shall pay for all overtime and additional expenses resulting therefrom. As used herein, "Tenant Responsible Premises" shall mean all alterations, additions and improvements in and to the Premises at any time or from time to time existing, whether constructed by Landlord or Tenant, including but not limited to all items of work constructed in the Premises in preparation for Tenant's initial occupancy thereof and any Antennae installed by Tenant from time to time on the Roof as described in Article 40, but excluding all "Building Systems" (as defined below in this Article 7). Subject to Force Majeure events, Landlord shall keep in good order and repair (and the cost thereof may be included in Operating Expenses), except as otherwise provided in Subparagraph B(ii) of Article 4 hereof) the following items ("Building Systems"): (i) the structural components and common areas of the Building serving the Premises; (ii) the mechanical, electrical, plumbing, heating ventilation, and air cooling systems serving the Premises unless installed by Tenant, including components of said systems outside and up to the perimeter of the Premises, but, other than as set forth in clauses (iii) and (iv), excluding any related systems, fixtures and equipment located within the Premises which are not a part of the Shell and Core Work; (iii) HVAC ducts in the Premises, but excluding variable air volume (VAV) boxes, reheats, in-ducts and other equipment and devices in or attached to the ducts; and (iv) the Building sprinkler system serving the Premises, including piping up to the Premises but excluding any piping, heads and apparatus within the Premises. Any liability of Tenant or Landlord for the performance of their respective obligations under this Article 7 shall be subject to the provisions of Articles 11 and 25 hereof. 8. ALTERATIONS. Tenant shall not, without the prior written consent of Landlord in each instance obtained, make any repairs, replacements, alterations, improvements or additions (collectively, "Improvements") to the Premises, the performance of which affects the Building structure, Building systems, common areas or other tenants' premises. Tenant shall give Landlord reasonable prior notice of all Improvements during the Term whether or not Landlord's consent thereto is required. To the extent Landlord's consent is required for any Improvements, such consent shall not be unreasonably withheld or delayed, but such consent may be conditioned upon such requirements regarding such Improvements as Landlord deems appropriate, including without limitation, the submission of detailed plans and specifications, and such Improvements shall be of a quality equal to or better than the standards of the Building. At -12- the time that Landlord gives its consent to any such improvements, Landlord may designate in writing any items which are atypical for standard office uses or require unusual expense for the removal (such as, but not limited to, staircases and vaults) as items which Landlord reserves the right to require Tenant to remove upon the expiration of the Term or upon any termination of this Lease or Tenant's right to possession hereunder. Neither approval of any plans and specifications nor supervision of any improvement work by Landlord or its agents shall constitute a representation or warranty by Landlord or its agents that such plans or work either (i) are complete or suitable for their intended purpose, or (ii) comply with applicable laws, ordinances, codes and regulations, it being expressly agreed by Tenant that Landlord assumes no responsibility or liability whatsoever to Tenant or to any other person or entity for such completeness, suitability or compliance. All such Improvements shall be done at Tenant's expenses by employees or agents of Landlord or contractors hired by Landlord (or by contractors hired by Tenant which contractors shall be subject to Landlord's prior written consent, which shall not be unreasonably withheld, and which contractors must be reputable and financially responsible, maintain proper insurance and /***/), and, in either event, Tenant shall pay to Landlord or its agent a reasonable charge for supervision, general conditions, overhead and other actual out-of-pocket costs and expenses incurred by Landlord in connection with such work, as established by Landlord from time to time. The billing for such employees' time and general conditions shall be based upon the then published rates of the Building. In the event that Tenant uses its own contractors for the Improvements Landlord may, without limitation, require Tenant to: (a) comply with such constructions standards or procedures as may be applicable from time to time for construction activities in the Building; (b) give assurances reasonably satisfactory to Landlord that the construction of such Improvements will not /***/; (c) submit satisfactory insurance certificates; (d) obtain all necessary permits; (e) furnish satisfactory security for the payment of all costs to be incurred in connection with the Improvements; and (f) upon completing any such Improvements, furnish Landlord with contractors' affidavits and full and final waivers of lien and receipted bills covering all labor and material expended and used and furnish Landlord with final construction drawings (marked up as constructed) for any such Improvements. Landlord and Tenant acknowledge that the Americans With Disabilities Act of 1990 (42 U.S.C. (S) 12-101 et seq.) and regulations and guidelines promulgated -- --- thereunder, as all of the same may be amended and supplemented from time to time (collectively "ADA"), establish requirements for business operations, accessibility and barrier removal, and that such requirements may or may not apply to the Premises and the Building depending on, among other things, whether: (1) Tenant's business is deemed a "public accommodation" or "commercial facility", (2) such requirements are "readily achievable", and (3) a given alteration affects a "primary function area" or triggers "path of travel" requirements. The parties hereby agree that __________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -13- (a) Landlord shall be responsible for ADA Title III compliance in the common areas of the Building, except as provided below, (b) Tenant shall be responsible for ADA Title III compliance in the Premises, including direct access into the Premises and any leasehold improvements or other work to be performed in the Premises under or in connection with this Lease other than the Shell and Core Work, and (c) Landlord may perform, or require that Tenant perform, and Tenant shall be responsible for the cost of, ADA Title III "path of travel" requirements triggered by alterations in the Premises other than the Shell and Core Work and the Tenant's Work to be performed in connection with Tenant's initial occupancy of the Premises. Tenant shall be solely responsible for requirements under Title I of the ADA relating to Tenant's employees. All Improvements shall comply with all insurance requirements and with all applicable governmental laws, requirements, codes, ordinances and regulations. All Improvements shall be constructed in a good and workmanlike manner and only good grades of material shall be used. Except for he negligence of Landlord, its beneficiary or their respective agents, Tenant shall protect, defend, indemnify and hold Landlord, the Building and the Property, Landlord's beneficiaries, and their respective officers, directors, beneficiaries, partners, agents and employees harmless from any and all liabilities of every kind and description which may arise out of or in connection with such Improvements. All Improvements made by Landlord or Tenant in or upon the Premises whether temporary or permanent in character, including but not limited to wall coverings, carpeting and other floor covering, lighting installations, built-in or attached shelving, cabinetry, and mirrors, and shall become Landlord's property and shall remain upon the Premises at the termination of this Lease by Lapse of time or otherwise without compensation to Tenant [excepting only Tenant's movable office furniture, trade fixtures (other than attached or installed lighting equipment), telecommunications and broadcasting equipment and office equipment]; provided, however, that Landlord shall have the right to require Tenant to remove at Tenant's sole cost and expense in accordance with the provisions of Article 16 of this Lease: such Improvements which, in the case of initial Improvements to the Premises, are atypical for standard office uses or require unusual expense for removal (such as, but not limited to, staircases, vaults and telecommunications and broadcasting equipment) and are so identified in writing by Landlord at the time of its approval of the Plans pursuant to Article 35; any and all hazardous materials installed or placed in the Premises by Tenant; any equipment installed by Tenant on the roof of the Building or elsewhere outside the Premises, and any cabling and wiring and other facilities located outside the Premises and serving or intended to serve the Premises; and any items which Landlord previously designated for possible removal, at the time Landlord granted its consent to such Improvements, as provided above in this Article 8. All cabling, wiring and equipment installed at any time by or on behalf of Tenant outside of the Premises on the Property, whether as part of the initial Tenant's Work or otherwise, -14- including, without limitation, any such items installed in connection the Antennae described in Article 40 hereof (any installation of any such cabling, wiring or equipment shall in all cases be subject to Landlord's consent in its absolute discretion), shall be operated and maintained at Tenant's sole cost and expense in a manner which does not disturb improvements on the Property or the operation thereof or interfere with the operations of, or services provided to, tenants in the Building. Any such installation, operation, and maintenance shall be in accordance with any reasonable rules and regulations established by the Landlord from time to time, shall be at Tenant's sole risk, and shall be subject to the Tenant insurance requirements of Article 25 hereof and the provisions of Article 11 hereof. All such cabling, wiring and equipment shall be appropriately identified by color code, identification plate and/or other means reasonably specified by Landlord at the time of installation if initially installed by Tenant, and Tenant shall provide Landlord with plans and drawings locating and identifying such items in such detail as may be reasonably requested by Landlord. 9. SERVICES. Landlord shall provide the following services on all days during the Term of this Lease excepting Sundays and holidays (which holidays are New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day and may, in addition, include any other holiday from time to time observed by Tenant), unless otherwise stated: (A) Adequate passenger elevator service will be furnished daily as determined by Landlord, including the services of at least one (1) passenger elevator at all times (including holidays), subject to Force Majeure. (B) Conditioned air for heating, ventilating and cooling when necessary for normal comfort in the Premises will be provided from 8:00 A.M. to 8:00 P.M. Monday through Friday, and 8:00 A.M. and 1:00 P.M. Saturday, in accordance with the standards for the Premises set forth in Exhibit "C" attached hereto and made a part hereof. Whenever heat-generating machines, equipment or lighting fixtures installed by Tenant or excessive electrical usage by Tenant affect the temperature maintained by Landlord in the Premises, Landlord shall be relieved of responsibility for maintaining air conditioning in the Premises, and in such event Landlord further reserves the right at its option to (1) require Tenant to discontinue use of such heat-generating machines, equipment, lighting fixtures or excessive electrical load, or (2) install supplementary air conditioning units in the Premises, the cost, installation, operation and maintenance of which shall be paid by Tenant to Landlord at such rates as Landlord charges from time to time in the Building. Tenant agrees that at all times it will cooperate with Landlord and abide by all regulations and requirements which Landlord may prescribe for proper functioning of the ventilating and air conditioning systems. Landlord agrees that it shall make available to Tenant after-hours HVAC service at the expense of Tenant at times other than those identified above in this Paragraph (B), -15- provided that if Tenant desires any such service on Mondays through Fridays (holidays described above excepted), it shall request such service from Landlord on or before 4:00 p.m. on the day for which such service is requested, and in the event Tenant desires such service on Saturdays or Sundays or holidays (as described above), it shall request such service from Landlord no later than 4:00 p.m. on Friday (for service on Saturday or Sunday) and by 4:00 p.m. on the day preceding any holiday (for service on such holiday). Tenant shall pay for all such after-hours HVAC services at Landlord's published rates in effect in the Building from time to time (the published rates currently in effect being $81/hour per fan for water chilled air and $51/hour per fan for circulating air). Tenant may request such after-hours HVAC service by zone (determined by the respective areas served by separate fan rooms); and if another tenant has also specifically requested such after-hours service in the same zone during the same time period as requested by Tenant, Landlord shall reasonably allocate the charge for such service between Tenant and such other tenants so requesting such service. (C) Electricity for the Premises shall not be furnished by Landlord but shall be furnished and billed directly to Tenant by the electric utility company serving the Building. Landlord shall cause the Premises to be separately metered, if necessary. Tenant shall make all necessary arrangements with the utility company for paying for electric current furnished by it to Tenant and Tenant shall pay for all charges for electric current consumed on the Premises during the Term of this Lease. Tenant agrees that the minimum electrical load of the Premises shall be engineered so that during and after normal business hours the minimum temperature required therein shall be maintained by Tenant at all times so long as electrical service to the Premises is not terminated or interrupted through no fault or neglect of Tenant. Tenant shall not install or operate any electrical equipment or fixtures that overload lines servicing the Premises or which exceed a connected electrical load of the incidental use equipment of an average of one watt per square foot of the Premises, and an average of 7 watts per square foot of the Premises when added to Tenant's electrical load for lighting. (D) Janitorial services, as specified on Exhibit "D" attached hereto and made a part hereof, shall be provided at the sole cost and expense of Landlord, except that commencing on January 1, 1998, all increases in the costs of providing such janitorial services to Tenant in any calendar year in excess of Landlord's annualized cost per rentable square foot of providing such services to Tenant in calendar year 1997 shall be paid by Tenant on an estimated basis in monthly installments subject to final year-end adjustment in the same manner as provided for the payment of Operating Expense adjustments in Article 4 hereof. Tenant may from time to time procure directly from Landlord's cleaning contractor at Tenant's Expense such additional cleaning services as are desired by Tenant. (E) Building directory identification of a reasonable number of listings for Tenant (not to exceed (10) listings). -16- (F) Additional services (including after-hour cooling and ventilation and the provision of water) may be provided on terms and conditions as may be mutually agreed upon by Landlord and Tenant. Subject to Force Majeure, Tenant and its employees and invitees shall have access to the Premises twenty-four (24) hours a day, seven (7) days a week, fifty-two (52) weeks a year. At times other than normal business hours (i.e. 8 A.M. to 6 P.M. Monday through Friday) access shall be available through limited entrances and subject to regulations and procedures in place in the Building from time to time, including the furnishing of proper employee identification or authorization and the registering of a person's name, room number and time of entry and departure in a register furnished by Landlord and placed in the Lobby of the Building. Tenant shall apply to the applicable utility company or municipality for gas, telephone and all other utility services, other than those provided by Landlord, required by Tenant for use in the Premises in accordance with Article 2 hereof and, subject to Article 8 hereof, Tenant shall be responsible for the connection and installation of same. All charges for any services shall be deemed rent reserved under this Lease and shall be due and payable at the same time as the installment of rent with which they are billed, or, if billed separately, shall be due and payable within twenty (20) days after such billing. In the event Tenant shall fail to make payment for such services within ten (10) days from notice from Landlord that such amount has not been received, Landlord may, in addition to all other remedies which Landlord may have for the non-payment of rent without notice to Tenant, discontinue any or all such services (including, without limitation, electric current for lights and power in the Premises), and such discontinuance shall not be held or pleaded as an eviction or as a disturbance in any manner whatsoever of Tenant's possession, or relieve Tenant from the payment of rent when due, or vary or change any other provision of this lease or render Landlord liable for damages for any kind whatsoever. Tenant agrees that, to the extent permitted by law, neither Landlord nor its beneficiaries nor any of their respective agents, partners or employees, shall be liable to Tenant, or any of Tenant's employees, agents, customers or invitees or anyone claiming through, by or under Tenant, for any damages, injuries, losses, expenses, claims or causes of action, because of any interruption, diminution, delay or discontinuance at any time in the furnishing of any of the above services (including access to the Premises as described above in this Article 9) when such interruption, diminution, delay or discontinuance is occasioned, in whole or in part, by repairs, renewals, improvements or additions, by any strike, lockout or other labor trouble, by inability to secure gas, electricity, water or other fuel at the Building, by any accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause beyond Landlord's reasonable control; nor shall any such interruption, diminution, delay or discontinuance be deemed an eviction or disturbance of Tenant's use or possession of the Premises or any part thereof; nor shall any such interruption, diminution, delay or discountenances relieve Tenant from full performance of -17- Tenant's obligations under this Lease, except as otherwise expressly provided herein. Notwithstanding the foregoing, in the event that (i) any interruption or discontinuance of services (including access to the Premises as described above) required to be provided pursuant to this Article 9 which was within the reasonable control of Landlord to prevent continues beyond three (3) consecutive business days after written notice to Landlord and materially and adversely affects Tenant's ability to conduct business in the Premises or (ii) the performance by Landlord of repairs in the Building that are not the responsibility of Tenant materially and adversely affects Tenant's ability to conduct business in the Premises and continues beyond three (3) consecutive business days after written notice to Landlord, and on account of such interruption or discontinuance described in clause (i) or such performance of repairs described in clause (ii), Tenant ceases doing business in the Premises (or a material portion thereof), Base Rent shall abate thereafter (as to the Premises or as to such material portion thereof, as the case may be) and for so long as Tenant remains unable to conduct its business in the Premises (or such material portion thereof). Landlord agrees to use reasonable efforts to restore such interrupted or discontinued service or to complete such repairs, as the case may be, as soon as reasonably practicable. 10. COVENANT AGAINST LIENS. Tenant agrees to pay when due for any work done or materials furnished by or on behalf of Tenant in or about the Premises or to all or any part of the Property and nothing in this Lease contained shall authorize or empower Tenant to do any act which shall in any way encumber the title of Landlord in and to the Premises or to the Property, nor shall the interest or estate of Landlord therein be in any way subject to any claims by way of lien or encumbrance whether claimed by operation or law or by virtue of any express or implied contract of Tenant, and any claim to a lien upon the Premises or the Property arising from any act or omission of Tenant shall accrue only against Tenant and shall in all respects be subordinate to the title and rights of Landlord to the Premises and the Property. Tenant covenants and agrees not to suffer or permit any lien or encumbrance to be placed against the Premises, the Building or the Property with respect to work or services claimed to have been performed for or materials claimed to have been furnished to Tenant or the Premises and, in case of any such lien or encumbrance attaching, or claim thereof being asserted, Tenant agrees to cause it to be immediately released and removed of record, or to provide security as hereinafter provided. If Tenant has not removed any such lien or encumbrance or provided Landlord with a title indemnity bond or such other security as is reasonably satisfactory to Landlord within thirty (30) days after notice to Tenant by Landlord, such failure shall constitute a default hereunder and, in addition to all other remedies available herein, Landlord may, but shall not be obligated to, pay the amount necessary to remove the lien or encumbrance, without being responsible for making any investigation as to the validity thereof, and the amount so paid together with all costs and expenses, including reasonable attorneys' fees, incurred in connection therewith shall be deemed additional rent reserved under this Lease due and payable forthwith. -18- 11. WAIVER OF CLAIMS. Subject to the provisions of Article 25 hereof, Tenant agrees that Landlord, Landlord's beneficiaries and their respective officers, directors, beneficiaries, partners, agents, and employees shall not be liable for (subject, however, to the provisions of Article 9 as to the abatement of rent for interruption of services) any direct or consequential damage (including, without limitation, damages claimed for actual or constructive eviction) either to person or property sustained by Tenant or any other person, due to the Building, the Property, or any part thereof or any appurtenances thereof becoming out of repair, or due to the happening of any accident in or about the Building or the Property, or due to any act or neglect of any tenant or occupant of the Building or the Property, or any other person, except to the extent that any such damage is caused by the negligence or intentional acts of Landlord, its beneficiaries or their respective agents, contractors, servants or employees. The foregoing provision, subject in all events to the provisions of Article 25 as stated above, shall apply particularly (but not exclusively) to damage caused by fire, explosion, water, snow, frost, steam, sewerage, illuminating gas, sewer gas or odors, or by the bursting or leaking of pipes, plumbing fixtures, or sprinkler system; without distinction as to the person whose act or neglect was responsible for the damage and whether the damage was due to any of the causes specifically enumerated above or to some other cause of an entirely different kind. Tenant further agrees that all personal property upon the Premises or brought or caused to be brought within the Building by Tenant shall be at the risk of Tenant only and that Landlord shall not be liable for any damage thereto or any theft thereof, except to the extent caused by the negligence or intentional acts of Landlord, its beneficiaries or their respective agents, contractors, servants or employees, subject in all events, however, to the provisions of Article 25. Subject to the provisions of Article 25 hereof, and except for the negligence or intentional acts of Landlord, its beneficiaries or their respective agents, contractors, servants or employees, Tenant shall protect, indemnify, defend and save Landlord, its beneficiaries and their respective officers, directors, agents, beneficiaries, partners, and employees harmless from and against any and all liabilities, damages, costs, claims, obligations and expenses arising out of or in connection with Tenant's use or occupancy of the Premises or Tenant's activities in or about the Building or the Property, or arising out of (and to the extent caused by) any act or negligence of Tenant or its agents, contractors, servants, employees or invitees. Subject to the provisions of Article 25 hereof, Landlord agrees that Tenant and its officers, directors, agents and employees shall not be liable to Landlord for any direct or indirect damage to the Building Systems or to person or property sustained by Landlord or any other person, caused by any portion of the Tenant Responsible Premises or any of Tenant's fixtures or equipment becoming out of repair or due to the happening of any accident in or about the Premises, except to the extent that any such damage is caused by the negligence or intentional acts of Tenant or Tenant's agents, contractors, servants or employees. Subject to the provisions of Articles 9 and 25 hereof, and except for the negligence or intentional acts of Tenant or Tenant's agents, contractors, servants or employees, Landlord shall -19- protect, indemnify, defend and save Tenant, its officers, directors, agents and employees harmless from and against any and all liabilities, damages, costs, claims, obligations and expenses arising out of or in connection with Landlord's operation of the Building or Landlord's activities in or about the Building or the Property other than the Premises or arising out of (and to the extent caused by) any act or negligence of Landlord, its beneficiaries or their respective agents, contractors, servants or employees. 12. ASSIGNMENT AND SUBLETTING. Tenant shall not, without the prior written consent of Landlord, (a) assign, convey, mortgage, pledge or otherwise transfer this Lease, or any part thereof, or any interest hereunder; (b) permit any assignment of this Lease, or any part thereof, by operation of law; (d) sublet the Premises or any part thereof; or (d) permit the use of the Premises, or any part thereof, by any parties other than Tenant, its agents and employees. Tenant shall, by notice in writing, advise Landlord of its desire from, on and after a stated date (which shall not be less than thirty (30) days after the date of Tenant's notice), to assign this Lease, or any part thereof, or to sublet any part or all of the Premises for the balance or any part of the Term. Tenant's notice shall: state the name and address of the proposed assignee or subtenant; provide financial information in reasonable detail concerning the proposed assignee or Tenant's obligation to provide such additional information concerning the financial condition of the proposed assignee or subtenant as may be requested by Landlord); include all of the material terms of the proposed assignment or sublease (whether contained in such assignment or sublease or in separate agreements) and state the consideration therefor and financial aspects thereof. In the event Tenant delivers such notice, Landlord shall have the right, to be, exercised by giving written notice to Tenant within ten (10) business days after receipt of Tenant's notice, to recapture the space described in Tenant's notice and such recapture notice shall, if given, cancel and terminate this Lease with respect to the space therein described as of the date stated in Tenant's notice. If Tenant's notice shall cover all of the Premises, and Landlord shall have exercised its foregoing recapture right, the Term of this Lease shall expire and end on the date stated in Tenant's 'notice as fully and completely as if that date had been herein definitely fixed for the expiration of the Term. If, however, this Lease be canceled with respect to less than the entire Premises, Base Rent and rent adjustments reserved herein shall be adjusted on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, as described in this Lease, and this Lease as so amended shall continue thereafter in full force and effect. If Landlord, upon receiving Tenant's notice with respect to any such space, shall not exercise its right to recapture as aforesaid, and if Tenant is not in default under the terms of this Lease, Landlord will not unreasonably withhold its consent to Tenant's assignment of the Lease or subletting such space to the party identified in Tenant's notice and upon the terms set forth ,in Tenant's notice, provided, however, that in the event Landlord consents to any such assignment or subletting, and as a condition thereto, Tenant shall pay to Landlord fifty per cent (50%) of all profit derived by Tenant from such assignment or subletting. For purposes of the foregoing, -20- profit shall be deemed to include, but shall not be limited to, the amount paid or payable to Tenant or any other party to effect or to induce Tenant or any third party to enter into any such transaction, and the amount of all rent and other consideration of whatever nature payable by such assignee or sublessee or a third party in excess of the Base Rent and rent adjustments payable by Tenant under this Lease, after deducting therefrom Tenant's reasonable expenses incurred in connection with such sublease or assignment, including advertising expenses, brokerage commissions, rent concessions, tenant improvement allowances, other financial concessions, and legal fees. If a part of the consideration for such assignment or subletting shall be payable other than in cash, the payment to Landlord of its. share of such non-cash consideration shall be in such form as is reasonably satisfactory to Landlord. Tenant shall and hereby agrees that it will furnish to Landlord upon request from Landlord a complete statement, certified by an officer of Tenant responsible for such information, setting forth in detail the computation of all profit derived and to be derived from such assignment or subletting, such computation to be made in accordance with generally accepted accounting principles. Tenant agrees that Landlord or its authorized representatives shall be given access at all reasonable times upon prior notice to Tenant to the books, records and papers of Tenant relating to revenue, expenses and the computation of profit with respect to any such assignment or subletting, and Landlord shall have the right to make copies thereof. The percentage of profit due Landlord hereunder shall be paid to Landlord within thirty (30) days of receipt of each payment of profit made from time to time by such assignee or sublessee to Tenant. Landlord's consent to any assignment or sublease shall not operate as a consent to any subsequent assignment or sublease or as a waiver of Landlord's right to require Tenant to seek Landlord's approval of all subsequent assignments and subleases. Any subletting or assignment hereunder shall not release or discharge Tenant of or from any liability, whether past, present or future, under this Lease, and Tenant shall continue fully liable hereunder. Any subtenant or assignee shall agree in a form reasonably satisfactory to Landlord to comply with and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease to the extent of the space sublet or assigned, and Tenant shall deliver to Landlord promptly within twenty (20) days after execution, a fully executed copy of each such sublease or assignment and all other agreements related thereto and an agreement of compliance by each such subtenant or assignee. Tenant agrees to pay to Landlord, on demand, all reasonable costs incurred by Landlord (including reasonable fees paid to attorneys) in connection with any request by Tenant for Landlord to consent to any assignment or subletting by Tenant. Any sale, assignment, mortgage, transfer, or subletting of this Lease which is not in compliance with the provisions of this Article shall be of no effect and void. Notwithstanding any requirement for Landlord to consider, solicit or obtain a sublease or assignment, whether statutory or otherwise, Landlord and Tenant expressly agree that Landlord's obligation with respect to such sublease