United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended September 30, 1998
Commission File Number 000-24817
Exact name of registrant as specified in its charter: 21st Century Telesis (II),
Inc.
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification No.: 33-069528
Address of principal executive offices: 650 Town Center Drive, Suite 1999, Costa
Mesa, CA 92626
Registrant's telephone number, including area code: (949) 752-2178
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: 21st Century Telesis
(II), Inc. Preference Stock
Indicate by check mark whether the registrant has file all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months, or such shorter period that registrant was required to file
such reports and whether registrant has been subject to such filing requirements
for the past 90 days. The answer to both questions is yes.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant: $22,688,280, as determined by the price at
which at which such equity was sold.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 100 shares of common stock and
2,571,328 shares of preference stock (note: all preferences associated with
registrant's preference stock have lapsed, and such stock is equivalent in all
respects to common stock).
Documents incorporated by reference: inapplicable.
Part I
Prefatory Note: The statements contained in this Form 10 that are not historical
facts are "forward-looking statements" (as defined in the Private Securities
Litigation Reform Act of 1995), which can be identified by the use of
forward-looking words such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
words. Registrant wishes to caution the reader that these forward-looking
statements, including, without limitation, statements regarding the development
of Registrant's business, the markets for its services, its anticipated sources
of financing and capital expenditures and other statements contained herein
regarding matters that are not historical facts, are only predictions. No
assurances can be given that such predictions will prove correct or that the
anticipated future results will be achieved; actual events or results may differ
materially, either because one or more of such predictions prove to be
erroneous, or as a result of risks facing Registrant.
Item 1. Business.
- -General Development of Business
Registrant and its joint venture partner, 21st Century Telesis, Inc., were
formed in late 1994 and early 1995 in Delaware, and formed a Delaware general
partnership under the name of the 21st Century Telesis Joint Venture in early
1995, for the purpose of raising funds to participate in the FCC's entrepreneur
block PCS auctions. In this Form 10, references to "registrant" shall be deemed
to include a reference to its joint venture partner, 21st Century Telesis, Inc.,
and to the Joint Venture, unless the context indicates otherwise.
For its entrepreneur block auctions, the FCC established bidding credits
and favorable payment terms for qualifying small businesses. The FCC required
participants to prove they were genuine small businesses, and not catspaws for
larger interests, by demonstrating their compliance with one or another of
several structural profiles approved by the FCC. The Joint Venture satisfied
these requirements by designating a "control group," which is required to own at
least 25% of the total shareholder equity in the licensee and must exercise de
facto and de jure control over its affairs.
Seven individuals, five of whom are directors of registrant, were so
designated in filings with the FCC prior to the commencement of the PCS
auctions. One of these individuals has since resigned from employment with the
Companies. Control is exercised by the remaining six individuals by virtue of
their voting control over registrant's joint venture partner, 21st Century
Telesis, Inc., which in turn, under the terms of the 21st Century Telesis Joint
Venture Agreement, enjoys sole management authority over the affairs of the
Joint Venture. The Joint Venture Agreement also specifies that 21st Century
Telesis, Inc. is entitled to a fixed distributive share of 30% of the Joint
Venture's distributable profits; The six "control group" members own,
collectively, sufficient shares of the capital stock of 21st Century Telesis,
Inc. to ensure that their equity interest in the licences is at least 25%,
calculated on a fully-diluted basis.
The FCC conducted two auctions for PCS licenses in which participation was
restricted to qualifying small businesses: licenses in the C block, covering 30
MHz of bandwidth and licenses in the F block, covering 10 MHz of bandwidth. The
Joint Venture secured 17 C block licenses, 8 F block licenses, and 2 D block
licenses (10 MHz PCS licenses not reserved for small business licencees). The
markets for which licenses are owned by Joint Venture and the amounts paid for
such licenses are set forth in the two tables below:
Registrant's C Block Licenses
<TABLE>
<CAPTION>
Market Population License Cost Cost per pop<F1>
<S> <C> <C> <C>
Jackson, MS. . . 615,521 $ 18,126,000 $ 29.45
Syracuse, NY . . 791,140 16,914,000 21.38
South Bend, IN . 330,821 13,226,846 39.82
Lincoln, NE. . . 309,515 7,657,871 24.74
Binghamton, NY . 356,645 6,902,254 19.35
Utica, NY. . . . 316,633 6,750,000 21.32
Terre Haute, IN. 236,968 5,344,596 22.55
Grand Island, NE 141,541 4,447,500 31.42
Kokomo, IN . . . 184,899 3,926,846 21.24
Watertown, NY. . 296,253 3,647,250 12.31
Marion, IN . . . 109,238 2,374,496 21.74
Ithaca, NY . . . 94,097 2,325,004 24.71
Oneonta, NY. . . 107,742 1,954,540 18.14
Danville, IL . . 114,241 1,894,256 16.58
North Platte, NE 80,249 1,549,346 19.31
McCook, NE . . . 36,618 671,963 18.35
Vincennes, IN. . 93,758 480,070 5.12
TOTAL. . . . . . 4,215,879 $ 98,192,838 $ 23.20<F2>
</TABLE>
<F1> i.e., the cost of the license divided by the total population of the
market.
<F2> average cost per pop.
Registrant's D and F Block Licenses
<TABLE>
<CAPTION>
Market Population License Cost Cost per Pop
<S> <C> <C> <C>
Indianapolis, IN . 1,321,911 $ 2,475,408 $ 1.87
Lafayette, IN. . . 247,523 236,996 0.96
Elkhart, IN. . . . 235,152 304,237 1.29
Bloomington,IN<F1> 217,914 790,650 3.63
Muncie, IN . . . . 182,386 321,221 1.76
Michigan City,IN . 107,066 160,314 1.5
Scranton, PA . . . 678,410 561,375 0.83
Plattsburgh, NY. . 123,121 114,005 0.93
Glens Fall, NY . . 118,539 521,662 4.4
Hastings, NE . . . 72,833 164,062 2.25
TOTAL. . . . . . . 3,304,855 $ 5,649,930 $ 1.71
</TABLE>
<F1> The licenses for Bloomington, Indiana and Muncie, Indiana are D block
licenses, and thus are paid in full; the licenses for the other markets in the
table are financed with the FCC over a ten-year term.
The FCC has granted 10-year installment payment terms for the C block and F
block licenses, contingent upon the licensee's continuing satisfaction of
applicable control group requirements.
- -Registrant's Plan of Operation Through Its Next Fiscal Year
- --------------------------------------------------------------------
Registrant has completed all preliminary engineering studies needed to build out
its 27 markets. It has also leased premises in South Bend, Indiana to house a
switch and administrative offices and has reached agreement in principle with
the local power utility providing for installation on power poles of
approximately 80% of the radio ports expected to be needed for that market.
Finally, registrant has prepared detailed construction practices studies
applicable to all its markets.
Registrant's current fiscal year will end on June 30, 1999, as a consequence of
a recent amendment to registrant's bylaws changing its fiscal year from one
ending on September 30 to one ending on June 30. During the balance of the
fiscal year ending June 30, 1999, registrant will seek to conclude agreements
with the incumbent wireline telephone service providers in its markets covering
the infrastructure requirements for registrant's PCS operations (chiefly, use of
the incumbent's wire to route traffic from registrant's radio ports to
registrant's central office switch, and the provision of power to the radio
ports) and covering interconnection charges for telephone traffic originating
with a customer of registrant and terminating with a customer of the incumbent
or other service provider, and vice versa.
If registrant receives timely financing in material amounts, as discussed in
Item 7 below, registrant will begin deployment of its markets during the period
mentioned above. In the absence of such financing, registrant does not expect to
complete any additional significant tasks related to system deployment during
the balance of its current fiscal year.
The total cost to acquire and install the equipment needed to bring all 27
markets on line, or to being any substantial portion thereof on line, and to
establish and bring to operational level the required management, marketing,
customer service, maintenance and billing functions, greatly exceeds the
financial resources of registrant and the Joint Venture. Over and above the
costs mentioned in the preceding sentence, additional cash will be needed to
defray anticipated start-up losses and to provided necessary working capital, in
aggregate amounts which likewise exceed the financial resources currently
available to registrant. See "Management Discussion and Analysis," Item 7,
below.
Registrant is exploring means to finance all the above costs by a variety of
means. In that connection, registrant has reached agreement with Hughes Network
Systems for the provision and installation of radio ports and radio port control
and network control equipment in all 27 of registrant's markets; as part of this
agreement Hughes has agreed in principle to provide the partial vendor
guarantees needed for the financing mentioned above, subject to Hughes' final
approval of any financing ultimately arranged. Registrant has also reached
agreement with vendors of other services and equipment necessary for the
buildout of its markets. All such agreements are contingent upon timely receipt
of financing by registrant, and none of such agreements comes into force until
such financing has beensecured. As to the status of Registrant's efforts to
secure financing, see "Management Discussion and Analysis," Item 7, below
Concurrently with its attempt to secure financing for all of its markets,
Registrant and its affiliates have also pursued the lesser amounts of financing
needed to build only a portion of their markets. See Item 7.
Registrant's expenses currently consist of (1) overhead items, such as employee
salaries, fees paid for professional services, business travel, office premises
rentals, office equipment purchase and lease costs and telecommunications costs,
and other customary business expenses, and (2) interest payments owed to the FCC
on the deferred portion of the acquisition cost of the 17 C block licenses and 8
F block licenses. See Notes 1.d. and 2 to the Combined Financial Statements
dated as of September 30, 1998, included as Item 8 of this Form 10-K. On March
24, 1998, the FCC issued an order that, inter alia, gave licensees, including
registrant, three means by which licensees might reduce their debt to the FCC by
returning licenses or spectrum to the FCC. These measures and their attendant
consequences are discussed in Note 2 to the Combined Financial Statements dated
as of September 30, 1998 included as Item 8 of this Form 10-K. On June 8, 1998,
registrant returned to the FCC half the spectrum in each of its 17 C block
licenses. As a consequence of this decision, registrant's continuing debt
service requirements to the FCC have been cut approximately in half, with no
near-term impact on anticipated operations.
Registrant currently has 12 full-time employees, with a total annual employee
payroll of $933,080. Registrant anticipates having approximately 600 employees
within five years if all 27 markets are timely built.
- -Financial Information About Foreign and Domestic Operations and Export Sales
- --------------------------------------------------------------------------------
Registrant has had no revenues from operations. Except for certain
expenditures incurred in connection with exploring foreign business
opportunities, which are immaterial in the aggregate, all of registrant's
expenditures have been incurred in connection with its domestic PCS business.
- -PACS Technology
- -----------------
The Joint Venture plans to deploy PCS equipment based on the Personal Access
Communications Services ("PACS") standard.This technology, which was developed
by BellCore, has an open system interconnection architecture and is optimized to
provide a low-cost, high-quality wireless telephone system capable of replacing
wireline telephony. The system is designed to function as an add-on to the
existing wireline infrastructures, and utilizes low-cost, low-power wireless
radio ports and radio port controllers which in turn connect with the wireline
infrastructure. Because cell sizes are small, the handsets carried by the user
can be small, low-powered and inexpensive. PACS PCS technology is designed to
offer superior voice quality, but also offers other advanced digital
capabilities, such as data transmission, fax, paging and, ultimately, compressed
video. PACS is the only "low tier" common air interface currently approved by
the Joint Technical Committee for use in the United States. The technology is an
improved version of the Personal Handy Phone service which has been deployed
with great success in Japan and which is currently undergoing trials in other
countries. In addition to the portable applications, the technology readily
supports fixed point usage, providing an economical means to connect
conventional telephones to the central office switch. Because it is designed as
an add-on to the existing wireline infrastructure, and because of the low costs
implicit in the technology, PCS systems based on the PACS standard have the
potential to be price-competitive with wireline telephony. None of the other PCS
technologies developed thus far can be deployed with capital costs as low as
PACS equipment.
Because of this cost advantage, registrant hopes to be able to achieve
satisfactory market penetration for its service, notwithstanding the existence
in each of its markets of (a) an existing, well-financed and well-known
incumbent wireline operator; (b) up to two well-established cellular service
providers; (c) up to 5 PCS licensees (including licensees holding 10 MHz
licenses in the D, E or F blocks), some of whom may be presumed to be
better-financed than registrant and whose systems may be deployed before
registrant's; and (d) the aggregated SMR service offered by Nextel in much of
the country. In addition, the FCC has announced plans to make additional
spectrum available in the future to support additional wireless telephone
services. Registrant expects to compete with all the abovementioned service
providers based on cost, service and product performance.
Few PCS licensees have announced plans to deploy systems based on the PACS
technology selected by registrant: most have opted to deploy systems based on
other standards. At the present time, equipment designed to work under one
technological standard will not work with another. As a consequence, handsets
used by registrant's customers in their home markets will support only very
limited "roaming" outside those markets. Such roaming may become possible in the
future, if other PCS licensees elect to deploy PACS-based systems, or if
handsets compatible with multiple standards are developed and become available.
- -Registrant's Licenses:
- ------------------------
The licenses granted to registrant give it the right to offer PCS service
for a period of 10 years; the licenses are renewable for an indefinite number of
successive 10-year terms, assuming that registrant continues to satisfy the
FCC's common carrier regulations.
The licenses are subject to a number of conditions:
1. Construction requirements:
a) within five years after issuance of the C block licenses facilities
must be constructed to provide adequate service to one-third of the population
of the market, and to two-thirds in 10 years;
b) within five years after issuance of the F block licenses facilities
must be constructed to provide adequate service to one-fourth of the population
of the market.
2. Registrant's C and F block licenses (which cover 25 of registrant's 27
markets) were obtained at FCC auctions reserved for qualifying small businesses,
and as a consequence are subject to a number of restrictions, chief among them
being the requirement that an identified control group exercise control over the
licenses for the full 10-year initial term. With FCC approval, licenses may be
transferred during the initial 10-year term to other entities that satisfy the
FCC's requirements respecting small businesses. Licenses may also be transferred
to entities that do not meet the FCC small business requirements, but the unpaid
balance of the purchase price and bidding credits must be paid in full
immediately. The Licenses must also be fully paid-up and the bidding credits
repaid in the event that the Joint Venture ceases to meet the FCC's small
business requirements at any time during the 10-year period of the initial
license grant.
- -PACS Equipment
- ----------------
The PACS standard is based on an open architecture, and thus any category
of equipment can be manufactured by multiple vendors. Although this works in
favor of ready availability and low prices, other factors may tend to constrain
supply or registrant's freedom in choosing equipment vendors.
First, no PCS systems based on the PACS standard have been deployed thus far,
and it is uncertain how many of such systems may be installed in the future;
lack of demand could reduce the number of manufacturers interested in supplying
PACS PCS equipment. Second, registrant has recently signed an agreement with
Hughes Network Systems for the provision and installation of PCS networks in
registrant's 27 markets. Even, therefor, if other vendors enter the PACS
equipment market, registrant will be able to avail itself of vendor price
competition only for markets it may acquire in the future.
The equipment to be installed and/or utilized in registrant's markets
consists of radio ports, radio port control units, central office switches and
billing equipment and individual user handsets. The number of radio ports and
radio port controllers required in any given market will vary in accordance with
traffic density. For its 27 markets, registrant expects to pay a total of
approximately $220 million for radio ports, radio port controllers and
associated network control equipment.
The cost of a central office switch, including associated site improvement cost,
is approximately $3,000,000. Registrant estimates that the initial deployment of
operating systems in all 27 markets will require expenditures for acquisition
and installation of switches of between $10 to $15 million, exclusive of site
improvements.
Registrant's business plan assumes that it will purchase all handsets from
manufacturers for resale to customers. Although handsets will be purchased only
as needed to satisfy anticipated demand, they nonetheless represent, in the
aggregate, a material capital cost, since they must be purchased for cash,
rather than financed. The business plan contemplates that handsets will be sold
to customers other than students at a price equal to 50% of registrant's
acquisition cost, with the balance amortized against the fixed monthly service
charge. Students will be charged $50 for a handset, an amount much less than
half registrant's acquisition cost. As of the filing date of this Form 10,
registrant was in negotiation with a major supplier of handsets over a long-term
supply contract.
Registrant's business plan assumes a "churn rate" of 13% per year, based on
cellular industry average, and further assumes that it will not be possible to
repossess from lost customers material numbers of handsets which have not been
fully amortized. Registrant's anticipated capital expenditures accommodate such
losses.
In addition to the equipment noted above, operation of registrant's PCS systems
will require agreements with local power utilities to permit registrant to
locate radio ports on the utility's poles, and agreements with incumbent
wireline telephone service providers, that (a) establish registrant's right to
use such provider's wire to connect the radio ports to their associated radio
port controllers and thence to registrant's switch; (b) provide for power to be
supplied to registrant's radio ports; and (c) specify interconnection
obligations and costs. Registrant has reached agreement in principle with
American Electric Power Company on the provisions of a contract covering the
attachment of registrant's radio ports on AEP poles. This agreement will cover
four of registrant's markets.
Registrant believes that all of its computers capable of computations involving
dates on or after January, 2000, and has secured similar warranties from all
material vendors of equipment that includes computer hardware or software.
Item 2. Properties
Registrant leases office premises in Costa Mesa, California for its
headquarters, under customary commercial terms. Registrant also leases premises
in South Bend, Indiana which will be utilized for office space and as the site
for the central office switch for the South Bend and contiguous markets, along
with associated network control equipment. Site preparation costs for the South
premises will be material (See Item 1, "PACS Equipment") and site preparation
will commence during registrant's current fiscal year, assuming timely
completion of its financing. See Item 1.
