Item 13 - Financial Statements
Registrant's financial statements are attached.
C O N T E N T S
Page
Independent Auditors' Report 1
Combined Balance Sheets 2 - 3
Combined Statements of Operations 4
Combined Statements of Shareholders' Equity 5 - 6
Combined Statements of Cash Flows 7
Notes to Combined Financial Statements 8 - 23
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
21st Century Telesis, Inc.
21st Century Telesis (II), Inc.
21st Century Telesis Joint Venture, and
21st Century Bidding Corporation
(Development Stage Companies)
Costa Mesa, California
We have audited the accompanying combined balance sheets of 21st Century
Telesis, Inc., 21st Century Telesis (II), Inc., 21st Century Telesis Joint
Venture, and 21st Century Bidding Corporation (development stage companies) as
of September 30, 1997 and 1996 and the related combined statements of
operations, stockholders' equity, and cash flows for years ended September 30,
1997, 1996, and 1995 and the period from inception, December 6, 1994, to
September 30, 1995 and 1997. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined 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 audits to
obtain reasonable assurance about whether the combined financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of 21st
Century Telesis, Inc., 21st Century Telesis (II), Inc., 21st Century Telesis
Joint Venture, and 21st Century Bidding Corporation (development stage
companies) as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for the years ended September 30, 1997 and 1996
and the period from inception, December 6, 1994, through September 30, 1995 and
1997 in conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Companies will continued as going concerns. As described in Note 8 to the
combined financial statements, in order to implement its business plan, the
Companies will require significant capital to meet its obligations to the FCC,
build out the PCS network infrastructure necessary to provide service, and to
provide working capital. These capital requirements raise a substantial doubt
about the Companies ability to continue as going concerns. Management's plans
in regard to this matter, which include raising additional capital through debt
offerings, are also described in Note 8. The combined financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ POSTLETHWAITE & NETTERVILLE, APAC
Baton Rouge, Louisiana
May 8, 1998
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
21ST CENTURY TELESIS JOINT VENTURE AND
21ST CENTURY BIDDING CORPORATION
(DEVELOPMENT STAGE COMPANIES)
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
A S S E T S
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
- ------------------------------------------------------------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,829,299 $ 5,447,791
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . 7,292 9,073
Note receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . 69,231 -
-----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 5,955,822 5,506,864
----------- -----------
FURNITURE AND EQUIPMENT
- ------------------------------------------------------------------
Net of accumulated depreciation of $55,226 and $24,519 . . . . . . 103,820 91,472
----------- -----------
OTHER ASSETS
- ------------------------------------------------------------------
PCS license costs, including capitalized interest (Notes 3 and 8) 84,971,202 72,039,183
Capitalized system development costs . . . . . . . . . . . . . . . 566,872 -
Deposit on PCS D and F block licenses. . . . . . . . . . . . . . . - 2,000,000
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,524 3,500
Organizational costs . . . . . . . . . . . . . . . . . . . . . . . 2,705 2,705
-----------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 85,552,303 74,045,388
----------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $91,611,945 $79,643,724
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
L I A B I L I T I E S
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
- ----------------------------------------------------------
Accounts payable and accrued expenses. . . . . . . . . . . $ 420,067 $ 413,714
Accrued interest - FCC currently payable . . . . . . . . . 398,323 233,040
Note payable, current portion. . . . . . . . . . . . . . . - 784,725
Due to stockholders (Note 6). . . . . . . . . . . . . . . - 174,104
------------
Total current liabilities. . . . . . . . . . . . . . . . . 818,390 1,605,583
------------ ------------
LONG-TERM DEBTS - less current maturities (Notes 2 and 3)
- ----------------------------------------------------------
Notes payable - Federal Communications Commission. . . . . 66,619,736 61,986,859
Accrued interest - FCC notes payable . . . . . . . . . . . 2,788,262 -
Note payable - Siemens Stromberg-Carlson . . . . . . . . . - 215,275
Total long-term debts. . . . . . . . . . . . . . . . . . . 69,407,998 62,202,134
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8). . . . . . . . . . - -
- ----------------------------------------------------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . 70,226,388 63,807,717
------------ ------------
S T O C K H O L D E R S' E Q U I T Y
- ----------------------------------------------------------
21st Century Telesis, Inc. (Notes 4 and 8)
Common stock - Series A, $.01 par value, 736,429
shares authorized, issued and outstanding. . . . . . . . . 7,364 7,364
Common stock - Series B, $.01 par value, 1,970,714 shares
authorized, 1,643,214 shares issued and outstanding. . . . - -
Preference stock, $.10 par value, 5,500,000 shares
authorized, 175,000 shares issued and outstanding. . . . . 17,500 17,500
21st Century Telesis (II), Inc. (Notes 4, 5 and 8)
Preference stock, $.10 par value, 5,500,000 shares
authorized, 2,571,328 and 1,886,802 shares
issued and outstanding, respectively . . . . . . . . . . . 257,133 188,680
Additional paid in capital . . . . . . . . . . . . . . . . 23,387,975 16,901,588
Deficit accumulated during the development stage . . . . . (2,284,415) (1,279,125)
------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . 21,385,557 15,836,007
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . $91,611,945 $79,643,724
============ ============
</TABLE>
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
COMBINED STATEMENTS OF OPERATIONS
---------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996 AND
---------------------------------------------------
FROM THE DATE OF INCEPTION, DECEMBER 6, 1994, TO SEPTEMBER 30, 1995 AND 1997
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Inception to Inception to
---------------
September 30, September 30, September 30, September 30,
---------------
1997 1996 1995 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . $ - $ - $ - $ -
- -------------------------------------- --------------- --------------- --------------- ---------------
- - - -
OPERATING EXPENSES
- --------------------------------------
Salaries . . . . . . . . . . . . . . . 563,665 389,904 278,643 1,232,212
Travel, meetings and conferences . . . 154,578 140,052 87,712 382,342
Legal and other professional services. 225,409 106,679 - 332,088
Interest expense . . . . . . . . . . . 49,186 42,523 212 91,921
Rent . . . . . . . . . . . . . . . . . 64,080 33,744 17,173 114,997
Telephone and utilities. . . . . . . . 17,414 30,939 19,673 68,026
Payroll taxes. . . . . . . . . . . . . 44,616 21,479 22,492 88,587
Office and other expenses. . . . . . . 125,827 149,548 26,673 302,048
1,244,775 914,868 452,578 2,612,221
--------------- --------------- --------------- ---------------
OTHER INCOME
- --------------------------------------
Interest income. . . . . . . . . . . . 239,485 69,084 19,237 327,806
--------------- --------------- --------------- ---------------
LOSS BEFORE PROVISION
- --------------------------------------
FOR INCOME TAXES . . . . . . . . . . . (1,005,290) (845,784) (433,341) (2,284,415)
- -------------------------------------- --------------- ---------------
Provision for income taxes (Note 7). . - - - -
--------------- --------------- --------------- ---------------
- - - -
NET LOSS . . . . . . . . . . . . . . . $ (1,005,290) $ (845,784) $ (433,341) $ (2,284,415)
- -------------------------------------- --------------- --------------- =============== ===============
21ST CENTURY TELESIS, INC.
- --------------------------------------
Basic and diluted loss per share . . . $ (0.12) $ (0.12) $ (0.14)
=============== =============== ===============
Weighted average shares outstanding. . 2,554,643 2,554,643 2,533,943
=============== =============== ===============
21ST CENTURY TELESIS (II), INC.. . . . -
- --------------------------------------
Basic and diluted loss per share . . . $ (0.30) $ (0.93) $ (2.60)
=============== =============== ===============
Weighted average shares outstanding. . 2,399,447 590,751 33,433
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
- -------------------------------------------------------------------------
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
PAGE 1 OF 2
-----------
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------
FROM THE DATE OF INCEPTION, DECEMBER 6, 1994, TO SEPTEMBER 30, 1997
-------------------------------------------------------------------
<TABLE>
<CAPTION>
21ST CENTURY TELESIS, INC.