or assignment shall arise only when Tenant submits such sublease or assignment to Landlord in the manner set out in this Article 12. -21- For purposes of the foregoing, (a) if Tenant is a partnership, any change in the partners of Tenant resulting in a change in the control of such Partnership, or (b) if Tenant is a corporation the voting stock of which is not listed on a nationally recognized security exchange or the National Association for Securities Dealers Automated Quotations (NASDAQ) or its equivalent, any transfer of any or all of the shares of stock of Tenant by sale, assignment, operation of law or otherwise resulting in a change in the present control of such corporation, or (c) the transfer of all or substantially all of the assets of Tenant, shall be deemed to be an assignment within the meaning of this Article 12. Notwithstanding anything set forth above to the contrary, Tenant shall have the right without the prior consent of Landlord, except as provided below, to assign this Lease or sublet the Premises or any part thereof to any Successor or Affiliate, as hereinafter defined, of Tenant, or to effect a transfer of ownership, control or assets of Tenant to a Successor or Affiliate of Tenant, on the following conditions: (a) Tenant shall notify Landlord in writing of such assignment, subletting or transfer not less than thirty. (30) days prior to the effective date thereof, and furnish to Landlord such information (including the most recent financial statement) regarding the identity, business, reputation and financial condition of such Affiliate or Successor as Landlord may reasonably require; (b) Tenant shall deliver to Landlord evidence reasonably satisfactory to Landlord that such Affiliate or Successor satisfies the requirements of this grammatical paragraph of Article 12; (c) in the case of any assignment (other than a deemed assignment by transfer of ownership, control or assets of Tenant) or any subletting, Tenant shall deliver to Landlord copies of all operative documents effecting such assignment or subletting, which documents shall be subject to Landlord's reasonable approval; and in the case of a deemed assignment by transfer of ownership, control or assets of Tenant, Tenant shall deliver to Landlord an executed copy of an agreement in form reasonably satisfactory to Landlord by which such transferee Affiliate or Successor has agreed to comply with, be bound by, and assume all of the terms, covenants, conditions and provisions of this Lease; (d) any such subletting, assignment or transfer shall not release or discharge Tenant of or from any liability, whether past, present or future, under this Lease and Tenant shall continue fully liable hereunder; and (e) the creditworthiness of such Successor or Affiliate shall be reasonably acceptable to Landlord. "Successor" is defined as any corporation or entity resulting from a merger or consolidation with Tenant or any corporation or entity succeeding to substantially all of the business and assets of Tenant; and "Affiliate" is defined as any corporation that through one or more - intermediaries, controls or is controlled by, or is under common control with, Tenant ("control" meaning the possession of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership o voting securities, by contract or otherwise). if, after giving effect to any such assignment, subletting or transfer to a Successor or Affiliate and any merger, consolidation, reorganization or transfer of assets in connection therewith, the aggregate net worth of the assigning Tenant (remaining liable on the Lease) and -22- the assignee, sublessee or transferee would not be substantially the same as or greater than the net worth of the Tenant (and any Affiliate or Successor previously liable on the Lease) immediately prior to such assignment, sublease or transfer (and any merger, consolidation, reorganization or transfer of assets in connection therewith), then Landlord shall not be deemed to be acting unreasonably in determining the creditworthiness of the Successor or Affiliate not to be acceptable. Notwithstanding anything to the contrary contained in this Article 12, Tenant shall have the right, without the consent of Landlord, to enter into license agreements (a "License") permitting the licensees to enter the Premises and use Tenant's telephone and computer systems in the Premises provided (i) Tenant gives Landlord reasonable advance notice of any such License with such information as Landlord may reasonably request, including, without limitation, a copy of the license agreement, (ii) Tenant shall not be in default under this Lease at the time such License is granted, (iii) the spaces subject to the License shall be operated by the licensee under the control of Tenant; however, the licensee shall not be required to assume Tenant's obligations under this Lease but shall be subject to, agree to be bound by and shall use and occupy the Premises in accordance with all of the terms, covenants and conditions of this Lease, (iv) such Licenses shall permit the use of the Premises only for limited hours and shall be of limited duration and the aggregate source subject to all such Licenses shall not exceed twenty-five percent (25%) of the Premises demised hereunder from time to time, (v) no licensee may use the name or address of or otherwise identify the Property or the Building in connection with its activities, and (vi) any such licensee shall have in effect at all times any necessary permits or licenses for its activities or business and the use of the Premises by such licensee shall not impair the reputation or character of the Building as a first class building. 13. EXPENSES OF ENFORCEMENT. Tenant shall pay all reasonable attorneys, fees and expenses of Landlord incurred in successfully enforcing any of the obligations of Tenant under this Lease. Landlord shall pay all reasonable attorneys, fees and expenses of Tenant incurred in successfully enforcing any of the obligations of Landlord under this Lease. 14. LANDLORD'S LIEN. Landlord shall have a first lien upon any and all rents from permitted subtenants or assignees of Tenant (if any)and upon the interest of Tenant under this Lease to secure the payment of all money due under this Lease. 15. LANDLORD'S REMEDIES. If default shall be made in the payment of the rent or any installment thereof or in the payment of any other sum required to be paid by Tenant under this Lease, or under the terms of any other lease or agreement between Landlord and Tenant, and such default shall continue for ten (10) days after written notice to Tenant or if default shall be made in the performance of any of the other covenants or conditions which Tenant is required to observe and perform hereunder or under any other lease or agreement -23- between Landlord and Tenant and such default shall continue for thirty (30) days after written notice to Tenant (or if any such default not involving a hazardous or dangerous condition and not involving Tenant's failure to comply with the provisions of Article 25 hereof cannot be cured within such 30-day period, so long as Tenant has promptly commenced to cure such default during such initial 30-day period and thereafter diligently pursues such cure to completion within a reasonable period of time and in all events within an additional sixty (60) days after the expiration of said 30-day period) or if the interest of Tenant in this Lease shall be levied on under execution or other legal process (and such 'levy is not dismissed within sixty (60) days), or if any petition shall be filed by or against Tenant to declare Tenant a bankrupt (and is not dismissed within sixty (60) days) or to delay, reduce or modify Tenant's debts or obligations or if any petition shall be filed or other action taken to reorganize or modify Tenant's capital structure, if Tenant be a corporation or other entity, or if Tenant be declared insolvent according to law or if any assignment of Tenant's property shall be made for the benefit of creditors or a receiver or trustee is appointed for Tenant or its property if Tenant shall abandon or vacate the Premises during the Term this Lease for a period exceeding fifteen (15) consecutive days, then Landlord may treat the occurrence of any one or more of the foregoing events as a breach of this Lease, and thereupon at its option may, without further notice or further demand of any kind to Tenant or any other person, have any one or more of the following described remedies in addition to all other rights and remedies provided at law or in equity: (a) Landlord may terminate this Lease and the Term created hereby, in which event Landlord may forthwith repossess the Premises by forcible entry and detainer suit or otherwise and be entitled to recover forthwith as damages a sum of money equal to the present value of the rent provided to be paid by Tenant for the balance of the stated Term of the Lease, less the present value of the fair rental value of the Premises for such period, and any other sum of money and damages owed by Tenant to Landlord. (b) Landlord may terminate Tenant's right of possession and may repossess the Premises by forcible entry and detainer suit, or otherwise, without further demand or notice of any kind to Tenant and without terminating this Lease, in which event Landlord shall reasonably attempt to mitigate its damages as required by law. Landlord in such instances expressly reserves the right to relet all or any part of the Premises for such rent and upon such terms as shall be satisfactory to Landlord may terminate greater or Lesser than that remaining under the Term of this Lease and the right to relet the Premises as a part of a larger area and the right to change the character or use made of the Premises). For the purpose of such reletting, Landlord may make such repairs, changes, alterations or additions in or to the Premises as may be necessary or convenient. If Landlord shall fail to relet the Premises, then Tenant shall pay to Landlord as damages a sum equal to the amount of the rent reserved in this Lease, for such period or periods. If the Premises are relet and a sufficient sum shall not be realized from such reletting after paying all of the costs and expenses of such repairs, changes, alterations and additions and the expense of such reletting and the collection of the rent accruing therefrom, to -24- satisfy the rent above provided to be paid, Tenant shall satisfy and pay any such deficiency upon demand therefor from time to time; and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this paragraph from time to time and that any suit or recovery of any portion due Landlord hereunder shall be no defense to any subsequent action brought for any amount not theretofore reduced to judgment in favor of Landlord. (c) In addition to all other rights and remedies of Landlord hereunder or at law, in the event of a default by Tenant which continues beyond any cure period provided in this Article 15, Landlord shall be entitled to receive as damages from Tenant (in addition to any other damages provided herein) an amount equal to (i) the then unamortized Landlord's Contribution made available to Tenant pursuant to Article 34 hereof, assuming amortization of such amount over a period of 180 calendar months, commencing on the first full Lease Year, at a level monthly payment with an interest factor equal to /***/ percent (***%) per annum, plus (ii) any then unamortized Take-Down Improvement Allowance made available to Tenant pursuant to Article 36 hereof, assuming amortization of such amount over a period commencing on the date of disbursement thereof and ending on the expiration of the initial Term hereof at a level monthly payment with an interest factor equal to *** percent (***%) per annum; provided, however, in no event shall the provisions of this subparagraph (c) permit Landlord to receive a double recovery of any rent actually paid by Tenant. 16. SURRENDER OF POSSESSION. On or before the date this Lease and the Term hereby created terminate, or on or before the date Tenant's right of possession terminates, whether by lapse of time or at the option of Landlord, Tenant will: (a) remove those alterations, improvements and additions installed by Tenant which Tenant is required to remove pursuant to Article 8 hereof and restore the Tenant Responsible Premises to the same condition they were in upon completion of Tenant's Work (except for reasonable wear and tear and as otherwise provided in Article 25 of this Lease) and repair any damage to the Tenant Responsible Premises or the Building caused by Tenant's removal of such alterations, improvements or additions; (b) remove from the Premises and the Building all of Tenant's trade fixtures and personal property; and (c) surrender possession of the Premises to Landlord. If Tenant shall fail or refuse to restore the Premises to the above described condition on or before the above- specified date, Landlord may upon notice to Tenant enter into and upon the Premises and put the Premises in such condition, and recover from Tenant Landlord's cost of so doing. If Tenant shall fail or refuse to comply with Tenant's duty to remove all trade fixtures and personal property from the Premises and the Building on or before the above-specified date, the parties hereto agree and stipulate that Landlord may, as its election: (1) treat such failure or refusal as an offer by Tenant to transfer title to such trade fixtures and personal property to Landlord, in which event title hereto shall thereupon pass under this Lease as a bill of sale to and vest in Landlord absolutely without any cost either by set-off, credit allowance or otherwise, and Landlord may remove, sell, retain, ______________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -25- donate, destroy, store, discard, or otherwise dispose of all or any part of said personal property in any manner that Landlord shall choose; or (2) treat such failure or refusal as conclusive evidence, on which Landlord and any third party shall be entitled absolutely to rely and act, that Tenant has forever abandoned such trade fixtures and personal property, and without accepting title thereto, Landlord may at Tenant's expense enter into and upon the Premises and remove, sell, retain, donate, destroy, store, discard or otherwise dispose of all or any part thereof in any manner that Landlord shall choose without incurring liability to Tenant or to any other person. In no event shall Landlord ever become or accept or be charged with the duties of a bailee (either voluntary or involuntary) of any personal property or trade fixtures; and the failure of Tenant to remove all personal property and trade fixtures from the Premises and the Building shall forever bar Tenant from bringing any action or from asserting any liability against Landlord with respect to any such property which Tenant fails to remove. If Tenant shall fail or refuse to surrender possession of the Premises to Landlord on or before the above-specified date, Landlord may forthwith re-enter the Premises and repossess itself thereof as of its former state and remove all persons and effects therefrom, using such force as may be necessary, without being guilty of any manner of trespass or forcible entry or detainer. 17. HOLDOVER. Tenant will pay to Landlord an amount equal to /***/ percent (***%) the sum of the annual Base Rent plus /***/ percent (***%) of rent adjustments for all the time Tenant shall retain possession of the Premises or any part thereof after the termination of this Lease, whether by lapse of time or otherwise, and, in addition thereto, all damages, whether direct or consequential, sustained by Landlord on account of or as result of any such holdover extending for more than twenty (20) days, but the provisions of this Article shall not operate as a waiver by the Landlord of any right of re-entry hereinbefore provided. Landlord agrees that, upon receipt of written request from Tenant during the last thirty (30) days of the Term, Landlord will use reasonable efforts to estimate the nature and scope of the damages that Landlord would anticipate incurring if Tenant failed to vacate the Premises promptly upon expiration of the Term of this Lease. At the option of Landlord, expressed in a written notice to Tenant and not otherwise, any holding over by Tenant extending more than twenty (20) days beyond the termination of this Lease for any portion of a calendar month shall constitute a holding over and extension of this Lease for such entire calendar month at a rental equal to the greater of the holdover rental specified above in this Article 17 or the then prevailing rental rates for similar space in the Building. 18. [Intentionally Omitted.] 19. NOTICE. In every case where it shall be necessary or desirable for Tenant to give or serve upon Landlord any notice or demand. Tenant shall give the requisite notice either (a) by delivering or causing to be delivered to Landlord a written or printed copy of such notice or _______________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -26- demand, or (b) by sending a written or printed copy of such notice or demand by either (i) Federal. Express or similar commercial overnight delivery service, or (ii) certified or registered mail-, return receipt requested, postage prepaid, addressed to Landlord at: Merchandise Mart Properties, Inc. 222 The Merchandise Mart, Suite 470 Chicago, Illinois 60654 Attention: President with a copy to: Merchandise Mart Properties, Inc. 222 The Merchandise Mart, Suite 470 Chicago, Illinois 60654 Attention: Legal Department In every case where under the provisions of this Lease it shall be necessary or desirable for Landlord to give or serve upon Tenant any notice or demand it shall be sufficient either (a) to deliver or cause to be delivered to Tenant a written or printed copy of such notice or demand, or (b) to send a written or printed copy of said notice or demand by either (i) Federal Express or similar commercial overnight delivery service, or (ii) certified or registered mail, return receipt requested, postage prepaid, addressed to Tenant, at: 21st Century Cable TV, Inc. 350 N Orleans Street 6th Floor Chicago, Illinois 60654 Attention: Manager of Purchasing and Contracts with a copy of default notices to: Neal, Gerber & Eisenberg Two North LaSalle Street Suite 2100 Chicago, Illinois 60602 Attention: Susan R. Proffitt Prior to commencement of the Term hereof and Tenant's occupancy of the Temporary Source (see Article 39), any notices which may be necessary or desirable for Landlord to give or serve upon Tenant shall be addressed to Tenant at 455 North Cityfront Plaza Drive, Suite 2950, Chicago, Illinois 60611, and addressed to the attention of those corporate titles set forth above. -27- Any such notice served upon Landlord or Tenant in accordance with the foregoing shall be deemed served effective upon receipt or upon refusal to accept delivery. Landlord and Tenant may designate alternative or additional addressees and addresses for notice by delivery of notice in accordance with the provisions of this Article 19; provided that the number of addressees/addresses to which notices to either party must be sent shall not exceed three (3). 20. NO SOLICITATION. Tenant shall not by itself or through any officer, salesman, employee, agent, advertisement or otherwise solicit business in the vestibules, entrances, elevator lobbies, corridors, hallways, elevators or other common areas of the Building. 21. CONDEMNATION. If the whole or any substantial part of the Premises or Building shall be taken or condemned by any competent authority for any public use or purpose or if any adjacent property or street shall be condemned or improved in such manner as to require the use of a substantial part of the Premises or the Building, the Term of this Lease, at the option of Landlord, shall end upon -the- date when the possession of the part so taken shall be required for such use or purpose and Landlord shall be entitled to receive the entire award, if any, without any payment to Tenant. Current rent shall be apportioned as of the date of such termination. Notwithstanding the foregoing, Tenant may, to the extent permitted by law, seek a separate award in a separate proceeding for the value of Tenant Responsible Premises and its trade fixtures and other personal property and moving and relocation expenses, so long as Tenant does not materially interfere with the proceedings being conducted by Landlord or otherwise reduce the award to which Landlord is entitled. 22. NONWAIVER. No waiver of any condition expressed in this Lease shall be implied by any neglect of Landlord or Tenant to enforce any remedy on account of the violation of such condition if such violation be continued or repeated subsequently, and no express waiver shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated. The receipt and acceptance by Landlord or Tenant of a sum of money which is less than the amount due and owing shall not, regardless of any endorsements or instructions to the contrary, constitute an accord and satisfaction. No receipt of moneys by Landlord from Tenant after the termination in any way of the Term hereof or of Tenant's right of possession hereunder or after the giving of any notice shall, reinstate, continue or extend the Term or affect any notice given to Tenant prior to the receipt of such moneys, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises Landlord may receive and collect any rent due, and the payment of such rent shall not waive or affect such notice, suit or judgment. 23. WAIVER OF NOTICE. To the extent that the notice provided in Article 15 hereof satisfies the requirements, if any, for service of notice or demand prescribed by any -28- applicable statute or law, Tenant hereby expressly waives the service of any other notice of intention to terminate this Lease or to re-enter the Premises and waives the service of any demand for payment of rent or for possession and waives the service of any other notice or demand prescribed by any statute or other law. 24. FIRE OR CASUALTY. If the Premises or any part of the Building shall be damaged by fire or other casualty and if such damage does not render all or a substantial portion of the Premises or the 'Building untenantable (and for purposes of this Article 24, the Premises shall be deemed untenantable if there is (i) a substantial impairment of the reasonable means of access thereto or (ii) substantial impairment of reasonable means of access to the Antennae on the Roof or damage to a substantial portion of the Antennae on the Roof which materially adversely impairs Tenant Is ability to conduct business in the Premises) , then Landlord shall proceed to repair and restore the Building Systems (including the Building Systems in the Premises) and the reasonable means of access to the Premises with reasonable promptness, given the nature of the damage to be repaired, subject to reasonable delays for insurance adjustments and delays caused by matters beyond Landlord's control. If any such damage renders all or a substantial portion of the Premises or the Building untenantable, Landlord shall, with reasonable promptness after the occurrence of such damage, but in all events within forty-five (45) days after such damage occurred, obtain, at no cost to Tenant, an opinion of an independent architect, engineer or other qualified licensed professional, estimating the length of time will be required to complete the repair and restoration of the Building Systems (including the reasonable means of access to the Premises) and the Tenant Responsible Premises (stating separate estimated time periods for the repair and restoration of the Building Systems, including those in the Premises, and the repair and restoration of the Tenant Responsible Premises) and by written notice advise Tenant of such estimate (such notice being referred to herein as the "Repair Estimate Notice"). If it is so estimated that the amount of time required to substantially complete such repair and restoration of both the Building Systems (including those in the Premises and the reasonable means of access to the Premises) and the Tenant Responsible Premises will exceed one hundred eighty (180) days, then either Landlord or Tenant (but as to Tenant, only if all or a substantial portion of the Premises are rendered untenantable) shall have the right to terminate this Lease as of the date of such damage upon giving notice to the other at any time within twenty (20) days after Landlord delivers the Repair Estimate Notice to Tenant (it being understood that Landlord may, if it elects to do so, also give such notice of termination together with the Repair Estimate Notice). Notwithstanding the foregoing, if such damage renders untenantable a substantial portion of the Building but does not render untenantable a substantial portion of the Premises, Landlord shall not have the right to terminate this Lease on account of such damage, unless Landlord elects generally to terminate all leases in the Building which Landlord is entitled to terminate on account of such damage or Landlord elects to demolish all or a substantial portion of the Building, and any such termination of this Lease shall be effective as of a date, specified by Landlord, not less than sixty (60) days after the delivery of such termination notice. -29- Unless this Lease is terminated as provided in the preceding paragraph, Landlord shall proceed with reasonable promptness to repair and restore the Building Systems, including Building Systems in the Premises and the reasonable means of access to the Premises, subject to reasonable delays for insurance adjustments and delays caused by matters beyond Landlord's reasonable control, and also subject to zoning laws and applicable building codes then in effect. when the repair and restoration of the Building Systems is completed to a degree making the Premises suitably available for Tenant's repair and restoration of the Tenant Responsible Premises, Tenant shall proceed with reasonable promptness to repair and restore the Tenant Responsible Premises, subject to reasonable delays for insurance adjustments and delays caused by matters beyond Tenant's reasonable control and applicable building codes then in effect. Landlord shall have no liability to Tenant, and Tenant shall not be entitled to terminate this Lease (except as hereinafter provided) if such repair and restoration of the Building Systems is not in fact completed within the time period specified in the Repair Estimate Notice. If the Building Systems are not repaired and restored by the number of days equal to one hundred fifty percent (150%.) of the number of days specified in the Repair Estimate Notice for completion of the repair and restoration of the Building Systems, measured from the date of delivery of the Repair Estimate Notice (provided, however, such number of days may be extended up to an additional one hundred twenty (120) days due to Force Majeure events), then either party (but as to Landlord, only if Landlord has diligently commenced and pursued such repair and restoration) may terminate this Lease, effective as of the date of such fire or other casualty, by written notice to the other party delivered not later than thirty (30) days after the expiration of said period but prior to substantial completion of such repair or restoration. Notwithstanding anything to the contrary herein set forth, (a) Landlord shall have obligation, to repair or restore any of the Tenant Responsible Premises or Tenant's office furniture, trade fixtures, office equipment, merchandise or any other items of Tenant's property in the Premises or the Building; (b) if any such damage rendering all or a substantial portion of the Premises or the Building untenantable shall occur during the last one (1) year of the Term and provided Tenant has not delivered a binding notice under Article 37 to extend the Term of this Lease beyond the then current Term (or Extended Term), each of Landlord and Tenant shall have the option to terminate this Lease by giving written notice to the other within sixty (60) days after the date such damage occurred, and if such option is so exercised, this Lease shall terminate as of a date not less than sixty (60) days after the delivery of such notice; and (c) Landlord shall have the right -to terminate this Lease by giving written notice to Tenant within sixty (60) days of the date such damage occurred if Landlord elects to terminate all tenant leases in the Building which Landlord is entitled to terminate on account of such damage or to demolish the Building, and if such right is so exercised, this Lease shall terminate as of a date, specified by Landlord, not less than sixty (60) days after the delivery of such notice. In the event any such fire or casualty damage renders the Premises or any part thereof untenantable and if this Lease shall not be terminated pursuant to the foregoing provisions of, -30- this Article 24 by reason of such damage, then all rent (including, without limitation, Base Rent and rent adjustments) payable pursuant to this Lease with respect to the Premises or such portion so rendered untenantable shall abate during the period beginning with the date of such damage and ending with the date that Tenant substantially completes the repair and restoration of the Tenant Responsible Premises (or such portion rendered untenantable) or commences substantial use of the Premises (or such portion rendered untenantable) for the conduct of its business, whichever is earlier, but in all events not later than the number of days equal to one hundred fifty percent (150%) of the number of days specified in the Repair Estimate Notice for completion of the repair and restoration of the Tenant Responsible Premises, measured from the date that the Building Systems are repaired and restored to a degree making the Premises suitably available for Tenant to commence and continue without unreasonable interruption Tenant's repair and restoration of the Tenant Responsible Premises, provided, however, such number of days may be extended up to an additional one hundred-twenty (120) days due to Force Majeure events. Such abatement shall be in an amount bearing the same ratio to the total amount of all rent (including rent adjustments) payable pursuant to this Lease for such period as the portion of the Premises rendered and remaining untenantable due to such fire or casualty from time to time bears to the entire Premises. In the event of termination of this Lease pursuant to this Article 24, all rent (including, without limitation, Base Rent and rent adjustments) payable pursuant to this Lease (to the extent not abated pursuant to the foregoing) shall be apportioned on a per diem basis and be paid to the date of termination. 