In addition, if financing timely becomes available, registrant will begin the
process of identifying and leasing premises to house its business offices,
central office switches and control centers in its other market clusters.
Item 3. Legal Proceedings
The Antitrust Division of the U.S. Department of Justice ("Department")
elected to commence a civil proceeding against Registrant, among others, to
challenge a bidding technique used by Registrant and a number of other
participants in the FCC's C block auctions.
Bidding in the C block auction was conducted by officers of Registrant on
behalf of the 21st Century Telesis Joint Venture ("JV"), the Delaware general
partnership of which Registrant is a member, and the entity that holds title to
the licenses ultimately secured in the auction.
During the auction, the JV had been higher bidder for several rounds on the
Indianapolis market. There came a time in which another bidder, which had not
previously shown an interest in Indianapolis, but which had been the repeated
high bidder for the Baton Rouge license, topped Registrant's bid for
Indianapolis. In the following round, Registrant, which had not previously bid
on Baton Rouge, placed the high bid on that market, bidding an amount that ended
with the numbers "XXX," which numbers were the same as market designator for
Indianapolis.
Thereafter, in the next round, the JV resumed bidding on Indianapolis and
ultimately won that market. The JV made no further bids on Baton Rouge and the
other bidder made no further bids on Baton Rouge. There were no discussions
between the JV, or any of its affiliates, and the other bidder, before or during
the auction respecting the C block markets, the auction or bidding strategies
for the auction. Neither were there any discussions respecting or touching upon
market allocation.
After reviewing the above circumstances, the FCC staff concluded that the
"trailing number" bid placed for one round on the Baton Rouge market did not
constitute a violation of the FCC's rules against bidding collusion.
Notwithstanding this finding by the primarily cognizant agency, the
Antitrust Division of the Department of Justice, upon review of the facts,
concluded that the single bid by the JV amounted to an improper signal, and
advised Registrant that it intended to commence an enforcement proceeding.
Registrant believes that the position of the Antitrust Division is
erroneous, and that Registrant would prevail in any enforcement action. Rather
than devote the time and resources necessary to contest the matter, however,
Registrant has entered into a consent decree which has been filed in an
Action commenced by the Department in Federal District Court. Under
the terms
of such
decree, Registrant agreed not to violate FCC bidding rules in the future, while
denying that it has done so in the past; no fines or penalties were assessed
against Registrant. A copy of the consent decree with the Antitrust Division
is filed herewith as an exhibit.
Item 4. Submission of Matters to a Vote of Security Holders.
Registrant's annual meeting of stockholders was held on August 12, 1998. The
following directors were elected to continue in office: H. Randolph Hart ,
Jeffrey V. Barbieri , Lawrence Kaufman, Robert Andrew Hart IV, Philip J.
Chasmar, James A. Roddey, John H. Greenberg, Gilbert Ross Rasco, Joseph A Miller
III, Vincent E. Stuedeman, Allen Terrell , Philip Nelson, Frank Coughlin. Each
of such individuals received 1,622,104 votes in favor of their election, out of
a total of 1,671,986 present in person or by proxy.
At this meeting stockholders also adopted a resolution amending the bylaws of
the corporation to change its fiscal year from one ending September 30 to one
ending June 30, and changing the date of the annual meeting of stockholders to
any day in November or December. The two resolutions received 1,652,116
favorable votes, out of a total of 1, 671,986 present in person or by proxy.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no established trading market for Registrant's equity securities. No
dividends have been paid on Registrant's equity securities in the two most
recent fiscal years, or since inception.
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
The following table presents, for the periods ended and as of the dates
indicated, selected combined financial information for the Companies on a
combined basis. The financial information is derived from the Companies'
audited combined financial statements and notes thereto. The selected
historical financial information should be read in conjunction with
"Management's Discussion and Analysis" and the Companies' Combined Financial
Statements and notes thereto and other financial and operating information
included elsewhere in this report.
Operating results shown in the following table are not indicative of future
performance due to the capital requirements associated with the build-out of the
Companies' PCS System and the uncertainties about the Companies' ability to
continue as a going concern.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Inception to
September 30, September 30, September 30, September 30,
1998 1997 1996 1998
--------------- --------------- --------------- ---------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . $ - $ - $ - $ -
--------------- --------------- --------------- ---------------
Operating expenses . . . . . 2,490,768 1,244,775 914,868 5,102,989
Extraordinary charge (a) . . 2,945,785 - - 2,945,785
--------------- --------------- --------------- ---------------
Total expenses . . . . . . . 5,436,553 1,244,775 914,868 8,048,774
Interest income. . . . . . . 206,991 239,485 69,084 534,797
--------------- --------------- --------------- ---------------
Net loss . . . . . . . . . . (5,229,562) (1,005,290) (845,784) (7,513,977)
--------------- --------------- --------------- ---------------
BALANCE SHEET DATA:
Working capital. . . . . . . $ 1,214,008 $ 5,137,432 $ 3,901,281
Property and equipment . . . 111,317 103,820 91,472
Licenses and system
development costs (a) . . 50,011,735 85,538,074 72,039,183
Total assets . . . . . . . . 53,378,145 91,611,945 79,643,724
Total liabilities (a) . . . 37,222,150 70,226,388 63,807,717
Deficit accumulated
during the development
stage . . . . . . . . . . (7,513,977) (2,284,415) (1,279,125)
Total stockholders'
Equity . . . . . . . . . . 16,155,995 21,385,557 15,836,007
</TABLE>
(a) The Companies recorded an extraordinary loss in June 1998 related to the
return of one-half of its C block PCS spectrum and related forgiveness of
one-half of the debts and accrued interest owed to the FCC. The return of these
licenses contributed to the decrease in licenses and total liabilities at
September 30, 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Introduction
21st Century Telesis, Inc. II (Registrant), and its joint venture partner, 21st
Century Telesis, Inc. (21st I) were formed in late 1994 and early 1995,
respectively, in Delaware and thereafter formed a Delaware general partnership
under the name of 21st Century Telesis Joint Venture (21st JV) in early 1995,
for the purpose of raising funds to participate in the FCC's entrepreneur block
PCS license auctions. 21st JV's sole purpose is to acquire PCS licenses from
the FCC and to develop its PCS system in those geographic market areas. 21st JV
formed a Delaware subsidiary 21st Century Bidding Corporation (21st BC) which
also acquired PCS licenses from the FCC. The Joint Venture Agreement provides
that 30% of all profits, gains, and losses of 21st JV will be allocated or
distributed to 21st Century I and 70% is to be allocated or distributed to 21st
II.
These companies, collectively referred to as "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. 21st I manages and has complete authority
over 21st JV under the terms of the Joint Venture Agreement. Since the
Companies are under common control and management, the financial statements of
each individual company have been combined to provide a more meaningful
financial presentation of the operations of the Companies.
Results of Operations
- -----------------------
The Companies have had no revenues from operating activities since their
inception. The Companies' sole source of revenues has been interest income
earned on invested cash balances. Interest income for the year ended September
30, 1998 was $206,991 compared to $239,485 and $69,084 for the year ended
September 30, 1997 and for the year ended September 30, 1996, respectively. The
decrease in interest income is attributable to a decrease in available cash
resulting from operations.
Total expenses for the year ended September 30, 1998 totaled $5,436,553 compared
to $1,244,775 for the year ended September 30, 1997 and $914,868 for the year
ended September 30, 1996. The increases in expenses for the year ended
September 30, 1998 were attributable primarily to increased salaries caused by
an increase in the number of personnel and costs associated with developing the
Companies business plans and PCS market areas. The Companies also incurred
additional legal and other professional services related to its efforts to
secure financing and the contracts associated with the development of its PCS
system. During the year ended September 30, 1998, the Companies incurred an
extraordinary charge of $2,945,785 related to the forgiveness of debt by the FCC
as discussed below. During the year ended September 30, 1998, the Companies
continued to devote substantially all of its efforts and incur costs related to
securing financing and contracts for the development of the PCS system.
Liquidity and Capital Resources During the years ended September 30, 1997 and
- ----------------------------------
1996 the Companies received proceeds from the issuance of preferred stock by
- --
21st II of $6,554,840 and $15,389,118, respectively, and $801,014 during the
- --
period from inception to September 30, 1995. 21st I also received $900,000
- --
during the period from inception to September 30, 1995 from the issuance of its
- --
capital stock. During the year ended September 30, 1996, the Companies borrowed
$1 million from Siemens Stromberg-Carlson which was repaid in full during the
year ended September 30, 1997. During the year ended September 30, 1998, the
Companies did not incur any new debt or raise any new equity capital.
The Companies paid $3,387,664 and $11,819,284 during the years ended September
30 1997 and 1996, respectively, to acquire the PCS licenses from the FCC. On
September 17, 1996, 21st JV entered into 17 notes payable to the FCC totaling
$88,373,554 related to the acquisition of 17 C block PCS licenses. On April 28,
1997, 21st BC entered into 8 notes payable to the FCC totaling $3,630,447
related to the acquisition of the F block PCS licenses. These notes payable to
the FCC, which included favorable financing terms, have been recorded at the net
present value of the cash flows required under the FCC notes using an estimated
borrowing cost of 13%, which represents management's estimated borrowing cost
for debt similar to that issued by the FCC.
The Companies also paid interest to the FCC of $3,093,074 during the year ended
September 30, 1997 related to the PCS license debts. Interest costs related to
the FCC notes payable, including note discount amortization, have been
capitalized and included as a part of the PCS license cost in the Companies
combined financial statements.
The FCC issued a reconsider order which went into effect in April 1998, which
allowed companies owning C block PCS licenses several options to restructure
their license holdings and associated notes payable to the FCC. On June 8,
1998, the Companies elected the disaggregation option to return one-half of the
C block PCS license spectrum (15 MHz of the original 30 MHz) in each of the 17 C
block PCS licenses of which the Company acquired. The disaggregation election
resulted in a 50% reduction in the respective C block license debts and accrued
interest owed to the FCC. Additionally, 50% of the original down payment for
each license continues to be considered a down payment for obtaining license
spectrum. Another 20% of the down payment was applied to reduce current
interest owed to the FCC for the remaining license debts. The remaining 30% of
the original C block PCS license down payments have been forfeited due to the
disaggregation election. At September30, 1998, the Companies owed the FCC
$47,817,211 (undiscounted) and accrued interest payable of approximately
$1,302,105.
The Companies' disaggregation election resulted in a charge to operations of
$2,945,785 being recorded in June 1998 which represented forfeiture of the down
payments made to the FCC for the return of the license spectrum. The Companies
are prohibited from owning or re-bidding on the disaggregated licenses for two
years from the date of the re-auction by the FCC of those licenses.
The Companies capitalized $566,872 during the year ended September 30, 1997 and
$170,000 during the year ended September 30, 1998 of PCS system development
cost.
The Companies had cash available to fund future operations of $2,660,126 at
September 30, 1998 and $5,829,299 at September 30, 1997. At September 30, 1998,
the Companies had current liabilities of $1,529,561at September 30, 1998 and
$818,390 at September 30, 1997. The Companies' total liabilities decreased to
$37,222,150 at September 30, 1998 due primarily to the return of C block license
spectrum and the related forgiveness of debt by the FCC in June 1998.
The Companies are continuing to evaluate the capital expenditures necessary to
design, install, and make operational each of its PCS license market areas.
Related thereto, the Companies have entered into various agreements and
contracts with equipment vendors and other contractors for the design and
build-out of the Companies' PCS networks. These agreements are contingent upon
the Companies obtaining the necessary capital and/or financing necessary to
finance the Companies' PCS network development.
The Companies to date have been unsuccessful in securing financing to deploy PCS
systems in its 27 markets. These difficulties have caused the Companies actively
to pursue the possibility of securing smaller amounts of financing needed to
build out a portion of their markets, with a view to using such markets to
demonstrate the viability of the PACS technology the Companies have selected for
their PCS systems; financing and build out of their other markets would take
place at some indefinite point in the future.
In this connection, the Companies entered into an agreement to borrow from a
substantial lender an amount of up to $100 million to finance the deployment of
PCS systems in all their Indiana markets except Indianapolis. The lending
commitment is subject to a number of contingencies, chief among which is the
requirement that the Companies must have secured commitments for $50 million in
additional equity by April 15, 1999, with not less than $25 million having been
subscribed in cash by such date. The Companies are in active discussion with a
number of institutional investors with a view to securing such additional
equity, but no assurances can be given that they will be successful in their
attempt to raise this additional capital.
In the event the Companies are unsuccessful in their attempt promptly to secure
new equity financing, or are unable promptly to satisfy the conditions of the
debt facility mentioned above, management intends to seek to secure alternative
financing, including bridge financing, from one or more vendors of PCS systems
based on technology standards other than PACS. There can be no assurance offered
that the Companies will be successful in arranging such alternative financing.
The Companies' remaining cash is not expected to be sufficient to fund its
operations at the present level and also make their next full scheduled license
payment to the FCC, due on April 28, 1999. This cash difficulty may be
exacerbated by the fact that the Companies' expenditure levels are likely to
increase during the first calendar quarter of 1999 owing to increased travel
costs and legal costs associated with the lending commitment mentioned above.
Failure to make an installment payment on any license will bring about its
forfeiture, as well as the forfeiture of all amounts previously paid on such
license. If the Companies are not successful in raising the necessary equity and
finalizing the committed debt financing prior to the next FCC interest payment
date, management may elect not to make their C block license payments, thereby
forfeiting their 17 C block licenses. The amount saved thereby - approximately
$773,000 - would give the Companies sufficient cash to continue operations
(assuming uniform levels of expenditure at the current levels) through the
balance of the period ending June 30, 1999. During such period the Companies
would continue to seek financing for the build out of their 10 remaining
markets.
Item 8. Financial Statements and Supplementary Data.
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, 1998 and 1997 and the related combined statements of
operations, stockholders' equity, and cash flows for each of the years during
the three year period ended September 30, 1998 and the period from inception,
December 6, 1994, to September 30, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years during the three year
period ended September 30, 1998, and the period from inception, December 6,
1994, through September 30, 1998 in conformity with generally accepted
accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Companies will continue as going concerns. As described in Note 8 to the
combined financial statements, the Companies will require additional capital in
order to meet its obligations to the FCC and to fund operating cash flow needs.
The Companies will also require significant capital to build out the PCS network
infrastructure necessary to provide services and implement its business plan.
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 equity offerings and debt
financing, 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
December 29, 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, 1998 AND 1997
A S S E T S
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CURRENT ASSETS
- ------------------------------------------------------------------
<S> <C> <C>
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,660,126 $ 5,829,299
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . 12,291 7,292
Note receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . 21,152 69,231
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 2,743,569 5,955,822
----------- -----------
FURNITURE AND EQUIPMENT
- ------------------------------------------------------------------
Net of accumulated depreciation of $94,263 and $55,226 . . . . . . 111,317 103,820
----------- -----------
OTHER ASSETS
- ------------------------------------------------------------------
PCS license costs, including capitalized interest (Notes 2 and 7) 49,274,863 84,971,202
Capitalized system development costs . . . . . . . . . . . . . . . 736,872 566,872
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 511,524 11,524
Organizational costs . . . . . . . . . . . . . . . . . . . . . . . - 2,705
----------- -----------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 50,523,259 85,552,303
----------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,378,145 $91,611,945
=========== ===========
</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. . . . . . . . . . . $ 139,148 $ 420,067
Accrued interest - FCC currently payable . . . . . . . . . 1,302,105 398,323
Note payable - Federal Communications Commission . . . . . 88,308 -
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . 1,529,561 818,390
------------ ------------
LONG-TERM DEBTS - less current maturities (Note 2)
- ----------------------------------------------------------
Notes payable - Federal Communications Commission. . . . . 35,692,589 66,619,736
Accrued interest - FCC notes payable . . . . . . . . . . . - 2,788,262
------------ ------------
Total long-term debts. . . . . . . . . . . . . . . . . . . 35,692,589 69,407,998
------------ ------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . 37,222,150 70,226,388
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8) . . . . . . - -
- ----------------------------------------------------------
S T O C K H O L D E R S' E Q U I T Y
- ----------------------------------------------------------
21st Century Telesis, Inc. (Notes 3 and 7)
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 3, 4 and 7)
Preference stock, $.10 par value, 5,500,000 shares
authorized, 2,571,328 shares issued and outstanding. . . . 257,133 257,133
Additional paid in capital . . . . . . . . . . . . . . . . 23,387,975 23,387,975
Deficit accumulated during the development stage . . . . . (7,513,977) (2,284,415)
------------ ------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . 16,155,995 21,385,557
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . $53,378,145 $91,611,945
============ ============
</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, 1998, 1997, 1996 AND
------------------------------------------------------
FROM THE DATE OF INCEPTION, DECEMBER 6, 1994, TO SEPTEMBER 30, 1998
-------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Inception to
---------------
September 30, September 30, September 30, September 30,
---------------
1998 1997 1996 1998
--------------- --------------- --------------- ---------------
REVENUES $- $- $- $-
- -------------------------------------- --------------- --------------- --------------- ---------------
OPERATING EXPENSES
- --------------------------------------
<S> <C> <C> <C> <C>
Salaries . . . . . . . . . . . . . . . 908,647 563,665 389,904 2,140,859
Travel, meetings and conferences . . . 204,432 154,578 140,052 586,774
Legal and other professional services. 691,646 225,409 106,679 1,023,734
Interest expense . . . . . . . . . . . 27,235 49,186 42,523 119,156
Rent . . . . . . . . . . . . . . . . . 154,129 64,080 33,744 269,126
Telephone and utilities. . . . . . . . 49,983 17,414 30,939 118,009
Payroll taxes. . . . . . . . . . . . . 69,065 44,616 21,479 157,652
Office and other expenses. . . . . . . 385,631 125,827 149,548 687,679
Loss on return of C block
licenses (Note 2) . . . . . . . . . . 2,945,785 - - 2,945,785
5,436,553 1,244,775 914,868 8,048,774
--------------- --------------- --------------- ---------------
OTHER INCOME
- --------------------------------------
Interest income. . . . . . . . . . . . 206,991 239,485 69,084 534,797
--------------- --------------- --------------- ---------------
LOSS BEFORE PROVISION
- --------------------------------------
FOR INCOME TAXES . . . . . . . . . . . (5,229,562) (1,005,290) (845,784) (7,513,977)
- -------------------------------------- --------------- ---------------
Provision for income taxes (Note 6). . - - - -
--------------- --------------- --------------- ---------------
NET LOSS . . . . . . . . . . . . . . . $ (5,229,562) $ (1,005,290) $ (845,784) $ (7,513,977)
- -------------------------------------- --------------- --------------- =============== ===============
21ST CENTURY TELESIS, INC.