--------------------------------
Common Stock Series A Common Stock Series B Preference Stock
-------------------------------- --------------------- -----------------
No. of No. of No. of
Shares Amount Shares Amount Shares Amount
- -------------------------------- --------------------- ----------------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Inception, December 6, 1994. . . - $ - - $ - - $ -
- - - - - -
Common stock Series A. . . . . . 736,429 7,364 - - - -
Common stock Series B issued
for services rendered . . . . - - 1,643,214 - - -
Preference stock issued for cash
at $5.00 per share . . . . . - - - - 175,000 17,500
Preference stock issued for cash
at $10.00 per share . . . . - - - - - -
Costs of raising equity. . . . . - - - - - -
Net loss . . . . . . . . . . . . - - - - - -
BALANCE, September 30, 1995. . . 736,429 7,364 1,643,214 - 175,000 17,500
Preference stock issued for cash
at $10.00 per share. . . . . - - - - - -
Preference stock issued for cash
at $9.00 per share . . . . . - - - - - -
Preference stock issued for cash
at $9.24 per share . . . . . - - - - - -
Costs of raising equity. . . . . - - - - - -
Net loss . . . . . . . . . . . . - - - - - -
BALANCE, September 30, 1996. . . 736,429 7,364 1,643,214 - 175,000 17,500
Preference stock issued for cash
at $10.00 per share. . . . . - - - - - -
Preference stock issued for cash
at $9.24 per share . . . . . - - - - - -
Preference stock issued for cash
at $10.77 per share. . . . . - - - - - -
Costs of raising equity. . . . . - - - - - -
Net loss . . . . . . . . . . . . - - - - - -
BALANCE, September 30, 1997. . . 736,429 $ 7,364 1,643,214 $ - 175,000 $17,500
===================== ================= ========= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
- -------------------------------------------------------------------------
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
PAGE 2 OF 2
-----------
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------
FROM THE DATE OF INCEPTION, DECEMBER 6, 1994, TO SEPTEMBER 30, 1997
-------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
21ST CENTURY TELESIS (II), INC. ACCUMULATED
Preference Stock ADDITIONAL DURING THE
- --------------------------------
No. of PAID IN DEVELOPMENT
Shares Amount CAPITAL STAGE TOTAL
---------------------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Inception, December 6, 1994. . . - $ - $ - $ - $ -
- - - - -
Common stock Series A. . . . . . - - 17,636 - 25,000
Common stock Series B issued
for services rendered . . . . - - - - -
Preference stock issued for cash
at $5.00 per share . . . . . - - 857,500 - 875,000
Preference stock issued for cash
at $10.00 per share . . . . 113,000 11,300 1,118,700 - 1,130,000
Costs of raising equity. . . . . - - (134,950) - (134,950)
Net loss . . . . . . . . . . . . - - - (433,341) (433,341)
BALANCE, September 30, 1995. . . 113,000 11,300 1,858,886 (433,341) 1,461,709
Preference stock issued for cash
at $10.00 per share. . . . . 784,695 78,470 7,768,480 - 7,846,950
Preference stock issued for cash
at $9.00 per share . . . . . 5,555 555 49,445 - 50,000
Preference stock issued for cash
at $9.24 per share . . . . . 983,552 98,355 8,989,663 - 9,088,018
Costs of raising equity. . . . . - - (1,764,886) - (1,764,886)
Net loss . . . . . . . . . . . . - - - (845,784) (845,784)
BALANCE, September 30, 1996. . . 1,886,802 188,680 16,901,588 (1,279,125) 15,836,007
Preference stock issued for cash
at $10.00 per share. . . . . 145,000 14,500 1,435,500 - 1,450,000
Preference stock issued for cash
at $9.24 per share . . . . . 86,329 8,633 788,064 - 796,697
Preference stock issued for cash
at $10.77 per share. . . . . 453,197 45,320 4,833,392 - 4,878,712
Costs of raising equity. . . . . - - (570,569) - (570,569)
Net loss . . . . . . . . . . . . - - . (1,005,290) (1,005,290)
BALANCE, September 30, 1997. . . 2,571,328 $ 257,133 $23,387,975 $(2,284,415) $21,385,557
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
- -------------------------------------------------------------------------
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
COMBINED STATEMENTS OF CASH FLOWS
---------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996 AND
---------------------------------------------------
FROM THE DATE OF INCEPTION, DECEMBER 6, 1994, TO SEPTEMBER 30, 1995 AND 1997
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Inception to Inception to
---------------
September 30, September 30, September 30, September 30,
---------------
1997 1996 1995 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- --------------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . $ (1,005,290) $ (845,784) $ (433,341) $ (2,284,415)
Adjustment to reconcile net loss to net cash
used by operating activities:
Depreciation expense . . . . . . . . . . . . . . . 30,707 21,984 2,535 55,226
Accrued interest receivable and prepaid expenses . (67,450) (9,073) - (76,523)
Increase in accounts payable and accrued expenses. (206,333) 279,525 134,188 207,380
---------------
Net cash used by operating activities. . . . . . . (1,248,366) (553,348) (296,618) (2,098,332)
--------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
- --------------------------------------------------
Payments for PCS licenses. . . . . . . . . . . . . (3,387,664) (11,819,284) - (15,206,948)
Payments for other capitalized system costs. . . . (312,119) - - (312,119)
Advanced on note receivable. . . . . . . . . . . . - (50,000) - (50,000)
Purchases of furniture and equipment . . . . . . . (43,055) (104,620) (11,370) (159,045)
Payment of organizational costs and other deposits (8,024) (4,055) (2,150) (14,229)
Net cash used by investing activities. . . . . . . (3,750,862) (11,977,959) (13,520) (15,742,341)
--------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
- --------------------------------------------------
Proceeds from issuance of common stock - Series A. - - 25,000 25,000
Proceeds from issuance of preference stock-
net of issuance costs . . . . . . . . . . . . . . 6,554,840 15,389,118 1,701,014 23,644,972
Advances from (repayments to) stockholder - net. . (174,104) 171,138 2,966 -
Proceeds from note payable . . . . . . . . . . . . - 1,000,000 - 1,000,000
Payments on note payable . . . . . . . . . . . . . (1,000,000) - - (1,000,000)
Net cash provided by financing activities. . . . . 5,380,736 16,560,256 1,728,980 23,669,972
--------------- --------------- --------------- ---------------
Net increase in cash . . . . . . . . . . . . . . . 381,508 4,028,949 1,418,842 5,829,299
Cash at beginning of period. . . . . . . . . . . . 5,447,791 1,418,842 - -
--------------- --------------- --------------- ---------------
Cash at end of period. . . . . . . . . . . . . . . $ 5,829,299 $ 5,447,791 $ 1,418,842 $ 5,829,299
=============== =============== =============== ===============
</TABLE>
See Note 1 i for supplemental cash flow information
- -----------------------------------------------------------
The accompanying notes are an integral part of these statements.
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
---------------------------------
A. NATURE OF BUSINESS
--------------------
21st Century Telesis, Inc. ("21st I") and 21st Century Telesis (II), Inc. ("21st
II") have been in the development stage since formation as Delaware corporations
on December 6, 1994, and January 5, 1995, respectively. The two corporations
were formed to participate in auctions by the Federal Communication Commission
("FCC") of licenses to provide Personal Communications Services ("PCS"), a new
telecommunications service.
In order to take advantage of certain bidding preferences granted by the FCC to
"designated entities" (qualifying small businesses, woman/minority owned
businesses and independent telephone companies), 21st I and 21st II thereafter
formed 21st Century Telesis Joint Venture ("21st JV") under the general
partnership law of Delaware, to serve as the entity that would participate in
the FCC auction and build and operate PCS systems under any licenses won at the
FCC auction. Under the terms of the Joint Venture Agreement, which was executed
as of January 23, 1995, 21st I controls and manages 21st JV, for which services
it is reimbursed for all its direct and indirect costs. Profits, gains and
losses of the 21st JV are to be distributed 30% to 21st I and 70% to 21st II.
In the first FCC auction reserved to designated entities, for 30 MHz C block PCS
licenses, the 21st JV obtained a total of 17 C block PCS licenses out of the 493
awarded, with total net winning bids of $98,192,838; of this total, $9,819,284
was paid in cash by the 21st JV, as required by the FCC.