25. INSURANCE. In consideration of the leasing of the Premises at the rental stated in Articles 3 and 4, Landlord and Tenant agree to provide insurance and allocate the risk of loss as follows: Tenant, at its sole cost and expense, agrees to purchase and keep in force and effect during the Term hereof (a) Property Insurance on the Tenant Responsible Premises and Tenant's contents, furniture, fixtures, equipment and other personal property located in the Building, covering the interests of Landlord and Tenant as to damage or other loss caused by those perils customarily covered by an all risk policy, and in any event including without limitation, fire or other casualty, vandalism, theft, sprinkler leakage, water damage (however caused), explosion, malfunction and failures of heating and cooling or similar apparatus, perils covered by extended coverage, and other similar perils in amounts not less than the full insurable replacement value of such property with a deductible amount in a commercially reasonable amount, taking into account the financial condition of Tenant, and (b) broad form Commercial General Liability Insurance, including blanket contractual liability, host liquor liability (if alcoholic liquor within the meaning of the Illinois Liquor Control Act will be given to guests), personal injury liability, and broad form property damage liability coverages, with limits of not less than /***/ for personal injury, bodily injury, sickness, disease or death or for damage or injury __________________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -31- to or destruction of property (including the loss of use thereof) for any one occurrence. Tenant's Property Insurance policy shall provide that it is specific and not contributory and shall contain a clause pursuant to which the insurance carrier waives all rights of subrogation against Landlord. and Landlord's- beneficiary, and its partners, trustees, officers, directors, agents and employees with respect to losses payable under such policy; and Tenant agrees to indemnify Landlord and Landlord's beneficiary, and its partners, trustees, officers, directors, agents and employees against all liabilities, damages, costs, claims, obligations and expenses (including attorneys, fees) arising from any failure of Tenant's Property Insurance policy to contain such a waiver of subrogation. If the potential for host liquor liability shall arise due to Tenant's activities pursuant to Article 2 of this Lease, the Tenant shall procure and maintain a policy, or endorsement for, liability insurance before undertaking such activities. Tenant's Commercial General Liability Policy and, if required, its host liquor liability policy or endorsement, shall each name Landlord, its beneficiaries, and their respective officers, directors, beneficiaries, partners, agents, and employees as additional insureds. All such insurance shall be provided by commercial insurers of recognized responsibility. Landlord agrees to purchase and keep in force and effect insurance on the Building and Building Systems against fire and such other risks as may be included in extended coverage insurance from time to time available on a replacement value basis in an amount sufficient to prevent Landlord from becoming a coinsurer under the terms of the applicable policies and shall contain a clause pursuant to which the insurance carriers waive all rights of subrogation against the Tenant, its agents, officers, directors and employees, with respect to losses payable under such policies. Tenant shall, from time to time upon request from Landlord but not more frequently than once each calendar year (except in the case of any change in coverage or any change in insurer, in any of which events Tenant agrees to provide Landlord written notice of such change within thirty (30) days of its occurrence), deliver to Landlord certificates of insurance evidencing the insurance coverage required by this Article 25, with a notation on such certificates as to the waiver of subrogation provided above. By this Article, Landlord and Tenant intend that the risk of loss or damage to property (including personal property and equipment used in connection with the Building and also including any automobile or other vehicles from time to time parked in any parking spaces which Landlord may from time to time lease to Tenant), as described above be borne by responsible insurance carriers to the 'extent above provided and' Landlord and Tenant hereby release each other and agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a loss of a type described above to the extent that such coverage is agreed to be provided hereunder. For this purpose any applicable deductible amount shall be treated as though it were recoverable under such policies. Landlord and Tenant agree that applicable portions of all moneys collected from such insurance shall be used toward full compliance with -32- the obligations of Landlord and Tenant under this Lease in connection with damage resulting from fire or other casualty. 26. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord shall have the following rights, exercisable without notice, except as otherwise stated, and without liability to Tenant for damages or injury to property, person or business and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession or giving rise to any claim for set- off or abatement except as otherwise expressly provided herein: (A) To change the Building's name or street address. Landlord agrees to give Tenant one hundred eighty (180) days prior notice of such change of street address (except where Landlord is required to change the street address by any governmental authority). (B) To install, affix and maintain any and all signs on the exterior and interior of the Building. (C) To designate and approve, prior to installation by Tenant, all types of window shades, blinds, drapes, awnings, window ventilators and other similar equipment, and to reasonably control all internal lighting that may be visible from the exterior of the Building so as to promote the uniformity or harmony of appearance of the exterior of the Building. (D) Except as provided otherwise in this Lease, to reserve to Landlord the exclusive right to designate, limit, restrict and control any business or any service in or to the Building. (E) To grant to anyone the exclusive right to conduct any business or render any service in or to the Building, provided such exclusive right shall not operate to exclude Tenant from the use expressly permitted herein or increase the costs therefor to Tenant, and the rates charged by any such vendor shall be competitive market rates. (F) To impose reasonable rules and regulations regarding the placing of vending or dispensing machines of any kind in or about the Premises without the prior written permission of Landlord. (G) To show the Premises to prospective tenants at reasonable hours by appointment during the last nine (9) months of the Term, as it may be extended. (H) To reasonably approve the weight, size and location of safes and other heavy equipment and bulky articles in and about the Premises and the Building (so as not to exceed the legal live load), and to require all such items and furniture and similar items to be moved into and out of the Building and Premises only at such times and in such manner as Landlord shall reasonably direct in writing. Subject to the provisions of Articles 11 and 25, any damages done -33- to the Building or to other tenants in the Building by taking in or taking out safes, furniture, and other articles or from overloading the floor in any way shall be paid by Tenant. Furniture, boxes, merchandise or other bulky articles shall be transported within the Building only upon or by vehicles equipped with rubber tires and shall be carried only in a freight elevator when such service is available. Movements of Tenant's property into or out of the Building and within the Building are entirely at the risk and responsibility of Tenant and Landlord reserves the right to require registration before allowing any such property to be moved into or out of the Building. Landlord reserves the right to reasonably regulate the movement of, and to inspect, all property and packages brought into or out of the Building to enforce compliance with the terms of this Lease and to reasonably regulate delivery and service of supplies and the usage of loading docks, receiving areas and freight elevators. Landlord shall not discriminate against Tenant in its right to use such loading docks, receiving areas and freight elevators in conjunction with other tenants. (I) To have access for Landlord to any mail chutes located on the Premises according to the rules of the United States Postal Service. (J) To close the Building after regular working hours and on Saturdays, Sundays and holidays established by Landlord (subject to the limitations set forth herein) from time to time subject, however, to Tenant's right to admittance under such reasonable regulations as Landlord may prescribe from time to time, which may include, by way of example but not of limitation, that persons entering or leaving the Building identify themselves to a security officer by registration or otherwise and that said persons comply with Landlord's regulations concerning their and leaving the Building (Landlord agrees to furnish to Tenant prior notice in the case of any scheduled Building shutdown when Tenant shall not be able to gain access to the Premises provided such notice shall not limit or affect any rights granted to Tenant in Article 9 hereof). (K) To change the arrangement, configuration, size or location of entrances, passageways, doors and doorways, corridors, stairs, toilets, elevators and escalators and other public service portions of the Building and the Property not contained within the Premises or any part thereof, so long as Landlord uses reasonable efforts to give Tenant prior notice in the event of any changes to common areas of the Building directly and materially serving the Premises or the Antennae on the Roof and so long as any such change does not materially and adversely affect Tenant's ability to conduct its business in the Premises or Tenant's access to the Premises or access to the Antennae on the Roof. (L) To change the character or use of any part of the Building or the Property. (M) Subject to the rights granted Tenant in Article 40 hereof, to use for itself the roof, the exterior portions of the Premises and such areas within the Premises (so long as the useable area of the Premises is not materially reduced) required for structural columns and their enclosures and the installation of utility lines, Building systems and other installations required -34- to service the Building, the Property or tenants or occupants thereof and to maintain and repair same, no rights being hereby conferred upon Tenant, and, unless otherwise specifically provided herein, to exercise for itself any rights to the land and improvements below the floor level of the Premises or the air .rights above the Premises and to the land and improvements located on and within the public areas. Neither Tenant nor its employees, invitees, guests and agents shall, without obtaining in each instance the prior written consent of Landlord (which consent shall not be unreasonably withheld or delayed, and shall be conditioned upon such requirements as Landlord deems appropriate) (1) go above or through suspended ceilings, (2) remove any ceiling tiles or affix anything thereto, remove anything therefrom or cut into or alter the same in any way, (3) enter fan rooms or other mechanical spaces, or (4) open doors or remove panels providing access to utility lines, Building systems or other installations required to service tenants. 27. RULES AND REGULATIONS. Subject to the rights expressly granted to Tenant elsewhere in this Lease, Tenant agrees to observe the reservations to Landlord in Article 26 hereof and agrees to comply and to use reasonable business efforts to have its employees, agents, and servants to observe and comply, at all times, with the following rules and regulations and with such reasonable modifications thereof and additions thereto as Landlord may make for the Building (so long as Landlord has delivered to Tenant prior notice of any such modifications and additions and that same are reasonable), and that failure to observe and comply with such reservations, rules and regulations, after written notice of such failure and an opportunity to cure as provided in Section 15 hereof, shall constitute a default under this Lease: (A) No sign, picture, advertisement or notice, typewritten or otherwise, shall be displayed, inscribed, painted or affixed on any part of the outside or inside of the Building, or on or about the Premises in any location visible from outside the Premises, except on glass of the doors and windows of the Premises and on the directory board of the Building and then only of such nature, color, size, style and material as shall be first approved by Landlord in writing, which approval shall not be unreasonably withheld. (B) Tenant shall not, without Landlord's prior written consent (which consent shall not be unreasonably withheld), install or operate any heating device or air conditioning equipment, steam or internal combustion engine, boiler, stove, machinery, or mechanical devices upon the Premises (other than as set forth in the final plans for Tenant's Work described in Article 35) or carry on any mechanical or manufacturing business thereon, or use or permit to be brought into the Building flammable fluids such as gasoline, kerosene, benzene, or naphtha (except in such small quantities as customarily used by office tenants for general office use in compliance with applicable legal requirements) or use any illumination other than electric lights. All equipment, fixtures, lamps and bulbs shall be compatible with, and not exceed the capacity of, the Building's electrical system. No explosives, firearms, radioactive or toxic or hazardous -35- substances or materials, or other articles deemed extra hazardous to life, limb or property shall be brought into the Building or the Premises. (C) Any person or persons employed by Tenant to do janitor work or care for the Premises shall be subject to and under the reasonable control and direction of the building manager (in such manner and to such extent as generally applicable to persons employed by Building tenants) while in the Building and outside of the Premises, but not as agent of Landlord. Tenant shall be responsible, at its sole cost and expense, for the removal of refuse and rubbish from the Premises to the designated collection areas in the Building. Such refuse and rubbish shall be stored and transported in containers reasonably acceptable to Landlord and shall be deposited in locations acceptable to Landlord and consistent with policies established by Landlord for the Building generally. (D) After completion of the Shell and Core Work, Tenant shall at its expense provide artificial light for employees of Landlord while doing work and making repairs or alterations in the Premises. (E) The location and manner of installation of all telegraph, telephone, communications, signal and electric connections, cabling and wiring (other than connections, wiring or cabling located exclusively within the Premises and not affecting the Building structure, Building Systems, common areas or other tenants' premises) shall be subject to the reasonable approval of Landlord and any work in connection therewith shall be subject to the direction of Landlord. Tenant shall give Landlord reasonable prior notice of the installation of all such telegraph, telephone, communication, signal and electric connections, cabling and wiring whether or not Landlord's approval thereto and direction thereof is required. Landlord reserves the right to control the entity or entities providing telephone wire installation, repair and maintenance in the Building to the Building telephone closets on the various floors and to reasonably restrict and control access to such Building telephone closets. Tenant may select the vendor or vendors and service providers with respect to the installation, repair and maintenance of other communication and signal cabling and wiring subject to the general direction of Landlord and such reasonable rules and regulations as may be established by Landlord for the protection of the Building and its efficient, high-quality and harmonious operation. (F) Tenant must list all furniture and fixtures to be taken from the Building at any time and from time to time prior to the expiration of the Term hereof upon a form furnished by Landlord. Such list shall be presented at the office of the Building for registration (or if closed, to the security officer) before acceptance by the security officer or elevator operator. (G) Tenant, its licensees, agents, servants, and employees and guests shall not encumber or obstruct sidewalks, entrances, passages, courts, corridors, vestibules, halls, elevators, stairways or other common areas in or about the Building. -36- (H) No bicycle or other vehicle and no animal (except seeing eye dogs) shall be allowed in the showrooms, offices, halls, corridors or any other parts of the Building. (I) Tenant shall not allow anything to be placed against or near the glass in the partitions between the Premises and the halls or corridors of the Building which shall diminish the light in the halls or corridors. (J) Tenant shall not allow anything to be placed on the outer window ledges of the Premises, nor shall anything be thrown by Tenant or its employees out of the windows of the Building. Tenant shall keep all windows closed. (K) No additional locks shall be placed upon any entry doors to the Premises and no locks shall be changed without the prior written consent of Landlord, which shall not be unreasonably withheld. Upon termination of this Lease, Tenant shall surrender all keys and key. cards of the Premises and of the Building and give to Landlord the explanation of the combination of all locks on safes or vault doors in the Premises. (L) The building manager shall at all times keep a pass key and be allowed admittance to the Premises to cover any emergency, fire or other casualty that may arise and in other appropriate instances. Landlord and Landlord's agents shall have the right to enter the Premises at all reasonable hours upon prior notice (except in case of an emergency) to examine the same. (M) Unless otherwise advised by Landlord, neither Tenant nor its employees shall undertake to regulate the radiator controls or thermostats. Tenant shall report to the office of the Building whenever such thermostats or radiator controls are not working properly or satisfactorily. (N) If Tenant desires shades or venetian blinds for outside windows, must be furnished and installed at the expense of must be of Tenant, and must of such type, color and material as may reasonably be prescribed by Landlord. (0) Tenant assumes full responsibility for protecting its space from theft, robbery and pilferage, which includes keeping doors locked and other means of entry into the Premises closed and secured. (P) Tenant shall not peddle, canvass, solicit or distribute handbills or flyers on or about the Property except as specifically authorized by Landlord. (Q) Tenant shall not sell food of any kind or cook in the Building, unless in coffee-makers or microwave or similar ovens installed and maintained by Tenant for use by its -37- employees and invitees, and subject to any reasonable applicable Building rules and regulations and all applicable laws. Tenant may serve complimentary foods to its guests provided that it shall first comply with all applicable laws, ordinances, codes and regulations. (R) Water in the Premises shall not be wasted by Tenant or its employees by tying or wedging back the faucets of the washbowls or otherwise. (S) Tenant shall use neither the name of the Building (except as the address of its business) nor pictures of the Building in advertising or other publicity or for any other purpose without Landlord's prior written consent. (T) In the event Tenant designates non-smoking areas in the Premises, Tenant shall also designate sufficient smoking areas within the Premises for its employees; and Tenant shall use all reasonable efforts, in dealing with its employees, to cooperate with and enforce Landlord's policies prohibiting the use of the public areas of the Building as smoking areas. Landlord reserves the right upon prior notice to Tenant to make such other and further reasonable rules and regulations as in Landlord's reasonable judgment may from time to time be needed for the safety, care and cleanliness of the Premises and the Building and for the preservation of good order therein so long as such further rules and regulations do not diminish any rights heretofore expressly granted to Tenant in this Lease. Landlord agrees that all such rules and regulations shall be enforced in a manner that does not singularly target Tenant and no other tenants similarly situated or engaged in conduct similar to that of Tenant. 28. MISCELLANEOUS. Tenant and Landlord further covenant with each other that: (A) All rights and remedies of Landlord and Tenant under this Lease shall be cumulative, and none shall exclude any other rights and remedies allowed by law. (B) The word "Tenant" wherever used herein shall be construed to mean tenants in all cases where there is more than one tenant, and the necessary grammatical changes required to make the provisions hereof apply either to corporations or individuals, men or women, shall in all cases be assumed as though in each case fully expressed. If there is more than one tenant, all obligations and liabilities hereunder imposed upon Tenant shall be joint and several. (C) This Lease and the rights of Tenant hereunder shall be and are subject and subordinate at all times to any ground leases or master leases and to the lien of any mortgages or deeds of trust now or hereafter in force against the Property or the Building, or both of them, and to all advances made or hereafter to be made upon the security thereof, and to all renewals, modifications, amendments, consolidations, replacements and extensions thereof. Any -38- mortgagee or beneficiary under a deed of trust, however, may elect to have this Lease be superior to its mortgage or deed of trust. This provision is self- operative and no further instrument of subordination or priority shall be required. In confirmation of such subordination or priority Tenant shall promptly execute such further instruments as may be reasonably requested by Landlord and in the event Tenant fails to do so within twenty (20) days after demand in writing by certified or registered mail, Landlord shall deliver to Tenant a further written request and if Tenant fails to execute and deliver such instruments within five (5) business days after receipt of such further notice from Landlord, such failure shall constitute a material default hereunder and shall entitle Landlord to exercise the remedies provided by Article 15 hereof (without any notice otherwise required by said Article 15). Notwithstanding the foregoing, this Lease and the rights of Tenant hereunder shall not be subject or subordinate to the lien of any mortgage or deed of trust imposed upon the Property after the date hereof unless, as a condition thereto, such mortgagee or holder shall deliver to Tenant a non-disturbance agreement in form and substance reasonably satisfactory to Tenant. (D) Each of the provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit of, not only Landlord and Tenant, but also their respective heirs, legal representatives, successors and assigns, provided, this clause shall not permit any assignment contrary to the provisions of Article 12 hereof. (E) All of the representations and obligations of Landlord and Tenant are contained herein and no modification, waiver or amendment of this Lease or any of its conditions or provisions shall be binding upon Landlord unless in writing signed by a duly authorized officer of Landlord's agent or upon Tenant unless in writing and signed by a duly authorized officer of Tenant. (F) All amounts due and payable from Tenant under this Lease or under any work order or other agreement relating to the Premises shall be considered as rent and, if unpaid when due, shall bear interest from such date until paid at the maximum legal rate of interest available, provided such rate of interest shall not exceed two percent (2%) per annum plus the Prime Rate as announced by the Northern Trust Bank in Chicago, Illinois and in effect on the first day of each calendar quarter, determined and subject to change as of the first day of each calendar quarter. (G) Submission of this instrument for examination shall not bind Landlord or Tenant in any manner, and no lease or obligation on Landlord or Tenant shall arise until this instrument is signed and delivered by Landlord and Tenant. (H) Except as set forth in Article 40, no rights to light or air over any property, whether belonging to Landlord or any other persons, are granted to Tenant by this Lease. -39- (I) The laws of the State of Illinois shall govern validity, performance and enforcement of this Lease. The invalidity or unenforceability of any provision of this Lease shall not affect or impair any other provision. (J) Landlord's title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to commit or engage in any act which can, shall or may encumber the title of Landlord. (K) In case Landlord or any successor owner of the Property or the Building shall convey or otherwise dispose of any portion thereof to another person, such other person shall in its own name thereupon be and become Landlord hereunder and shall assume fully in writing and be liable upon all liabilities and obligations of this Lease to be performed by Landlord which first arise after the date of conveyance, and such original Landlord or successor owner shall, from and after the date of conveyance, be free of all liabilities and obligations not then incurred. (L) Neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant, and the recording thereof in violation of this provision shall constitute a material breach of this Lease. (M) Nothing contained in this Lease. shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venture or any association or relationship between Landlord and Tenant other than that of landlord and tenant. (N) Landlord shall have the right to apply payments received from Tenant pursuant to this Lease (regardless of Tenant's designation of such payments) to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord in its reasonable discretion may elect. (O) All indemnities, covenants and agreements of Landlord and Tenant, respectively, contained herein which inure to the benefit of the other party shall be construed to inure also to the benefit of the other party's officers, directors, beneficiaries, partners, agents and employees. (P) Unless otherwise notified in writing by Landlord, Tenant may rely upon notices and directions from officers of Merchandise Mart Properties, Inc., Landlord's beneficiary's management agent for the Building and Property, as the authorized action of Landlord. 29. ATTORNMENT. Upon request of the holder of any note secured by a mortgage or deed of trust on the Building or Property, Tenant will agree in writing that no action taken by such holder to enforce said mortgage or deed of trust shall terminate this Lease or invalidate or constitute a breach of any of the provisions hereof and Tenant will attorn to such mortgagee or -40- holder, or to any purchaser of the Property or Building, at any foreclosure sale or sale in lieu of foreclosure, for the balance of the Term of this Lease and on all other terms and conditions herein set forth, provided that, in the case of any mortgage or trust deed imposed upon the Property after the date hereof, as a condition to such attornment by Tenant, such mortgagee or holder shall deliver a Non-Disturbance Agreement to Tenant. 30. ESTOPPEL CERTIFICATE. Tenant agrees that from time to time (but not more frequently than once each year and also upon commencement of the Term and in connection with any sale or refinancing of the Building and upon any request by Landlord's lender) upon not less than thirty (30) days' prior request by Landlord, Tenant or Tenant's duly authorized representative having knowledge of the following facts shall deliver to Landlord a statement in writing certifying (a) that this Lease is unmodified and in full force and effect (or if there have been modifications that the Lease as modified is in full force and effect); (b) the dates to which Base Rent, rent adjustments and other sums payable under this Lease have been paid; (c) that, to the best of Tenant's knowledge, neither Landlord nor Tenant is in default under any provision of this Lease, or, if in default, the nature thereof in reasonable detail; (d) that, to the best of Tenant's knowledge, there are no offsets or defenses to the payment of Base Rent, additional rent or any other sums payable under this Lease, or if there are any such offsets or defenses, specifying such in reasonable detail; and (e) such other matters relating to the status of the Lease as may be reasonably requested. In the event Tenant fails to deliver such statement to Landlord within such 30-day period, such failure, if not cured within an additional 15- day period after delivery of written notice thereof, shall constitute a material default hereunder and exercise the remedies provided by Article 15 hereof (without any notice otherwise required by said Article 15). Landlord agrees that from time to time upon not less than thirty (30) days prior written request by Tenant (but not more frequently than once each year) , and upon not less than thirty (30) days prior written request by any approved assignee or subtenant in connection with the execution and delivery of any assignment or sublease, Landlord or Landlord's duly authorized representative having knowledge of the following facts shall deliver to Tenant a statement in writing certifying (a) that this Lease is unmodified and in full force and effect (or if there have been modifications that the Lease, as modified, is in full force and effect); (b) the dates to which the Base Rent, rent adjustments and other sums payable under this Lease have been paid; (c) that to the best of Landlord's knowledge, neither Landlord nor Tenant is in default under any provision of this Lease, or, if in default, the nature thereof in reasonable detail; and (d) such other matters relating to the status of the Lease as may be reasonably requested. 31. BROKERS. Landlord and Tenant represent and warrant to the other that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker other than CB Commercial Real Estate Group, Inc. and Chicago Realty Group, L.L.C. in the negotiation or making of this Lease, and each agrees to indemnify and hold harmless the other -41- from the claim or claims of any other broker or brokers claiming to have interested Tenant in the Building or Premises or claiming to have caused Tenant to enter into this Lease. Landlord shall be responsible for the commission or other compensation of CB Commercial Real Estate Group, Inc. and Chicago Realty Group, L.L.C. payable pursuant to separate agreements, if any, between Landlord and such brokers. 32. SECURITY DEPOSIT. A. As security for the full and prompt performance by Tenant of all of Tenant's obligations hereunder, Tenant has upon execution of this Lease provided to Landlord and will during the Term of this Lease maintain on deposit with Landlord, an unconditional irrevocable letter of credit in favor of Merchandise Mart Properties, Inc., as agent of Landlord, from a bank approved by Landlord, in the form attached hereto as Exhibit "E" (the "Letter of Credit"), which provides for security in the initial amount of $***. Prior to and as a condition to Landlord's obligation to pay any Take-Down Improvement Allowance pursuant to Article 36 hereof, Tenant shall cause the amount of the Letter of Credit to be increased by the amount of the Take-Down Improvement Allowance to be paid by Landlord under Article 36 hereof. Commencing on the first day of the Second Lease Year and on the first day of each successive Lease Year thereafter, so long as Tenant is not in default-hereunder, the amount of the Letter of Credit shall be automatically reduced for such Lease Year by the amount necessary to result in the proportionate reduction (assuming a level annual reduction) of the Letter of Credit over the remaining balance of the Term. Tenant agrees that, in the event of any default by Tenant under this Lease, Landlord shall have the right to draw down on the Letter of Credit in an amount necessary to cure such default ("the Cure Amount") and Tenant agrees that within ten (10) days after such initial draw of the Cure Amount Tenant shall replenish the Cure Amount and shall cause the Letter of Credit to be amended in a manner that it is restored to the full amount available thereunder prior to such draw by Landlord. Tenant further agrees that, in addition to all of the rights and remedies provided to Landlord pursuant to Article 15 hereof, whether or not this Lease or Tenant's right to possession hereunder has been terminated, (a) in the event Tenant is in default under any of the terms, covenants and conditions of this Lease and Tenant has so failed to replenish the Letter of Credit as aforesaid, or (b) in the event Tenant has filed (or there has been filed against Tenant) a petition for bankruptcy protection or other protection from its creditors under any applicable and available law, then Landlord may at once and without notice to Tenant be entitled to draw down on the entire amount of the Letter of Credit and apply such resulting sums toward (i) reimbursement to Landlord for all of Landlord's then unamortized costs incurred in leasing to Tenant the Premises demised by this Lease, including, without limitation (xx) the then unamortized Landlord's Contribution made available to Tenant pursuant to Article 34 hereof, assuming amortization of such amount over a period of 180 calendar months, commencing on the first full Lease Year, at a level monthly payment with an interest factor equal to *** percent (***%) per annum, plus (yy) any then unamortized Take-Down Improvement Allowance made available to Tenant pursuant to Article 36 hereof, assuming amortization of __________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -42- such amount over a period commencing on the date of disbursement thereof and ending on the expiration of the initial Term hereof at a level monthly payment with an interest factor equal to *** percent (***%) per annum, and (ii) reimbursement to Landlord for any other damages suffered by Landlord as a result of such default. B. The foregoing Letter of Credit shall provide for an original expiration date of June 30, 1998 and shall be automatically extended without amendment (subject to the reductions described above) for additional successive one-year periods from the original expiration date or any future expiration date thereof for the Term of this Lease, unless sixty days prior to any such expiration date the bank sends to Landlord by certified/registered mail, return receipt requested or overnight courier written advice that the bank has elected not to consider the Letter of Credit renewed for any such additional one-year period. In the event such bank so advises Landlord that such Letter of Credit will not be so renewed, Landlord shall promptly thereafter notify Tenant thereof in writing, and Tenant shall obtain a substitute Letter of Credit from a bank reasonably approved by Landlord meeting all of. the terms and conditions described in Paragraph A. above, which substitute Letter of Credit ("Substitute Letter of Credit") shall be reasonably satisfactory to Landlord and delivered to Landlord no later than thirty (30) days prior to the expiration date of such Letter of Credit then in effect. In that event Tenant fails to deliver such Substitute Letter of Credit to Landlord at least thirty (30) days prior to the expiration date of such Letter of Credit then in effect, Landlord shall in such instance have the right without notice to Tenant to immediately draw down on the entire amount of the Letter of Credit then available to Landlord; in such instance Landlord shall retain such resulting sum as a cash security deposit (which sum shall be reduced, so long as Tenant is not then in default hereunder, to reflect the reduction schedule applicable if Landlord were holding the Letter of Credit described in Paragraph A above) and Landlord shall have the right to use such cash security to the same extent that Landlord would be entitled to draw down on the Letter of Credit pursuant to the terms of Paragraph A. above. Landlord shall not, unless required by law, keep the security deposit separate from its general funds or pay interest thereon to Tenant. As between Landlord and Tenant only, all draws under the Letter of Credit (or cash security, deposit, as the case may be) and rights of Landlord to apply the proceeds of any such draw or draft shall be subject to the provisions of this Lease, including all applicable notice and cure periods provided for in Article 15 hereof, if any, except that where this Article 32 states no notice to Tenant is required, Landlord is not obligated to give any notice under Article 15 prior to taking any action provided for in this Article 32. 