- --------------------------------------
Basic and diluted loss per share . . . $ (0.40) $ (0.12) $ (0.12)
=============== =============== ===============
Weighted average shares outstanding. . 2,554,643 2,554,643 2,554,643
=============== =============== ===============
21ST CENTURY TELESIS (II), INC.
- --------------------------------------
Basic and diluted loss per share . . . $ (1.64) $ (0.30) $ (0.93)
=============== =============== ===============
Weighted average shares outstanding. . 2,571,328 2,399,447 590,751
=============== =============== ===============
</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, 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>
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
Net loss . . . . . . . . . . . . - - - - - -
--------------------- ----------------- --------- ------- ------- -------
BALANCE, September 30, 1998. . . 736,429 $ 7,364 1,643,214 $ - 175,000 $17,500
===================== ================= ========= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
- -------------------------------------------------------------------------
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, 1998
-------------------------------------------------------------------
<TABLE>
<CAPTION>
21ST CENTURY TELESIS (II), INC.
Preference Stock ADDITIONAL
-------------------------------
No. of PAID IN
Shares Amount CAPITAL
------------------------------- -------- ------------
<S> <C> <C> <C>
Inception, December 6, 1994. . . . . . . . . . . . . . . . . . . - $ - $ -
Common stock Series A. . . . . . . . . . . . . . . . . . . . . . - - 17,636
Common stock Series B issued
for services rendered . . . . . . . . . . . . . . . . . . . . - - -
Preference stock issued for cash
at $5.00 per share . . . . . . . . . . . . . . . . . . . . . - - 857,500
Preference stock issued for cash
at $10.00 per share . . . . . . . . . . . . . . . . . . . . 113,000 11,300 1,118,700
Costs of raising equity. . . . . . . . . . . . . . . . . . . . . - - (134,950)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
------------------------------- -------- ------------
BALANCE, September 30, 1995. . . . . . . . . . . . . . . . . . . 113,000 11,300 1,858,886
Preference stock issued for cash
at $10.00 per share. . . . . . . . . . . . . . . . . . . . . 784,695 78,470 7,768,480
Preference stock issued for cash
at $9.00 per share . . . . . . . . . . . . . . . . . . . . . 5,555 555 49,445
Preference stock issued for cash
at $9.24 per share . . . . . . . . . . . . . . . . . . . . . 983,552 98,355 8,989,663
Costs of raising equity. . . . . . . . . . . . . . . . . . . . . - - (1,764,886)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
------------------------------- -------- ------------
BALANCE, September 30, 1996. . . . . . . . . . . . . . . . . . . 1,886,802 188,680 16,901,588
Preference stock issued for cash
at $10.00 per share. . . . . . . . . . . . . . . . . . . . . 145,000 14,500 1,435,500
Preference stock issued for cash
at $9.24 per share . . . . . . . . . . . . . . . . . . . . . 86,329 8,633 788,064
Preference stock issued for cash
at $10.77 per share. . . . . . . . . . . . . . . . . . . . . 453,197 45,320 4,833,392
Costs of raising equity. . . . . . . . . . . . . . . . . . . . . - - (570,569)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - .
------------------------------- -------- ------------
BALANCE, September 30, 1997. . . . . . . . . . . . . . . . . . . 2,571,328 257,133 23,387,975
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
------------------------------- -------- ------------
BALANCE, September 30, 1998. . . . . . . . . . . . . . . . . . . 2,571,328 $257,133 $23,387,975
=============================== ======== ============
</TABLE
The accompanying notes are an integral part of these statements.
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------- ------------
<S> <C> <C>
Inception, December 6, 1994. . . . . . . . . . . . . . . . . . . $ - $ -
Common stock Series A. . . . . . . . . . . . . . . . . . . . . . - 25,000
Common stock Series B issued
for services rendered . . . . . . . . . . . . . . . . . . . . - -
Preference stock issued for cash
at $5.00 per share . . . . . . . . . . . . . . . . . . . . . - 875,000
Preference stock issued for cash
at $10.00 per share . . . . . . . . . . . . . . . . . . . . - 1,130,000
Costs of raising equity. . . . . . . . . . . . . . . . . . . . . - (134,950)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (433,341) (433,341)
------------- ------------
BALANCE, September 30, 1995. . . . . . . . . . . . . . . . . . . (433,341) 1,461,709
Preference stock issued for cash
at $10.00 per share. . . . . . . . . . . . . . . . . . . . . - 7,846,950
Preference stock issued for cash
at $9.00 per share . . . . . . . . . . . . . . . . . . . . . - 50,000
Preference stock issued for cash
at $9.24 per share . . . . . . . . . . . . . . . . . . . . . - 9,088,018
Costs of raising equity. . . . . . . . . . . . . . . . . . . . . - (1,764,886)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (845,784) (845,784)
------------- ------------
BALANCE, September 30, 1996. . . . . . . . . . . . . . . . . . . (1,279,125) 15,836,007
Preference stock issued for cash
at $10.00 per share. . . . . . . . . . . . . . . . . . . . . - 1,450,000
Preference stock issued for cash
at $9.24 per share . . . . . . . . . . . . . . . . . . . . . - 796,697
Preference stock issued for cash
at $10.77 per share. . . . . . . . . . . . . . . . . . . . . - 4,878,712
Costs of raising equity. . . . . . . . . . . . . . . . . . . . . - (570,569)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,005,290) (1,005,290)
------------- ------------
BALANCE, September 30, 1997. . . . . . . . . . . . . . . . . . . (2,284,415) 21,385,557
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,229,562) (5,229,562)
------------- ------------
BALANCE, September 30, 1998. . . . . . . . . . . . . . . . . . . $ (7,513,977) $16,155,995
============= ============
</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, 1998, 1997, 1996 AND
------------------------------------------------------
FROM THE DATE OF INCEPTION, DECEMBER 6, 1994, TO SEPTEMBER 30, 1998
-------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Inception to
---------------
September 30, September 30, September 30, September 30,
---------------
1998 1997 1996 1998
--------------- --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
- -------------------------------------------------
<S> <C> <C> <C> <C>
Net loss. . . . . . . . . . . . . . . . . . . . . $ (5,229,562) $ (1,005,290) $ (845,784) $ (7,513,977)
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. . . . . . . . . . . . . . . 39,037 30,707 21,984 94,263
Accrued interest receivable and prepaid expenses. 45,785 (67,450) (9,073) (30,738)
Increase in accounts payable and accrued expenses (253,684) (206,333) 279,525 (46,304)
--------------- --------------- --------------- ---------------
Net cash used by operating activities . . . . . . (2,452,639) (1,248,366) (553,348) (4,550,971)
--------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
- -------------------------------------------------
Payments for PCS licenses . . . . . . . . . . . . - (3,387,664) (11,819,284) (15,206,948)
Payments for other capitalized system costs . . . (170,000) (312,119) - (482,119)
Advanced on note receivable . . . . . . . . . . . - - (50,000) (50,000)
Purchases of furniture and equipment. . . . . . . (46,534) (43,055) (104,620) (205,579)
Payment of deposits and organizational costs. . . (500,000) (8,024) (4,055) (514,229)
Net cash used by investing activities . . . . . . (716,534) (3,750,862) (11,977,959) (16,458,875)
--------------- --------------- --------------- ---------------
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. . . . . . . . . . . . . . - 6,554,840 15,389,118 23,644,972
Advances from (repayments to) stockholder - net . - (174,104) 171,138 -
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 23,669,972
--------------- --------------- --------------- ---------------
Net increase in cash. . . . . . . . . . . . . . . (3,169,173) 381,508 4,028,949 2,660,126
Cash at beginning of period . . . . . . . . . . . 5,829,299 5,447,791 1,418,842 -
--------------- --------------- --------------- ---------------
Cash at end of period . . . . . . . . . . . . . . $ 2,660,126 $ 5,829,299 $ 5,447,791 $ 2,660,126
=============== =============== =============== ===============
</TABLE>
See Note 1 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 licenses obtained at the
FCC auctions. 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. As discussed in Note
2, the Companies elected in June 1998 to return one-half of the C block PCS
spectrum (15 MHz of the 30 MHz) to the FCC in exchange for a 50% reduction in
the respective license debts.
The 21st JV also 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
winning 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"). The 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 financial 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 originally paid $9,819,284 in cash and financed the
remaining 90%, or $88,373,554, with the FCC. 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.
As more fully described in Note 2, on June 8, 1998 the Company elected to return
one-half of the C block license spectrum in exchange for a 50% reduction in the
related license debts and accrued interest. Accordingly, the Company reduced
the carrying value of the C block licenses by $43,698,686 to reflect the
forgiveness of debt and the return of the C block license spectrum to the FCC.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
---------------------------------
D. PCS LICENSE COSTS AND CAPITALIZED SYSTEM DEVELOPMENT COSTS (continued)
------------------------------------------------------------
At September 30, 1998 and 1997, the Companies PCS licenses consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash payments . . . . . . . . . . . . $ 6,929,125 $11,838,767
Net present value of debt obligations 33,572,157 64,536,596
Capitalized interest costs. . . . . . 8,773,581 8,595,839
----------- -----------
$49,274,863 $84,971,202
=========== ===========
</TABLE>
Costs incurred related to the design and development of the PCS System have been
capitalized. When the assets are placed in service, these costs will be
transferred to the appropriate equipment category and depreciated over the
estimated useful life of the equipment.
Management periodically reviews the values assigned to the PCS licenses and the
capitalized system development costs 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 and the capitalized
system development costs in the accompanying combined financial statements are
appropriately valued although the uncertainties described in Note 7 could have a
significant affect on this evaluation in the near future.
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.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
---------------------------------
F. ORGANIZATIONAL COSTS
---------------------
The Companies incurred various costs associated with the formation of the
Companies. These costs were capitalized in these combined financial statements
and were to be amortized on a straight-line basis once operations commenced.
During the year ended September 30, 1998, the Companies expensed these
insignificant balances pursuant to the adoption of Statement of Position 98-5
"Reporting on the Costs of Startup Activities".
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.
I. 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 no quoted market value, is
discussed in Note 2.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
---------------------------------
J. 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 Year Ended Inception to
September 30, September 30, September 30, September 30,
1998 1997 1996 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash paid for interest. . . . $ - $ 3,183,906 $ 457 $ 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
PCS licenses exchanged
for debt forgiveness. . . . 43,698,686 - - 43,698,686
Capitalization of interest
not paid. . . . . . . . . . 8,002,496 5,211,892 290,723 13,505,111
Forgiven accrued interest
capitalized . . . . . . . . 7,751,012 - - 7,751,012
Common stock issued in
exchange for origination
costs paid by stockholder . - - - 20,000
</TABLE>
<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 for each of the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
21st Century Telesis, Inc.
- --------------------------------------
Numerator: Net loss . . . . . . . . ($1,015,353) ($296,735) ($295,066)
============ ========== ==========
Denominator: weighted average shares
outstanding
Common stock - Series A. . . . . . 736,429 736,429 736,429
Common stock - Series B. . . . . . 1,643,214 1,643,214 1,643,214
Preference stock . . . . . . . . . 175,000 175,000 175,000
------------ ---------- ----------
2,554,643 2,554,643 2,554,643
============ ========== ==========
Basic and diluted EPS. . . . . . . . ($.40) ($.12) ($.12)
============ ========== ==========
21st Century Telesis II, Inc.
- --------------------------------------
Numerator: Net loss . . . . . . . . ($4,214,209) ($708,555) ($550,718)
============ ========== ==========
Denominator:
Weighted average preference
shares outstanding . . . . . . . 2,571,328 2,399,447 590,751
============ ========== ==========
Basic and diluted EPS. . . . . . . . ($1.64) ($.30) ($.93)
============ ========== ==========
</TABLE>
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
L. 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 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.
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. The 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.
2. 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 required
interest at a rate of 7.0% per annum due in quarterly interest payments through
September 30, 2002. Commencing December 31, 2002, quarterly principal and
interest payments were 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 represented 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.
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. Commencing July 28, 1999,
quarterly principal and interest payments were 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 were
recorded at $2,607,569 which represented the net present value of these payments
based on the Company's estimated borrowing cost of 13% for similar debt.
<PAGE>
2. FCC LICENSE OBLIGATIONS (continued)
-------------------------
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.
On June 8, 1998, the Company elected to return one-half of the spectrum (15
MHz of its 30 MHz) for each if its C block licenses as provided by a FCC Order
allowing C block license holders to restructure their debts. This
dissagregation election extinguished 50% of the respective license debt and
accrued interest and prohibits the Company 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 representing the forfeiture of part of the
original down payment on the C block 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 with a carrying value of $33,001,889
at September 30, 1998 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 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, 1998, 1997 and
1996, the Companies capitalized $8,002,466, $8,304,966 and $290,723,
respectively, as interest costs. As previously discussed, accrued interest was
forgiven by the FCC on June 8, 1998 and resulted in the reduction of capitalized
interest cost of $7,824,307 during the year ended September 30, 1998.
The license notes, after considering the restructured C block license note
terms, require future minimum principal payments (without consideration of the
discount) during each of the years ending September 30 as follows: $88,308 in
1999; $367,249 in 2000; $390,746 in 2001; $415,746 in 2002; $820,973 in 2003:
and $38,734,189 is due in years thereafter.
3. 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.
<PAGE>
3. CAPITAL STOCK (continued)
--------------
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.
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, 1998 and
1997, 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 7), 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.
4. CAPITAL STOCK OPTIONS AND WARRANTS
--------------------------------------
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. Management also approved and issued another 50,000 warrants in
August 1998 for broker services. 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, the future sale of 21 II capital stock, or in connection with securing
long-term financing. No warrants were forfeited or exercised through September
30, 1998.
5. 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, 1998 and 1997, the Companies paid $170,000 and $227,170 for these
engineering services. The Companies owed this firm $0 and $254,752 at September
30, 1998 and 1997, respectively. The majority of these costs have been
capitalized as network design and development costs.
<PAGE>
5. RELATED PARTY TRANSACTIONS (continued)
----------------------------
The Companies paid $48,063, $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, 1998, 1997 and 1996, respectively. 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 commitments to offer the opportunity to two
stockholders and director to build and/or manage the PCS network in two of the
Companies' license areas. The Companies 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.
6. PROVISION FOR INCOME TAXES
-----------------------------
The components of the provision for income taxes for each of the years ended
September 30, 1998, 1997, and 1996 and for the period from inception to
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Inception to
1998 1997 1996 September 30, 1998
-------------- ---------- ---------- --------------------
<S> <C> <C> <C> <C>
Current tax expense. . $ - ($6,815) $ 6,815 $ -
Deferred tax (benefit)
provision. . . . . . (1,764,070) (292,895) (279,245) (2,496,530)
-------------- ---------- ---------- --------------------
(1,764,070) (299,710) (272,430) (2,496,530)
Change in valuation
Allowance . . . . . 1,764,070 299,710 272,430 2,496,530
-------------- ---------- ---------- --------------------
Income tax expense . . $ - $ - $ - $ -
============== ========== ========== ====================
</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, 1998,
1997 and 1996. 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 $9 million which may be available to offset
future taxable income.