Thereafter, the 21st JV formed a wholly owned Delaware subsidiary, 21st Century
Bidding Corporation (21st BC), to participate in the FCC auctions for 10 MHz D
and F block PCS licenses. On January 15, 1997, the FCC announced that 21st BC
was the high bidder for 2 D and 8 F block PCS licenses, with total net winning
bids of $5,649,930; of this total, $2,019,483 was paid in cash by 21st BC, as
required by the FCC.
The Companies' PCS licenses and intended areas of operations include certain
market areas within Indiana, Mississippi, Nebraska, and New York. The Companies
are in the development stage and, to date, have devoted substantially all of
their efforts to developing their business strategy, raising capital, and
designing and developing their wireless network. Accordingly, the Companies have
recognized no operating revenues and have incurred, and expect to continue to
incur, operating losses and cash flow deficits.
B. PRINCIPLES OF COMBINATION
---------------------------
The accompanying combined financial statements reflect the combination of the
individual financial statements of 21st I, 21st II, 21st JV, and 21st BC
(collectively referred to as "the Companies"). These Companies are under common
control of 21st I, as described in Note 1a above, are under common management,
and engage in similar operating activities. Combination of the individual
financial statements provides a more meaningful financial presentation than
would the individual statements shown separately. Intercompany transactions and
balances have been eliminated in these combined financial statements.
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
---------------------------------
C. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
-------------------------------------------------------------------
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
D. PCS LICENSE COSTS AND CAPITALIZED SYSTEM DEVELOPMENT COSTS
-----------------------------------------------------------------
License costs represent the cost of the C, D, and F block PCS licenses granted
by the FCC. The PCS licenses financed by the FCC under favorable financing
terms are accounted for in accordance with industry practice at the net present
value of the debt obligations assumed plus any cash paid for the respective
licenses. Interest related to debt pertaining to each PCS license is capitalized
until that license is placed in service. Amortization of the capitalized costs
related to each license will commence when that license is placed in service and
will be computed on a straight-line basis over a period not to exceed forty (40)
years.
On September 17, 1996 21st JV acquired 17 C block PCS licenses from the FCC for
an aggregate price of $98,192,838, net of bidding credits. As a designated
entity, 21st JV received bidding credits equal to 25% of the gross bid price of
the licenses. The Company paid $9,819,284 in cash and financed the remaining
90%, or $88,373,554, with the FCC at an interest rate of 7.0% as described in
Note 3. The C block licenses are recorded at the net present value of these
payments, or $71,748,460, using an estimated borrowing cost for debt similar to
that issued by the FCC of 13%. 21st JV capitalized interest costs, $8,453,867
and $290,723 at September 30, 1997 and 1996, respectively, related to the
acquisition of the C block PCS licenses while activities are in process to ready
the licenses for their intended use.
On January 15, 1997 21st BC acquired 2 D block PCS licenses from the FCC for an
aggregate price paid in cash of $1,111,871. 21st BC also acquired 8 F block PCS
licenses from the FCC on this date for an aggregate price of $4,538,059. 21st
BC paid $907,612 in cash and financed the remaining balance of $3,630,447 with
the FCC at an interest rate of 6.25% as described in Note 2. The F block PCS
licenses are recorded at the net present value of these payments, or $3,515,181,
using an estimated borrowing cost of 13%. 21st BC has capitalized interest
costs of $141,822 at September 30, 1997 related to the F block PCS licenses.
As more fully described in Note 3, the FCC has announced that C block licensees,
including the Companies, may elect various options that, depending on the
Companies' election, could significantly affect the carrying values of the
licenses reflected in these financial statements.
1.
<PAGE>
SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------
D. PCS LICENSE COSTS AND CAPITALIZED SYSTEM DEVELOPMENT COSTS (continued)
- -- ------------------------------------------------------------
Management periodically reviews the values assigned to the PCS licenses to
determine whether any impairments are other than temporary. This assessment is
based on the undiscounted future cash flows from operating activities compared
to the carrying value of the related assets. In performing this analysis,
management considers such factors as current business plans, trends and
prospects, and other economic factors. An impairment loss would be recognized
when the sum of the expected future net cash flows is less than the carrying
amount of the asset. The Companies also record long-lived assets for which
management has committed to a plan to dispose of assets at the lower of the
carrying value or fair value less the cost to dispose of the asset. Management
believes that the PCS licenses in the accompanying combined financial statements
are appropriately valued although the uncertainties described in the previous
paragraph and in Notes 3 and 7 could have a significant affect on this
evaluation in the near future.
Costs incurred related to the design and development of the PCS System have been
capitalized and will be amortized as a component of the PCS system when placed
in service.
E. FURNITURE, EQUIPMENT AND DEPRECIATION
----------------------------------------
Furniture and equipment are recorded at cost and will be depreciated over their
estimated useful lives of 5 years on a straight-line basis.
F. ORGANIZATIONAL COSTS
---------------------
The Companies have incurred various costs associated with the formation of the
Companies. These costs have been capitalized in these combined financial
statements and are to be amortized on a straight-line basis over a period of
five years once operations commence.
G. CAPITAL STOCK
--------------
21st I and 21st II have issued capital stock and incurred various costs, such as
brokerage commissions, legal and other related costs, which are deducted from
additional paid in capital of the related stock.
H. INCOME TAXES
-------------
The Companies file separate income tax returns. Provisions for income taxes are
based on income taxes payable for the current year and deferred taxes on
temporary differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed in FASB
Statement No. 109, Accounting for Income Taxes. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
---------------------------------
I. STATEMENTS OF CASH FLOWS
---------------------------
The Companies consider all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Supplemental
disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Inception to Inception to
September 30, September 30, September 30, September 30,
1997 1996 1995 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash paid for interest. . . . $ 3,183,906 $ 457 $ 212 $ 3,184,575
Cash paid for income taxes. . 4,115 4,820 - 8,935
Non-cash investing and
Financing activities:
Liabilities incurred for
acquisition of PCS licenses 2,607,569 61,929,176 - 64,536,745
Common stock issued in
exchange for origination
costs paid by stockholder . - - 20,000 20,000
</TABLE>
J. FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
The Companies' financial instruments consist primarily of cash, note receivable,
trade payables and debt instruments. The book value of these instruments are
considered to be their respective fair value. The determination of the book
value of the FCC note obligations, which have not quoted market price, is
discussed at Note 3.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
---------------------------------
K. EARNINGS PER SHARE
--------------------
The combined financial statements are presented in accordance with Statement on
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Basic EPS
is completed using the weighted average number of shares outstanding during each
period. Diluted EPS gives the effect of the potential dilution of earnings
which may have occurred if dilutive potential shares had been issued. Since the
Companies incurred net losses, both basic and diluted earnings per share are the
same amount. Options, warrants and commitments to issue capital stock have been
excluded from the computation of diluted net loss per share as the effect of
their inclusion would have been anti-dilutive.
The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computations shown on the combined statements of
operations:
<TABLE>
<CAPTION>
Years ended September 30, Inception to
1997 1996 September 30, 1995
--------------------------- -------------- --------------------
<S> <C> <C> <C>
21st Century Telesis, Inc.
- ----------------------------------
Numerator: Net loss . . . . . . ($296,735) ($295,066) ($346,347)
=========================== ============== ====================
Denominator: Shares outstanding
Common stock - Series A. . . . $ 736,429 $ 736,429 $ 736,429
Common stock - Series B. . . . 1,643,214 1,643,214 1,641,014
Preference stock . . . . . . . 175,000 175,000 156,500
--------------------------- -------------- --------------------
$ 2,554,643 $ 2,554,643 $ 2,533,943
=========================== ============== ====================
Basic and diluted EPS. . . . . . ($.12) ($.12) ($.14)
=========================== ============== ====================
21st Century Telesis II, Inc.
- ----------------------------------
Numerator: Net loss . . . . . . ($708,555) ($550,718) ($86,994)
=========================== ============== ====================
Denominator:
Preference shares outstanding. $ 2,399,447 $ 590,751 $ 33,433
=========================== ============== ====================
Basic and diluted EPS. . . . . . ($.30) ($.93) ($2.60)
=========================== ============== ====================
</TABLE>
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
---------------------------------
L. RECENT ACCOUNTING STANDARDS
-----------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 30
"Reporting Comprehensive Income". This statement establishes standards for
reporting of comprehensive income and its components in financial statements.