33. PARKING. Landlord agrees to cause to be made available to Tenant during the first /***/ Lease years of the initial Term, /***/. __________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -43- So long as Tenant is not in default hereunder, /***/ shall be due by Tenant for the Parking Spaces during the first /***/ Lease Years and thereafter during the initial Term Tenant may lease the Parking Spaces at the then prevailing rates in effect from time to time for parking spaces in such parking lot. Landlord reserves the right to substitute a different garage or parking lot parking spaces to satisfy its obligation to provide the foregoing Parking Spaces, provided any such substitute garage or parking lot is the closest public lot to the Building. With respect to the Parking Spaces, Tenant agrees to comply with all regulations in effect from time to time at the facilities in which the Parking Spaces are located. Tenant agrees that its use, and the use by its agents, employees and invitees, of the Parking Spaces shall be entirely at Tenant's own risk and responsibility; and Tenant further agrees that, subject to the provisions of Article 25 hereof, Landlord, Landlord's beneficiaries, LaSalle National Bank, as Trustee under Trust Agreement dated May 27, 1981, known as Trust No. 104000 ("Mart Landlord"), Mart Landlord's beneficiaries, and their respective officers, directors, partners, agents and employees shall not, except as otherwise provided by law, be liable for any injury to persons or damage to property occurring in, on or around the Parking Spaces. 34. LANDLORD'S CONTRIBUTION. (A) As an inducement for Tenant to enter into this Lease, Landlord agrees to pay to Tenant an allowance (the "Landlord's Contribution") in an amount not to exceed /***/ (calculated by /***/). The Landlord's Contribution shall be applied towards the payment of costs incurred in connection with (i) the alterations, additions and improvements furnished or installed in the Premises by Tenant in accordance with Article 35 hereof, including, without limitation, fees for design, architectural and engineering drawings and (ii) such other expenses, including the cost of furnishings, fixtures and equipment as are related to the Lease. The Landlord's Contribution shall be applicable only in connection with the initial preparation for occupancy of the Premises. To the extent that any portion of the Landlord's Contribution is used for the purchase of furnishings, fixtures or equipment, Tenant agrees that Landlord shall have a security interest in such furnishings, fixtures or equipment, and Tenant agrees to execute, upon Landlord's request, security agreements, UCC financing statements or other documents evidencing Landlord's security interest in such items. (B) It shall be a condition of Landlord's obligation to pay any installment of the Landlord's Contribution for work performed by any contractor or supplier, other than those engaged by Landlord, that Tenant shall provide or cause to be provided to Landlord (to the extent customarily required by title insurance companies) contractor's affidavits and waivers of lien covering all labor and material used and expended for which contractors are requesting payment, and (if applicable) invoices establishing the actual cost of items purchased and labor provided, all _____________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -44- in form and content reasonably satisfactory to Landlord. it shall be a further condition to Landlord's obligation to pay or credit any amount of Landlord's Contribution at any time that Tenant is not then in monetary default or in default under any of the other material terms, covenants and conditions of this Lease. Landlord's Contribution shall be advanced, upon satisfaction of the foregoing conditions, as costs are incurred, subject to customary retainage. 35. IMPROVEMENT WORK. In connection with the preparation of the Premises for initial occupancy, and subject to the terms, covenants and conditions of Article 8 hereof (to the extent not contrary to or inconsistent with the provisions of this Article 35), Landlord and Tenant agree that the following shall apply: A. Shell and Core Work. ------------------- 1. Landlord shall substantially complete at its sole cost and expense as soon as reasonably possible all of the additional base building work included in the Shell and Core Work defined below, subject to delays caused by Force Majeure events and Tenant Delays (defined below) . For purposes hereof, the "Shell and Core Work" includes the following: (a) the demolition and removal of existing tenant improvements located in the Premises, including ceilings, grid, lighting, partitions, interior doors, floor coverings, millwork and fixtures and minor floor latexing; (b) the furnishing and installation of energy efficient thermopane glass windows with thermal break frames, comparable to the windows previously installed by Landlord on the fourth (4th) floor of the Building, on the southerly and westerly walls of the south tower. The parties recognize that a time period of fourteen (14) to sixteen (16) weeks is required for the ordering, fabrication and installation of the windows; (c) the construction of a demising wall ready to receive Tenant finish; and (d) the installation of sound batt installation around the fan room. 2. In the event Landlord shall fail to substantially complete the Shell and Core Work on or before the Commencement Date for reasons other than a Tenant Delay (as defined below), then, such failure shall constitute a Landlord Delay to the extent it delays the completion of Tenant's Work beyond the Commencement Date, and the -45- Commencement Date shall be extended one (1) day for each day that any Landlord Delay delays completion of Tenant's Work. If the completion of Tenant's Work is delayed beyond July 10, 1997 as a result of a Landlord Delay and not due to any Force Majeure events or Tenant Delays, then notwithstanding anything to the contrary set forth herein, Landlord agrees that in addition to the extension of the Commencement Date described above in this Article 35(A)(2), Base Rent and rent adjustments shall abate after the Commencement Date one (1) day for each day of such delay beyond July 10, 1997 (subject to extension of such date by reason of Force Majeure or Tenant Delays). 3. Substantial completion of the Shell and Core Work shall mean completion of such Work with the exception of minor and insubstantial details of construction or mechanical adjustment, the incompletion of which will not unreasonably interfere with Tenant's use of the Premises. 4. As used herein, "Force Majeure" events shall mean fire, casualty, emergencies, lockouts, strikes, labor disputes, war, governmental action, acts of God, labor or material short--ages, transportation delays, and other causes beyond the reasonable control of the respective party to prevent, of which the respective party has notified the other party within ten (10) days after the notifying party becomes aware of the occurrence of such a cause, but excluding insufficiency of funds or inability to obtain financing or disbursement of loans. 5. In the event Landlord shall be delayed in substantially completing the Shell and Core Work as a result of any fault of Tenant or its agents or representatives in connection with any of the obligations of Tenant set forth in this Lease, including, without limitation, any delay in Tenant's approval of any plans or specifications or other materials submitted by Landlord to Tenant for Tenant's review and approval such delay shall be a "Tenant Delay". 6. Landlord and Tenant agree that their respective construction representatives will cooperate with each other to prepare a construction schedule with the objective of substantially completing the Shell and Core Work and Tenant's Work as soon as reasonably possible and the parties recognize it is the goal of Tenant to commence initial construction of Tenant's Work within forty-five (45) days after Lease execution. Landlord and Tenant agree that it may be more efficient, cost effective and productive for Landlord to perform certain portions of the Shell and Core Work in conjunction with and during the construction of Tenant's Work and Tenant agrees to cooperate and coordinate with Landlord in good faith in identifying any items of the Shell and Core Work to be performed during the construction of Tenant's Work, and Landlord and Tenant agree to use reasonable -46- efforts to work in harmony with each other and cooperate so that Tenant may enter into occupancy of the Premises as soon as reasonably possible. B. Tenant's Work. Tenant shall be responsible for the construction of all ------------- improvements in the Premises beyond the Shell and Core Work, subject to the terms and conditions hereinafter provided: 1. Plans and Specifications. ------------------------ (a) Tenant shall cause to be prepared and delivered to Landlord by reputable and qualified architects and engineers, the following plans and specifications ("Plans") for all improvements Tenant desires to have completed in the Premises in connection with Tenant's initial occupancy of the Premises ("Tenant's Work"): (i) Architectural drawings (consisting of floor construction plan, ceiling lighting and layout, power, and telephone plan). (ii) Mechanical drawings (consisting of AC, electrical, telephone and plumbing). (iii) Finish drawings and schedule (consisting of wall finishes and floor finishes and miscellaneous details). All such Plans shall be submitted to Landlord in a state ready for Landlord's review and approval, which shall not be unreasonably withheld or delayed, on an interim basis when available from time to time. Tenant shall deliver to Landlord seven (7) sets of all Plans provided for Landlord's review. Landlord shall approve or disapprove of such Plans within six (6) business days after its receipt thereof (and in the case of disapproval, state its reasons for such disapproval), so long as Tenant or its architect have at least on a regular basis consulted with Landlord in connection with preparation of such Plans and delivered to Landlord preliminary drafts-of all such Plans as they become available from time to time. Landlord shall not withhold its approval of any improvements which do not affect Building Systems, the structural or member components of the Building, common areas of the Building or operations in and around the Building. Landlord and Tenant agree to cooperate and consult with each other on a regular basis in connection with the preparation of such Plans and during construction of the Tenant's Work. If Landlord fails to provide such approval or fails to notify Tenant of the reasons for Landlord's disapproval within the foregoing six (6) business day review period, Landlord shall be deemed to have approved all such Plans. (b) All Plans shall comply with all (1) applicable statutes, ordinances, regulations, laws, and codes, and (2) the requirements of Landlord's fire insurance underwriters. -47- Neither review nor approval by Landlord of the Plans shall constitute a representation or warranty by Landlord that such Plans either (i) are complete or suitable for their intended purpose, or (ii) comply with applicable laws, ordinances, codes and regulations, it being expressly agreed by Tenant that Landlord assumes no responsibility or liability whatsoever to Tenant or to any other person or entity for such completeness, suitability or compliance, except to the extent that any such work is performed specifically at and in accordance with the specific direction of Landlord or its management agent. Tenant shall not make any material changes in the Plans, whether before commencement of construction or during construction, without Landlord's prior written approval, which approval shall not be unreasonably withheld. Landlord shall approve or disapprove any such changes within six (6) business days after its receipt thereof (and in the case of disapproval, state its reasons for such disapproval). 2. Performance of Tenant's ----------------------- (a) Tenant may select its own contractors, subcontractors and/or suppliers for the performance of the Tenant's Work provided, however, that Landlord may require Tenant to give assurances reasonably satisfactory to Landlord that all such contractors, subcontractors and suppliers are reputable, financially responsible, maintain proper insurance and will not jeopardize labor harmony. Landlord may also require Tenant to comply with such construction standards or procedures as may be applicable from time to time for construction activities in the Building (a set of such standards and procedures currently in effect having been delivered by Landlord to Tenant in a book entitled Construction Standards, Procedures and Specifications, Revised: December, 1992.) - ------------------------------------------------------------------------------ and to submit reasonably satisfactory insurance certificates to Landlord. Tenant shall pay to Landlord, within thirty (30) days after receipt of any invoice therefor, Landlord's actual costs reasonably incurred by Landlord for reviewing the Plans, coordinating the construction with the Building and providing general conditions (as hereinafter provided), including any costs paid by Landlord to third parties, if any, and the reasonable actual cost of time spent by Landlord's employees to perform, such duties, such costs to be determined under the billing rates set forth in Exhibit "F" attached hereto and made a part hereof. (b) Subject to approval of Tenant's Plans as provided by Paragraph B.1 above and after the filing of the Plans with the appropriate governmental agencies, Tenant shall, at Tenant's sole costs and expense, except as otherwise provided herein, cause the contractors employed by it to commence, as soon as reasonably practicable, to construct and install and pursue to completion in the Premises the Tenant I s Work '-n accordance with the Plans and without' deviation from the Plans. Tenant agrees that it shall be responsible for all contractors, subcontractors and suppliers engaged by Tenant, and that all work performed by such parties shall be performed and completed in a good, diligent and workmanlike manner, with no unreasonable noise or interference with Landlord's and other tenants' Dcerations in the Building (taking into account the nature, extent and time schedule for Tenant's Work). -48- (c) Such license to enter upon the Premises prior to the Commencement Date for the performance of Tenant's Work is conditioned upon Tenant and Tenant's agents, contractors, workmen, mechanics, suppliers and invitees working in harmony and not interfering with Landlord or Landlord's contractors or agents in doing any work in or about the Building, or with other tenants, invitees and occupants of the Building. If at any time such entry shall cause such disharmony or interference or, in Landlord's reasonable judgment, such disharmony or interference is imminent, Landlord shall have the right to withdraw such license upon twenty-four (24) hours' written notice to Tenant. When, in Landlord's reasonable judgment, the cause of such disharmony or interference or imminent potential disharmony or interference ceases to be present, Landlord shall then promptly again grant such license to enter upon the Premises. Tenant agrees that any such entry into and occupation of the Premises shall be deemed to be under all of the terms, covenants, conditions and provisions of this Lease except as to the covenants to pay rent, and further agrees that, except for the negligence or willful acts of Landlord, its beneficiary or any of their respective agents, employees or contractors, Landlord shall not be liable in any way for any injury, loss or damage which may occur to any of Tenant's work or installations made in the Premises or to property placed therein; and, except for the negligence (by act or omission) or willful acts of Landlord, its beneficiary or any of their respective agents, employees or contractors, and except to the extent prohibited by law, Tenant shall protect, indemnify, defend and save Landlord, its beneficiaries and their respective officers, directors, agents, beneficiaries, partners, and employees harmless from and against any and all liabilities, costs, damages, fees and expenses arising out of or in any way connected with the activities of Tenant or its agents, contractors, suppliers or workmen in or about the Premises or Building. To the extent Tenant employs any contractors from time to time to do work in the Premises, Tenant shall cause such contractors to secure and pay for Worker's Compensation, Employers Liability Insurance, and Comprehensive General Liability Insurance in customary forms and amounts reasonably acceptable to Landlord. All policies shall be endorsed to include Landlord and its employees and agents as additional insured parties. Certificates of such insurance shall be delivered to Landlord prior to Tenant commencing any work in the Premises. (d) Subject to Tenant's compliance with the reasonable rules and regulations regarding the use thereof, Landlord shall provide Tenant (unless Tenant elects otherwise as provided below) with the following general conditions at Landlord's scheduled rates: (i) materials management coordination; (ii) reasonable access to freight elevator services and loading docks, free of charge during business hours (weekdays 7:30 a.m. to 5:00 p.m. for loading docks and weekdays 6:00 a.m. to 8:00 p.m. for elevator service) during the completion of the Tenant's Work, and in connection therewith Landlord agrees that it shall use reasonable efforts to accommodate Tenant's construction schedule (Tenant agrees to pay for any after business hours -49- elevator operator charges); (iii) ventilation, temporary electricity and water during the construction period; and (iv) trash removal services from the loading docks of the Building during construction. Landlord's schedule of costs for general conditions as of the date of execution hereof is included 4.-n Exhibit 'IF" attached hereto and made a part hereof; such charges may be revised from time to time to reflect Landlord's increased costs for supplying such items. Tenant shall have the right to supply any general conditions (except to the extent such general conditions are part of the normal operation of the Building and such operation would be disrupted if such general conditions were provided by another party) by itself or through its contractors rather than rely upon or be required to use any services supplied by Landlord, provided, however, in exercising such right, Tenant shall no-. interfere with the operation of the Building. (e) Landlord and Tenant acknowledge that Landlord and its contractors may be performing portions of the Shell and Core Work at the same time that Tenant and its contractors will be performing Tenant's Work. Landlord and Tenant agree to cooperate with each other and to coordinate their respective work, and to use their best efforts to cause their respective contractors to so cooperate and coordinate, so that both the Shell and Core Work and Tenant's Work may proceed expeditiously. 3. Delays in Completion of Tenant's Work. The number of days of ------------------------------------- delay beyond July 1, 1997 in substantially completing Tenant's Work arising out of or on account of any of the following events, except to the extent such events are caused by the act or failure to act of Tenant, shall constitute "Landlord Delays" and the outside date for the Commencement Date as set forth in Article 1 hereof shall be extended one day for each day that any Landlord Delay delays completion of Tenant's Work (and under certain circumstances, Landlord Delays may also result in a rent abatement as described in Article 35(A)(2) hereof): Any delay resulting from Landlord's failure to approve the Plans in a timely manner as required by this Article 35; or (ii) Any delay resulting from Landlord's failure to perform in a timely manner the Shell and Core Work pursuant to Paragraph (A) of this Article 35; or (iii) Provided Tenant and its contractors have used all, reasonable efforts to comply with the provisions of this Article 35(B), any delay resulting from Landlord's revocation of the license under subparagraph B.2(c) of this Article 35 for Tenant's contractors to enter upon the Premises for the construction of Tenant's Work; or (iv) Any other fault of Landlord or its agents, contractors, or representatives in connection with any of the obligations of Landlord set forth in this Article 35 (provided Tenant notifies Landlord in writing within ten (10) days after Tenant first learns of any such delay). -50- 4. Tenant's Move-In. In connection with Tenant's initial occupancy ---------------- of the Premises after substantial completion of Tenant's Work, Tenant shall have the right to reserve reasonable portions of the Building is loading docks and freight elevators (or passenger elevators), subject to scheduling to the mutual reasonable satisfaction of Landlord and Tenant. Such reservation and use of the elevators and loading docks in connection with Tenant's move-in shall be without charge to Tenant, except that Tenant shall pay the cost of any after-hours elevator service (i.e. other than 6:00 a.m. to 8:00 p.m. on weekdays) at Landlord's actual cost (including overhead) in accordance with the rates included in Exhibit "F". 36. EXPANSION OBLIGATIONS. (A) Effective on /***/, there shall be automatically added to the Premises demised hereunder approximately /***/ rentable square feet of space contiguous to the Premises on the /***/ of the Building (the "First Take-Down Space") , subject to the terms of this Article 36. Effective on /***/, there shall be automatically added to the Premises demised hereunder approximately /***/ rentable square feet of space contiguous to the Premises on the /***/ of the Building (the "Second Take-Down Space"), subject to the terms of this Article 36, which Second Take-Down Space is in addition to the First Take-Down Space. The exact size, location and configuration of the First Take-Down Space shall be reasonably determined by Tenant, provided the remaining balance of the space (being the Second Take-Down Space) is of a leasable and appropriate configuration and the exact size, location and configuration of the Second Take- Down Space shall be determined by Landlord, the rentable area set forth above for each Take-Down Space being an estimate only; however, it is the parties' intent that after the addition of the Second Take-Down Space, the Premises shall consist of approximately /***/ rentable square feet, being the /***/ of the Building. (B) Each of the Take-Down Spaces shall be added to the Premises on all of the terms, covenants and conditions of this Lease, including the payment of Base Rent and rent adjustments pursuant to Articles 3 and 4 hereof, except for Articles 34, 35 and 39 hereof. The Base Rent Schedule set forth in Article 3 and the Tenant's Proportionate Share set forth in Article 4 are inclusive of Tenant's obligation to pay Base Rent and rent adjustments for each of the Take- Down Spaces; however, if the rentable square footage of any Take-Down Space is other than as set forth above, then Landlord and Tenant shall enter into an amendment to this Lease reflecting the actual square footage and adjusting the Base Rent and Tenant's Proportionate Share accordingly. (C) Notwithstanding anything in this Lease to the contrary, Tenant agrees to accept each Take-Down Space in an "as is" broom clean condition (excluding furniture and equipment) __________________________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -51- as existing on the date such space is added to the Premises; provided, however, Landlord agrees to make Available to Tenant, at Tenant's option, an improvement allowance ("Take-Down Improvement Allowance") in an amount not to exceed to (i) with respect to the First Take-Down Space, $*** per rentable square foot of such First Take-Down Space, and (ii) with respect to the Second Take-Down Space, $*** per rentable square foot of such Take-Down Space, to be applied toward payment of costs of alterations, additions and improvements, made to such Take-Down Space by Tenant (including, without limitation, fees for design, architectural and engineering drawings). Landlord shall disburse such Take-Down Space Improvement Allowance to or on behalf of Tenant on the same terms and conditions as applicable to the disbursement of Landlord's Contribution with respect to Tenant's original construction of the Premises as provided in Article 34 hereof. It is a condition to Landlord's obligation to pay any portion of the Take-Down Improvement Allowance that Tenant has increased the amount of the Letter of Credit as described in Article 32. (D) Tenant may, at its option, add either of the Take-Down Spaces to the Premises on, the terms set forth in this Article 36, on a date which is earlier than the date set forth above for the automatic take-down of such space, upon delivery at least one hundred twenty (120) days prior written notice to Landlord. In such event, Landlord and Tenant agree to enter into an amendment to this Lease reflecting the addition of such Take-Down Space within 90 days after Landlord advises Tenant of the final size, location and configuration of such Take-Down Space, and in such event, in lieu of the Take-Down Improvement Allowance described in subparagraph (C), the amount of the Take-Down Improvement Allowance shall be equal to the product of (i) $*** per rentable square foot of such Take-Down Space by (ii) the number of Lease Years (including fractions thereof rounded to the nearest one-twelfth) remaining in the initial Term. 37. OPTIONS TO EXTEND TERM. Subject to the terms of this Article 37, the Term may be extended, at the option of Tenant, for /***/ successive periods of five (5) years each, each such period being herein sometimes referred to as an "Extended Term" (and constituting part of the "Term"), as follows: (A) Each option to extend the Term for an Extended Term must be exercised by Tenant by (1) delivery to Landlord, not more than /***/ months and not less than *** months, prior to the commencement of the applicable Extended Term, of a non-binding written notice of Tenant's good faith intent to exercise such option and (2) delivery to Landlord of a binding written notice exercising such option no less than /***/ months prior to the commencement of the applicable Extended Term; provided, however, in no event shall such binding written notice be required to be delivered earlier than fifteen (15) days after the final determination of Extension Term Rent pursuant to Paragraph (D) below and, if applicable, Article 38 hereof. Tenant shall not have the right to extend the Term beyond the last day of the /***/ full calendar month of the _______________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -52- Term (as extended pursuant to this Article 37). Any termination of this Lease or any termination of Tenant's right of possession hereunder during the initial Term hereof or during an Extended Term shall terminate all rights to extend granted hereunder. If Tenant shall fail to give Landlord timely notice of its exercise of an option herein contained or, in the case of the second option to extend, if Tenant shall fail to exercise such first option to extend, Tenant shall be deemed to have waived such option to extend the Term hereof and such option and subsequent option, if any, shall thereupon become null and void. (B) Each Extended Term shall be on the same terms, covenants and conditions of this Lease, except for the provisions of Articles 33, 34, 35 and 39 hereof, and except for the determination of Base Rent as hereinafter provided. The provisions of Article 4 hereof providing for the payment of rent adjustments with respect to increases in Operating Expenses and Ownership Taxes shall be applicable to any Extended Term, provided that the Base Year used in the calculation of such rent-adjustments in any Extended Term shall be the calendar year in which such Extended Term begins. -- (C) The Base Rent during any Extended Term (herein referred to as "Extension Term Rent") shall be at a rate equal to the Fair Market Rent (as defined in Article 38 hereof) during each Extended Term, which Fair Market Rent shall be calculated in advance but as of the first day of the applicable Extended Term rather than as of the date such calculation is made; provided, however, that the calculation so made shall be final and shall not be remade on the first day of any such Extended Term. The calculation shall reflect the full length of the Extended Term, and shall be recalculated for any subsequent Extended Term. (D) Landlord shall provide Tenant with Landlord's calculation of Fair Market Rent, no later than one month after delivery of Tenant's non-binding written notice under Paragraph (A) above. If Tenant notifies Landlord in writing within ten (10) days after delivery of Landlord's calculation of the Fair Market Rent that Tenant contests Landlord's calculation and the parties cannot within ten (10) days after delivery of such notice by Tenant ("the Negotiation Period") reach agreement on the Fair Market Rent payable during any such Extended Term, then the Fair Market Rent shall be determined in accordance with the procedures set forth in Article 38 hereof. (E) Tenant may extend the Term only as to all of the Premises as are demised to Tenant on the date of Tenant's exercise of such applicable option to extend. (F) Tenant's rights to exercise its option to extend the Term of this Lease for any Extended Term are subject to the condition that Tenant is not in monetary default or in default under any of the other material terms, covenants or conditions of this Lease at the time that Tenant delivers its written notice to Landlord of the exercise of any such option to extend for an Extended Term, or upon the commencement of such Extended Term unless Landlord, in its absolute discretion, elects in writing to waive such condition to the effective exercise of the opt-- -53- ion (provided the foregoing shall not affect or limit Landlord's rights to enforce any defaults of Tenant pursuant to Article 15 hereof). Notwithstanding the foregoing, if the existence of any such default shall, pursuant to the foregoing, make ineffective the exercise of such option, such exercise shall nevertheless become effective as of the originally scheduled date if such default is cured within the earlier of (i) any applicable cure or grace period specified in Article 15 hereof or (ii) thirty (30) days after delivery of notice of such default by Landlord to Tenant. (G) In the event Tenant exercises any option pursuant to this Article 37, Tenant shall accept the Premises in "as is" condition. (H) In the event Tenant exercises any option pursuant to this Article 37, Tenant and Landlord agree to enter into an amendment to this Lease setting forth the terms applicable to such Extended Term within ninety (90) days after the date Tenant gives binding notice of its exercise of an option to extend the Term of this Lease for an Extended Term. (I) The options to extend granted pursuant to this Article 37 are personal to 21st Century Cable TV, Inc. (and any Successor or Affiliate to whom this entire Lease has been assigned in compliance with Article 12) and may not be exercised by or for the benefit of any other party. Any termination of this Lease or of Tenant's right to possession under this Lease shall extinguish and cancel all rights of Tenant under this Article 37. 