<PAGE>
6. PROVISION FOR INCOME TAXES (continued)
-----------------------------
The combined provision for income taxes differs from the provision computed at
the statutory federal income tax rates for each of the years ended September 30,
1998, 1997, and 1996 and for the period from inception to September 30, 1998 for
the following reasons:
<TABLE>
<CAPTION>
Inception to
1998 1997 1996 September 30, 1998
-------------- ------------- ----------- --------------------
<S> <C> <C> <C> <C>
Net loss before income
taxes. . . . . . . . . ($5,229,562) ($1,005,290) ($845,784) ($7,513,977)
============== ============= =========== ====================
Income tax at statutory
Rates. . . . . . . . ($1,778,050) ($341,799) ($287,567) ($2,554,752)
Non-deductible expenses. 13,980 42,089 15,137 58,222
Change in valuation
allowance. . . . . . . . 1,764,070 299,710 272,430 2,496,530
-------------- ------------- ----------- --------------------
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred pre-operating and
developmental costs . . . . . . . . $ 1,412,500 $ 719,400
Net operating loss carryforwards. . . 3,129,230 2,116,360
------------ ------------
4,541,730 2,835,760
Less: Valuation allowances . . . . . (2,496,530) (732,460)
------------ ------------
2,045,200 2,103,300
Deferred tax liabilities:
Tax deduction of capitalized interest (2,045,200) (2,103,300)
------------ ------------
Net deferred tax asset. . . . . . . . $ - $ -
============ ============
</TABLE>
<PAGE>
7. 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 $10 per
share. Accordingly, at September 30, 1998 21st I was obligated to issue 19,886
shares of its preference shares at par value ($ .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 has negotiated with certain 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 for
the Companies' operating regions. The contract is subject to the ability of the
Companies to obtain satisfactory financing for the network development. Similar
conditional contracts have been entered into for the construction of central
office structures, telephone handsets, and various facility site locations. 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>
7. 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 capital in the amount of $150 to
$280 million, to be raised in the form of equity and debt financing with partial
guarantees by prospective equipment vendors. Such efforts to date have been
unsuccessful. These difficulties have caused the Companies to actively pursue
the possibility of securing smaller amounts of financing needed to build out a
portion of their markets, with the plan that the balance of their markets could
be built at some indefinite time in the future. In this connection, the
Companies have entered into an agreement to borrow from a substantial lender an
amount of up to $100 million to finance the deployment of PCS systems in all of
their Indiana markets except Indianapolis. See Note 8. Management intends to
continue to pursue capital for the development of all of its PCS license
markets. 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.
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:
1999 $ 149,975
2000 147,536
2001 164,699
2002 155,114
2003 51,509
Thereafter 189,737
-------
Total minimum lease commitments $ 858,570
= =======
Other
- -----
The Companies had amounts on deposit with financial institutions in excess of
federally insured limits totaling $2,454,000 at September 30, 1998.
<PAGE>
8. 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. At September 30, 1998, the Companies had $2,660,126 of cash
on deposit and current liabilities of $1,529,561, consisting primarily of
accrued interest payable. Management anticipates that its available cash will
not be sufficient to fund its operations at the present level and to make the
next scheduled interest payment on all of the FCC license obligations due on
April 28, 1999. Failure to make an installment payment on any FCC license
obligation will bring about the forfeiture of the license and all amounts paid
on such license.
The Companies entered into a commitment letter with a bank on December 29, 1998
for a multiple draw term loan facility for up to $100 million; the availability
of which is dependent on numerous contingencies and the Companies satisfying
certain conditions. The most significant financial condition is the requirement
that the Companies must have secured commitments for $50 million in additional
equity by April 15, 1999, with not less than $25 million having been subscribed
in cash by such date. The loan commitment is also contingent upon completion
of, among other things, usual due diligence reviews, no adverse changes in the
financial condition and operations of the Companies, no adverse conditions in
the capital or syndication markets, completion of satisfactory guarantees, and
the payment of various fees and costs by the Companies. The Companies are in
active discussion with a number of institutional investors in an effort to
secure additional equity, but no assurances can be given that they will be
successful in their attempt to raise additional equity capital
This borrowing facility and the additional equity capital are intended to
provide funds necessary for working capital, debt service requirements, and to
deploy the Companies' PCS systems in all of its Indiana markets except
Indianapolis. The loan commitment is to be divided into two tranches, the first
of which is for $45 million and is to be guaranteed by Hughes Electronics
Company and used only to purchase and install equipment, services, and software
from Hughes Electronics Company. The second tranche for up to $55 million is to
be available upon achievement of certain predetermined build out and subscriber
criteria and will be limited to a borrowing base derived from the amount of
qualifying PCS system subscribers in the initial Indiana markets. Management
believes, but cannot assure, that if the selected Indiana markets are
successful, additional financing will become available from the same source or
other sources to build out the reminder of its PCS license markets, including
Indianapolis.
In the event the Companies are unsuccessful in their attempt to secure new
equity capital, or are unable promptly to satisfy the conditions of the debt
facility mentioned above, management intends to seek alternative financing,
including bridge financing, from one or more vendors of PCS systems based on an
alternative PCS technical standard than is currently being pursued by
management. There can be no assurance offered that the Companies will be
successful in arranging such alternative financing.
<PAGE>
8. UNCERTAINTIES REGARDING FUTURE OPERATIONS (continued)
--------------------------------------------
If the Companies are not successful in attracting new financing prior to the end
of April, 1999, management may elect not to make their C block license payments,
thereby forfeiting their 17 C block licenses. The amount saved thereby -
approximately $773,000 - is expected to give the Companies sufficient cash to
continue operations (assuming uniform levels of expenditure at the current
levels) through the balance of the period ending June 30, 1999. During such
period the Companies intend to continue to seek financing for the build out of
their 10 remaining PCS license markets.
9. 21ST CENTURY TELESIS (II), INC.
-----------------------------------
As described in Note 1, the combined financial statements included in the
financial statements of 21st Century Telesis (II), Inc. The condensed balance
sheets at September 30, 1998 and 1997 and the condensed statements of operation
and cash flows for each of the years during the three year period ended
September 30, 1998 and for the period from inception to September 30, 1998 of
21st II are presented below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Condensed Balance Sheet
- ------------------------------------------------
Assets:
Cash and cash equivalents. . . . . . . . . . . . $ 249,741 $ 5,784,144
Investment in 21st Century Joint Venture . . . . 16,985,296 18,886,765
Organizational costs . . . . . . . . . . . . . . - 1,400
------------ ------------
$17,235,037 $24,672,309
============ ============
Liabilities:
Accounts payable and accrued expenses. . . . . . $ 23,995 $ 72,058
Due to 21st Century Joint Venture. . . . . . . . 546 3,175,546
------------ ------------
24,541 3,247,604
------------ ------------
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . 1,000 1,000
Preference stock . . . . . . . . . . . . . . . . 257,133 257,133
Additional paid-in capital . . . . . . . . . . . 22,512,839 22,512,839
Deficit accumulated during the development stage (5,560,476) (1,346,267)
------------ ------------
17,210,496 21,424,705
------------ ------------
$17,235,037 $24,672,309
============ ============
</TABLE>
<PAGE>
9. 21ST CENTURY TELESIS (II), INC. (continued)
-----------------------------------
<TABLE>
<CAPTION>
Year ended Year ended Year ended Inception to
September 30, September 30, September 30, September 30,
1998 1997 1996 1998
--------------- ------------------------------ --------------- ---------------
Condensed Statement of Operations
- --------------------------------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $ - $ - $ - $ -
Loss from unconsolidated affiliate 3,715,928 849,942 351,593 4,917,463
Management fee to 21st I . . . . . 540,000 - 240,000 874,000
Miscellaneous expense. . . . . . . 12,077 17,339 21,833 51,278
--------------- ------------------------------ --------------- ---------------
4,268,005 867,281 613,426 5,842,741
Interest income. . . . . . . . . . 53,796 158,726 62,708 282,265
--------------- ------------------------------ --------------- ---------------
Net income . . . . . . . . . . . . ($4,214,209) ($708,555) ($550,718) ($5,560,476)
=============== ============================== =============== ===============
Condensed Statement of Cash Flows
- --------------------------------------
Cash flows from operating
activities:
Net losses . . . . . . . . . . . ($4,214,209) ($708,555) ($550,718) ($5,560,476)
Losses from 21st JV 3,715,928 849,942 351,593 4,917,463
Changes in operating assets
and liabilities. . . . . . . . (46,663) (158,597) 229,635 23,995
--------------- ------------------------------ --------------- ---------------
(544,944) (17,210) 30,510 (619,018)
Cash flows from investing
activities:
Investments in 21st JV . . . . . (4,989,459) (6,082,754) (10,830,000) (21,902,213)
Cash flows from financing
activities:
Proceeds from issuance
of stock . . . . . . . . . . . . - 6,554,840 15,198,552 22,770,972
--------------- ------------------------------ --------------- ---------------
Net change in cash . . . . . . . . (5,534,403) 454,876 4,399,062 249,741
Cash at beginning of year. . . . . 5,784,144 5,329,268 930,206 -
--------------- ------------------------------ --------------- ---------------
Cash at end of year. . . . . . . . $ 249,741 $ 5,784,144 $ 5,329,268 $ 249,741
=============== ============================== =============== ===============
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Inapplicable.
Item 10. Directors and Executive Officers of Registrant.
Current officers of the Company are identified in the following table:
<TABLE>
<CAPTION>
Name Position
<S> <C>
Robert Andrew Hart IV Chairman and Chief Executive Officer
Philip J. Chasmar . . Executive Vice President,
Secretary
Dion S. Whitman . . . Chief Information Officer and Acting Chief Financial Officer
James A. LaBelle. . . Chief Operating Officer
</TABLE>
Robert Andrew Hart IV has served as Chairman and Chief Executive Officer of the
21st Century Telesis companies since their formation. For a period beginning
more than five years before the present, he has been the owner and principal
professional of Hart Engineers, Baton Rouge, Louisiana, a telecommunications
engineering firm. Mr. Hart serves on the Board of Directors of the Small
Business PCS Association, a trade association of nationwide scope focused on
small business applications and opportunities in PCS technology. Mr. Hart has
also served as Chairman of the Lobbying Committee of this organization. Mr.
Hart, who is 51 years old, is a graduate of Louisiana State University, with a
degree in electrical engineering, and is a Registered Professional Electrical
Engineer.
Philip J. Chasmar is one of the founders of the 21st Century Telesis project,
and has served as Secretary of the 21st Century Telesis companies since their
formation. He was appointed as Executive Vice President and elected to the
boards of directors of the companies in December, 1996. Mr. Chasmar is a member
of the "Control Group" identified to the Federal Communications Commission in
connection with the grant of the companies' PCS licenses. Prior to his
involvement in the 21st Century Telesis project he served in various marketing
capacities with American Wireless Systems, United Communications and Vision
Communications. Mr. Chasmar is a graduate of the Newhouse School of
Communications of Syracuse University. Mr. Chasmar is 41 years old.
James A. LaBellewas appointed Chief Operating Officer of the Company in October,
1997. Prior to this appointment, Mr. LaBelle served from 1995 to 1997 as Area
President - Midwest of GTE Wireless Products and Services, in which position he
had overall management responsibility for a four-state cellular operation with
500 employees and 500,000 customers. Prior to that time, Mr. LaBelle served from
1990 to 1995 as Area President - Florida for GTE Wireless Products and Services,
in which position he oversaw the growth of this cellular service from 30,000 to
350,000 customers. Mr. LaBelle is 52 years of age and received a Bachelor of
Business Administration degree from the University of Wisconsin in 1967 and
participated in the GTE Executive Development Program from 1980 to 1997.
Dion S. Whitman is one of the founding stockholders of the Company, and joined
it full-time in August, 1996. Prior to that time, Mr. Whitman had served from
May, 1994 as Controller/Chief Financial Office of the Long Beach Civic Light
Opera, a non-profit musical theater production company; prior to that time Mr.
Whitman served as Regional Controller of the Drug Emporium, a Southern
California retail drug chain, and in a sales capacity at United Communications,
LTD. Mr. Whitman is 39 years old, and received a B.A. degree from the University
of Southern California.
The directors of the Company are identified below:
Robert Andrew Hart IV Philip J. Chasmar
James Ross Rasco Joseph A Miller III
Vincent E. Stuedeman Allen Terrell
Philip Nelson Frank Coughlin
H. Randolph Hart Jeffrey V. Barbieri
Lawrence Kaufman John H. Greenberg
James C. Roddey
The business backgrounds of Messrs. Hart and Chasmar are given above. The
business backgrounds of the balance of the directors are set forth below.
James C. Roddey is Chairman of Star Cable Associates, Chairman of International
Sports Marketing, Chairman of the Bantry Group, a nationwide provider of
specialized health services, President of Business Records Management and
Chairman of Production Masters, IncHe is a former President and Director of
Turner Communications Corporation and of Rollins Communications Corporation. Mr.
Roddey also serves on the boards of Allin Communications Corporation and
Clo-White, Inc. Mr. Roddey is also active in charitable and civic organizations,
serving on the boards of the University of Pittsburgh, the University of
Pittsburgh Medical Center and many other Pittsburgh area organizations. Mr.
Roddey is 65 years of age and has served as a director of the two 21st Century
Telesis companies since 1995.
John Hendrix Greenberg for a period beginning more than five years before the
present has been President and General Manager of the Brazoria Telephone Company
of Brazoria, Texas. Mr. Greenberg is actively involved in a large number of
trade associations that represent the interests of small- and medium-size
telephone companies. Mr. Greenberg, who is 47 years old, has served as a
director of the two 21st Century Telesis companies since 1995.
Joseph A. Miller III is Vice President and General Manager of the Georgetown
Telephone Company of Georgetown, Mississippi and the President of Miller
Cablevision. Mr. Miller is a former President of the Alabama Mississippi
Telephone Association, and serves as a director of Bank of the South, of Crystal
Springs, Miss. Mr. Miller, who is 37 years old, has served as a director of the
two 21st Century Telesis companies since 1995.
Gilbert Ross Rasco is Vice President of Operations of the Brazoria Telephone
Company, Brazoria, Texas. Mr. Rasco has served for a number of years as a member
of the Texas Telephone Association Legislative Committee and as a member of that
Association's Academic Advisory Board. Mr. Rasco, who is 46 years old, has
served as a director of the two 21st Century Telesis companies since 1995.
Vincent E. Stuedeman is a certified public accountant with substantial
experience in telecommunications auditing; since 1980 he has been a member of
Martin Stuedeman & Associates, P.C., of Birmingham, Alabama, and he currently
serves as its President. Mr. Stuedeman is a member of the American Institute of
Certified Public Accountants and of the Alabama Society of Certified Public
Accountants. Mr. Stuedeman, who is 49 years old, has served as a director of
the two 21st Century Telesis companies since 1995.
Allen Terrell for a period of more than five years has been the President of the
Rochester Telephone Company, of Rochester, Indiana, and also serves as a
director of that publicly-held company. Mr. Terrell, who is 48 years old, was
elected to the boards of the 21st Century Telesis companies in December, 1996.
Mr. Terrell is also a director of Norwest Bank Indiana, N.A., of Fort Wayne,
Indiana, a publicly-held banking company.
Philip Nelson has been the President of the Hamilton Telephone Company of
Aurora, Nebraska for more than five years. Mr. Nelson, who is 58 years of age,
was elected to the boards of the 21st Century Telesis companies in December,
1996.
Frank Coughlin is a principal owner of the Lackawaxen Telephone Company, of
Rowland, Pennsylvania. Mr. Coughlin, who is 38 years of age, was elected to the
boards of the 21st Century Telesis companies in December, 1996.
H. Randolph Hart is the general partner of the H. R. Hart Communications Limited
Partnership, the original major investor in 21st I, and the brother of Mr.
Robert Andrew Hart IV. For a period of more than five years, Mr. Hart has been
Credit Manager of the Coca Cola Bottling Company of Baton Rouge, Louisiana, and
was elected to the boards of the 21st Century Telesis companies in December,
1996. Mr. Hart is 47 years old.
Jeffery V. Barbieri and Lawrence Kaufman are two of the original founders of the
21st Century Telesis companies, and are members of the "Control Group"
identified to the FCC. Prior to their involvement in the 21st Century Telesis
project they served in various marketing capacities with American Wireless
Systems, United Communications and Vision Communications. Messrs. Barbieri and
Kaufman were elected to the boards of the 21st Century Telesis companies in
December, 1996. Mr. Barbieri is 36 years old and Mr. Kaufman is 54.
The founders of the company were identified to the Federal Communications
Commission as members of the company's "Control Group," and were appointed as
officers and directors as a result of the requirement of the FCC that Control
Group members be active in the day to day management of the business. These
persons are Mr. Robert Andrew Hart IV, Chairman and Chief Executive Officer;
Philip J. Chasmar, Executive Vice President, Secretary and a director; Lawrence
Kaufman, a director; Jeffery Barbieri, a director; Dion Whitman, the company's
Chief Information Officer and Acting Chief Financial Officer; H. Randolph Hart,
an Assistant Secretary of the company and a director.
Certain board members were asked to serve as such because of their investment in
the H. Randolph Hart Communications L.P., which provided the seed capital for
the project, and/or because of their longstanding business ties with Mr. Robert
Andrew Hart IV. These individuals are John H. Greenberg; Gilbert Ross Rasco;
Joseph A Miller III; and Vincent E. Stuedeman.
Several individuals were asked (or sought) to serve as directors because of
sizable investments in the project, either directly or through affiliates: James
C. Roddey; Allen Terrell; Philip Nelson; and Frank Coughlin.
All the above-named directors have been re-elected by stockholders subsequent to
their initial appointments.
Form 3:
- --------
Through inadvertance, none of registrant's directors or officers filed Form 3
notifications by the time that registrant's registration statement on Form 10
had become effective. Each of such officers and directors has advised the
registrant that the oversight will be remedied forthwith.
There is no established market for or trading in the securities of the
registrant, and no shares of registrant have been sold to any person during the
fiscal year ended September 30, 1998. Securities of registrant owned by its
officers and directors are as set forth in Item 12 below, and such ownership has
remained unchanged throughout the fiscal year ended September 30, 1998, with
this exception: as disclosed in Item 11, below, the 9 non-employee directors
have the option of receiving, in lieu of cash attendance fees, warrants to
purchase 125 shares of registrant's preference stock at $10 per share for each
meeting attended during the year, up to a total of 500 shares for the year. Each
of such individuals has indicated that they wish to receive warrants in lieu of
cash fees. Accordingly, the ownership totals reflected in Item 12 will be
increased by 500 warrants each on the Form 3 notifications which will promptly
be filed by Messrs. H. R. Hart, Roddey, Terrell, Coughlin, Greenberg, Rascoe,
Nelson, Miller and Stuedeman. Ownership totals shown on the Form 3 notifications
to be filed by the remaining directors, viz., Messrs. R.A. Hart, Chasmar,
Barbieri and Kaufman, and by Messrs. And LaBelle and Whitman, who are officers
but do not serve as directors, will be as shown in Item 12.
