Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended December 31, 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes to both.
Indicate the number of shares outstanding of each of the issuer'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).
Part 1. Financial Information
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.
Registrant's financial statements (unaudited) for the quarter ended 12.31.98 are
set forth below.
21ST CENTURY TELESIS, INC.
21ST CENTURY TELESIS (II), INC.
21ST CENTURY TELESIS JOINT VENTURE and
21ST CENTURY BIDDING CORPORATION
(DEVELOPMENT STAGE COMPANIES)
COMBINED BALANCE SHEET
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
UNAUDITED
<TABLE>
<CAPTION>
ASSETS
December 31, 1998 September 30, 1998
-------------------- --------------------
Current assets
<S> <C> <C>
Cash in bank. . . . . . . . . . . . . . . . . . . . . . . . . . $ 719,988 $ 2,660,126
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . 50,931 21,152
Loan receivable . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Accrued interest receivable . . . . . . . . . . . . . . . . . . 13,542 12,291
-------------------- --------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 834,461 2,743,569
-------------------- --------------------
Property and equipment
Furniture, fixtures and equipment . . . . . . . . . . . . . . . 208,211 205,580
Accumulated depreciation. . . . . . . . . . . . . . . . . . . . (104,163) (94,263)
-------------------- --------------------
Total property and equipment. . . . . . . . . . . . . . . . . 104,048 111,317
-------------------- --------------------
Other assets
PCS licenses, including capitalized interest. . . . . . . . . . 50,437,742 49,274,863
Capitalized system development costs. . . . . . . . . . . . . . 805,305 736,872
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 261,643 511,524
-------------------- --------------------
Total other assets. . . . . . . . . . . . . . . . . . . . . . 51,504,690 50,523,259
-------------------- --------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 52,443,199 $ 53,378,145
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1998 . September 30, 1998
-------------------- --------------------
Current liabilities
Accounts payable and accrued fees . . . . . . . . . . . . . . . $ 128,336 $ 139,148
Insurance contract payable. . . . . . . . . . . . . . . . . . . 10,048 -
Note payable - Federal Communications
Commission. . . . . . . . . . . . . . . . . . . . . . . . . . 177,997 88,308
Accrued interest - FCC notes payable. . . . . . . . . . . . . . 1,560,149 1,302,105
-------------------- --------------------
Total current liabilities . . . . . . . . . . . . . . . . . . 1,876,530 1,529,561
-------------------- --------------------
Long term liabilities
Notes payable - Federal Communications
Commission. . . . . . . . . . . . . . . . . . . . . . . . . . 35,935,785 35,692,589
-------------------- --------------------
Total long term liabilities . . . . . . . . . . . . . . . . . 35,935,785 35,692,589
-------------------- --------------------
Shareholders' equity
21st Century Telesis, Inc.
Common stock - Series A, $.01 par value, 736,429 shares
authorized, issued and outstanding. . . . . . . . . . . . . 7,364 7,364
Common stock - Series B, $.01 par value, 1,970,714 shares
authorized, 1,643,214 shares issued and outstanding . . . . - -
Preference stock, $.10 par value, 5,500,000 shares authorized,
175,000 shares issued and outstanding . . . . . . . . . . . 17,500 17,500
21st Century Telesis (II), Inc.
Preference stock, $.10 par value, 5,500,000 shares authorized,
2,571,328 shares issued and outstanding . . . . . . . . . . 257,133 257,133
Additional paid in capital. . . . . . . . . . . . . . . . . . . 23,387,975 23,387,975
Deficit accumulated during the development stage. . . . . . . . (9,039,088) (7,513,977)
-------------------- --------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . 14,630,884 16,155,995
-------------------- --------------------
Total liabilities and
shareholders' equity . . . . . . . . . . . . . . . . . . . $ 52,443,199 $ 53,378,145
==================== ====================
</TABLE>
21ST CENTURY TELESIS, INC.
21ST CENTURY TELESIS (II), INC.