38. FAIR MARKET; ARBITRATION PROCEDURES. (A) "Fair Market Rent" for the Premises with respect to any Extended Term shall mean the fair rental, as of the date for which such Fair Market Rent is being calculated, per annum per rentable square foot for comparable space for a comparable term, by reference to comparable space with a comparable use in the Building, and in other buildings comparable to the Building in quality and location, but excluding those leases where the tenant has an equity interest in the property. The Fair Market Rent shall be determined on the basis of a fixed base rent per square foot without rent adjustments of any kind (other than rent adjustments with respect to increases in Operating Expenses and ownership Taxes as provided in Article 4 hereof and, with respect to Fair Market Rent f or any Extended Term, using as a Base Year the calendar year in which the respective Extended Term commences), whether in the nature of CPI adjustments, step increases or otherwise (the economic value of any such adjustments then customarily applicable in the market to be reflected instead in the determination of such base rent) , and taking into account in the calculation of such base rent (as a decrease in the otherwise applicable base rent) any then market tenant improvement allowance or concession, free rent concession, or other concessions, allowances or inducements (other than tenant equity interests in the property) of any kind then customarily available in the market (such concessions, allowances or inducements not to be separately stated or paid with respect to any Extended Term). -54- (B) In the event Tenant disagrees with Landlord's determination of. Fair Market Rent at any time and the parties thereafter reach agreement on such Fair Market Rent (and resulting Extension Term Rent) during any Negotiation Period described in Article 37 hereof, such Fair Market Rent (and resulting Extension Term Rent) shall be reflected in the lease amendment required to be executed by Landlord and Tenant pursuant to Article 37 hereof. (C) In the event Landlord and Tenant are unable to reach agreement on the calculation of Fair Market Rent during any Negotiation Period described in Article 37 hereof, then in any such event the Fair Market Rent shall be determined in accordance with the following arbitration procedures: (i) within five (5) days after the expiration of any such Negotiation Period, Landlord and Tenant shall each simultaneously submit to the other in a sealed envelope its good faith estimate of the Fair Market Rent. If the higher of such estimate is not more than /***/ percent of the lower of such estimates, then the Fair Market Rent shall he the average of the two estimates. Otherwise, within five (5) days after such exchange of estimates, either Landlord or Tenant may submit the question to arbitration in accordance with clause (ii) below, by delivery of written notice to the other exercising such right within such five (5) day period. (ii) within seven (7) days after receipt of such notice, Landlord and Tenant shall select, to act as an arbitrator, an independent MAI appraiser with experience in real estate activities, including at least ten (10) years' experience in appraising office space in the downtown Chicago area. If the parties cannot agree on such an appraiser, each party shall then within a period of seven (7) days thereafter select an independent MAI appraiser meeting the previously-described criteria, and within a third period of seven (7) days after the appointment of the last of the two appraisers to be appointed, the two appointed appraisers shall select a third appraiser meeting the aforementioned criteria, and all three of such appraisers shall independently determine the Fair Market Rent (each such independent determination of the Fair Market Rent shall be called an "Appraised Rent"). if one party shall fail to make an appointment of an appraiser within the foregoing seven (7) day period, then the appraiser chosen by the other party shall choose the other two appraisers. (iii) once the appraiser (or appraisers if the parties cannot agree on a single appraiser) has been selected as provided in clause (ii) above, then, as soon thereafter as practicable but in any case within fourteen (14) days after the selection of such appraiser (or the last of such appraisers, as the case may be) the single appraiser's Appraised Rent or the average of the two closest Appraised Rents (in the case of more than one appraiser) shall he calculated in accordance with the criteria described in Paragraph (A) of this Article 38 (such average shall be called the "Average Appraised Rent") a.-id the appraiser (or appraisers, as the case may be) shall ___________________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -55- select one of the two estimates of Fair Market Rent submitted by Landlord and Tenant pursuant to Article 38(C)(i), which shall be the one that is closer to the Appraised Rent or Average Appraised Rent, as the case may be. Landlord and Tenant agree that the estimates submitted by Landlord and Tenant to each other shall not be furnished to the appraisers) until the appraisers have informed Landlord and Tenant of the Appraised Rent or Average Appraised Rent, as the case may be, as determined by them. The value so selected shall be the Fair Market Rent. The decision of the appraisers) as to the Fair Market Rent shall be submitted in writing to, and be final and binding on, Landlord and Tenant. Landlord and Tenant shall share equally the costs of the appraisers who participated in the foregoing procedure. Any fees of any counsel engaged directly by Landlord or Tenant, however, shall be borne by the party obtaining such counsel. 39. TEMPORARY SPACE. As an accommodation to Tenant, Landlord shall make available, at the request of Tenant, for Tenant's occupancy for the conduct of its business up to approximately 5,000 rentable square feet of temporary space in the Building, which temporary space is more fully shown and described on Exhibit "G" attached hereto and made a part hereof, commencing on February 1, 1997, but extending not later than the Commencement Date. All of the covenants and conditions of the Lease shall be binding upon Tenant in respect of its use and possession of such temporary space, except that: (i) Tenant agrees to accept such space in "as is" condition as existing on the date such space is made available to Tenant; and (ii) Tenant shall not be obligated to pay to Landlord any rent in respect of such space (other than housekeeping and janitorial charges and utility charges, which may be billed directly to Tenant or allocated to Tenant on a proportional basis as reasonably determined by Landlord). 40. ROOFTOP EQUIPMENT. (A) Tenant may at any time during the Term, including any Extended Term, at its sole cost and expense, locate, install and maintain on those certain antennae platforms located on the roof' of the Building on the second and thirteenth floors, northwest side, of the Building (collectively, the "Roof") , as the location of such platforms is more fully shown and described in Exhibit "HI' attached hereto, satellite antennae or dishes or other similar communication devices from time to time (the "Antennae"), subject to the reasonable approval of Landlord with respect to size, location, method of installation, and screening (to the extent such is necessary to avoid unsightly installation of such Antennae). Tenant shall pay rent for the use of such antennae platforms on the Roof as follows: Lease Year Annual Rent Monthly Installment ---------- ----------- ------------------- -56- *** *** *** Such rent shall be additional rent due under this Lease payable at the same time and manner as Base Rent. (B) In connection with the installation of the Antenna, Tenant shall have the right at its sole cost and expense to connect such Antennae to the Premises demised hereby by appropriate cables in locations reasonably designated by Landlord and subject to such reasonable rules and regulations as may be unposed by Landlord from time to time. Landlord agrees to make available to Tenant riser space as is reasonable and necessary for such connection of the Antennae to the Premises. The location, installation, operation and maintenance of the Antennae shall (i) conform to all applicable zoning and other applicable governmental guidelines, laws, codes, rules, regulations, ordinances and licensing requirements in effect from time to time as well as all reasonable architectural standards established by Landlord from time to time and any other requirements or conditions applicable to such installation or maintenance; (ii) be subject to and completed in accordance with the terms and conditions of Article 8 hereof and be performed in such manner so as to maintain all warranties on the Roof and not affect the structural components of the Roof and shall be coordinated through Landlord; (iii) be located on that part of the Roof as Landlord may from time to time designate away from the perimeter of -.he Roof (as such initial location is shown on Exhibit "F") so as not to be visible from street level); provided that (a) Landlord shall reasonably cooperate with Tenant in locating such items so that they shall be useable and useful for their intended purposes, and (b) Landlord may from time to time require Tenant-to relocate any or all of such items to another portion or other portions of the Roof, at Landlord's sole cost and expense, so long as such relocation does not unreasonably interfere with Tenant's use thereof; and (iv) not unreasonably interfere with the use of any other communications equipment installed on the Roof -from time to time by Landlord or other tenants in the Building (and Landlord agrees not to grant to other tenants of the Building or third parties the right to install antennae or equipment on the Roof so as to adversely affect the Antennae of Tenant or the operation thereof and to require any such other tenants hereafter permitted to install similar equipment to agree not to unreasonably interfere with the use of any such communications equipment installed by other tenants, including Tenant, of the Building). Tenant shall promptly repair and restore, in a manner consistent with any warranties, any damage to the Roof or the Building resulting from or arising out of Tenant's installation, operation, maintenance and repair of the Antennae and other equipment of Tenant pursuant hereto and protect, indemnify, defend and hold Landlord and Landlord's beneficiaries and any other owner or owners of the Building and their beneficiaries, and all of their respective officers, directors, partners, agents and employees, harmless from and against any liabilities, damages, __________________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. -57- costs, claims, and expenses arising out of or in connection with Tenant's activities under this Article 40. (C) Tenant agrees that upon expiration of the Term hereof it will promptly remove any such Antennae and equipment and conduits, cables and other facilities connecting such Antennae and equipment to the Premises demised hereby, and repair and restore, in a manner consistent with any warranties, any damage caused to the Roof, the Building or the Property in connection with such installation or removal. Tenant and Landlord shall have continuing access to all areas of the Roof of the Building. Upon prior notice to Tenant, Landlord shall have the right, at Landlord's expense, to remove the Antennae and/or relocate the Antennae from time to time as may be necessary or desirable for the maintenance or repair of the Roof, provided that Landlord coordinates with Tenant the timing and location and uses reasonable efforts to mitigate any unreasonable interruption of Tenant's satellite services. 41. COVENANT OF QUIET ENJOYMENT. Landlord covenants that Tenant, upon paying the Base Rent, rent adjustments and other payments provided for herein, and upon keeping, observing and performing all other terms, covenants, conditions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Term, as extended, peaceably and quietly have, hold and enjoy the Premises subject to the rights of any mortgagee and the terms, covenants, conditions and agreements hereof free from hindrance by Landlord or any other person claiming by, through or under Landlord. 42. ENTIRE AGREEMENT. Except as expressly otherwise provided herein, this Agreement, together with all of the exhibits attached hereto, constitutes the entire understanding between Landlord and Tenant as to the subject matter hereof and supersedes all prior agreements between the parties hereto about such matters, and all of the representations and obligations of Landlord and Tenant are contained herein. 43. TRUSTEE CLAUSE. It is expressly understood and agreed that this Lease is executed on behalf of LASALLE NATIONAL BANK, not personally but as Trustee aforesaid, in the exercise of the power and authority conferred upon and invested in it as such Trustee, and under the direction of the beneficiaries of a certain Trust Agreement dated March 1, 1967, as extended, and known as Trust No. 36223. It is further expressly understood and agreed that LASALLE NATIONAL BANK, as Trustee aforesaid, has no right or power whatsoever to manage, control or operate said real estate in any way or to any extent and is not entitled at Any time to collect or receive for any -58- purpose, directly or indirectly, the rents, issues, profits or proceeds of said real estate or any lease or sale or any mortgage or any disposition thereof. Nothing in this Lease contained shall be construed as creating any personal liability or personal responsibility of the Trustee or any of the beneficiaries of the Trust, or any of their respective officers, directors, beneficiaries, partners, agents, and employees, and in particular, without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either expressly or impliedly herein contained, or to keep, preserve or sequester any property of said Trust or for said Trustee to continue as said Trustee; and that so far as the parties herein are concerned the owner of any indebtedness or liability accruing hereunder shall look solely to and attempt to collect solely from the trust estate from time to time subject to the provisions of said Trust Agreement for payment thereof, Tenant hereby expressly waiving and releasing said personal liability and personal responsibility of the Trustee and any of the beneficiaries of the Trust, and any of their respective officers, directors, beneficiaries, partners, agents and employees on behalf of itself and all persons claiming by, through or under Tenant. -59- IN TESTIMONY WHEREOF, the parties hereto have caused this instrument to be executed in duplicate as of the day and year first above written. TENANT: LANDLORD: 21ST CENTURY CABLE TV, INC. LASALLE NATIONAL BANK, not individually but as Trustee under a Trust Agreement dated March 1, 1967, as extended, and known as Trust No. 36223, as aforesaid By: /s/ Glenn Milligan By: /s/ ---------------------- ------------------------------- Its: President & CEO Its: Senior Vice President --------------------- ------------------------------ -60- CERTIFICATE (If Tenant is a Corporation) I, _______________________________, ___________________ Secretary of ___________________________________________, Tenant, hereby certify that the foregoing Lease has been authorized by all necessary corporate action on behalf of Tenant, the officer(s) executing the foregoing Lease on behalf of Tenant was/were duly authorized to act in his/their capacities as and his/their action(s) are the action of Tenant. _________________________ ______________ Secretary (Corporate Seal) -61- EX-10.10 7 EXHIBIT 10.10 EXHIBIT 10.10 NETWORK PRODUCTS PURCHASE AGREEMENT TABLE OF CONTENTS I NETWORK PRODUCTS PURCHASE AGREEMENT ("NPPA") II CARRIER NETWORKS PRODUCT ATTACHMENT III S/DMS ACCESSNODE PRODUCT ATTACHMENT IV S/DMS TRANSMISSION PRODUCT ATTACHMENT AGREEMENT NO. TCC9701N PAGE 1 OF 18 NETWORK PRODUCTS PURCHASE AGREEMENT Northern Telecom Inc., a Delaware corporation having offices at 5405 Windward Parkway, Alpharetta, Georgia 30004-3895 ("Nortel") and 21st Century Telecom Group, Inc., an Illinois corporation, having its principal offices and place of business at 350 North Orleans Street, Suite 600, Chicago, Illinois 60654-1509 ("Buyer"), acting on behalf of itself and its Affiliates (as defined in Exhibit A hereto) agree as follows: 1. SCOPE AND TERM -------------- 1.1 Certain terms used in this Agreement shall be defined as set forth in Exhibit A. 1.2 The terms and conditions of this Agreement shall apply to the purchase by Buyer and the sale by Nortel of Equipment and Services and the licensing of Software furnished in connection with such Equipment. The terms and conditions contained in a Product Attachment hereto shall modify or supplement the other terms and conditions of this Agreement, only with respect to the Product Line and Services described in the applicable Product Attachment. 1.3 All Products and Services obtained by Buyer pursuant to this Agreement shall be obtained by Buyer solely for initial use by Buyer in its internal business to provide services available through its networks, and not as stock in trade or inventory that is intended for resale by Buyer to any third party as new and unused material. All such Products shall be installed in the United States. Notwithstanding anything to the contrary contained in the preceding sentence, nothing in this Section 1.3 shall prevent Buyer from reselling used Products or, with the permission of Nortel, making incidental sales of new Equipment purchased hereunder; provided, however, that Buyer's principal intent for purchasing is not with a view toward resale. 1.4 This Agreement, including any Product Attachments hereto, shall commence on the date last signed by the parties and be in effect for a period of thirty-six (36) months from such date ("Term"). This Agreement or any part thereof may be terminated in accordance with the express provisions of this Agreement concerning termination or by written agreement of the parties. 1.5 The termination of this Agreement or any part thereof shall not affect the obligations of either party thereunder that have not been fully performed with respect to any accepted Order, unless such Order is expressly terminated in accordance with this Agreement or by written agreement of the parties. 1.6 During the Term, as set forth in Section 1.4 herein, Buyer shall purchase and take delivery of Products and other products manufactured by Nortel and Services, exclusive of TNS Services, having a minimum cumulative total value of /***/ ("Purchase _____________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N PAGE 2 OF 18 Commitment"). The Purchase Commitment shall be satisfied by the total prices and fees paid by Buyer for such Products and Services. The parties have agreed in the following Product Attachments for the sale of Products and Services contained therein. Purchase of such Products and Services shall be referred to herein as "Qualified Products and Services": Product Attachment for S/DMS Carrier Networks Products Product Attachment for S/DMS Transmission Products Product Attachment for S/DMS AccessNode Products Additional pricing and other terms and conditions for other Nortel products and services will be mutually agreed upon by the parties and added as separate Product Attachments. 1.7 In the event Buyer fails to meet the Purchase Commitment by the end of the Term, Buyer shall pay to Nortel as liquidated damages, and not as a penalty, /***/ of the difference between the sum of Buyer's cumulative purchases of Products and Services during the Term and Buyer's Purchase Commitment. Nortel shall invoice Buyer immediately upon expiration of the Term for such liquidated damages and such invoice shall be due and payable within thirty (30) days of the date of such invoice. 1.8 Conditions to Buyer's Obligation to Fulfill the Purchase Commitment. -------------------------------------------------------------------- 1.8.1 Buyer's Purchase Commitment under Section 1.6 is subject to the conditions set forth below. Should any of these conditions be initially satisfied but subsequently fail or subsequently occur, Buyer's commitment requirement shall be adjusted in the manner set forth herein. 1.8.1.1 Buyer Relieved of Purchase Commitment Obligation. In the event that any of the conditions precedent set forth in this Section 1.8.1.1 are not met, Buyer shall be relieved in its entirety of the obligation to satisfy the Purchase Commitment, at no penalty to Buyer, except as provided under Section 3.2. The conditions for which Buyer shall be relieved of its Purchase Commitment obligation are as follows: (a) Nortel is in material breach of the terms and conditions of this Agreement; or (b) The Board of Directors or executive management of the Buyer changes the business direction of the Buyer such that Buyer is to exit the industry, discontinue the line of business or make a formal decision to not grow the line of business such that the Products and Services to be purchased hereunder are no longer _____________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N PAGE 3 OF 18 needed and are inconsistent with a volume purchase commitment and Buyer does not buy comparable products from another telecommunication equipment provider; or (c) A change in regulatory requirements occurs that makes it unfeasible for the Buyer to honor its Purchase Commitment in its entirety; or (d) The economic well being of the Buyer declines to such a great extent that honoring its Purchase Commitment is neither practical nor prudent and Buyer does not buy comparable products from another telecommunication equipment provider. 1.8.1.2 In the event that Nortel fails to comply with any of the conditions precedent set forth in this Section 1.8.1.2, Buyer's Purchase Commitment shall be equitably reduced to reflect the impact on Buyer of such failure. The conditions precedent that will result in Buyer's Purchase Commitment being equitably reduced if not satisfied are as follows: (a) During any calendar year in the Term, Nortel fails to offer Products and Services that are reasonably competitive in features, size, weight, quality, functionality, and price with equipment available from other suppliers and where Nortel's failure to do so places Buyer in a competitive disadvantage and has a material adverse financial impact on Buyer. (b) If Nortel shall be in default of its obligations to deliver Products and Services ordered under this Agreement, Buyer's Purchase Commitment shall be equitably reduced. Such reduction of Buyer's Purchase Commitment pursuant to this Section 1.8.1.2 shall be based on the magnitude and duration of such default by Nortel and the effect upon Buyer's business resulting from Nortel's inability to deliver Products and Services in a timely manner, including cost to Buyer's operations and the impact on Buyer's ability to attract and maintain customers. 2. ORDERING -------- 2.1 All purchases pursuant to this Agreement shall be made by means of Orders issued from time to time by Buyer and accepted by Nortel in writing within fifteen (15) days. Any Order not so accepted shall be deemed rejected and, therefore, void. Nortel agrees that it shall use reasonable efforts to accept all such Orders placed by Buyer with respect to Product quantities and delivery dates requested. In the event Nortel cannot comply with Buyer's requested delivery date, before rejecting any Order, Nortel shall propose an alternative delivery date. 2.2 Affiliates of Buyer shall be allowed to place Orders under this Agreement as long as such Affiliates agree, in writing, to be bound by the terms herein, and provided that Nortel AGREEMENT NO. TCC9701N PAGE 4 OF 18 shall be entitled to reject such Order(s) in accordance with Section 2.1. Nortel agrees that any Order for Qualified Products and Services and other Nortel products placed by an Affiliate and for which payment is ultimately received by Nortel shall count toward the Purchase Commitment. 2.3 All Orders shall reference this Agreement and the applicable Product Attachment and shall be governed solely by the terms and conditions set forth herein as modified or supplemented pursuant to Section 1.2 by the terms and conditions of any applicable Product Attachments. 3. ANTICIPATED VOLUME LEVEL, TNS CREDITS AND RECONCILIATION 3.1 Nortel and Buyer acknowledge that the prices established in the applicable Product Attachment(s) and pricing schedule(s) hereto are quoted and predicated on Buyer purchasing during the Term of this Agreement no less than /***/ of any other Nortel products and Services. In addition, Buyer agrees to provide Nortel with an eighteen (18-month) rolling forecast of such anticipated purchases. 3.2 In the event Buyer does not purchase or license Product(s) aggregating /***/ by the expiration or earlier termination of the Term, in addition to any amount payable under Section 1.7, Nortel shall calculate the difference between the /***/ and the actual amount of Product(s) purchased or licensed ("Actual Purchases") and Nortel shall invoice Buyer for an amount equal to /***/ of the Actual Purchases, for each /***/ or part thereof, that the Actual Purchases fall short of the ***, but, in no event shall such percentage exceed /***/. For example, if Buyer has Actual Purchases of /***/, the sum invoiced by Nortel would be calculated as follows: (a) The shortfall is /***/, therefore the multiplier is /***/, (i.e. /***/ for each /***/ of shortfall); (b) The Actual Purchases against which the /***/ multiplier is applied are /***/; (c) The forfeited amount to be returned to Nortel would be, therefore, /***/, (i.e. /***/ x /***/). 3.3 In partial consideration of Buyer's Purchase Commitment and Nortel's anticipation that Buyer may make Actual Purchases of /***/, for each /***/ of Product(s) and Services Buyer has purchased and taken delivery of from Nortel during the Term, Nortel /***/ of the total value of the Qualified Products and Services actually purchased by Buyer ("TNS Service Credit") up to the /***/ that may be applied toward the purchase of TNS Services for any Product line referenced in Section 1.6 herein, provided that prior to receiving such TNS ___________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N PAGE 5 OF 18 Service Credit(s) Buyer shall have purchased Qualified Products and Services from all three Product Attachments hereto ("TNS Service Credit Criteria"). 3.4 Nortel agrees that, commencing on the date last signed by the parties ("Execution Date") and until utilized in full, Buyer shall be entitled to use and apply no more than a maximum credit equal to /***/, (i.e., a maximum aggregate TNS Service Credit of /***/). In the event that Buyer reaches such maximum credit level before the end of the Term, Buyer shall not be entitled to any additional TNS Service Credits. 3.5. Commencing on the Execution Date and for each of the first two years of the Term, Buyer shall be permitted to apply, in advance, an aggregate TNS Service Credit equal to /***/ of Buyer's Purchase Commitment level, each year, provided that Buyer shall apply no more than /***/ of the allotment for such year during the first quarter. For example, Buyer will be entitled to take total TNS Service Credits up to /***/ hereunder. Accordingly, Buyer may apply advance credits of up to /***/ (i.e., /***/ x /***/ x /***/) in each of the first two years of the Term, provided that no more than *** (i.e., /***/ x /***/) may be used in the first quarter of any given year of the Term. 3.6 TNS Service Credits may not be redeemed for cash or used for the purchase of Products. All TNS Service Credits must be taken within twelve (12) months of the end of the Term or shall be deemed forfeited. Buyer shall not be entitled to any refund for any TNS Service Credit(s) not used. The use of any TNS Service Credit shall not reduce the Purchase Commitment and shall not entitle Buyer to be granted additional TNS Service Credits. 3.7 If, at the end of the Term, Buyer has not made sufficient purchases under this Agreement to have earned any TNS Service Credits applied in advance, Nortel shall invoice Buyer, and Buyer agrees to pay, for the actual costs of such TNS Services applied, but unearned. 3.8 In the event that Buyer exceeds *** in purchases during the Term, for the remainder of the Term, Buyer shall be entitled to a /***/ discount off net price ("Product Discount") on any subsequent purchases of Hardware and Software provided hereunder. Notwithstanding anything to the contrary in the preceding sentence, Nortel agrees that in the event that Buyer's purchases aggregate /***/ during the Term, Buyer will receive an additional credit of /***/ to be applied against any purchases during the Term of Products in excess of /***/; provided, however that such credit may only be used for up to fifty percent (50%) of the price of Products on any Order. Buyer agrees that it will not be entitled to receive a cash refund of any unused credit. 3.9 Unless otherwise provided in one of the Product Attachments herein, during the Term, provided Buyer has satisfied its obligations under Sections 1.6 and 1.7 with respect to the Purchase Commitment, then Nortel agrees, for the benefit of Buyer only, /***/. In the ___________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N PAGE 6 OF 18 event that Nortel decides to discontinue the manufacture of any such Equipment, then Nortel shall give Buyer written notice of such intent at least twelve (12) months prior to the date of such discontinuance, during which period Buyer may order as much of such Equipment as it needs at the prices set forth in the referenced Product Attachments. In the event Nortel replaces any of the Equipment with equipment that is equivalent with respect to form, fit and function, then the price for such equipment shall be the same as the price for the Equipment that said equipment replaced. If, however, Nortel replaces any Equipment with equipment that is materially different with respect to form, fit or function, then the price for such equipment shall be no more than Nortel's then standard and current list price for such equipment. Nothing herein shall be construed to require Nortel to continue to manufacture any Equipment. 4. PRICES ------ 4.1 The prices, charges, and fees applicable to Orders shall be set forth in the appropriate Product Attachments and may be revised in accordance with the provisions stated therein. Buyer shall pay transportation charges, including insurance, in accordance with the applicable Product Attachment. Nortel agrees that all transportation and insurance costs will be charged to Buyer on a pass through basis and Nortel shall not markup any such charges prior to invoicing Buyer for same. 4.2 Until the total of all prices, charges and fees for Products and related Services furnished hereunder shall have been paid to Nortel, Buyer shall cooperate with Nortel in perfecting Nortel's purchase money security interest in such Products and Buyer shall promptly execute all documents and take all actions required by Nortel in connection therewith. Buyer shall not sell, lease or otherwise transfer such Products or any portion thereof or allow any liens or encumbrances to attach to such Products or any portion thereof prior to payment in full to Nortel of the total of all such prices, charges, and fees. 4.3 Nortel agrees that, if at any time during the Term it implements an across the board (i.e., to all customers) price reduction to any of the Qualified Products or Services hereunder, and such price reduction is effective at, or prior to, shipment of Products to Buyer or performance of Services on behalf of Buyer, then Buyer shall be charged such reduced prices. 5. TERMS OF PAYMENT ---------------- 5.1 The amounts payable for Products and Services may be invoiced by Nortel to Buyer in accordance with the applicable Product Attachments. All amounts payable and properly invoiced pursuant to this Agreement shall be paid by Buyer to Nortel within thirty (30) days from the date of Nortel's invoice in accordance with the payment instructions contained in such invoice. Notwithstanding anything to the contrary contained in the preceding sentence, Nortel agrees that in no event shall it invoice Buyer for Products or AGREEMENT NO. TCC9701N PAGE 7 OF 18 Services prior to shipping such Products or performing such Services, unless mutually agreed upon or as set forth in a Product Attachment hereto. 