Item 11. Executive Compensation.
Item 11 - Executive Compensation
The following table sets forth the total compensation paid to the executive
officers of registrant during the years indicated. All compensation was paid in
the form of salary; registrant has not yet adopted any deferred or incentive
compensation plans. All the individuals noted in the table save Messrs. Heller
and LaBelle are members of registrant's promotional group, and Messrs. Hart,
Chasmar, Barbieri, Kaufman and Whitman are members of registrant's "control
group' identified to the FCC. See Item 1.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Robert Andrew Hart IV . . Chairman of the Board;
Chief Executive Officer $98,250.00 $ 92,750.00 $154,531.40
Philip J. Chasmar . . . . Executive Vice President;
Secretary . . . . . . . $95,049.92 $ 87,549.92 $ 94,944.84
Jeffery V. Barbieri . . . Senior Executive; $ 91,049.92 $ 89,149.92 $94,944.84
Lawrence Kaufman. . . . . Senior Executive $ 93,049.92 $ 87,549.92 $80,559.84
Dion Whitman. . . . . . . Acting Chief Financial
Officer;
Chief Information
Officer . . . . . . . . $72,000.00 $ 66,500.00 $ 24,769.20
James LaBelle . . . . . . Chief Operating Officer 170,200.00 $ 37,000.00 $ -
Doug L. Heller. . . . . . Chief Financial Officer $ - $ 35,807.20 $89,623.60
</TABLE>
(g) Compensation of Directors
Those directors who are not employees of the company, viz., Messrs. Roddey,
Terrell, Nelson, Coughlin, Miller, Greenberg, Rasco, Stuedeman and H. Randolph
Hart, receive attendance fees of $1,250 per meeting, with a maximum of $5,000
payable for any single year (exclusive of expenses of attendance, which are
reimbursed in full). Such fees are payable in cash, or, at the election of a
director, are payable in the form of warrants to purchase shares of preference
stock of 21st Century Telesis (II), Inc.; such warrants currently have an
exercise price of $10 per share, and will be deemed to have a value of $10 per
share, so that the $1,250 fee for attendance at a meeting will be paid in the
form of an option to purchase 125 shares at an exercise price of $10 per share.
The options will have a term of 10 years and are fully vested upon issuance.
(h) Employment Contracts
Each of Messrs. Robert Andrew Hart IV, Philip J. Chasmar, Jeffery V. Barbieri,
Lawrence Kaufman and Dion Whitman, who comprise registrant's promotional group,
has a written employment contract with registrant. All of such contracts are
terminable at the will of registrant's board of directors, and no termination
indemnities are payable in connection with any such termination.
Mr. James LaBelle, registrant's Chief Operating Officer, is party to an
employment contract with registrant pursuant to the terms of which he is to
receive a base annual salary of $171,600 plus an automobile allowance of
$500/month, with incentive compensation as follows: (a) a cash bonus of $25,000
upon completion of deployment of an operational PCS system in each Basic Trading
Area in which registrant possesses licenses to offer PCS service; (b) for each
full fiscal year for which the earnings before income taxes, depreciation and
amortization ("EBITDA") of registrant from the operation of PCS systems shall be
a positive number, as reflected in the annual audited financial statements of
registrant, Mr. LaBelle will be paid a cash bonus equal to 0.25% of EBITDA for
such year. The contract also calls for Mr. LaBelle to receive stock options
commensurate with his position at such time as registrant establishes an
employee stock option plan.
The contract is terminable at will, but if Mr. LaBelle is terminated
involuntarily following a change in control of registrant, he will be entitled
to receive a multiple of the base pay and incentive compensation he received in
the fiscal year next preceding such involuntary termination: the multiple will
be three times such annual compensation if the termination occurs within 12
months following a change in control; two times such annual compensation if the
change of control occurs during the 13th through 24th month following such
change in control; and an amount equal to such annual compensation if
termination occurs in the 25th through 36th month after such a change in
control. No indemnity will be payable for an involuntary termination that occurs
thereafter.
(j) Compensation Committee Interlocks and Insider Participation.
Registrant's compensation committee consists of Mr. Allen Terrell, Mr. James
Roddey and Mr. John Greenberg. None is an executive officer or employee of
registrant or any affiliate of registrant. No employee or executive officer of
registrant serves on the compensation committee of any entity whose board of
directors or compensation committee includes Mr. Terrell, Mr. Roddey or Mr.
Greenberg, or which employs any of them.
(k) Compensation Committee Action on Executive Compensation
Registrant's Compensation Committee was first organized on April 29, 1997. No
such committee had existed prior to that time. No action was proposed or taken
by the committee during the fiscal year ended September 30, 1998, to change the
compensation payable to any executive officer of registrant, as it was deemed
inappropriate materially to increase such compensation prior to the commencement
of operations.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) No persons other than members of management are known to own beneficially or
of record 5% or more of 21st Century Telesis, Inc. or 21st Century Telesis (II),
Inc.
(b) Security ownership of members of management is given in the table below:
<TABLE>
<CAPTION>
Name of Beneficial Title of Class Amount Percent of Class
Owner And Nature of
Beneficial Owner
<S> <C> <C> <C>
Robert Andrew Hart IV . . 21st Century Telesis, Inc. 392,857<F1> 23.91%
Series B common
Philip J. Chasmar . . . . " 457,286 27.83%
Jeffery V. Barbieri " 429,786 26.16%
Lawrence Kaufman. . . . . " 179,143 10.90%
Dion Whitman. . . . . . . " 102,142 6.22%
H. Randolph Hart. . . . . 21st Century Telesis, Inc. 736,429<F2> 100%
Series A Common
James C. Roddey<F3> . . . 21st Century Telesis, Inc. 60,000 34.28%
Preference Stock
John Hendrix Greenberg. . 21st Century Telesis (II) 25,000 1%
Preference Stock
Joseph A. Miller III. . . " 25,000<F4> 1%
Gilbert Ross Rasco. . . . 21st Century Telesis, Inc. 82,480<F5> 11.20%
Series A Common
Vincent E. Stuedeman. . . " 27,493<F6> 3.70%
Allen Terrell . . . . . . 21st Century Telesis (II) 62,500 2.40%
Preference Stock
Philip Nelson . . . . . . " 100,000 3.90%
Frank Coughlin. . . . . . " 115,000 4.50%
</TABLE>
<F1> Does not include Mr. Hart's 5.6% limited partner interest in the H. R.
Hart Communications LP.
<F2> Mr. H.Randolph Hart has a 16.6% undivided interest in the H.R. Hart
Communications LP as general partner. Mr. H. Randolph Hart and Mr. Robert Andrew
Hart IV are brothers.
<F3> Owned of record by Star Cable Partners; Mr. Roddey disclaims beneficial
ownership.
<F4> Includes 20,000 shares owned of record by Mr. Miller's mother, Olene
Miller, as to which Mr. Miller disclaims beneficial ownership. Does not include
Mr. Miller's one-third interest in the JOV Partnership, which owns an 11.2%
limited partner's interest in the H. R. Hart Communications LP.
<F5> A derived figure, representing Mr. Rasco's 11.2% limited partner's
interest in the H.R. Hart Communications LP.
<F6> A derived figure, representing Mr. Stuedeman's one-third interest in
the JOV Partnership, which in turn owns an 11.2% limited partner's interest in
the H. R. Hart Communications LP.
Item 13. Certain Relationships and Related Transactions.
(a) Transactions with management and others
Philip J. Chasmar and Jeffery V. Barbieri, both of whom are promoters and
directors of registrant, control Aventine, Inc., a Texas corporation which in
turn owns all the outstanding capital stock of Atlantic-Pacific Financial, Inc.,
an NASD broker-dealer that participated in the private placement of securities
of Registrant or its affiliates. , Registrant or registrant's affiliates (i.e.,
21st Century Telesis LLC and PCS Communications LLC) paid brokerage commissions
of $453,512 and $618,648 to Atlantic-Pacific Financial for the years ended
September 30, 1996 and 1997, respectively. All such payments were commissions
payable in connection with private offerings of securities of Registrant and
affiliates, and did not differ in kind from commissions paid to non-affiliated
broker-dealers participating in such private placements.
In addition to the foregoing, Registrant and/or its affiliated LLC's paid
$1,010,444 for the year ended September 30, 1996 and $436,959 for the year ended
September 30, 1997 and $48,063 for the year ended September 30, 1998 to
Aventine, Inc. Aventine utilized the amounts paid to it as follows. From the
$1,010,444 paid to it during the year ended September 30, 1996, it paid (a) a
total of $537,172 in finder' fees and wholesaling overrides (i.e., fees paid for
inducing broker-dealers other than Atlantic-Pacific Financial to participate in
the private placements) to six individuals, none of whom were officers or
directors of Registrant, or members of Registrant's promotional group or 5% or
more stockholders in Registrant; (b) salaries of $62,000 each to Messrs.
Chasmar, Barbieri and Kaufman; (c) repayment of a "seed money" advance in the
amount of $165,000 made by the H. R. Hart Communications L.P., one of
Registrant's promoters; and (d) the balance was used to help defray overhead.
From the $436,959 paid to Aventine during the 12 months ending September 30,
1997, Aventine paid (a) $135,322 in finders' fees and wholesaling fees to three
individuals, none of whom were officers or directors of Registrant, or members
of Registrant's promotional group or 5% or more stockholders in Registrant; (b)
salaries of $45,000 each to Messrs. Chasmar, Barbieri and Kaufman; repaid loans
totalling $53,966 made to it by three of its employees, none of whom were
officers or directors of Registrant, or members of Registrant's promotional
group or 5% or more stockholders in Registrant; and (c) utilized the balance to
help defray overhead. The $48,063 paid in 1998 was used by Aventine to help
defray overhead.
During December, 1996 and January, 1997 registrant paid a total of $174,104 to
Hart Engineers, a telecommunications engineering firm owned by Mr. Robert Andrew
Hart IV, the Chairman and Chief Executive Officer of registrant, and one of
registrant's promoters. The payments were reimbursements for advances made by
Hart Engineers for the benefit of registrant, principally during the period
prior to the commencement of and during the FCC's PCS auctions.
Registrant utilizes the services of Hart Engineers to provide engineering
oversight services for the deployment of registrant's PCS systems. The
arrangement, as authorized by registrant's board, calls for Hart Engineers to be
compensated for such services on a time and materials basis, at rates not to
exceed those customary in the industry for services of like character.
Registrant paid $227,170 to Hart Engineers for services for the twelve month
period ended September 30, 1997, and had an unpaid balance of an additional
approximately $254,752 as of such date, which amount was subsequently paid.
During the twelve month period ended September 30, 1998, Registrant paid Hart
Engineers $120,000 for services, with an additional $68,432.69 billed during
such period but paid after September 30, 1998.
Prior to the C block auctions, registrant agreed with one of its stockholders,
Georgetown Telephone Company, that in consideration of additional investment by
Georgetown, registrant would attempt to win the Jackson, MS market in the
auction, and would bid up to $7 million to do so. If the license was secured,
Georgetown was to be offered the opportunity to build and manage the PCS system
for the market and would also be given the right to partition Copiah and Simpson
counties from the market for a further payment of $50,000. Registrant
subsequently won the Jackson license, but at a cost greatly in excess of the $7
million ceiling contemplated in the agreement with Georgetown. Mr. Joseph E.
Miller, one of the directors of registrant, is Vice President and General
Manager of the Georgetown Telephone Company, and beneficial owner of of the
shares of registrant held of record by Georgetown. Neither registrant nor
Georgetown Telephone Company has taken any steps to implement these agreements.
Mr. Miller has informally indicated that he is not prepared at the present time
to waive Georgetown's rights thereunder. Registant considers that such
agreements are not enforceable in their original form, because the price paid
for the Jackson license substantially exceeded the $7million ceiling
contemplated by such agreements.
Family partnerships of which Mr. Frank Coughlin is a member purchased
115,000 shares of preference stock of registrant and received assurances that he
would be appointed to registrant's board and that he would be invited to serve
as a consultant to registrant for unspecified compensation. Mr. Coughlin was
appointed to registrant's board in December, 1996, and has since been elected by
stockholders. Although neither registrant nor Mr. Coughlin has taken any steps
to implement this agreement, Mr. Coughlin has informally indicated that he is
not prepared to relinquish his right to serve as a consultant to registrant in a
paid capacity at some future time.
The Hamilton Telephone Company, owned in part by Mr. Philip Nelson, one of
Registrant's directors, has an informal agreement with the Companies to provide
management and other services for portions of the Companies' Nebraska BTA's. In
the opinion of management of Registrant such agreement, if implemented, will not
have a material effect on the Companies' operations, prospects or profitability.
(d) Transactions with Promoters
Registrant was formed through the promotional efforts of Messrs. Robert
Andrew Hart IV, Philip J. Chasmar, Jeffery V. Barbieri, Lawrence Kaufman and
Dion Whitman. All five individuals continue to serve in executive capacities,
and all save Mr. Whitman are members of registrant's board of directors.
Compensation received by the promoters is as shown in Item 13 (a) above and in
Item 11. The ownership of registrant's stock by each promoter is shown in Item
12. All shares shown in Item 12 were issued for services rendered by the
promoters.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed with this report:
(1) 21st Century Telesis, Inc.; 21st Century Telesis (II), Inc.; 21st Century
Telesis Joint Venture and 21st Century Bidding Corp. (Development Stage
Companies) Combined Financial Statements dated September 30, 1998.
(2) Paribas Commitment Letter dated December 16, 1998, re secured financing, and
associated documents.
(3) Form of Agreement between the Antitrust Division of the United States
Department of Justice and 21st Century Telesis (II), Inc. respecting consent
proceeding.
No reports on Form 8-K were filed in the last quarter.
The following exhibits previously filed with registrant's registration statement
on Form 10 are incorporated herein by reference:
1. Certificate of Incorporation
2. Bylaws
3. 21st Century Telesis Joint Venture Agreement
4. James A. LaBelle Employment Contract
5. Premises Lease--South Bend, Indiana Operations Center
6. PCS Licenses
A. KNLF 303
B. KNLF 315
C. KNLF 304
D. KNLF 305
E. KNLF 306
F. KNLF 307
G. KNLF 308
H. KNLF 309
I. KNLF 310
J. KNLF 311
K. KNLF 312
L. KNLF 313
M. KNLF 314
N. KNLF 316
O. KNLF 317
P. KNLF 318
Q. KNLF 319
R. KNLF 888
S. KNLG 257
T. KNLG 258
U. KNLG 259
V. KNLG 260
W. KNLG 261
X. KNLG 262
Y. KNLG 263
Z. KNLG 264
AA. KNLG 265
Signatures:
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
21st Century Telesis (II), Inc., registrant
By: Robert Andrew Hart IV, Chief Executive Officer; Director
Dated: January 21, 1999
By: Philip J. Chasmar, Executive Vice President and Secretary; Director
By: Dion Whitman, Acting Chief Financial Officer
Dated: January 21, 1999
By: Jeffery Barbieri, Director
Dated: January 21, 1999
By: Lawrence Kaufman, Director
Dated: January 21, 1999
By: John H. Greenberg, Director
Dated: January 21, 1999
By: Gilbert Ross Rascoe, Director
Dated: January 21, 1999
By: H. Randolph Hart, Director
Dated: January 21, 1999
PARIBAS
21st Century Telesis, Inc.
650 Town Center Drive, Suite 1999
Costa Mesa, CA 92626
Attention: Philip J. Chasmar
Executive Vice President
December 16, 1998
Re: Commitment Letter / 21st Century Telesis, Inc. Senior Secured Financing
Gentleman:
You have advised Paribas ("Paribas") that 21st Century Telesis, Inc. (the
"Company") proposes to construct and operate a Personal Access Communications
System as developed by Hughes Electronics Company ("Hughes") in certain markets
in the State of Indiana (the "System Buildout").
Paribas understands that all funding required to effect the System
Buildout, to pay reasonable fees and expenses incurred in connection therewith
and to provide working capital financing for the Company and its subsidiaries
will be provided solely through the receipt of gross proceeds of at least $50
million from the issuance of common stock of the Company to persons, and on
terms and conditions, acceptable to Paribas and the incurrence of the Senior
Secured Financing as described below.
Paribas further understands that the Senior Secured Financing will be in
the form of (i) a multiple draw term loan facility fully guaranteed by Hughes in
the aggregate amount of $45 million and (ii) an additional multiple draw term
loan facility in the aggregate amount of $55 million (the term loan facilities
are hereinafter referred to as the "Senior Secured Financing"). A summary of the
proposed principal terms and conditions of the Senior Secured Financing is
attached as Exhibit A to this letter (the "Summary of Terms").
Paribas is pleased to confirm that, subject to and upon the terms and
conditions set forth herein and in the Summary of Terms, it will provide the
Senior Secured Financing. In connection with the Senior Secured Financing,
Paribas will act as agent for a syndicate of financial institutions (the
"Lenders") party to the Senior Secured Financing.