Comprehensive income is the total of net income and all other nonowner changes
in equity. The Companies are required to adopt SFAS No. 130 no later than the
fiscal year ended September 30, 1999. Reclassification of comparative financial
statements provided for earlier periods will be required. The Companies believe
that the display of comprehensive income will not differ materially from the
currently reported net loss attributable to stockholders.
2. NOTE PAYABLE
-------------
<TABLE>
<CAPTION>
At September 30, 1997 and 1996, note payable consisted of:
1997 1996
----- -----------
<S> <C> <C>
Note payable to Siemens Stromberg-Carlson, due in five quarterly
installments, commencing October 31, 1996, and any remaining
balance due on October 31, 1997. The note was unsecured with
interest at 10.59%. The note was paid in full in 1997.. . . . . . $ - $1,000,000
Less: Current portion . . . . . . . . . . . . . . . . . . . . . - (784,725)
----- -----------
Note payable due after one year. . . . . . . . . . . . . . . . . . $ - $ 215,275
===== ===========
</TABLE>
3. FCC LICENSE OBLIGATIONS
-------------------------
Pursuant to the successful bid for 17 C block PCS licenses, 21st JV entered into
17 notes payable to the Federal Communications Commission (FCC) dated September
17, 1996 totaling $88,373,554. The original terms of the notes require interest
at a rate of 7.0% per annum due in quarterly interest payments of $1,546,537
through September 30, 2002. Commencing December 31, 2002, quarterly principal
and interest payments of $6,380,533 are required with any unpaid balances due on
September 17, 2006. Each note is secured by the respective PCS C block license.
In accordance with industry practices, the C block license notes were recorded
at $61,929,027 which represents the net present value of these payments based on
the Companies' estimate of borrowing costs of 13% for debt similar to that
issued by the FCC.
<PAGE>
3. FCC LICENSE OBLIGATIONS (continued)
-------------------------
Pursuant to the successful bid for 8 F block PCS licenses, 21st BC entered into
8 notes payable to the FCC dated April 28, 1997 totaling $3,630,447. The
original terms of the notes require interest at a rate of 6.25% per annum due
quarterly from July 28, 1997 through April 28, 1999 in the amount of $56,726.
Commencing July 28, 1999, quarterly principal and interest payments of $145,034
are required with any unpaid balances due on April 28, 2007. Each note is
secured by the respective PCS F block license. Similar to the C block licenses,
the F block license notes are recorded at $2,607,569 which represents the net
present value of these payments based on the Company's estimated borrowing cost
of 13% for similar debt.
The difference in the net present value of the C and F block license notes and
the stated amount of these debts represents the amount of discount recorded for
both the notes payable and the related licenses. The discounts recorded for
both the C and the F block PCS license note payables are being amortized to
interest costs and capitalized as a part of the license costs until the licenses
are placed in service. During the years ended September 30, 1997 and 1996, the
Companies capitalized $8,304,966 and $290,723, respectively, as interest costs
which included $2,025,307 and $57,683, respectively, of discount amortization
during each year. Since inception the Companies have capitalized $8,595,689 as
interest costs, including $2,082,990 of discount amortization.
The C and F block license notes require future payments during each of the years
ending September 30: none in 1998; $88,308 in 1999; $367,249 in 2000; $390,746
in 2001; $415,746 in 2002; and $90,741,952 thereafter.
In March 1997, the FCC issued an order suspending quarterly interest payments
due under the C block license notes for an indefinite period of time. In April
1997, the FCC issued a similar interest payment suspension order for the F block
license notes. The interest under these note obligations continues to accrue
and has been recorded in these financial statements as accrued interest payable.
On March 24, 1998, the FCC issued an order requiring licensee to resume payment
of interest on C and F block license notes along with payment of the interest
accrued during the interest payment suspension period in eight equal quarterly
installments commencing July 30, 1998. Accrued interest for these notes through
September 30, 1997 has been classified in accordance with these repayment terms.
The same FCC order also outlines three means by which licensees might reduce the
debt they owe to the FCC on their C block licenses:
1. Disaggregation. A licensee can elect to return one-half of its
spectrum (15 MHz of its 30 MHz) and surrender such spectrum to the FCC for
reauction for a 50% reduction in the respective license debt. A licensee must
disaggregate spectrum for all of the Basic Trading Area licenses it holds within
any Major Trading Area (MTA), but need not disaggregate the licenses it holds in
other MTAs. The licensee will be prohibited from bidding for this spectrum, or
otherwise acquiring it in the secondary market, for two years from the date of
the start of the reauction. Licensees electing this option will repay in eight
equal quarterly installments, beginning with the payment due in July, 1998, all
interest that was accrued during the suspension period, adjusted to reflect the
reduction in debt obligations. Disaggregation may be combined with the
prepayment option described below.
<PAGE>
3. FCC LICENSE OBLIGATONS (continued)
------------------------
Fifty percent of the down payment of such licenses is considered a
down payment for the retained 15 MHz, and 20% of the original down payment may,
at the licensee's option, be applied either to interest accrued during the
suspension period or as a reduction of outstanding principal.
2. Amnesty. A licensee can elect to surrender all licenses within a
given MTA, and in return will have the corresponding C block debt forgiven. The
down payment for surrendered C block licenses will be, at the licensee's option,
(a) forfeited, and the licensee will remain eligible to bid in the reauction of
its returned licenses or (b) subject to the seventy percent credit and the
licensee will forego eligibility to reacquire the subject licenses for a period
of two years from the date the reauction begins. The seventy percent credit
must be applied toward prepayment of the entire principal amount owed for a
retained MTA with 30MHz licenses and/or toward prepayment of the entire
principal owed for retained 15 MHz licenses in a disaggregated MTA.
3. Prepayment. A licensee can elect to purchase any of its licenses by
prepaying the license note at the face value of the note. All licenses within
any single MTA must be purchased under this option. In addition, a licensee can
use 70% of its total down payments on surrendered licenses as credit towards the
prepayment of any of the licenses it elects to purchase. The licensee may not
rebid in the reauction for any of the licenses surrendered, and is prohibited
from acquiring surrendered licenses in the secondary market for a period of two
years. As noted above, disaggregation may be combined with prepayment.
The licensees may choose different options for different licenses. Action on
any of these three options must be taken by June 8, 1998. The Companies are
evaluating these alternatives from financial, strategic and economic
standpoints, and are also evaluating the alternative of maintaining all their
current licenses intact.
4. CAPITAL STOCK
--------------
21st I has the authority to issue common stock (Series A and Series B) and
preference stock. All such shares are entitled to one vote per share. Until
June 30, 1996, Series A common stock and preference stock carried preferences as
to liquidating distributions, equal in amount to the original subscription price
of the shares. Such preferences lapsed by their own terms after that date, and
any subsequent distributions will be pro rata as to all classes and series of
the corporation's capital stock.
21st I issued 1,621,214 shares of common stock Series B on December 15, 1994 to
eight individuals for services provided prior to, and as part of the formation
of 21st I. 21st I also issued 22,000 shares of common stock Series B on January
30, 1995 to two preference stockholders in consideration for their preference
stock investment and to a third party in consideration of services rendered. No
value has been assigned to the Series B shares issued for non-cash consideration
due to the lack of an objective valuation.
<PAGE>
4. CAPITAL STOCK (continued)
--------------
21st II also has common and preference stock. All of the corporation's
authorized common stock, 100 shares, is owned by 21st I; such shares have been
eliminated in these combined financial statements. At September 30, 1997 and
1996, 21st II had issued 1,864,193 shares of its preference stock to investors.
Earlier preferences as to liquidating distributions and weighted voting rights
lapsed by their own terms on June 30, 1996, and each share of the corporation's
common and preference stock now participates equally in any distributions and is
entitled to one vote.
In order to comply with certain FCC requirements applicable to the licenses held
by the 21st JV (see Notes 1a and 8), both 21st I or 21st II are authorized to
redeem shares of their preference stock at their original issue prices to ensure
that no single affiliated group of investors (other than the founding
stockholders of 21st I) owns more than 25% of the total outstanding capital
stock of the two corporations.