5.2 Overdue payments, excluding those that are the subject of a good faith dispute, shall be subject to interest charges, calculated daily commencing on the 31st day after the date of the invoice, at one and one half percent (1-1/2%) per month or such lesser rate as may be the maximum permissible rate under applicable law. Notwithstanding anything to the contrary contained in the preceding sentence, no such interest charge shall accrue on any balance or invoice that is disputed by Buyer in good faith. 5.3 Good faith disputes related to charges for Services shall not prevent Buyer from remitting the full amount invoiced for Products within thirty (30) days from the date of such invoice. 6. TAXES ----- At Nortel's direction, Buyer shall promptly pay to Nortel or pay directly to the applicable government or taxing authority, if requested by Nortel, all taxes and charges, including, without limitation, penalties and interest, that may be imposed by any federal, state, or local governmental or taxing authority arising hereunder, such as, but not limited to all such taxes and charges relating to the purchase, license, ownership, possession, use, operation or relocation of any Equipment, Software, or Services furnished by Nortel pursuant to this Agreement, excluding, however, all taxes computed upon the net income of Nortel. Buyer's obligations pursuant to this Section 6 shall survive any termination of this Agreement. 7. RISK OF LOSS, TITLE ------------------- 7.1 In the event that Nortel does not install the Products, risk of loss or damage to Products shall pass to Buyer upon delivery to the delivery location specified by Buyer in its Order, and Buyer shall keep such Products fully insured for the total amount then due Nortel for such Products. Buyer shall cause its insurers with respect to such Products to name Nortel as loss payee as Nortel's interests may appear. 7.2 In the event that Nortel installs the Products, risk of loss or damage to Products shall pass to Buyer upon delivery to the installation site specified by Buyer in its Order. Nortel and Buyer agree, however, that each party shall be liable for damages to Products that occur as a result of negligence or willful misconduct of that party's officers, agents or employees. 7.3 Good title to Equipment furnished hereunder, shall be free and clear of all liens and encumbrances, shall vest in Buyer upon full payment by Buyer of the total prices, charges and fees payable by Buyer for such Equipment and any related Software or Services furnished by Nortel in connection with such Equipment. AGREEMENT NO. TCC9701N PAGE 8 OF 18 7.4 Buyer is hereby granted a license to use Software subject to the terms set forth in Exhibit B herein. 8. TESTING, TURNOVER AND ACCEPTANCE -------------------------------- 8.1 If Nortel installs any Products furnished hereunder, the rights and obligations of the parties with respect to testing, turnover and acceptance of such Products shall be as set forth in the applicable Product Attachment. 8.2 If Nortel does not install Products furnished hereunder, Nortel shall prior to delivery of the Products perform such factory tests as Nortel determines to be appropriate in order to confirm that such Products shall be in accordance with the applicable Specifications and any mutually agreed upon test plan as set forth in the applicable Product Attachment(s). Buyer shall have a period of ten (10) business days after delivery to inspect such Products and shall notify Nortel immediately of any defects, deficiencies or shortages. In the event Buyer does not notify Nortel of any such defects, deficiencies or shortages, Buyer shall be deemed to have accepted the Products on the eleventh (11th) business day after the delivery date. 8.3 In the event that Buyer places Products into "revenue-generating service", such Products shall be deemed to have been accepted by Buyer without limitation or restriction. In no event would the foregoing limit any rights that Buyer may have under this Agreement as set forth in Exhibit D and the Warranty Section of each applicable Product Attachment hereto. 8.4 Security Features. Notwithstanding anything to the contrary contained elsewhere in this Agreement, if Nortel delivers to Buyer a Software update, Software enhancement or such other version release or upgrade of the Software without informing Buyer that such Software update, Software enhancement or such other version release or upgrade omits previously included security features and that result in the unauthorized or improper access and use of Buyer's system by third parties, then Nortel shall /***/ Buyer shall use commercially reasonable efforts to detect fraud or other improper access or use of Buyer's system by third parties and shall promptly notify Nortel of any incidence of same believed by Buyer to result from such Software change. Buyer is responsible for the accuracy and completeness of data transcript information that it supplies to Nortel. Nortel is responsible for the accuracy and completeness of data transcript information that it supplies Buyer or enters into Buyer's system or systems. _____________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N PAGE 9 OF 18 In the event that Buyer believes that it has a claim against Nortel under this Section 8.4, Buyer shall promptly notify Nortel of such claim and shall cooperate with Nortel in conducting a joint investigation to identify the source of the error or omission. Buyer acknowledges and agrees that any claim to be made under this provision must be made within six (6) months of receipt and Installation of such Software update, Software enhancement or other Software release. Buyer and Nortel agree that once Buyer makes a claim under this Section 8.4, Buyer shall, at its option: (i) require Nortel to /***/ (ii) continue to operate its system with the new Software that permits such breach of security of Buyer's system. In the event that Buyer elects to exercise its option under (i) above, Nortel /***/. In the event that Buyer elects to exercise its option under (ii) above, Buyer shall bear the risk of loss of any breach of security of its system occurring subsequent to the date that Buyer makes its claim under this Section 8.4. 9. DISCLAIMERS OF WARRANTIES AND REMEDIES -------------------------------------- THE WARRANTIES AND REMEDIES SET FORTH IN EXHIBIT D AND IN ANY PRODUCT ATTACHMENT CONSTITUTE THE ONLY WARRANTIES OF NORTEL WITH RESPECT TO THE PRODUCTS AND SERVICES AND BUYER'S EXCLUSIVE REMEDIES IN THE EVENT SUCH WARRANTIES ARE BREACHED. THEY ARE IN LIEU OF ALL OTHER WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NORTEL SHALL NOT BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE WHATSOEVER, BEFORE OR AFTER THE PLACING OF ANY PRODUCT INTO SERVICE. 10. LIABILITY FOR BODILY INJURY, PROPERTY DAMAGE AND PATENT INFRINGEMENT -------------------------------------------------------------------- 10.1 A party hereto shall defend the other party against any suit, claim, or proceeding brought against the other party for direct damages due to bodily injuries (including death) or damage to tangible property that allegedly result from the gross negligence or willful misconduct of the defending party in the performance of this Agreement. The defending party shall pay all litigation costs, reasonable attorney's fees, settlement payments and such direct damages awarded or resulting from any such suit, claim or proceeding. 10.2 Nortel shall defend Buyer against any suit, claim or proceeding brought against Buyer alleging that any Products, excluding Vendor Items, furnished hereunder infringe any United States patent. Nortel shall pay all litigation costs, reasonable attorney's fees, ______________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N PAGE 10 OF 18 settlement payments and any damages awarded or resulting from any such suit, claim or proceeding. With respect to Vendor Items, Nortel shall assign any rights with respect to infringement of U.S. patents granted to Nortel by the supplier of such Vendor Items to the extent of Nortel's right to do so. 10.3 The party entitled to defense pursuant to Section 10.1 or 10.2 shall promptly advise the party required to provide such defense of the applicable suit, claim, or proceeding and shall cooperate with such party in the defense or settlement thereof. The party required to provide such defense shall have sole control of the defense of the applicable suit, claim, or proceeding and of all negotiations for its settlement or compromise. Notwithstanding anything to the contrary contained elsewhere in this Section 10.3, the party required to provide such defense shall not enter into any form of settlement agreement that materially deprives the party entitled to defense of its indemnification rights under this Section without first consulting with the party entitled to defense and reaching mutual agreement on the terms and conditions of such settlement agreement negatively affecting such indemnification rights. 10.4 Upon providing the Customer with notice of a potential or actual infringement claim, Nortel may (or in the case of an injunction, shall), at Nortel's option, either procure a right to use, replace or modify, or require the return of the affected Product for a refund of its depreciation cost. 10.5 The obligations of Nortel hereunder with respect to any suit, claim, or proceeding described in Section 10.2 shall not apply with respect to Products that are (a)manufactured or supplied by Nortel in accordance with any design or any special instruction furnished by Buyer, (b)used by Buyer in a manner or for a purpose not contemplated by this Agreement, (c)located by Buyer outside the United States, or (d)used by Buyer in combination with other products not provided by Nortel, including, without limitation, any software developed solely by Buyer through the permitted use of Products furnished hereunder, provided the infringement arises from such combination or the use thereof. Buyer shall indemnify and hold Nortel harmless against any loss, cost, expense, damage, settlement or other liability, including, but not limited to, attorneys' fees, that may be incurred by Nortel with respect to any suit, claim, or proceeding described in this Section 10.5. 10.6 The provisions of Sections 10.2 through 10.5 state the entire liability of Nortel and its suppliers and the exclusive remedy of Buyer with respect to any suits, claims, or proceedings of the nature described in Section 10.2. Nortel's total cumulative liability, pursuant to Sections 10.2 shall for each infringement claim /***/. 10.7 Each party's respective obligations pursuant to this Section shall survive any termination of this Agreement. ____________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N PAGE 11 OF 18 11. REMEDIES AND LIMITATION OF LIABILITY ------------------------------------ 11.1 Nortel shall have the right to suspend its performance by written notice to Buyer and forthwith remove and take possession of all Products that shall have been delivered to Buyer, if, prior to payment to Nortel of any amounts due pursuant to this Agreement with respect to such Products, Buyer shall (a) become insolvent or bankrupt or cease, be unable, or admit in writing its inability, to pay all debts as they mature, or make a general assignment for the benefit of, or enter into any arrangement with, creditors, (b) authorize, apply for, or consent to the appointment of, a receiver, trustee, or liquidator of all or a substantial part of its assets or have proceedings seeking such appointment commenced against it that are not terminated within ninety (90) days of such commencement, or (c) file a voluntary petition under any bankruptcy or insolvency law or under the reorganization or arrangement provisions of the United States Bankruptcy Code or any similar law of any jurisdiction or have proceedings under any such law instituted against it that are not terminated within ninety (90) days of such commencement. 11.2 In the event of any material breach of this Agreement that shall continue for sixty (60) or more days after written notice of such breach (including a reasonably detailed statement of the nature of such breach) shall have been given to the breaching party by the aggrieved party, the aggrieved party shall be entitled at its option to avail itself of any and all remedies available at law or equity, except as otherwise provided in this Agreement, or terminate the Agreement. 11.3 Nothing contained in Section 11.2 or elsewhere in this Agreement shall make Nortel liable for any incidental, indirect, consequential or special damages of any nature whatsoever for any breach of this Agreement whether the claims for such damages arise in tort, contract, or otherwise, or shall increase the liability of Nortel under Section 9 or 10 or Exhibit D beyond that prescribed therein. 11.4 Nortel shall not be liable for any additional costs, expenses, lossed or damages resulting from errors, acts or omissions of Buyer, including, but not limited to, inaccuracy, incompleteness or untimeliness in the provision of information by Buyer to Nortel or fulfillment by Buyer of any of its obligations under this Agreement. Buyer shall pay Nortel the amount of any such costs, expenses, losses or damage incurred by Nortel. 11.6 The limitations on Nortel's liability and other obligations set forth in Sections 9, 10, and 11 shall survive any termination of this Agreement. 12. FORCE MAJEURE ------------- 12.1 If the performance by a party of any of its obligations under this Agreement shall be interfered with by reason of any circumstances beyond the reasonable control of that party, including without limitation, unavailability of supplies or sources of energy, power failure, breakdown of machinery, or labor difficulties, including without limitation, AGREEMENT NO. TCC9701N PAGE 12 OF 18 strikes, slowdowns, picketing or boycotts, then that party shall be excused from such performance for a period equal to the delay resulting from the applicable circumstances and such additional period as may be reasonably necessary to allow that party to resume its performance. With respect to labor difficulties as described above, a party shall not be obligated to accede to any demands being made by employees or other personnel. 12.2 Notwithstanding anything to the contrary contained in this Section 12, if a non-performing party's condition of force majeure shall remain in effect for a period of ninety (90) days or longer, then the other party shall, at its election, be entitled to terminate this Agreement. 13. CONFIDENTIAL INFORMATION ------------------------ 13.1 Each party that receives the other party's Confidential Information shall use reasonable care to hold such Confidential Information in confidence and not disclose such Confidential Information to anyone other than to its employees and employees of its Affiliates on a need to know basis. A party that receives the other party's Confidential Information shall not reproduce such Confidential Information, except to the extent reasonably required for the performance of its obligations pursuant to this Agreement and in connection with any permitted use of such Confidential Information. 13.2 Buyer shall take reasonable care to use Nortel's Confidential Information only for study, operating, or maintenance purposes in connection with Buyer's use of Products furnished by Nortel pursuant to this Agreement. 13.3 Nortel shall take reasonable care to use Buyer's Confidential Information only to perform Nortel's obligations to provide Products and Services to Buyer, provided Nortel may use any of Buyer's Confidential Information for the development, manufacture, marketing and maintenance of new products and services and changes or modifications to the existing Products and Services, that Nortel may, in either case, provide to third parties without restriction. 13.4 The obligations of either party pursuant to this Section 13 shall not extend to any Confidential Information that: (i) recipient can demonstrate through written documentation was already known to the recipient prior to its disclosure to the recipient; (ii) was known or generally available to the public at the time of disclosure to the recipient; (iii) becomes known or generally available to the public (other than by act of the recipient) subsequent to its disclosure to the recipient; (iv) is disclosed or made available in writing to the recipient by a third party having a bona fide right to do so, or, (v) is required to be disclosed by process of law, provided that the recipient shall notify the disclosing party promptly upon any request or demand for such disclosure. 13.5 The parties' obligations pursuant to this Section 13 shall survive the termination of this Agreement. AGREEMENT NO. TCC9701N PAGE 13 OF 18 14. BUYER'S RESPONSIBILITIES ------------------------ 14.1 All sites to which the Products shall be delivered or installed shall be prepared by Buyer in accordance with Nortel's standards, including, without limitation, environmental requirements. 14.2 Buyer shall provide Nortel-designated personnel access to the Products during the times deemed necessary by Nortel to install, maintain and service the Products in accordance with Nortel's obligations. Nortel personnel shall comply with Buyer's reasonable site and security regulations, provided Nortel receives written notice of any such regulations reasonably in advance of the arrival of Nortel's personnel at the site. 14.3 Buyer shall provide reasonable working space and facilities, including heat, light, ventilation, telephones, electrical current, trash removal and other necessary utilities for use by Nortel-designated maintenance personnel, and adequate secure storage space, if required by Nortel, for Products and materials. Buyer shall also provide adequate security for the Products while on Buyer's site. 14.4 Buyer shall obtain all necessary governmental permits applicable to Buyer in connection with the installation, operation, and maintenance of Products furnished hereunder, excluding any applicable permits required in the normal course of Nortel's doing business. If requested in writing by Buyer, Nortel, for a nominal fee, will assist Buyer in identifying and obtaining such necessary government permits that may be applicable to Buyer. 14.5 Any information that Nortel reasonably requests from Buyer and that is necessary for Nortel to properly install or maintain the Products shall be provided by Buyer to Nortel in a timely fashion and in a form reasonably specified by Nortel. 15. HAZARDOUS MATERIALS ------------------- 15.1 Prior to issuing any Order for Services to be performed at Buyer's facilities, Buyer shall identify and notify Nortel in writing of the existence of all Hazardous Materials of which Buyer is aware and that Nortel may encounter during the performance of such Services, including, without limitation, any Hazardous Materials contained within any equipment to be removed by Nortel. 15.2 If Buyer breaches its obligations pursuant to Section 15.1, (a)Nortel may discontinue the performance of the appropriate Services until all the applicable Hazardous Materials have been removed or abated to Nortel's satisfaction by Buyer at Buyer's sole expense, and (b)Buyer shall defend, indemnify and hold Nortel harmless from any and all damages, claims, losses, liabilities and expenses, including, without limitation, attorneys' fees, that AGREEMENT NO. TCC9701N PAGE 14 OF 18 arise out of Buyer's breach of such obligations. Buyer's obligations pursuant to this Section 15.2 shall survive any termination of this Agreement. 16. SUBCONTRACTING -------------- Nortel may subcontract any of its obligations under this Agreement, but no such subcontract shall relieve Nortel of primary responsibility for performance of its obligations. Additionally, Nortel shall warrant to Buyer the quality of any such subcontracted Services as set forth in Exhibit D and the Warranty Section of each applicable Product Attachment hereto. 17. REGULATORY COMPLIANCE --------------------- In the event of any change in the Specifications or Nortel's manufacturing or delivery processes for any Products as a result of the imposition of requirements by any government, Nortel may upon notice to Buyer, increase its prices, charges and fees to cover the added costs and expenses directly and indirectly incurred by Nortel as a result of such change. 18. GENERAL ------- 18.1 If any of the provisions of this Agreement shall be invalid or unenforceable under applicable law and a party deems such provisions to be material, that party may terminate this Agreement upon notice to the other party. Otherwise, such invalidity or unenforceability shall not invalidate or render this Agreement unenforceable, but this Agreement shall be construed as if not containing the particular invalid or unenforceable provision and the rights and obligations of the parties shall be construed and enforced accordingly. 18.2 A party shall not release, without the prior written approval of the other party, any advertising or other publicity relating to this Agreement wherein such other party may reasonably be identified. In addition each party shall take reasonable precautions to keep the existence and the contents of this Agreement confidential so long as this Agreement remains in effect and for a period of three (3) years thereafter, except as may be reasonably required to enforce this Agreement or by law. 18.3 The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of Illinois. 18.4 Neither party may assign or transfer this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party, such consent not to be unreasonably withheld, except Buyer's consent shall not be required for any assignment or transfer by Nortel (a)to any Affiliate of all or any part of this Agreement or of Nortel's AGREEMENT NO. TCC9701N PAGE 15 OF 18 rights hereunder, or (b)to any third party of Nortel's right to receive any monies that may become due to Nortel pursuant to this Agreement. 18.5 Notices and other communications shall be transmitted in writing by certified United States Mail, postage prepaid, return receipt requested, by guaranteed overnight delivery, or by facsimile addressed to the parties as follows: To Buyer: 21st Century Telecom Group, Inc. 350 North Orleans, Suite 600 Chicago, Illinois 60654 Attention: Mr. Jay Carlson, Chief Technical Officer Facsimile: (312) 470-2111 with copies to: Piper & Marbury L.L.P. 1200 19th Street N.W. Washington, D.C. 20036 Attention: Mark Tauber, Esq. Facsimile: (202) 223-2085 Director of Purchasing and Contracts 21st Century Telecom Group, Inc. 350 North Orleans Street, Suite 600 Chicago, Illinois 60654-1509 Facsimile: (312) 470-2111 To Nortel: Northern Telecom Inc. 5405 Windward Parkway Alpharetta, Georgia 30004-3895 Attention: Vice-President, Carrier Networks Facsimile: (770) 708-5565 with a copy to Nortel: Northern Telecom Inc. 5405 Windward Parkway Alpharetta, Georgia 30004-3895 Attention: Mr. Peter Farranto, Sr. Counsel Facsimile: (770) 708-5272 In addition, notices submitted by Buyer to Nortel specific to any Product Attachment shall be delivered to the address stated in the applicable Product Attachment along with a copy submitted to Nortel at the address stated above. Any notice or communication sent under this Agreement shall be deemed given upon receipt, as evidenced by the United States Postal Service return receipt Mail if given by certified United States Mail, on the following business day if sent by guaranteed AGREEMENT NO. TCC9701N PAGE 16 OF 18 overnight delivery, or on the transmission date if given by facsimile during the receiving party's normal business hours. The address information listed for a party in this Section or any Product Attachment may be changed from time to time by that party by giving notice to the other as provided above. 18.6 In the event of a conflict between the provisions of this Agreement that are not contained in a Product Attachment and the provisions of a Product Attachment, the provisions of the Product Attachment shall prevail with respect to the Product Line and Services described in that Product Attachment. 18.7 All headings used herein are for index and reference purposes only, and shall not be given any substantive effect. This Agreement has been created jointly by the parties, and no rule of construction requiring interpretation against the drafter of this Agreement shall apply in its interpretation. 18.8 Buyer shall not export any technical data received from Nortel pursuant to this Agreement, or release any such technical data with the knowledge or intent that such technical data will be exported or transmitted to any country or to foreign nationals of any country, except in accordance with applicable U.S. law concerning the exporting of such technical data. Buyer shall obtain all authorizations from the U.S. government in accordance with applicable law prior to exporting or transmitting any such technical data as described above. 18.9 Any changes to this Agreement may only be effected if agreed upon in writing by duly authorized representatives of the parties hereto. No agency, partnership, joint venture, or other similar business relationship shall be or is created by this Agreement. 18.10 This Agreement may be executed in two counterparts, each of which shall be deemed an original and both of which, when taken together, shall constitute one and the same instrument. 18.11 The Product Attachments, exhibits and schedules attached hereto, are hereby incorporated by reference herein, and made a part of this Agreement with the same force and effect as though set forth in their entirety herein. Such documents together with this Agreement are herein referred to as the "Agreement". 18.12 In the event of any conflict or inconsistency among the provisions of this Agreement and the documents attached and incorporated herein, such conflict shall be resolved by giving precedence to this Agreement. Notwithstanding anything to the contrary contained in the preceding sentence, any Product Attachment shall supersede with respect to that particular Product. AGREEMENT NO. TCC9701N PAGE 17 OF 18 18.13 If Buyer notifies Nortel prior to the scheduled shipment date of Products that Buyer does not wish to receive such Products on the date agreed by the parties, or the installation site or other delivery location is not prepared in sufficient time for Nortel to make delivery in accordance with such date, or Buyer fails to take delivery of any portion of such Products, Nortel may place the applicable Products in storage. In that event Buyer shall be liable for all additional costs thereby incurred by Nortel; provided, however, that Buyer shall only be liable for Nortel's actual out-of-pocket expenses, with no additional mark-up thereon. Delivery by Nortel of any Products to a storage location as provided above shall be deemed to constitute delivery of the Products to Buyer for purposes of this Agreement, including, without limitation, provisions for payment, invoicing, passage of risk of loss, and commencement of the Warranty Period. 18.14 Nortel shall support Buyer with joint press announcements, as mutually agreed upon, related to the execution of this Agreement. Further, Nortel shall periodically support Buyer with application brief collaterals, as mutually agreed upon, describing Buyer's key applications and uses of the Products purchased hereunder. Any requests for use of the Nortel logo must be submitted in advance and approved in writing by Nortel. 19. ENTIRE AGREEMENT ---------------- This Agreement, including all Product Attachments, Exhibits and Schedules constitutes the entire agreement of the parties with respect to the subject matter hereof, and save as expressly provided herein, may not be altered or amended, except in writing, expressly intending such alteration or amendment and signed by authorized representatives of each party hereto. AGREEMENT NO. TCC9701N PAGE 18 OF 18 NORTHERN TELECOM INC. 21ST CENTURY TELECOM GROUP, INC. By: __________________________ By: _____________________________ (Signature) (Signature) Name: _________________________ Name: ___________________________ (Print) (Print) Title: ________________________ Title: ___________________________ Date:__________________________ Date: ___________________________ AGREEMENT NO. TCC9701N EXHIBIT A PAGE 1 OF 2 EXHIBIT A DEFINITIONS ----------- As used in the Agreement (as defined below), the following initially capitalized terms shall have the following meanings: "Affiliate" shall mean any entity, as mutually agreed upon and set forth in Exhibit E herein, that is a parent corporation of Nortel or Buyer, or a corporation that Nortel, Buyer or such parent, directly or indirectly, owns or controls 50% of the shares or other securities in such corporation. "Agreement" shall mean the Networks Products Purchase Agreement to which this Exhibit, and all other Exhibits and Product Attachments, are attached. "Confidential Information" shall mean all information, including, without limitation, specifications, drawings, documentation, know-how, pricing information, and business plans, of every kind or description that may be disclosed by either party or an Affiliate to the other party in connection with this Agreement, provided the disclosing party shall clearly mark any such information that is disclosed in writing as the confidential property of the disclosing party and the disclosing party shall identify the confidential nature of any such information that it orally discloses at the time of such disclosure and shall provide a written summary of the orally disclosed information to the recipient within fifteen (15) days of such disclosure. "Equipment" shall mean the hardware listed or otherwise identified in, or pursuant to, any Product Attachment. "Exhibits" shall mean Exhibits A, B, C, D, and E attached hereto, and any additional Exhibits that Nortel and Buyer subsequently agree in writing shall be incorporated into, and made a part of the Agreement by reference. "Hazardous Materials" shall mean any pollutants or dangerous, toxic or hazardous substances (including, without limitation, asbestos) as defined in, or pursuant to, the OSHA Hazard Communication Standard (29 CFR Part 1910, Subpart Z), the Resource Conservation and Recovery Act of 1976 (42 USC Section 6901, et seq.), the Toxic Substances Control Act (15 USC Section 2601, et seq.), the Comprehensive Environmental Response Compensation and Liability Act (42 USC Section 9601, et seq.), and any other federal, state or local environmental law, ordinance, rule or regulation. "Order" shall mean a written purchase order issued by Buyer to Nortel. Each Order shall specify on the face of the Order the types and quantities of Products or Services to be furnished by Nortel pursuant to the Order, the applicable prices, charges or fees with AGREEMENT NO. TCC9701N EXHIBIT A PAGE 2 OF 2 respect to such Products or Services, Buyer's facility to which the Products are to be delivered, the delivery or completion schedule, and any other information that may be required to be included in an Order in accordance with the provisions of this Agreement. "Product Attachments" shall mean any Product Attachments that the parties agree in writing shall be incorporated into, and made a part of, this Agreement. "Product Attachment Term" shall mean the period set forth in Section 1.4 herein. "Product Line" shall mean the Products described in and that may be furnished pursuant to a specific Product Attachment. "Products" shall mean any Equipment or Software that may be provided under this Agreement. "Services" shall mean all installation, engineering, training, and support services, exclusive of TNS Services, listed or otherwise identified in, or pursuant to, any Product Attachment that may be purchased from or provided by Nortel and that are associated with the Product Line described in that Product Attachment. "Software" shall mean (a)programs in machine-readable code or firmware that (i) are owned by, or licensed to, Nortel or any of its Affiliates, (ii) reside in Equipment memories, tapes, disks or other media, and (iii)provide basic logic operating instructions and user-related application instructions, and (b)documentation associated with any such programs that may be furnished by Nortel to Buyer from time to time. "Specifications" shall mean, with respect to any Product Line, the specifications identified in the applicable Product Attachment, provided Nortel shall have the right at its sole discretion to modify or amend such specifications at any time. "Third Party Software Vendor" shall mean any supplier of programs contained in the Software that is not an Affiliate. "TNS Services" shall mean Total Network Solution Services as set forth in Exhibit C herein. "Vendor Items" shall mean, with respect to a Product Line, those portions of the Product that are identified in the applicable Product Attachment as Vendor Items. "Warranty Period" shall mean, with respect to a Product Line, the Warranty Period specified in the applicable Product Attachment. AGREEMENT NO. TCC9701N EXHIBIT B PAGE 1 OF 2 EXHIBIT B SOFTWARE LICENSE ---------------- 1. Buyer acknowledges that the Software may contain programs that have been supplied by, and are proprietary to, Third Party Software Vendors. In addition to the terms and conditions herein, Buyer shall abide by any additional terms and conditions provided by Nortel to Buyer with respect to any Software provided by any Third Party Software Vendor. 