Paribas reserves the right, prior to or after execution of the definitive
credit documentation, to syndicate all or part of its commitments to one or more
Lenders that will become parties to such definitive credit documentation for the
Senior Secured Financing pursuant to a syndication to be managed by Paribas. You
hereby agree actively to assist Paribas
in achieving a satisfactory syndication. Such syndication will be
accomplished by a variety of
means, including direct contact during the syndication between the senior
management and advisors of the Company and the proposed syndicate members. To
assist Paribas in its syndication efforts, you hereby agree both before and
after the initial finding under the Senior Secured Financing (a) to provide and
cause your advisors to provide Paribas and the other proposed syndicate members
upon request with all reasonable information deemed necessary by us to complete
syndication, including but not limited to information and evaluations prepared
by the Company or on its or their behalf relating to the transactions
contemplated hereby and (b) to assist Paribas in the preparation of an
Information Memorandum to be used in connection with the syndication of the
Senior Secured Financing, including making available officers of the Company and
Hughes from time to time and to attend and make presentations regarding the
business and prospects of the Company and their respective subsidiaries at a
meeting or meetings of Lenders or prospective Lenders. It is understood and
agreed that, if Paribas deems such actions advisable in order to ensure
successful syndication of the Senior Secured Financing, Paribas shall be
entitled to change the structure, terms and conditions of the Senior Secured
Financing, including, without limitation, by increasing the pricing from that
set forth in the Summary of Terms and the Fee Letter and!or allocating (and
following the initial allocation, re-allocating) the aggregate amount of its
commitment with respect to the Facilities in a manner different from that set
forth herein and in the Summary of Terms or eliminating any of the facilities
comprising, or adding additional facilities to, the Senior Secured Financing,
provided that the aggregate commitments under the Senior Secured Financing
remains the same.
As you are aware, while Paribas has completed a substantial portion of its
business, financial and accounting due diligence analysis and review, it has not
completed all of such diligence. In addition, Paribas has not yet conducted its
legal due diligence. Paribas' willingness to provide the financing described in
this letter is therefore subject to its not learning during the completion of
such analysis and review anything that Paribas did not previously know and which
is materially negative with respect to the business, property, operations,
nature of assets, assets, liabilities, condition (financial or otherwise) or
prospects of the Company, Hughes or the System Buildout.
You hereby represent and covenant that (i) all information, which has been
or is hereafter made available to Paribas or the other Lenders by you or any of
your representatives in connection with the transactions contemplated hereby
(the "Information") is and will be complete and correct in all material respects
and does not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements contained therein
not materially misleading and (ii) all financial projections concerning the
Company and its subsidiaries that have been or are hereafter made available to
Paribas or the other Lenders by you in connection with the transactions
contemplated hereby (the "Projections") have been or will be prepared in good
faith based upon reasonable assumptions. You acknowledge that in arranging and
syndicating the Senior Secured Financing, Paribas will be using and relying on
the Information and Projections without independent verification thereof. In
issuing this commitment, Paribas is relying on the accuracy of the information
furnished by you or on your behalf.
You agree to pay all out-of-pocket costs and expenses (including the
reasonable fees and expenses of White & Case and local counsel) of Paribas and
any of its agents or affiliates (collectively the "Paribas Group") arising in
connection with the preparation, execution and delivery of this letter (and
Paribas' due diligence in connection herewith) and in connection with the
transactions described herein (including the syndication of the Senior Secured
Financing), whether or not the Senior Secured Financing is made available or
definitive credit documents are executed. Whether or not the transactions
contemplated in this letter are consummated, you further agree to indemnify and
hold harmless each member of the Paribas Group and each of the other Lenders,
and each director, officer, employee and affiliate thereof (each an "indemnified
person") from and against any and all actions, suits, proceedings (including any
investigations or inquiries), claims, losses, damages, liabilities or expenses
of any kind or nature whatsoever which may be incurred by or asserted against or
involve the Paribas Group, any Lender or any such other indemnified person
(whether asserted by you or any other person) as a result of or arising out of
or in any way related to or resulting from this letter, the transactions
described in this letter or any eventual extension of the Senior Secured
Financing or in any way arising from any use or intended use of this letter or
the proceeds of any of the Senior Secured Financing and, upon demand, to pay and
reimburse the Paribas Group, any Lender and each other indemnified person for
any legal or other expenses incurred in connection with investigating, defending
or preparing to defend any such action, suit, proceeding (including any inquiry
or investigation) or claim (whether or not the Paribas Group, any Lender or any
such other indemnified person is a party to any action or proceeding out of
which any such expenses arise); provided, however, that you shall not have to
indemnify any indemnified person against any loss, claim, damage, expense or
liability which resulted from the gross negligence or willful misconduct of such
indemnified person as finally and judicially decided. You further agree that
neither Paribas, nor any other Lender nor any other indemnified person shall be
responsible or liable for any consequential damages that may be alleged as a
result of this letter. The provisions of this paragraph shall survive any
termination of this letter.
As you know, Paribas or its affiliates may from time to time effect
transactions, for its own account or for the accounts of customers, and may hold
positions in loans, options on loans, securities and options on securities of,
companies that may be the subject of the transactions contemplated by this
letter or otherwise relate to the Company.
Paribas' willingness to provide the Senior Secured Financing as set forth
above will terminate on April 15, 1999, if a definitive credit agreement
evidencing the Senior Secured Financing, satisfactory in form and substance to
Paribas, shall not have been entered into prior to such date.
This letter is delivered to you with the understanding that without our
prior written consent neither it nor its substance or existence shall be
disclosed, except to your directors, employees, counsel, accountants and
advisors. This letter is issued for your benefit only and may not be relied upon
by any other person or entity. If this letter is not accepted by you as provided
in the immediately succeeding paragraph, you are to immediately return this
letter (and any copies hereof) to the undersigned.
If you are in agreement with the foregoing, please sign and return to Paribas
(including by way of facsimile transmission) the two enclosed copies of this
letter, together with two signed copies of the related Fee Letter and the
$250,000 fee referred to therein, no later than 5:30 p.m., New York time, on
December 22, 1998. This letter may be executed in any number of counterparts,
and by the different parties hereto on separate counterparts, each of which when
executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument. This letter and the accompanying Summary
of Terms and the rights and obligations of the parties hereto shall be governed
by and construed in accordance with the laws of the State of New York.
Paribas is delighted to have the opportunity to work with you on the
transaction and we look forward to the successful consummation of the Senior
Secured Financing.
Sincerely,
PARIBAS
Name: Salo Aizenberg
Title: Vice President
By__________________
Name: Errol Antzis
Title: Managing Director
Accepted and Agreed to this
day of December, 1998:
21ST CENTURY TELESIS, INC.
By: Philip J.Chasmar
Name:
Title: Executive Vice President
EXHIBIT A
21st CENTURY TELESIS, INC.
SENIOR SECURED FACILITIES
DECEMBER 9, 1998
SUMMARY OF PROPOSED PRINCIPAL TERMS & CONDITIONS
Borrower: 21st Century Telesis, Inc. (the 'Borrower' - An entity that will
- --------
construct, own and operate Personal Access Communications Systems ("PACS") as
developed by Hughes Electronics Co. ("Hughes") for the Indiana Markets (see
definitions), and own the FCC Licenses (see definitions) through wholly-owned
subsidiaries).
Agent: Paribas
- -----
Lenders: Paribas and a syndicate of financial institutions acceptable to the
- -------
Agent and the Borrower.
Credit Facilities: $100,000,000 total Credit Facilities divided into two
- ------------------
tranches as follows:
- ---
A. Hughes Tranche - A $45,000,000 Multi-Draw Term Loan with drawings
---------------
permitted until 12/31/2002 (the "Final Draw Date"). All unused commitments under
the Hughes Tranche on the Final Draw Date will be canceled. All drawings under
the Hughes Tranche will be fully guaranteed by Hughes (the "Hughes Guarantee",
as described below).
B. Non-Hughes Tranche - A $55,000,000 Multi-Draw Term Loan with drawings
-------------------
permitted until the Final Draw Date. All unused commitments under the Non-Hughes
Tranche on the Final Draw Date will be canceled. Borrowings under the Non-Hughes
Tranche will be available upon achievement of the Initial Milestones (as
described below) and will be limited by the Borrowing Base (as described below).
Agent Commitment: $100,000,000 underwriting commitment to the Credit
- -----------------
Facilities
- -------
Uncommitted
- -----------
Facility: The Borrower will have the right to request that one or more
- --------
Lenders commit to make additional loans under an uncommitted facility (the
- -----
"Uncommitted Facility"); provided that the total commitments under the
- -----
Uncommitted Facility shall not exceed $50,000,000, any commitments under the
- -----
Uncommitted Facility shall be allocated with 1/3 under the same terms and
- ---
conditions as the Hughes Tranche and 2/3 under the same terms and conditions as
- ---
the Non-Hughes Tranche, and the Uncommitted Facility will be available for the
same purposes as the Hughes Tranche and Non-Hughes Tranche. Fees payable to
Lenders for an Uncommitted Facility commitment will be negotiated between the
Company and each such Lender at the time such commitment becomes effective, but
all other terms of the Uncommitted Facility (including Interest, Commitment Fees
and Maturity) will be the same as those applicable to the Credit Facilities.
Such additional commitments must be requested from the Lenders under the Credit
Facilities; provided, however that the Lenders shall have no obligation to
------------------
provide any such additional commitments.
Purpose: The Borrower may use the proceeds under the Credit Facilities as
follows:
(i) Hughes Tranche - The Hughes Tranche may be used to fund the purchase and
--------------
installation of Hughes equipment, services and software under the Hughes Master
Contract for the Indiana Markets, only to the extent that such borrowings are
guaranteed by Hughes under the Hughes Guarantee.
(ii) Non-Hughes Tranche - From the Closing Date through the Final Draw Date,
------------------
the Non-Hughes Tranche may be used to fund capital expenditures for the
construction of a Personal Access Communications Systems ("PACS") as developed
by Hughes for the Indiana Markets, to fund debt service related to the FCC
Licenses, and to provide for working capital related to the start-up and
operations of the Indiana Markets.
Maturity: Hughes Tranche: December 31, 2006
- -------- ---------------
Non-Hughes Tranche: December 31, 2005
-------------------
Repayment: Outstandings under the Hughes Tranche will be subject to four
- ---------
quarterly amortization payments (as a percentage of amounts outstanding on the
- ---
Final Draw Date) beginning on 3/31/2006 and ending on 12/31/2006 in accordance
with the following schedule:
YEAR QUARTERLY PAYMENT
2006 (4 Quarters) 25 %
Outstandings under the Non-Hughes Tranche will be subject to 12 quarterly
amortization payments (as a percentage of amounts outstanding on the Final Draw
Date) beginning on 3/31/2003 and ending on 12/31/2005 in accordance with the
following schedule:
YEAR QUARTERLY PAYMENT
2003 (4 Quarters) 3.5% (14% total)
2004 (4 Quarters) 7.0% (7.0%)
2005 (4 Quarters) 14.5% (58% total)
Interest: The Borrower may elect to borrow under the Facility at either (i)
- --------
the Alternative Base Rate ("ABR") (which equals the higher of the Prime Rate or
the Federal Funds Rate plus 0.50%) or (ii) the LIBOR rate ("LIBOR"), in each
case, plus the Applicable Margin.
Interest on ABR borrowings will be payable quarterly in arrears on the
basis of actual number of days elapsed over a 365(6)-day year. Interest on
LJI3OR borrowings will be calculated on the basis of actual days elapsed over a
360-day year, payable in arrears at the earlier of the end of each applicable
interest period or, in the case of a period longer than three months, every
three months. The Borrower may elect interest periods of 1, 2, 3, or 6 months
for LIBOR borrowings. The LIBOR rate shall be adjusted for the maximum reserves.
Applicable Margin - Hughes Tranche: The Applicable Margin for the Hughes
- --------------------------------------
Tranche will be 1.00% for LIBOR borrowings and 0.00% for ABR borrowings.
- ---
Notwithstanding the above, for every decrease in the corporate credit rating of
- ---
Hughes by either Standard & Poors or Moody's, the Applicable Margin for the
Hughes Tranche will increase by 0.25% (i.e. a downgrade of two levels would lead
to a 0.50% margin increase) and when borrowings under the Hughes Tranche are no
longer guaranteed under the Hughes Guarantee or the corporate credit rating of
Hughes is below investment grade according to Standard & Poors or Moody s, the
Applicable Margin for the Hughes Tranche will be equal to the Applicable Margin
of the Non-Hughes Tranche.
Applicable Margin - Non-Hughes Tranche: The Applicable Margin for the Non-Hughes
- --------------------------------------
Tranche will be 3.75% for LIBOR borrowings and 2.75% for ABR borrowings from the
Closing Date until the Borrower achieves positive EBITDA for two consecutive
fiscal quarters. Thereafter the Applicable Margin for the Non-Hughes Tranche
will be based on the Borrower's Total Leverage Ratio set forth in the table
below:
LEVERAGE RATIO PRIME LIBOR+
> 10.00x 2.500% 3.500%
> 9.00x and<10.00x 2.250% 3.250%
> 8.00x and<9.00x 2.000% 3.000%
> 7.00x and<8.00x 1.875% 2.875%
> 6.00x and<7.00x 1.750% 2.750%
> 5.00x and<6.00x 1.625% 2.625%
> 4.00x and<5.00x 1.500% 2.500%
> 3.00x and<4.00x 1.375% 2.375%
< 3.00x 1.250% 2.250%
During the continuance of any default or Event of Default under the loan
documentation, the Applicable Margin for both the Hughes Tranche and Non-Hughes
Tranche shall increase by 2% per annum.
Commitment Fee: A commitment fee on the undrawn portion (i.e. total
- ---------------
commitment less outstandings) of the Hughes Tranche commitment and the
- --------
Non-Hughes Tranche commitment will commence at the Closing Date and will be
- --------
payable quarterly in arrears and upon the termination of such commitment.
- ----
Commitment Fee Rate - Hughes Tranche: The Commitment Fee Rate for the Hughes
- ------------------------------------
Tranche will be 0.50%. Notwithstanding the above, for every decrease in the
corporate credit rating of Hughes by either Standard & Poors or Moody's, the The
Commitment Fee Rate for the Hughes Tranche will increase by 0.125% (i.e. a
downgrade of two levels would lead to a 0.25% commitment fee rate increase) and
when borrowings under the Hughes Tranche are no longer guaranteed under the
Hughes Guarantee or the corporate credit rating of Hughes is below investment
grade according to Standard & Poors or Moody's, the Commitment Fee Rate for the
Hughes Tranche will be equal to the Commitment Fee Rate of the Non-Hughes
Tranche.
Commitment Fee Rate - Non-Hughes Tranche: The Commitment Fee Rate for the
- ---------------------------------------------
Non-Hughes Tranche will be based on the available but unused commitments (i.e.
- ------
total commitment less outstandings) as a percentage of the total Non-Hughes
Tranche commitment, as set forth in the table below:
PERCENTAGE UNUSED COMMITMENT FEE
> 75% 1.875%
> 50% and < 75% 1.500%
> 25% and < 50% 1.000%
< 25% 0.500%
Security: The Credit Facilities will be secured by (i) all present and
- --------
future assets of the Borrower and each existing and future subsidiary; (ii) a
- -----
first priority pledge of the capital stock of the Borrower and all of its
- --
existing and future subsidiaries (including stock of the subsidiaries holding
- --
the FCC Licenses and any other material licenses, approvals or permits); and
- --
(iii) all present and future rights under any interconnection or other operating
- --
agreements to which the Borrower and its subsidiaries are a party.
Guaranties: All subsidiaries of the Borrower (together the "Guarantors")
- ----------
shall be required to provide an unconditional and irrevocable guaranty of all
- ---
amounts owing under the Credit Facilities.
- --
Hughes Guarantee: All outstandings under the Hughes Tranche shall be
- -----------------
unconditionally guaranteed by Hughes in a manner satisfactory to the Agent by
- -------
Hughes or a Hughes entity satisfactory to the Agent (i.e. All payments of
- --
principal, interest and commitment fees under the Hughes Tranche will be
- --
unconditionally guaranteed by Hughes if for any reason the Borrower is unable to
- --
make such payments for the life of the Hughes Tranche or until the the guarantee
falls away as described below. In addition, no amortization or prepayment of
outstandings under the Hughes Tranche will be permitted until all outstandings
under the Non-Hughes Tranche have been repaid). The Hughes Guarantee will apply
to 46% of all Hughes related capital expenditures both for downpayments and
performance, completion and any other payments to Hughes. Outstandings under the
Hughes Tranche will cease to be guaranteed by Hughes under the Hughes Guarantee
only to the extent that the Borrower's Total Leverage Ratio shall be below 4.00x
for three consecutive quarters and provided that no default or Event of Default
has occurred or will occur following the release of the Hughes Guarantee.
Notwithstanding the above, the Hughes Guarantee shall remain in full force at
all times for the five year period following the Closing Date of the Credit
Facilities.
Permitted Buildouts: The Borrower will be required to complete the buildout
- --------------------
of the South Bend, Elkhart and Michigan City markets in the State of Indiana
(the "First Three Markets") prior to commencing the buildout of any other
market. Thereafter, the Borrower will be permitted to build out all remaining
Indiana Markets except for Indianapolis. The Borrower will not be permitted to
begin construction of the Indianapolis, Indiana market without Majority Lender
consent. Notwithstanding the above, if the Borrower can demonstrate that current
availability under the Borrowing Base is sufficient to fund all capital
expenditures (less amounts that will be funded under the Hughes Tranche) to
complete the buildout (i.e. achieves System Turn-On) of the Indianapolis,
Indiana market, lender approval shall not be required in order to begin
construction of the Indianapolis, Indiana market. At no time will the Borrower
be permitted to build-out or invest any funds (equity or debt) in the
Non-Indiana Markets.