5. CAPITAL STOCK OPTIONS AND WARRANTS
--------------------------------------
21st II granted an option to PCS Communications, LLC to purchase 400,000 shares
of 21st II's preference stock for a cash price of $10.75 per share. The number
of shares subject to this option was subsequently informally increased and
during the year ended September 30, 1997, PCS Communications, LLC paid
$4,878,712 pursuant to the stock option agreement to 21st II for 430,537
preference shares which were issued subsequent to September 30, 1997.
21st II has from time to time approved the grant of warrants to individuals to
purchase shares of 21st II preference shares at an exercise price of $10.00 per
share. During the years ended September 30, 1997 and 1996, 21st II approved the
grant of 94,600 and 48,420, respectively, warrants as compensation for certain
broker services. Management issued 120,300 of such warrants during February and
March 1998. These warrants are exercisable for 10 years from the date of
issuance at an exercise price of $10.00 per preference share of 21st II.
Management expects to issue more warrants in connection with prior services and
the future sale of 21 II capital stock. No warrants were issued, forfeited, or
exercised through September 30, 1997.
6. RELATED PARTY TRANSACTIONS
----------------------------
The Companies owed a stockholder and officer $174,104 at September 30, 1996 for
expenses paid on behalf of the Companies. These amounts were repaid, without
interest, during the year ended September 30, 1997.
The 21st JV has retained an engineering firm owned by a stockholder and officer
to provide telecommunications engineering service in connection with the design
and build-out of the Joint Venture's markets. During the year ended September
30, 1997, the Companies paid $227,170 and owed approximately $254,752 at
September 30, 1997 to this firm for services rendered. The majority of these
costs have been capitalized as network design and development costs.
<PAGE>
6. RELATED PARTY TRANSACTIONS (continued)
----------------------------
The Companies paid $436,959 and $1,010,044 in consulting fees and finder fees to
Aventine, Inc., a corporation controlled by two stockholders and directors of
21st I in connection with the sale of shares of 21st II during the years ended
September 30, 1997 and 1996, respectively. The Companies also owed Aventine
$48,063 for such fees at September 30, 1997. Aventine, Inc. controls a NASD
broker-dealer that participated in such sales. Aventine, Inc. paid salaries to
three stockholders and directors of 21st I.
The Companies entered into a commitment to offer the opportunity to a
stockholder and director to build and manage the PCS network in one of the
Companies' license areas. The Company also entered into a commitment with a
stockholder and director for consulting services to be provided pursuant to
developing another of the Companies'PCS market areas.
There has been no development to date in these PCS license areas or payments
made pursuant to these commitments.
7. PROVISION FOR INCOME TAXES
-----------------------------
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Inception to
September 30, 1997 September 30, 1996 September 30, 1995
-------------------- -------------------------------------------- --------------------
<S> <C> <C> <C>
Current tax expense. ($6,815) $ 6,815 $ -
provision. . . . . . (292,895) (279,245) (160,320)
-------------------- -------------------------------------------- --------------------
(299,710) (272,430) (160,320)
Change in valuation
Allowance . . . . . 299,710 272,430 160,320
-------------------- -------------------------------------------- --------------------
Income tax expense . . $ - $ - $ -
==================== ============================================ ====================
Inception to
September 30, 1997
--------------------
<S> <C>
Current tax expense. $ -
Deferred tax (benefit)
provision. . . . . . (732,460)
--------------------
(732,460)
Change in valuation
Allowance . . . . . 732,460
--------------------
Income tax expense . . $ -
====================
</TABLE>
<PAGE>
7. PROVISION FOR INCOME TAXES (continued)
-----------------------------
The combined provision for income taxes differs from the provision computed at
the statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
Year ended Year ended Inception to
September 30, 1997 September 30, 1996 September 30, 1995
-------------------- -------------------------------------------- --------------------
<S> <C> <C> <C>
Net loss before income taxes ($1,005,290) ($845,784) ($433,341)
==================== ============================================ ====================
Income tax at statutory rates. (341,799) (287,567) (147,336)
Non-deductible expenses. . . . 42,089 15,137 (12,984)
State income taxes . . . . . . - - -
Change in valuation allowance. 299,710 272,430 160,320
-------------------- -------------------------------------------- --------------------
Income tax expense . . . . . . $ - $ - $ -
==================== ============================================ ====================
Inception to
September 30, 1997
--------------------
<S> <C>
Net loss before income taxes ($2,284,415)
====================
Income tax at statutory rates. (776,702)
Non-deductible expenses. . . . 44,242
State income taxes . . . . . . -
Change in valuation allowance. 732,460
--------------------
Income tax expense . . . . . . $ -
====================
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes based on
currently enacted tax laws and regulations. The components of net deferred tax
assets at September 30, 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred pre-operating and
developmental costs. . . . $ 719,400 $ 297,750 $ 153,650
Net operating loss
carryforwards. . . . . . . 2,116,360 214,200 6,670
------------ ---------- ----------
2,835,760 511,950 160,320
Less: valuation allowance. . (732,460) (432,750) (160,320)
------------ ---------- ----------
2,103,300 79,200 -
Deferred tax liabilities:
Tax deduction of capitalized
Interest . . . . . . . . . (2,103,300) (79,200) -
------------ ---------- ----------
Net deferred tax asset . . . . $ - $ - $ -
============ ========== ==========
</TABLE>
A valuation allowance has been recorded against the deferred income tax asset
due to the uncertainty of realization of these assets at September 30, 1997,
1996, and 1995. The valuation allowance will be reduced at such time as
management believes it is more likely than not that the related net deferred tax
assets will be realized. The Companies have combined net operating loss
carryforwards of approximately $5,970,000 which may be available to offset
future taxable income.
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
-------------------------------
Capital Stock
21st I has agreed with its preference stockholders that if 21st I or 21st II
subsequently issues preference shares at a price lower than $10 per share, all
21st I shareholders who purchased preference shares at $5 per share will be
given an opportunity to purchase additional preference shares at par value
($.10) to reduce their average acquisition cost per share to an amount equal to
50% of any subsequent preference share offering at less than $10 per share.
During 1997, 21st II issued preference shares at amounts less than $10 per
share. Accordingly, at September 30, 1997 21st I was obligated to issue 19,886
shares of its preference shares at par value ($ .10).
FCC Control Requirements
As a qualifying small business with an identified control group (certain of the
founding stockholders of 21st I), the 21st JV benefited from bidding credits and
installment financing in the FCC's C and F block auctions. The 21st JV must
continue to comply with applicable FCC small business criteria for the initial
10-year term of the licenses; failure to do so will result in an immediate
requirement to pay the unpaid balance of the license fees in cash and to refund
the bidding credits, plus interest thereon. With FCC approval, the C and F
block licenses owned by the 21st JV may be transferred at any time to another
entity that qualifies under the FCC small business criteria. Transfers to
non-qualifying transferees are prohibited during the first five years after
license award; non-qualifying transfers from the sixth year after license award
through tenth and final year of the initial license term require the cash
payment of the unpaid balance of the license fees and the refund of the bidding
credits, plus interest thereon.
FCC Build-out Requirement
All PCS license holders are required to meet certain requirements imposed by the
FCC relating to the provision of service in each license area. C block license
holders must provide coverage to one-third of the population in each license
service area within five years of license grant and two-thirds of the population
in each license service area within ten years of license grant. F block
license holders must provide coverage to one-quarter of the population in each
license service area within five years of license grant, or make a showing of
substantial service in their license area within five years of being licensed.
Failure to comply with the build-out requirements could subject 21st JV to
license forfeiture or other penalties, and may have a material adverse effect on
the financial condition of 21st JV.
PCS Network Build-out and Development
Management of the Companies is negotiating with equipment vendors to acquire,
install and maintain PCS network equipment in the operating areas represented by
its PCS licenses. Related thereto, the Companies have entered into a contract
with Hughes Network Systems for the design and installation of PCS equipment
throughout the Companies' operating regions. The contract is subject the
ability of the Company to obtain satisfactory financing for the network
development. The Company will substantially rely on and be dependent upon this
equipment supplier and other suppliers to install and make operational the
equipment and technology necessary for the Companies' PCS network.