2. Upon Buyer's payment to Nortel of the applicable fees with respect to any Software furnished to Buyer pursuant to this Agreement, Buyer shall be granted a personal, non-exclusive, paid-up license to use the version of the Software furnished to Buyer only in conjunction with Buyer's use of the Equipment with respect to which such Software was furnished for the life of that Equipment as it may be repaired or modified. Buyer shall be granted no title or ownership rights to the Software, which rights shall remain in Nortel or its suppliers. 3. As a condition precedent to this license and to the supply of Software by Nortel pursuant to the Agreement, Nortel requires Buyer to give proper assurances to Nortel for the protection of the Software. Accordingly, all Software supplied by Nortel under or in implementation of the Agreement shall be treated by Buyer as the exclusive property, and as proprietary and a TRADE SECRET, of Nortel or its suppliers, as appropriate, and Buyer shall: a) hold the Software, including, without limitation, any methods or concepts utilized therein in confidence for the benefit of Nortel or its suppliers, as appropriate; b)not provide or make the Software available to any person except to its employees on a 'need to know' basis; c)not reproduce, copy, or modify the Software in whole or in part except as authorized by Nortel; d)not attempt to decompile, reverse engineer, disassemble, reverse translate, or in any other manner decode the Software; e)issue adequate instructions to all persons, and take all actions reasonably necessary to satisfy Buyer's obligations under this license; and f)forthwith return to Nortel, or with Nortel's consent destroy, any magnetic tape, disc, semiconductor device or other memory device or system or documentation or other material, including, but not limited to all printed material furnished by Nortel to Buyer that shall be replaced, modified or updated. 4. The obligations of Buyer hereunder shall not extend to any information or data relating to the Software that is now available to the general public or becomes available by reason of acts or failures to act not attributable to Buyer. 5. Buyer shall not assign this license or sublicense any rights herein granted to any other party without Nortel's prior written consent. AGREEMENT NO. TCC9701N EXHIBIT B PAGE 2 OF 2 6. Buyer shall indemnify and hold Nortel and its suppliers, as appropriate, harmless from any loss or damage resulting from a breach of this Exhibit B. The obligations of Buyer under this Exhibit B shall survive the termination of the Agreement and shall continue if the Software is removed from service. 7. Nortel warrants that it has the right to sublicense any applicable third party software provided under this Agreement. AGREEMENT NO. TCC9701N EXHIBIT C EXHIBIT C TOTAL NETWORK SOLUTIONS SERVICES -------------------------------- AGREEMENT NO. TCC9701N EXHIBIT D PAGE 1 OF 2 EXHIBIT D LIMITED WARRANTIES AND REMEDIES ------------------------------- 1. Nortel warrants that the Equipment supplied hereunder will under normal use and service be free from defective material and faulty workmanship and will conform to the applicable Specifications for the Warranty Period specified in the Product Attachment with respect to such Equipment. The foregoing warranty shall not apply to items normally consumed in operation, such as, but not limited to, lamps and fuses or to Vendor Items. Any installation Services performed by Nortel with respect to such Equipment shall be free from defects in workmanship for the Warranty Period set forth in the applicable Product Attachment. 2. Nortel's sole obligation and Buyer's exclusive remedy under the warranty set forth in Section 1 above shall be limited to the replacement or repair, at Nortel's option and expense, of the defective Equipment, or correction of the defective installation Services. Replacement Equipment may be new or reconditioned at Nortel's option. 3. Nortel warrants that any Software licensed by Nortel to Buyer under this Agreement shall function during the Warranty Period of the Equipment with respect to which such Software is furnished without any material, service- affecting nonconformance to the applicable Specifications, provided that Buyer shall have paid all undisputed Software support fees specified in the applicable Product Attachment. If the Software fails to so function, Buyer's sole remedy and Nortel's sole obligation under this warranty is for Nortel to correct such failure through, at Nortel's option, the replacement or modification of the Software or such other actions as Nortel reasonably determines to be appropriate, and Nortel shall do so in a manner as expeditiously as commercially reasonably practicable. Nortel further warrants that both before and after January 1, 2000, any Software licensed by Nortel to Buyer under this Agreement shall function during the Term of the Agreement without any material, service-affecting nonconformance to the applicable Specifications. If the Software fails to so function, Buyer's sole remedy and Nortel's sole obligation under this warranty is for Nortel to correct such failure through, at Nortel's option, the replacement or modification of the Software or such other actions as Nortel reasonably determines to be appropriate. 4. Unless otherwise stated in a Product Attachment, (a) Nortel's warranties in Section 3 above shall only apply to the portion of the Software actually developed by Nortel or its Affiliates, (b) all other Software shall be provided by Nortel "AS IS", (c) Nortel shall assign to Buyer on a nonexclusive basis any warranty on such other Software provided to Nortel by the developer of such other Software to the extent of Nortel's legal right to do so. AGREEMENT NO. TCC9701N EXHIBIT D PAGE 2 OF 2 5. The obligations and remedies set forth in Sections 1, 2, and 3 above shall be conditional upon: the Equipment not having been altered or repaired, the Software not having been modified, and the Products not having been installed outside the United States; any defect or nonconformance not being the result of mishandling, abuse, misuse, improper storage, improper performance of installation, other services, maintenance or operation by other than Nortel (including use in conjunction with any product that is incompatible with the applicable Equipment or Software or of inferior performance), or any error, act, or omission of Buyer described in Section 11.4; the Product not having been damaged by fire, explosion, power failure, power surge, or other power irregularity, lightning, failure to comply with all applicable environmental requirements for the Products specified by Nortel or any other applicable supplier, such as but not limited to temperature or humidity ranges, or any act of God, nature or public enemy; and written notice of the defect having been given to Nortel within the applicable Warranty Period. 6. The performance by Nortel of any of its obligations described in Section 2 or 3 of this Exhibit D shall not extend the applicable Warranty Period except to the extent specified in the applicable Product Attachment. 7. Upon expiration of the applicable Warranty Period for Equipment furnished hereunder, repair and replacement Service for such Equipment shall be available to Buyer from Nortel in accordance with Nortel's then-current terms, conditions and prices. Such repair and replacement Service and notice of any discontinuance of such repair and replacement Service shall be available for a minimum period set forth in the Product Attachment applicable to such Equipment. This provision shall survive the expiration of this Agreement. 8. Unless Nortel elects to repair or replace defective Equipment at Buyer's facility, all Equipment to be repaired or replaced, whether in or out of warranty, shall be packed by Buyer in accordance with Nortel's instructions stated in the applicable Product Attachment and shipped at Buyer's expense and risk of loss to a location designated by Nortel. Replacement Equipment shall be returned to Buyer at Nortel's expense and risk of loss. Buyer shall ship the defective Equipment to Nortel within thirty (30) days of receipt of the replacement Equipment. In the event Nortel fails to receive such defective Equipment within such thirty-(30) day period, Nortel shall invoice Buyer for the replacement Equipment at the then-current price in effect therefor. 9. With respect to any Vendor Item furnished by Nortel to Buyer pursuant to this Agreement, Nortel shall assign to Buyer on a nonexclusive basis any warranty granted by the party that supplied such Vendor Item to Nortel to the extent of Nortel's right to do so. AGREEMENT NO. TCC9701N EXHIBIT D PAGE 3 OF 2 10. Neither Nortel nor Nortel's suppliers, as appropriate, shall have any responsibility for warranties offered by Buyer to any of its customers. Buyer shall indemnify Nortel and Nortel's suppliers, as appropriate, with respect thereto. AGREEMENT NO. TCC9701N EXHIBIT E PAGE 1 OF 1 EXHIBIT E AFFILIATES Northern Telecom Inc. 21st Century Telecom Group, Inc. Northern Telecom Ltd. AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 1 OF 11 PRODUCT ATTACHMENT CARRIER NETWORKS PRODUCTS Northern Telecom Inc. ("Nortel") and 21st Century Telecom Group, Inc. ("Buyer") agree as follows: 1. INCORPORATION BY REFERENCE -------------------------- This Product Attachment shall be incorporated into and made a part of Network Products Purchase Agreement No. TCC9701N ("NPPA") between Nortel and Buyer. 2. DEFINITIONS ----------- For purposes of this Product Attachment: "Acceptance Criteria" shall mean, with respect to any Products installed by Nortel hereunder, the standards and specifications contained in the Nortel Installation Manuals that are applicable to such Products. "Equipment" shall mean the equipment listed in Schedule A. "Extension" shall mean Equipment and Software that Nortel engineer, install and that is added to an Initial System after the Turnover Date of the Initial System. "Initial System" shall mean the Equipment and Software that is included in any configuration identified in Schedule A as an "Initial System." "Installation Site" shall mean Buyer's facility identified in an Order to which the applicable Products identified in such Order shall be delivered or at which the applicable Services, if any, are to be performed, respectively. "Merchandise" shall mean any Equipment that is not part of a System and with respect to which no engineering or installation Services shall be provided by Nortel. "Product Attachment Term" shall mean the period set forth in Section 1.4 of the NPPA. "Services" shall mean the services described in Schedule B. "Software" shall mean the software listed in Schedule A. AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 2 OF 11 "Specifications" shall mean with respect to any Products furnished hereunder, the specifications published by Nortel which Nortel identifies as its standard performance specifications for such Products as of the date of Buyer's Order for such Products. "System" shall mean any Initial System or Extension. "Turnover Date" shall mean, with respect to any Products installed by Nortel hereunder, the date on which Nortel provides the Turnover Notice to Buyer pursuant to Section 8.a. of this Product Attachment. "Warranty Period" shall mean, with respect to: (a) Any Equipment included in any System, the period which shall commence /***/. With respect to Software included in any System, the warranty period shall be /***/. (b) Merchandise, the period which shall commence /***/ with respect to such Merchandise by Nortel to Buyer and /***/, (c) Installation Services involving any System, the period that shall commence upon the Turnover Date with respect to such System and shall expire twelve (12) months thereafter, (d) Equipment that is repaired or replaced pursuant to Nortel's obligations under Exhibit D to the NPPA, the period commencing *** after (i) shipment of the replacement Equipment to Buyer or (ii) completion of the repair at the Installation Site of the applicable Equipment and that shall expire on *** or replaced, and (e) Software that was corrected pursuant to Nortel's obligations under Exhibit D to the NPPA, the period commencing /***/ of the corrected Software by Nortel to Buyer and expiring on /***/. 3. SCOPE ----- 3.1 During the Term as defined in Section 2 herein, Buyer shall order and license, as applicable, and take delivery of Equipment and Software listed in Schedule A of this Product Attachment in partial satisfaction of its obligations with respect to the Purchase Commitment set forth in Section _____________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 3 OF 11 1.6 and the *** of anticipated purchases as set forth in Section 3 of the NPPA. 3.3 Pursuant to Sections 3.3, 3.4, 3.5, 3.6 and 3.7 of the NPPA, Buyer may use the TNS Service Credits to apply toward the purchase of TNS Services listed in Exhibit C of the NPPA. The TNS Services exclude engineering and installation of Initial Systems and Extensions. 4. SCHEDULES --------- The following Schedules, which are attached hereto, are an integral part of the Product Attachment and are incorporated herein by reference: Schedule A - Products, Prices, and Fees Schedule B - Services and Charges Schedule C - Delivery Schedule D - Documentation Schedule E - Local Number Portability Compliance 5. ORDERING -------- With respect to Section 2, ORDERING of the NPPA the following additional terms shall apply: a. Buyer shall identify in each Order for Products whether the Products constitute an Initial System, Extension, or Merchandise. All Orders for Extensions, Merchandise, or any Services other than engineering and installation Services provided by Nortel in connection with an Order for an Initial System shall be subject to written agreement of Buyer and Nortel on the applicable prices, charges and fees with respect thereto as required pursuant to Section 6, PRICING, of this Product Attachment. Nortel must receive Orders for any Initial System at least sixty (60) days prior to the scheduled delivery date of the Initial System ordered. b. Notwithstanding anything contained in Exhibit C to the NPPA to the contrary, Buyer may by written notice to Nortel cancel without charge any Order for Products or Services prior to the delivery date of the applicable Products set forth in such Order or the agreed date for the commencement by Nortel of the applicable Services ("Service Commencement Date"), except that if Buyer cancels such Order within six (6) weeks or less of any such date, a cancellation fee of /***/ of the aggregate price of all Products or Services included in such cancelled Order shall be payable by Buyer. Nortel may invoice such amount upon receipt of Buyer's notice of cancellation of the Order. ______________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 4 OF 11 c. Notwithstanding anything contained in Exhibit C to the NPPA to the contrary, Buyer may by written notice to Nortel not less than six (6) weeks prior to the delivery date of any Products set forth in an Order or the Service Commencement Date of the applicable Services, delay the delivery date of such Products or the Service Commencement Date of such Services for a period that shall not exceed ninety (90) days from the date such Products were originally scheduled to be delivered or ninety (90) days from the Service Commencement Date, subject to the availability from Nortel of the applicable Products or Services after such period of delay. d. Except as set forth in Sections 5.b. and 5.c. of this Product Attachment, any change to an Order after Nortel's acceptance of such Order shall require written agreement of Nortel and Buyer upon a written change to the Order ("Change Order"), which shall reference the original Order and be executed by the parties. No such changes shall be implemented until the applicable Change Order has been executed by the parties. e. With respect to each Order for Products that is accepted by Nortel, Buyer may make a written request at least ninety (90) days prior to the scheduled shipment date of such Products for a change ("Change") consisting of certain addition(s) or deletion(s) to such Products. After receipt of such request, Nortel shall submit a Job Change Order ("JCO") to Buyer for Buyer's approval with respect to the requested Change, except that Nortel shall be under no obligation to submit such JCO to Buyer if Nortel determines that the Price applicable to such Order would be reduced by more than ten percent (10%) as a result of the implementation of the Change. Each JCO shall state whether the requested Change shall increase or decrease the Price and/or time required by Nortel for any aspect of its performance under the NPPA with respect to such Order. Buyer shall accept or reject the JCO in writing within ten (10) days of receipt thereof. Failure of the Buyer to accept or reject the JCO in writing as described above shall be deemed a rejection of the JCO by Buyer. In the event an accepted JCO involves the return to Nortel of any Equipment which shall have been previously delivered to Buyer, Nortel may invoice and Buyer shall pay the transportation costs and Nortel's then-current restocking charge for the returned Equipment. f. Any increase or decrease in the Price with respect to an Order hereunder which is occasioned by an accepted JCO shall be added to or subtracted from, as applicable, the amount of the last payment due pursuant to Section 6 with respect to such Order. g. If Buyer rejects a proposed JCO, then the rights and obligations of the parties with respect to the applicable Order shall not be subject to Buyer's requested Changes, provided that Buyer shall promptly pay to Nortel all of Nortel's additional costs and expenses incurred hereunder in accordance with Buyer's requested Changes and Nortel's additional costs and expenses subsequently incurred in order that Nortel may AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 5 OF 11 be able to perform Nortel's obligations without modification by the requested Changes, and Nortel shall be entitled to an extension of the dates for performance of its obligations with respect to the applicable Order as a result of any delays in such performance which result from the foregoing. 6. PRICING ------- With respect to Section 4, PRICES of the NPPA, the following additional terms shall apply: a. The prices listed in Schedule A shall apply to any Order for an Initial System listed in Schedule A which shall be received by Nortel prior to the effective date of any change in such prices as permitted by this Section, provided that delivery date for such Initial System as set forth in the applicable Order shall be not more than *** after Nortel's acceptance of such Orders. b. The prices for Equipment and the fees for the right to use the Software included in any Extension not listed in Schedule A, prices for any Merchandise, and charges for any Services, other than engineering and installation Services provided with any Initial System shall be as subsequently agreed in writing by Nortel and Buyer. c. All transportation charges associated with the shipment of the Products to Buyer shall be payable by Buyer. Buyer shall promptly reimburse Nortel for any such charges which may be incurred by Nortel. 7. TERMS OF PAYMENT ---------------- With respect to Section 5, TERMS OF PAYMENT of the NPPA, the following additional terms shall apply: a. With respect to each Initial System furnished hereunder by Nortel to Buyer the price listed in Schedule A shall be invoiced by Nortel in accordance with the following schedule: (i) /***/ of such price may be invoiced upon Nortel's acceptance of the Order for such Initial System, (ii) /***/ of such price may be invoiced on the date of shipment by Nortel to Buyer of the switch component of such Initial System, _________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 6 OF 11 (iii) /***/ of such price may be invoiced on the Turnover Date of such Initial System, and (iv) /***/ of such price may be invoiced on the date of Acceptance of such Initial System. b. With respect to each Extension furnished hereunder by Nortel to Buyer, the applicable price determined in accordance with Section 6.b. of this Product Attachment shall be invoiced by Nortel in accordance with the following schedule: (i) /***/ of such price may be invoiced upon Nortel's acceptance of the Order for such Extension, (ii) /***/ of such price may be invoiced on the date of shipment by Nortel to Buyer of the Equipment included in such Extension, (iii) /***/ of such price may be invoiced on the Turnover Date with respect to such Extension, and (iv) /***/ of such price may be invoiced on the date of Acceptance of such Extension. c. Except as may be otherwise agreed in writing by the parties Nortel's prices for Merchandise and charges for any Services determined in accordance with Section 6.b. above may be respectively invoiced upon delivery of such Merchandise and upon performance of such Services by Nortel. 8. TESTING, TURNOVER, AND ACCEPTANCE --------------------------------- Pursuant to Section 8.1 of the NPPA, the rights and obligations of the parties with respect to testing, turnover and acceptance of any Products furnished hereunder and installed by Nortel shall be as follows: a. Nortel shall provide Buyer with five (5) days written notice prior to commencing final commissioning and testing of any Products installed by Nortel. Buyer shall cause an authorized representative of Buyer to be present at the applicable Installation Site to witness such final commissioning and testing, provided that in the event such representative fails to be present for any reason, Nortel shall not be required to delay performance of such final commissioning and testing. In connection with the final commissioning and testing of such Products, Nortel shall test the Products for conformity with the applicable Acceptance Criteria. When such _________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 7 OF 11 tests have been successfully completed, Nortel shall provide Buyer with written notice ("Turnover Notice") that the applicable Products meet such Acceptance Criteria and are ready for Buyer's testing for compliance with such Acceptance Criteria. Buyer shall promptly complete and return to Nortel Buyer's acknowledgment of receipt of such Turnover Notice. b. Following the Turnover Date, Buyer may test the applicable Products for compliance with the Acceptance Criteria using the tests and test procedures contained in Nortel's Installation Manuals with respect to such Products. Within fifteen (15) days following the Turnover Date of the applicable Products, Buyer shall notify Nortel either that Buyer has accepted such Products in writing using Nortel's standard Acceptance Notice form or that Buyer has not accepted such Products in which case Buyer shall also provide Nortel with a written notice ("Notice of Deficiency") which shall provide in reasonable detail the manner in which Buyer asserts that the Products failed to meet the Acceptance Criteria. With respect to any such details with which Nortel agrees, Nortel shall promptly proceed to take appropriate corrective action and following correction, Buyer may retest the Products in accordance with this Section. Buyer shall accept the Products in writing without delay when the tests pursuant to this Section indicate that the Products comply with the Acceptance Criteria. c. With respect to any points of disagreement between Nortel and Buyer concerning any Notice of Deficiency that are not resolved by Nortel and Buyer within ten (10) days after the effective date of the Notice of Deficiency, Buyer, at its option, may waive any rights it may have on account of any such points of disagreement, or require that the disputed points be resolved by arbitration. d. Buyer shall notify Nortel in writing of its election pursuant to Section 8.c. not later than ten (10) days after the effective date of the Notice of Deficiency, if any, given to Nortel by Buyer. Upon expiration of such ten (10) day period unless Buyer has notified Nortel to the contrary, Buyer shall be deemed to have elected to waive its right with respect to any points of disagreement then existing between it and Nortel with respect to such Notice of Deficiency. e. If Buyer makes timely election to require arbitration of such disputed points, the arbitrator shall be chosen by mutual agreement. If the parties cannot agree upon an arbitrator within three (3) days of Buyer's election to arbitrate, each party shall within three (3) days thereafter select an independent and an unaffiliated person to be an arbitrator. These two (2) persons selected shall select a third person, independent and unaffiliated with either party, as a third arbitrator. The arbitration shall be conducted in accordance with the Rules of the American Arbitration Association, provided, however that the Arbitrator(s) shall be empowered to reduce the Prices of Products only to the extent that the Arbitrator(s) find that the benefit of Buyer's AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 8 OF 11 bargain has been reduced. The Arbitrator(s) shall not have any authority to grant partial or total rescission unless the Arbitrator(s) determine that (i) Buyer has not substantially received the benefit of its bargain; and (ii) money damages will not provide an adequate remedy. Judgment upon the award rendered by the Arbitrator(s) may be entered in any Court of competent jurisdiction. f. For purposes of this Product Attachment, "Acceptance" of the applicable Products shall occur upon the earliest of the following and Buyer shall upon request sign Nortel's Acceptance Notice confirming such Acceptance without any conditions, restrictions, or limitations of any nature whatsoever: (i) The date on which Buyer accepts such Products pursuant to Section 8.b. of this Product Attachment; (ii) The failure of Buyer to provide Nortel with any notice required by Section 8.b. of this Product Attachment, with respect to such Products; (iii) Use by Buyer of such Products or any portion thereof in revenue- producing service at any time; or (iv) Waiver by Buyer of its rights pursuant to Section 8.c. or 8.d. g. Acceptance by Buyer of such Products pursuant to Section 8.f. of this Product Attachment above shall not be withheld or postponed due to: (i) Deficiencies of such Products resulting from causes not attributable to Nortel, such as, but not limited to (A) inaccuracy of information provided by Buyer, (B) inadequacy or deficiencies of any materials, facilities or services provided directly or indirectly by Buyer and tested in conjunction with the applicable Products, (C) other conditions external to the Products which are beyond the limits specified by Nortel in the Specifications for the Products and which are used by Nortel in performance calculations with respect to the Acceptance Criteria, or (D) spurious outputs from adjacent material; or (ii) Minor deficiencies or shortages with respect to such Products which are attributable to Nortel, but of a nature that do not prevent full and efficient operation of the Products. h. With respect to any deficiencies of the type described in Section 8.g.(i), Nortel shall at Buyer's request and expense assist Buyer in the elimination or minimization of any such deficiencies. With respect to any deficiencies or shortages as described in the Section 8.g.(ii), Nortel shall, at Nortel's expense, take prompt and effective action to correct any such deficiencies or shortages. AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 9 OF 11 i. In the event Buyer's Acceptance of any Products is withheld or postponed due to any deficiencies of the type described in Section 8.g.(i), Nortel shall invoice and Buyer shall pay Nortel's charges and reasonable expenses incurred by Nortel associated with Nortel's investigation of the reasons for Buyer's withholding or postponement of such Acceptance. 9. WARRANTIES AND REMEDIES ----------------------- With respect to Exhibit D to the NPPA, LIMITED WARRANTIES AND REMEDIES, the following additional terms shall apply: a. Except as set forth in Section 9.b. below, Nortel shall in performance of its obligations under Section 2 of Exhibit D to the NPPA, (i) ship replacement Equipment or complete the repair within thirty (30) days of Nortel's receipt of the Equipment to be replaced or repaired, and (ii) commence the correction of the applicable installation Services within thirty (30) days of receipt of notice from Buyer pursuant to Section 5 of Exhibit D to the NPPA. b. For emergency warranty service situations involving the Equipment, Nortel shall during the applicable Warranty Period use all reasonable efforts to ship replacement Equipment within twenty-four (24) hours of notification of the applicable warranty defect by Buyer pursuant to Section 5 of Exhibit D to the NPPA, provided that Buyer shall have requested such emergency service. Nortel may invoice Buyer and Buyer shall pay Nortel's surcharge for emergency warranty services. If Nortel determines that due to the particular circumstances, onsite technical assistance is necessary, Nortel shall use all reasonable efforts to dispatch emergency service personnel to the applicable Installation Site within twenty-four (24) hours of receipt of notice from Buyer as described above. c. All Products to be repaired or replaced, both within and outside of the applicable Warranty Period, shall be packed by Buyer in accordance with Nortel's then-current instructions. d. No later than ninety (90) days prior to the expiration of the Warranty Period with respect to any Initial System, Nortel shall offer to Buyer post-warranty support by means of an extended service plan or other terms, provided that neither party shall have any obligation with respect thereto except as may be agreed upon in writing by the parties. 10. NOTICES ------- AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 10 OF 11 Pursuant to Section 18.5 of the NPPA, any notices by Buyer to Nortel which are specific to this Product Attachment shall be delivered to the following address: Northern Telecom Inc. 2350 Lakeside Blvd. Richardson, Texas 75082-4399 Attn: Senior Manager, Contracts Management & Negotiations 11. ADDITIONAL TERMS ---------------- The following additional terms shall apply to the NPPA: (a) With respect to Section 14, BUYER'S RESPONSIBILITIES, the following additional terms shall apply: (i) Buyer shall be responsible for ordering and coordinating with each applicable local telephone company the installation of all central office trunks and test trunks and Buyer shall be responsible for all utility charges associated with the installation, testing, operation and maintenance of Products furnished hereunder, including, but not limited to, all applicable charges for such central office trunks, test trunks and any tie lines. (b) Nortel shall provide documentation with respect to the Products in accordance with Schedule D to this Product Attachment. (c) If Nortel has made /***/ Software Release generally available to its other customers prior to shipment of the DMS-500 Initial System ordered hereunder, Nortel will furnish the DMS-500 Initial System with such /***/ Software Release. In the event /***/ Software Release is not generally available at the time of Turnover of the DMS-500 Initial System, Nortel will furnish the DMS-500 Initial System with /***/ Software Release. However, Nortel will /***/. Such /***/ Software Release Level may require the purchase of additional Equipment, which purchase shall remain Buyer's responsibility. (d) The matrix shown in Schedule E sets forth Nortel's DMS-500 Local Number Portability compliance to Illinois Communication Committee ("ICC") Generic Switching and Signaling Requirements for the NCS07 and NCS08 Software Releases. _______________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N CARRIER NETWORKS PRODUCT ATTACHMENT PAGE 11 OF 11 (e) During the Product Attachment Term, Nortel shall make available to Buyer for a license fee not to exceed /***/ per Software release for each DMS-500 Initial System ordered hereunder, a standard feature DMS-500 Initial System Software Upgrade ("DMS-500 Standard Feature Upgrade") which Nortel may make generally available to its other customers. The /***/ license fee does not include associated engineering and labor, Equipment or optional Software packages. NORTHERN TELECOM INC. 21ST CENTURY TELECOM GROUP, INC. By:_______________________________ By:___________________________________ (Signature) (Signature) Name:_____________________________ Name:_________________________________ (Print) (Print) Title:____________________________ Title:________________________________ Date:_____________________________ Date:_________________________________ ___________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N SCHEDULE A PAGE 1 OF 1 SCHEDULE A ---------- PRODUCTS, PRICES AND FEES ------------------------- AGREEMENT NO. TCC9701N SCHEDULE A PAGE 1 OF 2 SCHEDULE B ---------- SERVICES AND CHARGES -------------------- ENGINEERING - ----------- 1. Nortel shall engineer each System furnished hereunder in accordance with Nortel's engineering practices applicable to such Initial System at the time such engineering is performed. 