FCC License
- ------------
License Payments: The Borrower will not be permitted to pay interest expense
- ----------------
or make debt reduction payments for FCC debt obligations related to FCC Licenses
for the Non-Indiana Markets if an Event of Default has occurred or will occur
following such payment.
Mandatory
- ---------
Prepayments: The Borrower will prepay the Credit Facilities with: (i) 75% of
- -----------
the Borrower's Excess Cash Flow (see definitions) commencing on April 30, 2003
in respect to the previous fiscal year; (ii) 100% of the net proceeds of any
approved asset sale and net insurance proceeds; (iii) 100% of net cash proceeds
of issuances of equity (public or private) that are completed following any
drawings under the Non-Hughes Tranche. The proceeds from Mandatory Prepayments
will be applied first to the Non-Hughes Tranche until there are no outstandings
under the Non-Hughes Tranche. Subsequent Mandatory Prepayments will be applied
to the Hughes Tranche.
Voluntary
- ---------
Prepayments: Borrowings may be prepaid without penalty, upon at least five
- -----------
business days notice in an amount of $5,000,000 or a multiple of $1,000,000
thereafter, subject to reimbursement for any breakage costs and funding losses.
Prepayments will be applied first to the Non-Hughes Tranche until there are no
outstandings under the Non-Hughes Tranche. Subsequent Voluntary Prepayments will
be applied to the Hughes Tranche. In addition, prior to the Final Draw Date, the
Borrower will have the right, upon at least five days business notice to
terminate or cancel, in whole or in part, any unused portion of the Credit
Facilities, provided that each partial reduction shall be in an amount of
$5,000,000 or a multiple of $1,000,000 thereafter.
Representations
- ---------------
and Warranties: The loan documentation will contain representations and
- ---------------
warranties customarily found in the Agents' loan agreements for similar senior
- ----
financings and others deemed by the Agents to be appropriate for the specific
transaction. Representations and warranties shall include, but not be limited
to, accuracy of financial statements; absence of undisclosed liabilities; no
material adverse change; corporate existence; compliance with law; corporate
power and authority; enforceability of credit documentation; no conflict with
law or contractual obligations; no material litigation; no default or Event of
Default; ownership of property; no liens or burdensome restrictions; taxes,
Federal Reserve regulations; ERISA; subsidiaries; environmental matters;
solvency, accuracy of disclosure; and creation and perfection of security
interests.
Condition Precedent
- --------------------
to Initial Borrowings: Hughes Tranche - Borrowings under the Hughes Tranche
- ----------------------- --------------
will be available at the Closing Date subject to no default or Event of Default.
Borrowings under the Hughes Tranche will only be permitted subject to such
borrowings being fully guaranteed by Hughes under the Hughes Guarantee and will
only be permitted to fund budgeted Hughes capital expenditures related to the
Indiana Systems.
Non-Hughes Tranche - Borrowings under the Non-Hughes Tranche will be available
- -------------------
once all the Initial Milestones (as described below) have been achieved. All
- - ---
borrowings under the Non-Hughes Tranche will be limited by the Borrowing Base
(as described below).
Initial Milestones - The Initial Milestones will be considered to have been
- -------------------
achieved (the date on which the Initial Milestones have been achieved shall be
- ----
known as the "Initial Milestone Date" or "IMD") once all of the following have
- - ---
occurred: (i) Within 14 months from the Closing Date, the buildout for the South
Bend market shall have been completed to all Hughes specifications, including
System Turn-On (see definitions) with at least 70% coverage of Total POPs (see
definitions) of at least 350,000; (ii) Within 16 months from the Closing Date,
the buildout for both the Elkhart market and Michigan City market shall have
been completed to all Hughes specifications, including System Turn-On with at
least 70% coverage of Total POPs of at least 350,000; (iii) Within 270 days of
System Turn-On for the South Bend market, for the South Bend market only, the
ratio of Qualified Paying Subscribers (see definitions) to Total POPs
("Penetration") shall be at least 1.00%. If any of the Initial Milestones shall
have not been achieved within the specified time frames, all commitments under
the Non-Hughes Tranche shall be canceled. Satisfaction of the initial milestones
shall be demonstrated by an audit from a Big-5 accounting firm.
Borrowing Base: Upon achievement of Initial Milestone (i), the Borrower will
- --------------
be permitted to borrow a maximum of $3,000,000 for working capital and general
corporate purposes related only to the start-up and operation of the First Three
Markets.
Following the Initial Milestone Date, total outstanding loans under the
Non-Hughes Tranche shall not exceed the lesser of: (i) Commitments under the
Non-Hughes Tranche and (ii) the product of (x) the sum of Qualified Paying
Subscribers and (y) The Borrowing Base Rate. Qualified Paying Subscribers for
any Indiana Market which has not achieved Penetration of at least 1.00% within
12 months after System Turn-On, Penetration of at least 2.00% within 24 months
of System Turn-On, and PenetratiOn of at least 3.00% within 36 months of System
Turn-On (and maintain a level of at least 3.00% at all times thereafter), shall
not be included as part of Qualified Paying Subscribers for the purposes of
calculating the Borrowing Base, with such reduction in the Borrowing Base to
occur at the end of the respective 12, 24, and 36 month period (and thereafter
if Penetration falls below 3.00%). The Borrowing Base Rate is as set forth in
the table below:
NUMBER OF MONTHS
FOLLOWING THE IMD BORROWING BASE RATE
1 to 12 $1,500
13 to 16 $1,425
l7 to 2O $1,350
21 to 23 $1,200
24 to 26 $1,100
27 to Final Draw Date $1,000
Financial
- ---------
Covenants: A. First Three Markets Minimum Penetration
- --------- -------------------------------------------
Measured on the last day of each period as shown below beginning three months
following the Initial Milestone Date, for the First Three Markets only,
Penetration (calculated on a combined basis for the First Three Markets) shall
not be less than the following levels:
PERIOD MINIMUM LEVEL
3 Months after IMD 1.20%
6 Months after IMD 1.45%
9 Months after IMD 1.70%
12 Months after IMD 2.00%
15 Months after IMD 2.30%
18 Months after IMD 2.60%
21 Months after IMD 3.00%
24 Months after IMD 3.30%
27 Months after IMD 3.60%
30 Months after IMD 3.90%
33 Months after IMD 4.25%
12/31/03 5.25%
12/31/04 6.25%
B. First Three Markets Minimum EBITDA Contribution:
----------------------------------------------------
Measured on the last day of each period as shown below beginning on the Initial
Milestone Date, for the First Three Markets only, the ratio of Market Subscriber
EBITDA (see definitions) for the previous three month period to Total
Subscribers at the end of such period shall not be less than the following
levels:
PERIOD MINIMUM LEVEL
Initial Milestone Date ("IMD") Not Tested
9 Months after IMD $15.00
12 Months after IMD $17.50
15 Months after IMD $20.00
18 Months after IMD $21.50
21 Months after IMD $23.00
24 Months after IMD $24.00
Every 3 Months Thereafter $25.00
C. Maximum Subscriber Acquisition Costs
---------------------------------------
Measured on the last day of each period as shown below beginning on the Initial
Milestone Date, for First Three Markets only, the ratio of Subscriber
Acquisition Costs (see definitions) for the previous three month period to the
difference between (i) Total Subscribers (see definitions) at the end of the
three month period, and (ii) Total Subscribers at the beginning of the three
month period shall not exceed the following levels:
PERIOD MAXIMUM LEVEL
Initial Milestone Date ( IMD ) Not Tested
12 Months after IMD $325
Eve 3 Months Thereafter $275
D. Interest Coverage Ratios:
--------------------------
Indiana Interest Coverage - Measured on the last day of each fiscal quarter
- ---------------------------
beginning on 12/31/2001, the ratio of Qualified Market EBITDA (see definitions)
- ----
during such fiscal quarter to Indiana Interest Expense (see definitions) during
such fiscal quarter shall not be less than the following levels:
PERIOD MINIMUM
12/31/01 - 3/31/02 1.00x
4/1/02 - 6/30/02 1.25x
7/1/02 - 12/30/02 1.50x
Total Interest Coverage - Measured on the last day of each fiscal quarter
beginning on 12/31/2002, the ratio of EBITDA (see definitions) during such
fiscal quarter to Total Interest Expense (see definitions) during such fiscal
quarter shall not be less than the following levels:
PERIOD MINIMUM
12/31/02 l.10x
1/1/03 - 3/31/03 1.25x
4/1/03 - 6/30/03 1.50x
7/1/03 - 9/30/03 1.75x
10/1/03 - 12/31/03 2.00x
Thereafter 2.50x
E. Leverage Ratios:
----------------
Indiana Debt to Qualified Market EBITDA
- --------------------------------------------
Measured on the last day of each fiscal quarter beginning on 9/30/2001, the
ratio of Indiana Debt (see definitions) to Qualified Market EBITDA for such
fiscal quarter multiplied by four shall not exceed the following levels:
PERIOD MINIMUM
9/30/01 10.00x
10/1/01 - 12/31/01 8.50x
1/1/02 - 3/31/02 7.50x
4/1/02 - 6/30/02 6.50x
7/1/02 - 12/31/02 5.50x
Total Leverage Ratio
- ----------------------
Measured on the last day of each fiscal quarter beginning on 12/31/02, the ratio
of Total Debt (see definitions) to EBITDA for such fiscal quarter multiplied by
four shall not exceed the following levels:
PERIOD MINIMUM
12/31/02 l0.00x
1/1/03 - 3/31/03 8.50x
4/1/03 - 06/30/03 7.50x
7/1/03 - 9/30/03 6.50x
10/1/03 - 12/31/03 5.00x
1/1/04 - 6/30/04 4.00x
7/1/04 - thereafter 3.00x
F. Fixed Charges Coverage Ratio:
-------------------------------
Measured on the last day of each fiscal quarter commencing 3/31/04 and ending on
12/31/05, the ratio of EBITDA for such fiscal quarter multiplied by four to
Fixed Charges (see definitions) for the 12 month period ending during such
fiscal quarter shall not be less than 1 .05x.
G. Maximum Capital Expenditures
------------------------------
To be determined on a market-by-market basis for both Hughes related and other
capital expenditures based on forecasted capital expenditure budgets.
Maintenance capital expenditure maximums to be determined.
Affirmative
- -----------
Covenants: Customary for transactions of this nature to include, without
- ---------
limitation, continuation of business and maintenance of existence and material
- ---
rights and privileges; compliance with laws and material contractual
obligations; maintenance of property and insurance prudent for the operations of
the Borrower; maintenance of books and records; right of the Lenders to inspect
property and books and records; notice of defaults or Events of Default; notice
of adverse change in the business; litigation and other material events; and
compliance with environmental and FCC laws.
Negative
- --------
Covenants: Customary for transactions of this nature to include prohibitions
- ---------
on: additional indebtedness; liens; guarantee obligations; mergers;
consolidations; formation of subsidiaries; liquidations and dissolutions;
purchases and sales of assets; leases; no payment of dividends or any other
payments in respect of capital stock; no redemption of capital stock;
investments; loans and advances; transactions with affiliates; sales and
leasebacks; negative pledge clauses; and changes in lines of business, and a
limitation on the minimum price for PACS handsets sold to potential customers.
Financial
- ---------
Information: The Borrower will furnish, or will cause to be furnished, to
- -----------
the Lenders certain agreed-upon information, including, without limitation:
- --
A. monthly unaudited consolidated statements (including subscriber and
operating information on a market-by-market basis) and certificates of
compliance with financial covenants and the Borrowing Base (with appropriate
conclusions and computations) of the Borrower within 30 days of each month end,
including a comparison with the prior year (if available) and budget;
B. quarterly financial statements, certificates of compliance with financial
9
covenants (with appropriate conclusions and computations), and certificates of
no default within 45 days of each quarter end;
C. annual audited statements and certificates of compliance for the Borrower
within 90 days of the end of each fiscal year, prepared in accordance with
Generally Accepted Accounting Principles and accompanied by a statement by an
independent certified public accountant acceptable to the Agent (i.e. a Big 5
accounting firm) certifying that no default was detected during the examination
of the Borrower;
D. consolidated financial projections for the Borrower for the following
fiscal year (including market-by-market forecasts) prepared on a monthly basis
within 30 days of the end of each fiscal year;
E. construction budgets and progress reports related to system buildouts;
and
F. such other information respecting the Borrower as either Agent or the
Majority Lenders may reasonably request.
Documentation: The Lenders' commitments will be subject to the negotiation,
- -------------
execution and delivery of definitive documentation customary for a financing of
this nature (including credit agreement, related security documentation,
guaranties, etc.) consistent with the terms of this proposal, in each case
prepared by counsel to the Agents and satisfactory to the Lenders. Documentation
shall contain expense and indemnification provisions for the benefit of the
Agent and the Lenders customary for transactions of this type.
Conditions
- ----------
Precedent to Closing: In addition to conditions precedent typical for such
- ----------------------
credit facilities, as well as any additional ones appropriate in the context of
the transactions contemplated hereby, the following conditions shall apply:
(1) The completion of credit work, including satisfactory due diligence, as
required by the Agents and the Lenders (including, without limitation, review of
the PACS technology and feasibility of constructing and operating such a system
in the Indiana Markets).
(2) The absence of any material adverse change in the condition, operations,
assets, business, properties or prospects of the Borrower.
(3) The absence of any material adverse change to the capital or
syndications markets.
(4) Evidence satisfactory to the Agents that at least $50,000,000 of new
equity contributions (the "Initial Equity Contribution") have been committed to
the Borrower (and at least $25,000,000 has been contributed in cash to the
Borrower at the Closing Date and $45,000,000 has been contributed in cash by the
Initial Milestone Date) in a form acceptable to the Agent. Evidence satisfactory
the Agent that any equity committed but not contributed in cash at the Closing
Date can be accessed by the Borrower as needed at any time after the Closing
Date and can be unconditionally called upon in a default or Event of Default.
(5) Agent satisfaction with all the terms and conditions of the Hughes
Guarantee including provisions outlining the method of repayment of the Hughes
Tranche in a default or Event of Default.
(6) Agent satisfaction with the buildout schedule for the Indiana Markets
and capital expenditure budgets for both Hughes related and other capital
expenditures.
(7) Agent satisfaction with the Master Contract between Hughes and the
Borrower, including, but not limited to, amounts to be guaranteed by Hughes
under the Hughes Guarantee, payment schedules by the Borrower to Hughes, capital
expenditure budgets, performance guarantees and penalties and repayments in the
event of delays or non-performance by Hughes (including provisions for the
repayment of borrowings under the Hughes and Non-Hughes Tranches to the extent
used to fund Hughes related capital expenditures). Agent satisfaction with
contracts between the Borrower and other equipment vendors, including, but not
limited to, agreements with Acer Corporation, Siemens Corporation, Deutsche
Telekom, American Electrical Power and Spectrum Telecommunications Services.
(8) Corporate structure acceptable to the Agent.
(9) The accuracy of representations and warranties.
(10) The negotiation and execution of loan documents, including the credit
agreement, guaranties, security agreements, officer's certificates, and legal
opinions in form and substance acceptable to the Agents, the Borrower and their
respective counsel.
(11) The Agents will have received all costs, fees and expenses (including,
without limitation, legal fees and expenses) and other compensation contemplated
hereby and by the bank fee letter, payable to the Lenders or the Agents or
payable in connection with the transactions contemplated hereby shall have been
paid to the extent due.
(12) Other conditions precedent customary for transactions of this nature.
(13) A Chief Financial Officer satisfactory to the Agent shall have been
hired on terms and conditions satisfactory to Paribas.
Events of Default: Customary Events of Default, including, without
- -------------------
limitation: failure to pay principal, interest or any other amount payable under
- ---------
the loan documentation when due; outstanding under the Non-Hughes Tranche exceed
amounts available under the Borrowing Base; the Initial Milestones have not been
achieved within the specified time frames; failure to perform or observe any
negative or affirmative covenant or any condition of the credit agreement; any
default or non-performance under the Hughes Guarantee; bankruptcy, insolvency,
material judgements against the Borrower or its subsidiaries, or similar events;
certain ERISA events; incorrect representations and warranties; a change of
control of the Borrower in a manner to be determined; invalidity of any security
document; termination or material modification in the Master Contract agreement
between Hughes and the Borrower; Default by the
Borrower or Hughes under the Hughes Master Contract; Termination or loss by the
Borrower of any FCC licenses for the Indiana Markets or the failure of the
Borrower to maintain other material licenses, regulatory approvals or permits to
operate the Indiana Markets; Failure to maintain functionality of any Indiana
System that has achieved System Turn-On for a population coverage of at least
60% of Total POPs in such market for more than 15 days.
Majority Lenders: Lenders holding 66-2/3% of aggregate commitments and
loans.
Interest Rate
Protection: The Borrower will agree to fix the rate on at least 50% of the
Credit Facilities (when total borrowings on a combined basis for both the Hughes
Tranche and Non-Hughes Tranche reaches $20,000,000, and for every $20,000,000
increase in borrowings thereafter) at a rate to be determined within 60 days
from the such borrowings for a period to be determined.
Miscellaneous: The loan documentation shall include standard protections
(including compliance with risk-based capital guidelines, increased costs,
payments free and clear of withholding taxes and interest period breakage
indemnities), Eurodollar illegality and similar provisions.