<PAGE>
8. COMMITMENTS AND CONTINGENCIES (continued)
-------------------------------
FCC Network Build-out and Development (continued)
The development of the infrastructure necessary to offer PCS services is subject
to delays and risks, including those inherent in the general uncertainty
associated with design, acquisition, installation and construction of wireless
telephone systems. The successful development of the licenses also depends on
the Companies' ability to lease or acquire sites for the location of equipment,
some of which may be subject to zoning or other regulatory approvals which are
beyond the Companies' control. Delays in the site acquisition process, as well
as in the acquisition of equipment or in construction, could adversely affect
the timing for build-out of the Companies' licenses.
The Companies will require substantial amounts of additional capital to design,
develop and build their PCS network, meet their FCC license debt service
requirements and provide for their continuing working capital needs. The
Companies are exploring the availability of financing in the amount of $550 to
$600 million, to be raised in the form of a debt offering backed by equipment
lease with partial lease payment guarantees by prospective equipment vendors and
with credit enhancement insurance. As previously described, the Companies have
signed a contract with a major supplier of wireless communications equipment to
provide and install the PCS network for the Companies' 27 markets; as part of
that understanding, the supplier has agreed, in principle, to provide the vendor
guarantees necessary for the proposed debt financing. The supplier's obligation
is subject to a number of contingencies, including the successful closing of the
debt financing. Although no assurances can be offered, management believes that
the Companies will be successful in finalizing these financing arrangements,
which will permit the timely build-out of its PCS systems and provide necessary
working capital and debt service capital.
Leases
The Companies are obligated under various long-term operating leases for office
space which expire at various dates through 2007. The leases provide from
minimum annual rentals plus certain payments for property operating expenses and
property taxes and include certain renewal options. Future minimum lease
commitments under noncancellable operating leases are as follows for each of the
years ending September 30:
1998 $ 145,975
1999 145,975
2000 147,536
2001 164,699
2002 155,114
Thereafter 245,246
-------------
Total minimum lease commitments $ 1,004,545
============
<PAGE>
8. COMMITMENTS AND CONTINGENCIES (continued)
-------------------------------
Other
The Companies had amounts on deposit with financial institutions in excess of
federally insured limits totaling $5,685,198 at September 30, 1997.
Uncertainties Regarding Future Operations
The Companies are developmental companies which have incurred net losses since
inception and expect to continue to experience net losses and cash flow
deficiencies from operations. In order to implement its business plan,
significant capital will be required to meet the FCC debt obligations, design
and build out the PCS network infrastructure necessary to provide services, meet
operating costs and working capital needs, and to market and promote the
Companies' services.
Uncertainties Regarding Future Operations (continued)
The Companies currently have 17 C block PCS licenses which have been financed by
the FCC. As described in Note 3, the FCC has given C block licenses the option
of returning entire licenses or a portion of their licensed spectrum. This
election must be made no later than June 8, 1998.
As described above in "PCS Network Build-out and Development," the Companies are
exploring debt financing in the range of $550 to $600 million, which would be
sufficient to permit development to operational status of all 27 of the
Companies' markets. If the prospects of securing such financing diminish, or if
such financing proves unavailable by the June 8, 1998 election date, the
Companies may elect to return licenses or spectrum. A decision by the Companies
to return licenses would reduce the number of markets in which the Companies
would be authorized to offer PCS services, and would therefore adversely affect
prospects for future growth. Management believes a decision to return spectrum
would not affect near-term growth, since retained spectrum would be sufficient
to support voice telephone operations at anticipated levels of market
penetration for several years, but might constrain the Companies' long-term
competitive ability to offer other services, such as certain kinds of high-speed
data transfer, video telephone services, etc. In either case, these limitations
on future growth would be the price paid for the benefit of a substantial
reduction in the Companies' near term capital needs and infrastructure capital
costs. It is not clear what affect, if any, the return of licenses or spectrum
would have on the Companies' long-term ability to raise additional capital.
9. 21ST CENTURY TELESIS (II), INC.
-----------------------------------
As described in Note 1b., the combined financial statements included in the
financial statements of 21st Century Telesis (II), Inc. The condensed balance
sheets, condensed statements of operation, and condensed statements of cash
flows for 21st II are presented below:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
--------------- ---------------
Condensed Balance Sheet
- --------------------------------------------------
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . $ 5,784,144 $ 5,329,268
Interest receivable. . . . . . . . . . . . . . . - 6,781
Investment in 21st Century Joint Venture . . . . 18,886,765 10,478,407
Organizational costs . . . . . . . . . . . . . . 1,400 1,400
--------------- ---------------
$ 24,672,309 $ 15,815,856
=============== ===============
Accounts payable and accrued expenses. . . . . . $ 72,058 $ 237,436
Due to 21st Century Joint Venture. . . . . . . . 3,175,546 -
--------------- ---------------
3,247,604 237,436
--------------- ---------------
Common stock . . . . . . . . . . . . . . . . . . 1,000 1,000
Preference stock 257,13 188,680
Additional paid-in capital . . . . . . . . . . . 22,512,839 16,026,452
Deficit accumulated during the development stage (1,346,267) ( 637,712)
--------------- ---------------
$ 24,672,309 $ 15,815,856
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Year ended Year ended Inception to Inception to
September 30, September 30, September 30, September 30,
1997 1996 1995 1997
--------------- --------------- --------------- ---------------
Condensed Statement of Operations
- --------------------------------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $ - $ - $ - $ -
Loss from unconsolidated affiliate 849,942 351,593 - 1,201,535
Management fee to 21st I . . . . . - 240,000 94,000 334,000
Miscellaneous expense. . . . . . . 17,339 21,833 30 39,202
--------------- --------------- --------------- ---------------
867,281 613,426 94,030 1,574,737
Interest income. . . . . . . . . . 158,726 62,708 7,036 228,470
--------------- --------------- --------------- ---------------
($708,555) ($550,718) ($86,994) ($1,346,267)
=============== =============== =============== ===============
</TABLE>
9. 21ST CENTURY TELESIS (II), INC. (continued)
=======-----------------------------------
<TABLE>
<CAPTION>
Year ended Year ended Inception to Inception to
September 30, September 30, September 30, September 30,
1997 1996 1995 1997
--------------- --------------- --------------- ---------------
Condensed Statement of Cash Flows
- -----------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net losses. . . . . . . . . . . . . ($708,555) ($550,718) ($86,994) ($1,346,267)
Losses from 21st JV . . . . . . . . 849,942 351,593 - 1,201,535
Changes in operating assets
and liabilities . . . . . . . . . (158,597) 229,635 (380) 70,658
--------------- --------------- --------------- ---------------
(17,210) 30,510 (87,374) (74,074)
Cash flows from investing activities:
Investments in 21st JV. . . . . . . (6,082,754) (10,830,000) - (16,912,754)
Cash flows from financing activities:
Proceeds from issuance of stock . . 6,554,840 15,198,552 1,017,580 22,770,972
--------------- --------------- --------------- ---------------
Net change in cash. . . . . . . . . . 454,876 4,399,662 930,206 5,784,144
Cash at beginning of year . . . . . . 5,329,268 930,206 - -
--------------- --------------- --------------- ---------------
Cash at end of year . . . . . . . . . $ 5,784,144 $ 5,329,268 $ 930,206 $ 5,784,144
=============== =============== =============== ===============
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm and to the use of our report dated May
8, 1998 with respect to the combined financial statements of 21st Century
Telesis, Inc., 21st Century Telesis (II), Inc., 21st Century Telesis Joint
Venture and 21st Century Bidding Corporation included in this Form 10 for the
registration of 21st Century Telesis (II), Inc.'s preference stock.