2. Nortel's charges for engineering each Initial System are included in the prices and fees for the Initial System set forth in Schedule A. 3. The provision of any other engineering by Nortel and the charges associated therewith shall be as subsequently agreed in writing by Nortel and Buyer. INSTALLATION - ------------ 1. Nortel shall install each Initial System furnished hereunder at the applicable Installation Site in accordance with Nortel's installation practices applicable to such Initial System at the time such installation is performed. 2. Nortel's charges for performance of such installation are included in the prices and fees for the Initial System set forth in Schedule A. 3. The provision of any other installation by Nortel and the charges associated therewith shall be as subsequently agreed in writing by Nortel and Buyer. TRAINING - -------- 1. With each Initial System furnished hereunder, Nortel shall provide to Buyer *** of training at Nortel's Training Center currently located in Raleigh, North Carolina. Such training shall be in any of the courses scheduled to be provided at that Training Center as set forth in Nortel's applicable Technical Training Course catalog with respect to the Products described in Schedule A to this Product Attachment. 2. Buyer shall be responsible for the payment of all travel and living expenses of its employees whom Buyer sends to receive such training. ____________________ *** Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT. NO.TCC9701N SCHEDULE B PAGE 2 OF 2 3. Additional Training in such courses shall be provided by Nortel to Buyer subject to availability and scheduling of such courses. Nortel may change the schedule of such courses at any time. Such additional training shall be provided at Nortel's then-current charges. 4. All training provided by Nortel shall consist of such materials and cover such subject as Nortel in its sole discretion determines to be appropriate. Nortel makes no representation concerning the ability of anyone to satisfactorily complete any training. 5. Nortel may add to, or delete from, the subject matter and or medium of any of the training courses which Nortel provides. In addition, Nortel may reschedule such courses as Nortel determines to be appropriate. 6. The availability of any training to Buyer as set forth above shall be subject to any prerequisites identified by Nortel in its training catalog or other documentation with respect to such training. ADDITIONAL SERVICES - ------------------- 1. All other services to be furnished hereunder shall be subject to written agreement of the parties which shall set forth the terms and conditions applicable to the provision of such services and a description of such services and the charges for such services. AGREEMENT. NO. TCC9701N SCHEDULE B PAGE 1 OF 1 SCHEDULE ---------- DELIVERY -------- Intentionally Left Blank AGREEMENT. NO. TCC9701N SCHEDULE D PAGE 1 OF 3 SCHEDULE D ---------- DOCUMENTATION ------------- Certain documentation with respect to the Products may be made available to Buyer on CD-ROM pursuant to the terms and conditions set forth below. In addition, Nortel may furnish to Buyer such other documentation with respect to the Products as Nortel deems appropriate. CD-ROM TERMS AND CONDITIONS 1. DEFINITIONS "CD-ROM" shall mean a compact disk with read-only memory. "CD-ROM Documentation" shall mean the documentation that Nortel makes available to its customers on CD-ROM with respect to DMS-250, DMS-300, and/or DMS-STP Systems. " CD-ROM Software" shall mean the computer programs that provide basic logic, operating instructions or user-related application instructions with respect to the storage and/or retrieval of any CD-ROM Documentation residing on the CD-ROM, along with the documentation used to describe, maintain and use such computer programs. 2. SCOPE With the delivery of each Initial System ordered by Buyer, Nortel shall deliver a CD-ROM on which the appropriate CD-ROM Documentation is contained and a user manual which shall set forth the procedures by which Buyer may use the CD-ROM Software to access to the CD-ROM Documentation. Buyer shall be solely responsible for obtaining, at its cost and expense, any computer or other equipment and software required to use the CD-ROM, CD-ROM Software or CD-ROM Documentation. Buyer may order additional CD-ROMs from Nortel at Nortel's then current fees therefor, and any such additional CD-ROMs shall be subject to these terms and conditions. AGREEMENT. NO. TCC9701N SCHEDULE D PAGE 2 OF 3 3. LICENSE Upon delivery of the CD-ROM, Nortel shall grant to Buyer a non-exclusive, non- transferable and non-assignable license, subject to these terms and conditions: (a) to use CD-ROM Software solely to access to the CD-ROM Documentation; and (b) to use the CD-ROM Documentation solely to operate and maintain the Initial System with which it was delivered. Buyer acknowledges that, as between Nortel and Buyer, Nortel retains title to and all other rights and interest in the CD-ROM Software and CD-ROM Documentation. Buyer shall not modify, translate or copy the CD-ROM Software or CD-ROM Documentation without Nortel's prior written consent. Buyer shall hold secret and not disclose to any person, except Buyer's employees with a need to know, any of the CD-ROM Software or CD-ROM Documentation. Buyer shall not sell, license, reproduce or otherwise convey or directly or indirectly allow access to the CD-ROM Software or CD-ROM Documentation to any other person, firm, corporation or other entity. Except to the extent expressly set forth in this Schedule D, Nortel shall have no obligations of any nature whatsoever with respect to the CD-ROM Software or the CD-ROM Documentation. 4. DISCLAIMER OF WARRANTY AND LIABILITY NORTEL MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY NATURE WHATSOEVER WITH RESPECT TO THE CD-ROM, CD-ROM SOFTWARE, CD-ROM DOCUMENTATION OR ANY INFORMATION CONTAINED ON ANY OF THE FOREGOING OR ANY RESULTS OR CONCLUSIONS REACHED BY BUYER AS A RESULT OF ACCESS TO OR USE THEREOF, OR WITH RESPECT TO ANY OTHER MATTER OR SERVICE PROVIDED BY NORTEL, WHETHER STATUTORY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR AGAINST INFRINGEMENT. NORTEL SHALL NOT BE LIABLE FOR ANY DIRECT, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY NATURE WHATSOEVER INCLUDING ANY SUCH DAMAGES WHICH MAY ARISE OUT OF THE USE OF OR INABILITY TO USE OR ACCESS THE CD-ROM, THE CD-ROM SOFTWARE, THE CD-ROM DOCUMENTATION, AND FURTHER INCLUDING LOSS OF USE, REVENUE, PROFITS OR ANTICIPATED SAVINGS REGARDLESS OF HOW SUCH DAMAGES MAY HAVE BEEN CAUSED. AGREEMENT. NO. TCC9701N SCHEDULE D PAGE 3 OF 3 5. GENERAL Nothing contained in this Schedule D shall limit, in any manner, Nortel's right to change the CD-ROM Software or CD-ROM Documentation or the design or characteristics of Nortel's Products at any time without notice and without liability. AGREEMENT. NO. TCC9701N SCHEDULE E PAGE 1 OF 1 SCHEDULE E ---------- NORTEL'S DMS-500 LOCAL NUMBER PORTABILITY COMPLIANCE ---------------------------------------------------- AGREEMENT NO. TCC9701N ACCESS NODE ATTACHMENT PAGE 1 OF 6 PRODUCT ATTACHMENT S/DMS ACCESSNODE PRODUCTS Northern Telecom Inc. ("Nortel") and 21st Century Telecom Group, Inc. ("Buyer") agree as follows: NOW, THEREFORE Buyer and Nortel agree as follows: 1. INCORPORATION BY REFERENCE -------------------------- This Product Attachment shall be incorporated into and made a part of Network Products Purchase Agreement No. TCC9701N ("NPPA") between Nortel and Buyer. 2. DEFINITIONS ----------- For purposes of this Product Attachment: "Equipment" shall mean the equipment listed in Schedule A. "Product Attachment Term" shall mean the period set forth in Section 1.4 of the NPPA. "Services" shall mean the services described in Schedule B. "Software" shall mean the software listed in Schedule A. "Specifications" shall mean Nortel's standard published performance specifications for the Products. "Warranty Period" shall mean /***/ from the date of shipment stamped on the Equipment or, if the date of shipment is not marked on the Equipment, /***/ from the date of manufacture. In the event Nortel performs installation Services, the Equipment warranty shall be /***/. With respect to Software provided hereunder, the warranty period shall be /***/ of such Software. 3. SCOPE ----- 3.1 During the Product Attachment Term, as defined in Section 2 herein, Buyer shall purchase and take delivery of Products listed in schedule A of this Product Attachment in partial satisfaction of its obligations with respect to the Purchase Commitment set forth in Section 1.6 and the /***/ of anticipated purchases as set forth in Section 3 of the NPPA. ____________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT. NO. TCC9701N ACCESS NODE ATTACHMENT PAGE 2 OF 6 3.2 Pursuant to Sections 3.3, 3.4, 3.5, 3.6, and 3.7 of the NPPA, Buyer may use the TNS Service Credits to apply toward the purchase of TNS Services listed in Exhibit C of the NPPA. 4. SCHEDULES --------- The following Schedules which are attached hereto are an integral part of the Product Attachment and are incorporated herein by reference:
Schedule A - Products, Prices, and Fees Schedule B - Services and Charges Schedule C - Delivery Intervals
5. ORDERING -------- All Orders shall specify the Products required and the Services, Nortel is to perform, if any. Any change to the original Order initiated by Buyer after Nortel's acceptance of the Order and any resulting adjustments to prices, schedule and/or other requirements of the Order shall be negotiated, mutually agreed upon and subsequently detailed in a written change to the Order ("Change Order"), referencing the original Order and executed by authorized representatives of Buyer and Nortel. The adjustment of the Order prices for Equipment and charges for any Services, as applicable, in a Change Order shall be established on the basis of Nortel's then current merchandise prices for such Equipment and/or charges for Services. In the event that the Change Order affects work already performed, the adjustment of the Order price shall include reasonable charges incurred by Nortel related to such work. No such changes shall be performed until a Change Order has been executed by Nortel and Buyer as described above. 6. PRICING AND TERMS OF PAYMENT ---------------------------- 6.1 Pricing for Equipment and Software shall be as set forth in Schedule A, Section 1. Pricing for Engineered Systems and/or Merchandise Orders shall be as set forth in Schedule A, Section 2. 6.2 In the event that Buyer has not met the AccessNode Minimum, the pricing for Line Cards listed in Schedule A shall increase by /***/ per Line Card ("New Line Card Price") for all such Line Cards purchased during the Product Attachment Term. For any such Line Cards previously purchased during the Product Attachment Term, Nortel shall invoice Buyer for the /***/. Such invoice shall be payable as set forth in Section 6.7 herein. ______________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT. NO. TCC9701N ACCESS NODE ATTACHMENT PAGE 3 OF 6 6.3 The prices for engineering, installation and/or system line-up and testing ("SLAT") Services performed by Nortel with respect to an accepted Order shall be as quoted by Nortel and agreed to by Buyer prior to issuance of the applicable Order. 6.4 Nortel will prepay freight charges and the cost of any insurance requested by Buyer and invoice Buyer for these items at Nortel's actual cost. These charges will appear as separate line items on Nortel's invoice. 6.5 Nortel's prices set forth in Schedule A may be revised by Nortel, from time to time, by means of /***/ prior written notice given to Buyer. Such notice shall specify the effective date of the price change and shall apply to Orders received by Nortel on or after the effective date of the price change. Additions and/or deletions of products to these price lists may occur as the Product evolves. 6.6 Nortel shall invoice Buyer for the price of the Products upon shipment of the Products. Any Services provided hereunder shall be invoiced to Buyer upon Nortel's completion of such Services. 6.7 Payment of the purchase price of the Equipment as well as any prepaid freight and insurance charges shall be due within thirty (30) days from the date of Nortel's invoice for such Equipment. Nortel's charges, as applicable, for installation and/or other services performed during each calendar month shall be paid by Buyer on a monthly basis within thirty (30) days after receipt of Nortel's invoice for such Services. 7. TESTING, TURNOVER, AND ACCEPTANCE --------------------------------- 7.1 If installation is being purchased pursuant to this contract, Buyer shall be responsible for having the installation sites ready on time and in accordance with Nortel's requirements and shall reimburse Nortel for any additional expense incurred by Nortel as a result of Buyers failure in this respect. Any installation purchased pursuant to this contract shall be performed in accordance with Nortel's standard installation procedures and manuals. Upon completion of installation, Nortel shall perform its standard test procedures in accordance with applicable Nortel Specifications and any mutually agreed upon test plan, and shall certify to Buyer that the Equipment (and Software, if applicable) is ready to be placed in service and same shall be conclusively deemed to have been accepted by Buyer. Acceptance shall not be postponed due to any deficiencies of Equipment or Services supplied by Buyer and tested in conjunction with the Equipment. In the event that installation is not purchased pursuant to this contract, any Equipment ______________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT. NO. TCC9701N ACCESS NODE ATTACHMENT PAGE 4 OF 6 and Software delivered hereunder shall be conclusively deemed to have been accepted upon delivery of same to purchaser at the Shipping Point. 7.2 When Nortel installs the Products, Buyer's acceptance of the Products and Services shall take place, or be deemed to have taken place, upon completion by Nortel of installation and SLAT Services in accordance with Nortel's standard procedures and practices, as evidenced by the acceptance test results showing that the Products meet and perform in accordance with the applicable Specifications. Upon such acceptance, Nortel shall provide Buyer with a turnover notice to be acknowledged in writing by Buyer. By providing the turnover notice, Nortel certifies that the Products meet and perform in accordance with the applicable Specifications. Acceptance of Products shall not be withheld or postponed due to: a) deficiencies of the Products or any other product with which such Products are used or operated, resulting from causes not attributable to Nortel, such as but not limited to (i) inaccuracy of information provided by Buyer, (ii) inadequacy or deficiencies of product, facilities or services provided by Buyer or a third party and tested in conjunction with the Products, or (iii) other conditions, external to the Products provided by Nortel, which are beyond limits specified herein and are used by Nortel in performance calculations and spurious outputs from adjacent product. Nortel shall, however, at Buyer's expense, assist Buyer in the elimination or minimization of such deficiencies; or b) minor deficiencies or shortages, attributable to Nortel, of a nature that do not prevent full and efficient commercial operation of the Products. Nortel shall, however, at its expense, take prompt and effective action to correct any such deficiencies or shortages. 7.3 The effort associated with Nortel's investigation of any deficiencies not attributable to Nortel shall be billed to Buyer. 8. WARRANTIES AND REMEDIES ----------------------- 8.1 The repair or replacement of Equipment and the correction of defective installation Services shall be warranted for a period of /***/ days or the remainder of the original Warranty Period whichever is longer. 8.2 Nortel shall provide Buyer with repair and replacement service for a minimum period of /***/ from the commencement date of this Product Attachment. Nortel shall provide Buyer with a /***/ prior written notice of any discontinuance so as to enable Buyer to place an order for its requirements or to enter into any other _____________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT. NO. TCC9701N ACCESS NODE ATTACHMENT PAGE 5 OF 6 mutually satisfactory agreement with Nortel prior to such discontinuance. This provision shall survive the expiration of this Product Attachment. 9. NOTICES ------- Pursuant to Paragraph 18.5 of the NPPA, any notices by Buyer to Nortel which are specific to this Product Attachment shall be delivered to the following address: Northern Telecom Inc. 5405 Windward Parkway Alpharetta, Georgia 30004-3895 Attn: Vice President, Carrier Networks Facsimile: (770) 708-5565 with a copy to: Northern Telecom Inc. 5405 Windward Parkway Alpharetta, Georgia 30004-3895 Attn: Peter Farranto, Senior Counsel Facsimile: (770) 708-5272 10. ADDITIONAL TERMS ---------------- 10.1 Nortel may, from time to time, issue updates to the Software and, upon Buyer's payment of applicable Right to Use Fees or Software License Fees, if any, shall license these updates to Buyer. Nortel shall classify such updates as either: 1) /***/ ("ISU's"), /***/, 2) /***/ ("Enhancements"), or 3) /***/ ("Generics"). Updates to Software classified, as ISU's by Nortel will be provided at /***/ to Buyer. Notwithstanding the foregoing, ISU's and Enhancements shall not include the cost of /***/ that may be required to update such ISU's. Updates classified as Generics, which will be used by Buyer in its operations shall be made available to Buyer on a /***/ basis. In the event that Nortel determines that the update includes both ISU's and Generics which will be used by Buyer in its operations, such update shall be made available to Buyer. If Buyer elects to receive the update(s) during the Term of the Agreement, Nortel shall invoice Buyer /***/. 10.2 Standard delivery intervals for Unforecasted Product shall be as set forth in Schedule C. If Buyer desires to maintain the shorter delivery schedules set forth in Schedule C, Buyer agrees to issue quarterly forecasts in a time frame and format mutually agreed to by the parties. Nortel's only obligation regarding such delivery intervals shall be to meet delivery dates set forth in an accepted Order. If Nortel, prior to acceptance of an Order, advises Buyer that it cannot meet a delivery date shown in an Order, both parties will negotiate a revised date prior to acceptance of the Order by Nortel. The installation and SLAT intervals _______________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT. NO. TCC9701N ACCESS NODE ATTACHMENT PAGE 6 OF 6 applicable to an Order will be quoted by Nortel and agreed to by Buyer and Nortel prior to issuance of such Order. 10.3 INSTALLATION SITES If Nortel is providing Buyer with installation Services, Buyer shall be responsible for having all installation sites ready on time and in accordance with Nortel's requirements. Buyer shall be responsible for any expense incurred by Nortel as a result of Buyer's failure to meet the foregoing obligations. NORTHERN TELECOM INC. 21ST CENTURY TELECOM GROUP, INC. By:_____________________________ By:_____________________________ (Signature) (Signature) Name:___________________________ Name:___________________________ (Print) (Print) Title:__________________________ Title:__________________________ Date:____________________________ Date:___________________________ AGREEMENT NO. TCC9701N TRANSMISSION PRODUCT ATTACHMENT PAGE 1 OF 6 PRODUCT ATTACHMENT S/DMS TRANSMISSION PRODUCTS Northern Telecom Inc. ("Nortel") and 21st Century Telecom Group, Inc. ("Buyer") agree as follows: NOW, THEREFORE, Nortel and Buyer agree as follows: 1. INCORPORATION BY REFERENCE -------------------------- This Product Attachment shall be incorporated into and made a part of Network Products Purchase Agreement No. TCC9701N ("NPPA") between Nortel and Buyer. 2. DEFINITIONS ----------- For purposes of this Product Attachment: "Equipment" shall mean the equipment listed in Schedule A. "Product Attachment Term" shall mean the period set forth in Section 1.4 of the NPPA. "Services" shall mean the services described in Schedule B. "Software" shall mean the software listed in Schedule A. "Specifications" shall mean Nortel's standard published performance specifications for the Products. "Vendor Items" shall mean the equipment marked with an asterisk (*) in Schedule A. "Warranty Period" shall mean /***/ from the date of shipment stamped on the Equipment or, if the date of shipment is not marked on the Equipment, /***/ months from the date of manufacture. In the event Nortel performs installation Services, the Equipment warranty shall be /***/ from the /***/. With respect to Software provided hereunder, the warranty period shall be /***/ of such Software. 3. SCOPE ----- 3.1 During the Product Attachment Term, as defined in Section 2 herein, Buyer shall purchase and take delivery of Products listed in Schedule A of this Product Attachment in partial satisfaction of its obligations with respect to the Purchase Commitment set forth in Section 1.6 and the /***/ of anticipated purchases as set forth in Section 3 of the NPPA. _____________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N TRANSMISSION PRODUCT ATTACHMENT PAGE 2 OF 6 3.2 Pursuant to Sections 3.3, 3.4, 3.5, 3.6, and 3.7 of the NPPA, Buyer may use the Service Credits to apply toward the purchase of Services listed in Schedule A of this Product Attachment. 4. SCHEDULES --------- The following Schedules which are attached hereto are an integral part of the Product Attachment and are incorporated herein by reference: Schedule A - Products, Prices, and Fees Schedule B - Services and Charges Schedule C - Delivery Intervals Schedule D - Forecast 5. ORDERS AND CANCELLATIONS ------------------------ 5.1 Delivery of Products and Services will be in accordance with Nortel's accepted Order. All Orders issued by Buyer shall include the following information: (a) an Order number and a reference to the Agreement and this Product Attachment; (b) the detailed description, quantity and price of the Products and Services to be performed by Nortel, if any; (c) requested delivery date(s); (d) shipping destination(s) for Products; (e) mailing address for Nortel invoice(s); 5.2 Orders submitted by Buyer for Products to be supplied furnish only ("FO") shall be acknowledged by Nortel in a timely fashion. Orders submitted by Buyer for Products engineered, furnished and installed ("EFI") shall be acknowledged by Nortel as received in a timely fashion. Nortel shall provide one copy of the order acknowledgment to Buyer for each Order received. 5.3 In the event of total or partial cancellation of an Order by Buyer within ten (10) business days prior to scheduled ship date, Buyer shall pay to Nortel charges calculated in accordance with the following based upon the percentage of the total Order or affected portion thereof: Notification prior to Cancellation Penalty scheduled ship date paid by Buyer -------------------- ------------- 5 to 6 Weeks /***/ _________________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N TRANSMISSION PRODUCT ATTACHMENT PAGE 3 OF 6 Less than 4 Weeks /***/ 5.4 During any calendar year period during the Term, Buyer may request, one (1) time only that an Order be rescheduled without penalty upon giving at least two (2) weeks written notice to Nortel prior to the scheduled ship date. The new ship date shall be no more than /***/ later than the original ship date. Any request by Buyer for rescheduling ship dates shall be subject to mutual agreement. 5.5 All Orders for Products set forth in Schedule A and all Orders for engineered Products canceled by Buyer after delivery to Buyer, shall be subject to cancellation penalties of /***/ of the value of the affected Order. 5.6 Any change to the original Order initiated by Buyer after Nortel's acceptance of the Order and any resulting adjustments to prices, schedule or other requirements of the Order shall be negotiated, mutually agreed upon and subsequently detailed in a written change to the Order ("Change Order"), referencing the original Order and executed by authorized representatives of Buyer and Nortel. The adjustment of the Order prices for Products and charges for any Services, as applicable, in a Change Order shall be established on the basis of Nortel's then current merchandise prices for such Products or charges for Services. In the event that the Change Order affects work already performed, the adjustment of the Order price shall include reasonable charges incurred by Nortel related to such work. No such changes shall be performed until a Change Order has been executed by Nortel and Buyer as described above. 6. PRICING AND TERMS OF PAYMENT ---------------------------- 6.1 Pricing for Equipment and Software shall be as set forth in Schedule A, Section 1 subject to any discounts, if applicable, set forth in Schedule A, Section 2. 6.2 The prices for engineering, installation and system line-up and testing ("SLAT") Services performed by Nortel with respect to an accepted Order shall be as quoted by Nortel and agreed to by Buyer prior to issuance of the applicable Order. 6.3 Nortel will prepay freight charges and the cost of any insurance requested by Buyer and invoice Buyer for these items at Nortel's actual cost. These charges will appear as separate line items on Nortel's invoice. 6.4 Nortel's prices set forth in Schedule A may be revised by Nortel, from time to time, by means of /***/ days prior written notice given to Buyer. Such notice shall specify the effective date of the price change and shall apply to Orders received by Nortel on or after the effective date of the price change. _______________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N TRANSMISSION PRODUCT ATTACHMENT PAGE 4 OF 6 6.5 Nortel shall invoice Buyer for the price of the Products as well as any prepaid freight and insurance charges upon shipment of the Products. Any Services provided hereunder shall be invoiced to Buyer upon Nortel's completion of such Services. 7. TESTING, TURNOVER, AND ACCEPTANCE --------------------------------- 7.1 When Nortel installs the Products, Buyer's acceptance of the Products and Services shall take place, or be deemed to have taken place, upon completion by Nortel of installation and SLAT Services in accordance with Nortel's standard procedures and practices, as evidenced by the acceptance test results showing that the Products meet and perform in accordance with the applicable Specifications and any mutually agreed upon test plan. Upon such acceptance, Nortel shall provide Buyer with a turnover notice to be acknowledged in writing by Buyer. By providing the turnover notice, Nortel certifies that the Products meet and perform in accordance with the applicable Specifications. Acceptance of the Products shall not be withheld or postponed due to: a) deficiencies of the Products or any other product with which such Products are used or operated, resulting from causes not attributable to Nortel, such as but not limited to (i) inaccuracy of information provided by Buyer, (ii) inadequacy or deficiencies of product, facilities or services provided by Buyer or a third party and tested in conjunction with the Products, or (iii) other conditions, external to the Products provided by Nortel, which are beyond limits specified herein and are used by Nortel in performance calculations and spurious outputs from adjacent product. Nortel shall, however, at Buyer's expense, assist Buyer in the elimination or minimization of such deficiencies; or b) minor deficiencies or shortages, attributable to Nortel, of a nature that do not prevent full and efficient commercial operation of the Products. Nortel shall, however, at its expense, take prompt and effective action to correct any such deficiencies or shortages. 7.2 The effort associated with Nortel's investigation of any deficiencies not attributable to Nortel shall be billed to Buyer. 8. WARRANTIES AND REMEDIES ----------------------- 8.1 The repair or replacement of Equipment and the correction of defective installation Services shall be warranted for a period of /***/ or the remainder of the original Warranty Period whichever is longer. 8.2 Nortel shall provide Buyer with repair and replacement service for a minimum period of /***/ from the commencement date of this Product Attachment, subject to the condition that should Nortel discontinue manufacture of the Product or portions thereof prior to the _________________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N TRANSMISSION PRODUCT ATTACHMENT PAGE 5 OF 6 expiration of such /***/ period (such right of discontinuance being expressly reserved by Nortel), Nortel shall provide Buyer with a /***/ prior written notice of any discontinuance so as to enable Buyer to place an order for its requirements or to enter into any other mutually satisfactory agreement with Nortel prior to such discontinuance. This provision shall survive the expiration of this Product Attachment. 9. NOTICES ------- Pursuant to Section 18.5 of the NPPA, any notices by Buyer to Nortel that are specific to this Product Attachment shall be delivered to the following address: Northern Telecom Inc. 5405 Windward Parkway Alpharetta, Georgia 30004-3895 Attn: Vice President, Carrier Networks Facsimile: (770) 708-5565 with a copy to: Northern Telecom Inc. 5405 Windward Parkway Alpharetta, Georgia 30004-3895 Attn: Peter Farranto, Senior Counsel Facsimile: (770) 708-5272 10. ADDITIONAL TERMS ---------------- 10.1 Nortel may, from time to time, issue updates to the Software and, upon Buyer's payment of applicable Right to Use Fees or Software License Fees, if any, shall license these updates to Buyer. Nortel shall classify such updates as either: 1) /***/ ("ISUs"), /***/ or 2) /***/ ("Enhancements"). Updates to Software, classified as ISUs by Nortel, will be provided at no cost to Buyer. Notwithstanding the foregoing, ISUs and Enhancements shall not include the cost of /***/ that may be required to update such ISUs. Updates classified as Enhancements, which will be used by Buyer in its operations shall be made available to Buyer on a /***/ basis. In the event Nortel determines that the update includes both ISUs and Enhancements which will be used by Buyer in its operations, such update shall be made available to Buyer. If Buyer elects to receive the update, Nortel shall invoice Buyer only for the amount determined by Nortel to be attributed to the Enhancements contained in such update. 10.2 In order to allow Nortel to meet its delivery requirements, Buyer shall issue a forecast showing the specific types and quantities of Products to be released and the dates such Products will be released throughout the Product Attachment Term. Buyer shall update such forecasts quarterly with each forecast stating the specific types of Products and quantities of Products to be released during the next quarter. The initial forecast shall be ____________________ /***/ Confidential Information has been omitted and filed separately with the Securities and Exchange Commission. AGREEMENT NO. TCC9701N TRANSMISSION PRODUCT ATTACHMENT PAGE 6 OF 6 as set forth in Schedule D. In the event Buyer does not meet its obligation to update its forecast quarterly, then Nortel shall not be obligated to meet its forecasted delivery intervals as stated in Schedule C. Nortel's only obligation regarding such delivery intervals shall be to meet delivery dates set forth in an accepted Order. If Nortel, prior to acceptance of an Order, advises Buyer that it cannot meet a delivery date shown in an Order, both parties will negotiate a revised date prior to acceptance of the Order by Nortel. The installation and SLAT intervals applicable to an Order will be quoted by Nortel and agreed to by Buyer and Nortel prior to issuance of such Order. 10.3 If Nortel is providing Buyer with installation Services, Buyer shall be responsible for having all installation sites ready on time and in accordance with Nortel's requirements. Buyer shall be responsible for any expense incurred by Nortel as a result of Buyer's failure to meet the foregoing obligations. NORTHERN TELECOM INC. 21st CENTURY TELECOM GROUP, INC. By:______________________________ By:___________________________ (Signature) (Signature) Name:___________________________ Name:__________________________ (Print) (Print) Title:__________________________ Title:_________________________ Date:___________________________ Date:__________________________ EX-23.1 8 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTS As independent public accounts, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of the registration statement on Form S-4 for 21st Century Telecom Group, Inc., File Number 333-47235. /s/ --------------------------------------- ARTHUR ANDERSEN LLP Chicago, Illinois May 14, 1998 -----END PRIVACY-ENHANCED MESSAGE-----