Amendments and
Waivers With the consent of the Agent and the Required Lenders, provided
that amendments or waivers relating to interest rates, fees, repayment amounts
and dates, and releases of any Guarantor or any part of the Security shall
require the consent of all Lenders.
Assignments and
Participations Each Lender shall have the right to sell participations in
the Facility and to assign all or part of the Facility to another lender, so
long as no such sale is for an amount less than $5,000,000, subject to approval
by the Borrower, such approval not to be unreasonably withheld. The Agent shall
be paid a processing fee (by the other Lenders) of $3,500 in connection with
each assignment.
Investment Rights: For committing to the Facility described herein, the
Agent or any affiliate shall have the right, but not the obligation, to purchase
up to $5 million of common stock (or as the case may be, preferred stock) of the
Borrower on terms TBD. Such stock shall have customary shareholder rights
including, but not limited to, information, liquidity (including registration,
tag-along, piggyback and put rights) and board observation rights.
Governing Law: State of New York
Expenses: The Borrower shall be responsible for and reimburse the Agent and
any affiliates for all reasonable out of pocket costs, including, but not
limited to, legal and documentation costs.
Definitions: Closing Date shall mean the date that the Documentation (as
previously described) shall have been executed, delivered and received by the
Agent.
Covered POPs shall mean at any time the aggregate number of persons within a
geographical area for which a PACS system owned and operated by the Borrower
that has achieved System Turn-On.
EBITDA shall mean for the Borrower on a consolidated basis, for any period of
calculation, net income plus (i) depreciation, (ii) amortization, (iii) income
taxes, and (iv) interest expense (both cash and noncash); minus extraordinary
gains.
Excess Cash Flow shall mean for any period of determination thereof, EBITDA less
the sum of debt service (required or scheduled principal and interest payments
with respect to Total Debt), capital expenditures, income taxes and changes in
working capital.
Fixed Charges shall mean the sum of (i) capital expenditures, (ii) required or
scheduled principal and interest payments with respect to Total Debt, and (iii)
income taxes.
FCC Licenses shall mean the C, D and F Block Personal Communications Services
("PCS") licenses auctioned by the FCC for the Borrower's Indiana Markets and
Non-Indiana Markets.
Indiana Debt shall mean total outstandings under the Non-Hughes Tranche plus FCC
debt obligations for FCC Licenses for the Indiana Markets only (i.e. does not
include debt guaranteed by Hughes under the Hughes Tranche and FCC debt
obligations related to the Non-Indiana Markets)
Indiana Interest Expense shall mean for any period of calculation, interest
expense and commitment fees related to Total Debt less interest expense related
to FCC debt obligations for FCC Licenses for the Non-Indiana Markets only.
Indiana Markets shall mean the following cities in Indiana: South Bend, Elkhart,
Michigan City, Lafayette, Kokomo, Marion, Indianapolis, Muncie, Terre Haute,
Vincennes, Bloomington. Indiana Markets shall also include Danville, Illinois.
Market Subscriber EBITDA shall mean, for any period of calculation, the sum of
(i) EBITDA, and (ii) Subscriber Acquisition Costs, calculated at the market
level (i.e. does not include corporate overhead expenses, but does include
overhead expenses at the individual market level).
Non-Indiana Markets shall mean certain markets located in New York,
Pennsylvania, Nebraska, and Mississippi, where the Borrower owns PCS licenses.
Qualified Market EBITDA shall mean, for any period of calculation, EBITDA
calculated at the market level (i.e. does not include corporate overhead
expenses, but does include overhead expenses at the individual market level)
only for markets that have been in operation (i.e. have achieved System Turn-On)
for at least 12 months.
Qualified Paying Subscribers shall mean the lesser of (i) Total Subscribers
and (ii) Total Service Revenues (see definitions) for the most recently ended
month divided by $40.00.
Subscriber Acquisition Costs shall mean, for any period of calculation, the sum
of (i) Net handset subsidies (i.e. handset costs less handset revenue earned),
(ii) Advertising and promotion expenses, (iii) Sales force expenses and
commissions of any nature paid for the addition of subscribers, and (iv) Any
other expense related solely to the acquisition or addition of subscribers less
(a) activation, connection or any similar fees paid by subscribers.
System Turn-On shall mean the activation of the PACS system for full commercial
deployment with coverage of the forecasted market area and Total POPs and
completion to original specifications including, but not limited to, projected
system capacity and wireline voice quality. In addition, handsets sold to
customers must meet original specification and be available to customers for use
with the PACS system.
Total Debt shall mean all indebtedness of the Borrower (i.e. includes
outstandings under the Hughes Tranche, Non-Hughes Tranche, FCC debt obligations
for all FCC Licenses and any other indebtedness).
Total Interest Expense shall mean, for any period of calculation, interest
expense and commitment fees related to Total Debt.
Total Service Revenue shall mean revenue earned by the Borrower related to
subscriber access fees, phone usage, enhanced services, long distance and other
similar services (i.e. does not include revenue related to handset purchases and
activation or similar fees).
Total POPs shall mean at any time the aggregate number of persons within a
geographical area as estimated by a geographical or census report or survey
acceptable to the Agent.
Total Subscribers shall mean the sum of subscribers to the Borrower's PACS
service from whom the Borrower has received at least one payment for service in
the previous 90 day period.
<PAGE>
PARIBAS
21st Century Telesis, Inc.
650 Town Center Drive, Suite 1999
Costa Mesa, CA 92626
Attention: Philip J. Chasmar
Executive Vice President
December 16, 1998
Re: Fee Letter /21st Century Telesis, Inc. Senior Secured Financing
Gentlemen:
Reference is made to the letter (the "Commitment Letter") concerning the
financing of the transaction. Terms defined in the Commitment Letter shall have
the same meaning when used herein.
This letter will supplement the Commitment Letter by setting forth the
arrangements relating to compensation for certain services rendered and to be
rendered by Paribas. Paribas willingness to provide commitments pursuant to the
Commitment Letter and to act as provided therein is subject to your acceptance
and return of this letter as provided in the penultimate paragraph of this
letter. You hereby acknowledge and represent that you are executing this letter
to induce us to provide the commitments pursuant to the Commitment Letter and
you will receive benefits as a result thereof.
You hereby agree to pay to Paribas (or affiliates of Paribas designated by
it) the following fees (each fee being non-refundable and being in addition to
and not creditable against any other fee, including, without limitation, fees
payable to Paribas (or such affiliates) pursuant to any other agreements or for
acting in any other capacities, and each of which fees shall be retained and/or
distributed by Paribas (or such affiliates) in such manner as Paribas (or such
affiliates) shall determine in its (or their) sole discretion):
1. A non-refundable financing fee equal to the remainder of (x) 2.50%
of the total amount of the Senior Secured Financing (i.e., $100,000,000) less
(y) the $250,000 fee paid to Paribas pursuant to paragraph 4 of this letter,
which fee shall be earned by, and payable to, Paribas on the Closing Date.
2. If you, or any other person, group or entity controlled by or
affiliated with you,
incur any indebtedness for borrowed money the proceeds of which are used to
effect the System Buildout, in any such case prior to October 16, 1999, without
utilizing the Senior Secured Financing contemplated by the Commitment Letter, an
additional non-refundable fee equal to
$500,000, which fee shall by payable to Paribas on the date any such transaction
is effected.
3. As an additional fee for the commitment provided by Paribas under the
Commitment Letter, warrants (the "Warrants") in the amount, and subject to the
terms set forth as follows:
10-year warrants representing 2.50% of the fully diluted equity of the Borrower
(as defined in the Summary of Terms), at the the Closing Date, exercisable at
various prices as described below, with prices to be based on the equity value
of the Borrower following the Initial Equity Contribution (as defined in the
Summary of Terms) (the "Post Money Value") as follows:
(i) The warrant percentage (i.e. the percentage of the fully diluted equity of
the Borrower) with a nominal exercise price (the "Nominal Price Warrant
Percentage") shall equal: (a) 1.00% for a Post Money Value less than or equal to
$78,000,000; or (b) 1.00% plus (1.50% multiplied by (the Post Money Value minus
$78,000,000) divided by ($250,000,000 minus $78,000,000)) for a Post Money Value
greater than $78,000,000 and less than or equal to $250,000,000; or (c) 2.50%
for a Post Money value greater than $250,000,000.
(ii) The warrant percentage (i.e. the percentage of the fully diluted equity of
the Borrower)
with an exercise price based on a $78,000,000 value for the Borrower (the "Base
Price
Warrant Percentage") shall equal: (a) 1.50% for a Post Money Value equal to
$78,000,000; or
(b) (2.50% minus the Nominal Price Warrant Percentage) divided by two for a Post
Money
Value greater than $78,000,000; or (c) 0.00% for a Post Money Value less than
$78,000,000.
(iii) The warrant percentage (i.e. the percentage of the fully diluted equity of
the Borrower) with an exercise price based on the Post Money Value (the "Post
Money Value Warrant Percentage") shall equal: (a) 0.00% for a Post Money Value
equal to $78,000,000; or (b) (2.50% minus the Nominal Price Warrant Percentage)
divided by two for a Post Money Value greater than $78,000,000; or (c) 1.50% for
a Post Money Value less than $78,000,000.
(For example: Warrant percentage for a Post Money Value of $200,000,000 is as
follows: (i)
Nominal Price Warrant Percentage = 1.00% (1.50% x ($200,000,000 - $78,000,000)
/
($172,000,000)) = 2.06395%; (ii) Base Price Warrant Percentage = (2.50% -
2.06395%) / 2 =
0.2180%; (iii) Post Money Value Warrant Percentage = (2.50% - 2.06395%) / 2 =
0.2180%).
All warrants will have shareholder rights typical for a warrant including, but
not limited to, anti-dilution protection, comprehensive information and access,
registration rights, demand rights, piggyback rights, tag along rights, put
rights and pre-emptive rights, all subject to satisfactory shareholder
agreement.
4. A non-refundable fee of $250,000, which fee shall be earned by, and
payable to, Paribas on the date of execution and delivery of this letter.
If you are in agreement with the foregoing, please sign and return to
Paribas the enclosed copy of this letter no later than 5:00 P.M., New York time,
on December 22, 1998. This letter may be executed in any number of
counterparts, and by the different parties hereto on separate counterparts, each
of which when executed and delivered, shall be an original, but all of which
shall together constitute one and the same instrument. This letter and the
rights and obligations of the parties hereto shall be governed by and construed
in accordance with the laws of the State of New York.
You are not authorized to show or circulate this letter to any other person
or entity (other than your legal advisors in connection with your evaluation
hereof) without the prior written consent of Paribas (which consent shall not be
unreasonably withheld or delayed). If this letter is not accepted by you as
provided in the immediately preceding paragraph, you are directed to immediately
return this letter (and any copies hereof) to the undersigned.
Sincerely,
PARIBAS
Name: Salo Aizenberg
Title: Vice President
Name: Errol Antzis
Title: Managing Director
Accepted and Agreed to this
____ day of December, 1998:
21ST CENTURY TELESIS, INC.
By_Philip J. Chasmar
Name: Philip J.; Chasmar
Title: Executive Vice President
</TEXY>
UNITED STATES DISTRICT COURT
FOR THE
DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA. )
)
PLAINTIFF )
)
) Case NO.
)
FCC BIDDER )
)
Defendant. )
FINAL JUDGMENT
----- --------
Plaintiff, United States of America, filed Its Complaint on xx/xx, 1998.
Plaintiff and the Defendant by their respective attorneys, have consented to the
entry of this Final Judgment without trial or adjudication of any issue of fact
or law. This Final Judgment shall not be evidence against or an admission by any
party with respect to any issue of fact or law. Therefore, before the taking of
any testimony, without trial or adjudication of any Issue of fact or law herein7
and upon consent of the parties, it is hereby ORDERED, ADJUDGED, AND DECREED, as
follows:
I.
Jurisdiction
This Court has jurisdiction of the subject matter of this action and of
each of the parties consenting hereto. Venue is proper in the District of
Columbia, The Complaint states a claim upon which relief may be granted against
the Defendant under Section 1 of the Sherman Act, 15 U.S.C. Sec. 1.
II
Definitions
As used hcreim the term:
(A) "Defendant" means [FCC bidder].
(B) 'Document" means all "writings and recordings" as that phrase Is defined
in Rule 1001(1) of the Federal Rules of Evidence.
(C) "FCC" means the Federal Communications Commission.
(D) "License-identifying information" means any number, letter, code or
description that designates or identifies a license or that links licenses.
(E) 'Person" means any natural person, corporation, firm, company, sole
proprietorship, partnership, association1 institution, governmental unit, public
trust, or other legal entity.
III.
Applicability
(A) This Final Judgment applies to the Defendant, to its successors,
and assigns, and to all other persons in active concert or participation with
any of them who shall have received actual notice of the Final Judgment by
personal service or otherwise.
(B) Nothing herein contend shall suggest that any portion of' this
Final Judgment is or has been created for the benefit of any third party and
nothing herein shall be construed to provide any rights to any third party.
IV.
Prohibited Conduct
The Defendant is enjoined and restrained from
(A) Entering into any agreement with any other license applicant to
fix, establish, suppress or maintain the price for any license to be awarded by
the FCC in an auction, or to allocate any such licenses amongst competitors,
provided, however, that nothing in this provision shall prohibit the Defendant
from participating in any bidding consortium, teaming arrangement or other joint
venture authorized under the rules and regulations of the FCC pertaining to
future auctions, and disclosed to the FCC.
(B) in the course of any auction conducted pursuant to the rules and
regulations of the FCC, offering any price to the FCC for the lease, purchase,
or right to use any FCC-awarded license, that includes within that price any
license-identifying information, unless the inclusion of such information is
required by the FCC,
V.
Compliance Program
The Defendant is ordered to maintain an antitrust compliance program, which
shall include the following:
(A) Designating, within 30 days of entry of this Final Judgment, an
Antitrust Compliance Officer with responsibility for accomplishing the antitrust
compliance program and with the purpose of achieving compliance with this Final
Judgment. The Antitrust Compliance Officer shall, on a continuing basis,
supervise the review of the current and proposed activities of the Defendant to
ensure that it complies with this Final Judgment.
(B) The Antitrust Compliance Officer shall be responsible for:
(1) Distributing within 60 days of the entry of this Final Judgment, a
copy of this Final Judgment to (a) all officers and directors of the Defendant;
and (b) to all employees who have any responsibility for formulating, proposing,
recommending, establishing, approving, implementing or submitting the
Defendant's prices in FCC-CONDUCTED LICENSE AUCTIONS.
(2) Distributing in a timely manner a copy of this Final Judgment to
any officer, director or employee who succeeds to a position described in
Section V (B)(L);
(3) Obtaining from each present or future officer, director or
employee designated in Section V(B)(1), within 60 days of entry of this Final
Judgment or of the person's succession to a designated position, a written
certification that he or she: (I) has read, understands, and agrees to abide by
the terms of this Final Judgment, and (2) has been advised and understands that
his or bet failure, to comply With THIS FINAL Judgment may result in conviction
for criminal contempt of court;
(4) Maintaining a record of persons to whom the Final Judgment has been
distributed and from whom, pursuant to Stction V(B)(3), the certification has
been obtained; and
(5) Reporting to the Plaintiff any violation of the Final Judgment
VI.
Plaintiff Access
(A) To determine or secure compliance with this Final Judgment and for
no other purpose, duly authorized representative of the Plaintiff shall, upon
written request of the Assistant Attorney General In charge of the Antitrust
Division, and on reasonable notice to the defendant made to its principal
office, be permitted, subject to any legally recognized privilege:
(1) access during the Defendants office hours to Inspect and copy all
documents In the possession or under the control of the Defendant, who may have
counsel present, relating to any matters contained in this Final Judgment; and
(2) subject to the reasonable convenience of the Defendant and without
restraint or interference from it, to interview officers, employees or agents of
the Defendant, who may have counsel present, regarding such matters.
(B) Upon the written request of the Assistant Attorney General in
charge of to Antitrust Division made to the Defendant's principal office1 the
Defendant shall submit such written reports, under oath if requested, relating
to any matters contained in this Final Judgment as my be reasonably requested,
subject to any legally recognized privilege.
(C) No information or documents obtained by the means provided in Section VI
shall be divulged by the Plaintiff to any person other than a duly authorized
representative of the Executive Branch of the United States, except in the
course of legal proceedings to which the United States is a party, or for the
purpose of securing compliance with this Final Judgment or as otherwise required
by law.
(D) If at the time information or documents are furnished by the
Defendant to Plaintiff, the Defendant represents and identifies in writing the
material in any such information or documents to which a claim of protection may
be asserted under Rule 26(c)(7) of the Federal Rules of Civil Procedure, and
Defendant marks each pertinent page of such material "Subject to a claim of
protection under Rule 26(c)(7) of the Federal Rules of Civil Procedure," THEN
10 days' notice shall be given by Plaintiff to the Defendant prior to divulging
such material in any legal proceeding (other than a grand jury proceeding) to
which Defendant is not a party.
VII.
Further Elements of the Final Judgment
(A) This Final Judgment shall expire ten years from the date of its
entry.
(B) Jurisdiction is retained by this Court for the purpose of enabling
the parties to this Final Judgment to apply to this Court at any time for
further orders and directions as may be necessary or appropriate to carry out or
construe this Final Judgment, to modify or terminate any of its provisions, to
enforce compliance, and to punish violations of its provisions.
(C) Entry of this Final Judgment is in the public Interest.
DATED: ___________
______________________
United States District Judge