/s/ POSTLETHWAITE & NETTERVILLE, APAC
Baton Rouge, Louisiana
December 30, 1998
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
21ST CENTURY BIDDING CORPORATION
(DEVELOPMENT STAGE COMPANIES)
CONDENSED COMBINED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
A S S E T S
1998 1997
----------- -----------
CURRENT ASSETS
- -------------------------------------------------
<S> <C> <C>
Cash. . . . . . . . . . . . . . . . . . . . . . . $ 3,783,008 $ 5,742,270
Accrued interest receivable . . . . . . . . . . . 19,591 6,042
Note receivable . . . . . . . . . . . . . . . . . 50,000 50,000
Prepaid expenses. . . . . . . . . . . . . . . . . 11,042 51,388
Total current assets . . . . . . . . . . . . . 3,863,641 5,849,700
----------- -----------
FURNITURE AND EQUIPMENT
- -------------------------------------------------
Net of accumulated depreciation . . . . . . . . . 120,000 107,765
----------- -----------
OTHER ASSETS
- -------------------------------------------------
PCS license costs, including capitalized interest 48,413,122 81,744,502
Capitalized system development costs. . . . . . . 716,872 321,170
Deposits. . . . . . . . . . . . . . . . . . . . . 11,524 3,500
Organizational costs. . . . . . . . . . . . . . . 2,705 2,705
Total other assets. . . . . . . . . . . . . . . . 49,144,223 82,071,877
----------- -----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . $53,127,864 $88,029,342
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
L I A B I L I T I E S
<TABLE>
<CAPTION>
1998 1997
------------ ------------
CURRENT LIABILITIES
- ---------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses . . . . . . . . . . $ 79,276 $ 399,161
Accrued interest - FCC currently payable. . . . . . . . . 444,875 -
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . 524,151 399,161
------------ ------------
LONG-TERM DEBTS - less current maturities
- ---------------------------------------------------------
Notes payable - Federal Communications Commission . . . . 35,749,150 62,949,175
Accrued interest - FCC notes payable. . . . . . . . . . . - 3,630,447
Total long-term debts . . . . . . . . . . . . . . . . . . 35,749,150 66,579,622
------------ ------------
COMMITMENTS AND CONTINGENCIES . . . . . . . . . . . . . . - -
- ---------------------------------------------------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . 36,273,301 66,978,783
------------ ------------
S T O C K H O L D E R S' E Q U I T Y
- ---------------------------------------------------------
21st Century Telesis, Inc.
Common stock - Series A, $.01 par value, 736,429
shares authorized, issued and outstanding . . . . . . . . 7,364 7,364
Common stock - Series B, $.01 par value, 1,970,714 shares
authorized, 1,643,214 shares issued and outstanding . . . - -
Preference stock, $.10 par value, 5,500,000 shares
authorized, 175,000 shares issued and outstanding . . . . 17,500 17,500
21st Century Telesis (II), Inc.
Preference stock, $.10 par value, 5,500,000 shares
authorized, 2,571,328 shares issued and outstanding . . . 257,133 248,031
Additional paid in capital. . . . . . . . . . . . . . . . 23,387,975 22,721,625
Deficit accumulated during the development stage. . . . . (6,815,409) (1,943,961)
Total Stockholders' Equity. . . . . . . . . . . . . . . . 16,854,563 21,050,559
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . $53,127,864 $88,029,342
============ ============
</TABLE>
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS
-------------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997 AND
----------------------------------------------------
FROM THE DATE OF INCEPTION, DECEMBER 6, 1994, TO JUNE 30, 1997
--------------------------------------------------------------
<TABLE>
<CAPTION>
Inception to
--------------
1998 1997 30-Jun-97
-------------- ---------- ------------
REVENUES $- $- $-
- ------------------------------------- -------------- ---------- ------------
OPERATING EXPENSES
- -------------------------------------
<S> <C> <C> <C>
Salaries. . . . . . . . . . . . . . . 719,598 433,655 2,040,397
Travel, meetings and conferences. . . 133,476 75,951 515,818
Legal and other professional services 505,791 140,176 837,879
Interest expense. . . . . . . . . . . - 49,186 91,921
Rent. . . . . . . . . . . . . . . . . 109,935 36,490 224,932
Telephone and utilities . . . . . . . 33,780 11,222 101,806
Office and other expenses . . . . . . 249,973 93,997 552,021
Loss on return of C block licenses. . 2,945,785 - 2,945,785
4,698,338 840,677 7,310,559
-------------- ---------- ------------
OTHER INCOME
- -------------------------------------
Interest income . . . . . . . . . . . 167,344 175,841 495,150
-------------- ---------- ------------
LOSS BEFORE PROVISION
- -------------------------------------
FOR INCOME TAXES. . . . . . . . . . . (4,530,994) (664,836) (6,815,409)
- ------------------------------------- -------------- ----------
Provision for income taxes. . . . . . - - -
-------------- ---------- ------------
NET LOSS. . . . . . . . . . . . . . . $ (4,530,994) $(664,836) $(6,815,409)
- ------------------------------------- -------------- ---------- ============
</TABLE>
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
CONDENSED COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------------
FOR THE NINE MONTH PERIOD ENDED JUNE 30, 1998
---------------------------------------------
<TABLE>
<CAPTION>
21ST CENTURY TELESIS, INC.
- -------------------------------
Common Stock Series A Common Stock Series B Preference Stock
------------------------------- - -------------------- -----------------
No. of No. of No. of
Shares Amount Shares Amount Shares Amount
--------------------------------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1997 . . 736,429 7,364 1,643,214 - 175,000 17,500
Net loss. . . . . . . . . . . . - - - - - -
BALANCE, June 30, 1998. . . . . 736,429 $ 7,364 1,643,214 $ - 175,000 $17,500
===================== ================= ========= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
21ST CENTURY TELESIS (II), INC. ACCUMULATED
Preference Stock ADDITIONAL DURING THE
- ---------------------------------------------------------------- PAID
Number of IN DEVELOPMENT
Shares Amount CAPITAL STAGE
- ---------------------------------------------------------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1997. . . . . . . . . . . . . . . . . . . 2,571,328 257,133 23,387,975 (2,284,415)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - (4,530,994)
BALANCE, June 30, 1998 . . . . . . . . . . . . . . . . . . . . . 2,571,328 $ 257,133 $23,387,975 $(6,815,409)
=========== ============ =========== ============
21ST CENTURY TELESIS (II), INC.
Preference Stock
- ----------------------------------------------------------------
TOTAL
-------
<S> <C>
BALANCE, September 30, 1997. . . . . . . . . . . . . . . . . . . 21,385,557
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,530,994)
BALANCE, June 30, 1998 . . . . . . . . . . . . . . . . . . . . . $16,854,563
============
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
</TABLE>
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
-------------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997 AND
----------------------------------------------------
FROM THE DATE OF INCEPTION, DECEMBER 6, 1994, TO JUNE 30, 1997
--------------------------------------------------------------
<TABLE>
<CAPTION>
Inception to
--------------
1998 1997 30-Jun-98
-------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
- -------------------------------------------------
<S> <C> <C> <C>
Net loss. . . . . . . . . . . . . . . . . . . . . $ (4,530,994) $ (664,836) $ (6,815,409)
Adjustment to reconcile net loss to net cash
used by operating activities:
Loss on return of C block licenses. . . . . . . . 2,945,785 - 2,945,785
Depreciation expense. . . . . . . . . . . . . . . 19,985 22,433 75,211
Accrued interest receivable and prepaid expenses. 45,890 (48,357) (30,633)
Increase in accounts payable and accrued expenses (340,792) (293,655) (133,412)
-------------- ------------ -------------
Net cash used by operating activities . . . . . . (1,860,126) (984,415) (3,958,458)
-------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
- -------------------------------------------------
Payments for PCS licenses . . . . . . . . . . . . - (3,387,664) (15,206,948)
Payments for other capitalized system costs . . . (150,000) - (462,119)
Advanced on note receivable . . . . . . . . . . . - - (50,000)
Purchases of furniture and equipment. . . . . . . (36,165) (38,726) (195,210)
Payment of deposits and organizational costs. . . - - (14,229)
Net cash used by investing activities . . . . . . (186,165) (3,426,390) (15,928,506)
-------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
- -------------------------------------------------
Proceeds from issuance of common stock - Series A - - 25,000
Proceeds from issuance of preference stock-
net of issuance costs. . . . . . . . . . . . . . - 5,879,388 23,644,972
Advances from (repayments to) stockholder - net . - (174,104) -
Proceeds from note payable. . . . . . . . . . . . - - 1,000,000
Payments on note payable. . . . . . . . . . . . . - (1,000,000) (1,000,000)
Net cash provided by financing activities . . . . - 4,705,284 23,669,972
-------------- ------------ -------------
Net increase in cash. . . . . . . . . . . . . . . (2,046,291) 294,479 3,783,008
Cash at beginning of period . . . . . . . . . . . 5,829,299 5,447,791 -
-------------- ------------ -------------
Cash at end of period . . . . . . . . . . . . . . $ 3,783,008 $ 5,742,270 $ 3,783,008
============== ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
------------------------------------------------
1. GENERAL
-------
21st Century Telesis, Inc. ("21st I") and 21st Century Telesis (II), Inc. ("21st
II") have been in the development stage since formation as Delaware corporations
on December 6, 1994, and January 5, 1995, respectively. 21st I and 21st II
thereafter formed 21st Century Telesis Joint Venture ("21st JV") under the
general partnership law of Delaware, to serve as the entity that would
participate in the FCC auction and build and operate Personal Communications
Services ("PCS") systems under licenses obtained at the FCC auctions. 21st JV
formed a wholly owned Delaware subsidiary, 21st Century Bidding Corporation
(21st BC). Under the terms of the Joint Venture Agreement, which was executed as
of January 23, 1995, 21st I controls and manages 21st JV, for which services it
is reimbursed for all its direct and indirect costs. Profits, gains and losses
of the 21st JV are to be distributed 30% to 21st I and 70% to 21st II.
The accompanying combined financial statements reflect the combination of the
individual financial statements of 21st I, 21st II, 21st JV, and 21st BC
(collectively referred to as "the Companies"). These Companies are under common
control of 21st I, as described above, are under common management, and engage
in similar operating activities. Combination of the individual financial
statements provides a more meaningful financial presentation than would the
individual statements shown separately. Intercompany transactions and balances
have been eliminated in these combined financial statements.
The accompanying condensed combined financial statements of the Companies have
been prepared by the Companies without audit pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the SEC. The
Company believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed combined financial statements
should be read in conjunction with the combined financial statements and notes
thereto included in the Companies' Form 10 for the year ended September 30,
1997.
In the opinion of the Companies, the accompanying unaudited condensed combined
financial statements reflect all adjustments necessary to present fairly the
combined financial position of the Companies as of June 30, 1998 and 1997, and
the combined results of operations and cash flows for the nine months periods
then ended. Interim results are not necessarily indicative of fiscal year
performance because of the impact of seasonal or short-term variations.
2. RETURN OF C BLOCK LICENSES AND DEBT RESTRUCTURING
- -- --------------------------------------------------------
In March 1997, the FCC issued an order suspending quarterly interest payments
due under the C block license notes for an indefinite period of time. In April
1997, the FCC issued a similar interest payment suspension order for the F block
license notes.
2.
- --
<PAGE>
RETURN OF C BLOCK LICENSES AND DEBT RESTRUCTURING (continued)
- --------------------------------------------------------
The FCC issued a reconsideration order which went into effect in April,
1998 which allowed C block PCS license holders options to restructure their
licenses and related debts to the FCC. On June 8, 1998, the Companies elected
to return one-half of the spectrum (15 MHz of its 30 MHz) for each if its C
block licenses. This dissagregation election extinguished 50% of the respective
license debt and accrued interest and prohibits the Companies from bidding for
this spectrum, or otherwise acquiring in the secondary market, for two years
from the date of the start of the re-auction. As a result of this election, the
Companies recognized a charge to operations of $2,945,785 in June 1998,
representing the forfeiture of part of the original down payment on the C block
PCS licenses. The Company also recognized reductions in its FCC debt of
$33,001,889 (net of discount), accrued interest payable of $7,751,012 and
capitalized license cost of $43,698,686.
The restructured C block license notes have a carrying value of $33,001,889
at June 30, 1998. These notes continue to bear interest at 7.0% and require
quarterly interest only payments of $773,269 beginning on October 31, 1998
through October 31, 2002. Commencing January 31, 2003, quarterly principal and
interest payments of $3,190,268 are required with any unpaid balances due on
September 17, 2006.
The Companies also have F block notes payable to the FCC with a carrying value
of $2,747,261 at June 30, 1998. These notes bear interest at 6.25% and require
interest only payments of $56,725 through April 1999 and quarterly principal and
interest payments thereafter of $145,034 through April 2007.
Pursuant to industry practices, the FCC debts have bee recorded at the net
present value of the required payments based on the Companies' estimate of
borrowing costs of 13% for debt similar to that issued by the FCC.
3. COMMITMENTS AND CONTINGENCIES
-------------------------------
FCC Control Requirements
As a qualifying small business with an identified control group (certain of the
founding stockholders of 21st I), the 21st JV benefited from bidding credits and
installment financing in the FCC's C and F block auctions. The 21st JV must
continue to comply with applicable FCC small business criteria for the initial
10-year term of the licenses; failure to do so will result in an immediate
requirement to pay the unpaid balance of the license fees in cash and to refund
the bidding credits, plus interest thereon. With FCC approval, the C and F
block licenses owned by the 21st JV may be transferred at any time to another
entity that qualifies under the FCC small business criteria. Transfers to
non-qualifying transferees are prohibited during the first five years after
license award; non-qualifying transfers from the sixth year after license award
through tenth and final year of the initial license term require the cash
payment of the unpaid balance of the license fees and the refund of the bidding
credits, plus interest thereon.
<PAGE>
3. COMMITMENTS AND CONTINGENCIES (continued)
-------------------------------
FCC Build-out Requirement
All PCS license holders are required to meet certain requirements imposed by the
FCC relating to the provision of service in each license area. C block license
holders must provide coverage to one-third of the population in each license
service area within five years of license grant and two-thirds of the population
in each license service area within ten years of license grant. F block
license holders must provide coverage to one-quarter of the population in each
license service area within five years of license grant, or make a showing of
substantial service in their license area within five years of being licensed.
Failure to comply with the build-out requirements could subject 21st JV to
license forfeiture or other penalties, and may have a material adverse effect on
the financial condition of 21st JV.
PCS Network Build-out and Development
Management of the Companies is negotiating with equipment vendors to acquire,
install and maintain PCS network equipment in the operating areas represented by
its PCS licenses. The development of the infrastructure necessary to offer PCS
services is subject to delays and risks, including those inherent in the general
uncertainty associated with design, acquisition, installation and construction
of wireless telephone systems. The successful development of the licenses also
depends on the Companies' ability to lease or acquire sites for the location of
equipment, some of which may be subject to zoning or other regulatory approvals
which are beyond the Companies' control. Delays in the site acquisition
process, as well as in the acquisition of equipment or in construction, could
adversely affect the timing for build-out of the Companies' licenses.
The Companies are developmental companies that have incurred net losses since
inception and expect to continue to experience net losses and cash flow
deficiencies from operations. As more fully discussed in the Management's
Discussion and Analysis, the Companies will require substantial amounts of
additional capital to design, develop and build their PCS network, meet their
FCC license debt service requirements, provide for continuing working capital
needs, and to market and promote the Companies' services. The Companies are
exploring the availability of additional capital. The ability of the Companies
to raise the necessary capital is subject to numerous uncertainties and
management can provide no assurances that such capital will be raised timely for
the built-out of the Companies' PCS system or to meet the debt service
requirements of the PCS license debts.
4. RECENT ACCOUNTING PRONOUNCEMENTS
----------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income". This statement establishes standards for
reporting of comprehensive income and its components in financial statements.
Comprehensive income is the total of net income and all other non-owner changes
in equity. The Companies are required to adopt SFAS No. 130 no later than the
fiscal year ended September 30, 1999. Reclassification of comparative financial
statements provided for earlier periods will be required. The Companies believe
that the display of comprehensive income will not differ materially from the
currently reported net loss attributable to stockholders.
<PAGE>
4. RECENT ACCOUNTING PRONOUNCEMENTS (continue)
----------------------------------
In March 1998, Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which
provides guidance on whether and under what conditions the costs of internal-use
software should be capitalized. SOP 98-1 is effective for all transactions
entered into in fiscal years beginning after December 15, 1998, however earlier
adoption is encouraged. Companies believe the adoption of SOP 98-1 will not be
material to its results of operations or cash flows.
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" was issued which
redefines how operating segments are determined and requires disclosures of
certain financial and descriptive information about operating segments. SFAS
131 is effective for fiscal periods beginning after December 15, 1997 and its
adoption may require additional disclosure of the Company's historical financial
data beginning with fiscal year ending September 30, 1999.