21ST CENTURY TELESIS JOINT VENTURE and
21ST CENTURY BIDDING CORPORATION
(DEVELOPMENT STAGE COMPANIES)
COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
PERIOD FROM DECEMBER 6, 1994 TO DECEMBER 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
December 6, 1994
Three Months Three Months (Date of
Ended Ended Inception) To
December 31, 1998 December 31, 1997 December 31, 1998
--------------------------- ---------------------------- -------------------
<S> <C> <C> <C>
Revenue. . . . . . . . . . . . . . . . . $ - $ - $ -
--------------------------- ---------------------------- -------------------
Operating expenses
Salaries . . . . . . . . . . . . . . . 238,629 204,562 2,379,488
Travel, meetings and conferences . . . 56,242 32,946 643,016
Legal and other professional services. 1,108,493 52,817 2,132,227
Interest expense . . . . . . . . . . . - - 119,156
Rent . . . . . . . . . . . . . . . . . 36,494 29,319 305,620
Telephone. . . . . . . . . . . . . . . 13,066 10,081 131,075
Payroll taxes. . . . . . . . . . . . . 8,599 11,219 166,251
Office and other expense . . . . . . . 82,557 69,431 770,236
Loss on return of C block licenses . . - - 2,945,785
--------------------------- ---------------------------- ------------------
Total operating expenses . . . . . . 1,544,080 410,375 9,592,854
Other income
Miscellaneous. . . . . . . . . . . . . 2,916 - 2,916
Interest income. . . . . . . . . . . . 16,053 60,132 550,850
--------------------------- ---------------------------- ------------------
Loss before provision for income taxes . (1,525,111) (350,243) (9,039,088)
Provision for income taxes . . . . . . . - - -
--------------------------- ---------------------------- ------------------
Net loss . . . . . . . . . . . . . . . . $ (1,525,111) $ (350,243) $ (9,039,088)
=========================== ============================ ===================
Three Months. . . . . . . Three Months
Ended. . . . . . . . . . . Ended
December 31, 1998. . . . . December 31, 1997
--------------------- -------------------------
21st Century Telesis, Inc.
Basic and diluted income (loss)
per share. . . . . . . . . . . . . . (0.18) 0.01
=========================== ============================
Weighted average shares outstanding. . 2,554,643 2,554,643
=========================== ============================
21st Century Telesis (II), Inc.
Basic and diluted loss per share . . . (0.42) (0.14)
=========================== ============================
Weighted average shares outstanding. . 2,571,428 2,571,428
=========================== ============================
</TABLE>
21ST CENTURY TELESIS, INC.
21ST CENTURY TELESIS (II), INC.
21ST CENTURY TELESIS JOINT VENTURE and
21ST CENTURY BIDDING CORPORATION
(DEVELOPMENT STAGE COMPANIES)
CONDENSED COMBINED STATEMENT OF SHAREHOLDERSEQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
21st Century Telesis, Inc.
---------------------------
Common Stock - Series A Common Stock - Series B Preference Stock
----------------------- ------------------------ ----------------
No. of No. of No. of
Shares Amount Shares Amount Shares Amount
----------------------- ------------------------ ---------------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1998 736,429 $ 7,364 1,643,214 $ - 175,000 $17,500
Net loss. . . . . . . . . . - - - - - -
----------------------- ------------------------ ---------------- ------- ------- -------
Balance, December 31, 1998. 736,429 $ 7,364 1,643,214 $ - 175,000 $17,500
======================= ======================== ================ ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
21st Century Telesis (II), Inc.
-------------------------------
Deficit
Preference Stock Accumulated
----------------
Additional During the
No. of Paid In Development
Shares Amount Capital Stage Total
---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1998 2,571,328 $ 257,133 $ 23,387,975 $(7,513,977) $16,155,995
Net loss. . . . . . . . . . - - - (1,525,111) (1,525,111)
---------------- ------------ ------------ ------------ ------------
Balance, December 31, 1998. 2,571,328 $ 257,133 $ 23,387,975 $(9,039,088) $14,630,884
================ ============ ============ ============ ============
</TABLE>
21ST CENTURY TELESIS, INC.
21ST CENTURY TELESIS (II), INC.
21ST CENTURY TELESIS JOINT VENTURE and
21ST CENTURY BIDDING CORPORATION
(DEVELOPMENT STAGE COMPANIES)
COMBINED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
PERIOD FROM DECEMBER 6, 1994 TO DECEMBER 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
December 6, 1994
Three Months Three Months
Ended Ended
December 31, 1998 December 31, 1997
------------------------------------- ----------------------------------
<S> <C> <C>
Cash flows from operating activities: . . . . . . . - -
Net loss. . . . . . . . . . . . . . . . . . . . . $ (1,525,111) $ (350,243)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss on return of C block licenses. . . . . . . - -
Other non-cash adjustments. . . . . . . . . . . 478,106 (230,410)
------------------------------------- ----------------------------------
Net cash used by operating activities . . . . . (1,047,005) (580,653)
------------------------------------- ----------------------------------
Cash flows from investing activities:
Payments for PCS licenses . . . . . . . . . . . . (571,950) -
Payments for capitalized system costs . . . . . . (68,433) (150,000)
Advanced on note receivable . . . . . . . . . . . - -
Purchases of property and equipment . . . . . . . (2,631) (42,281)
Payments of deposits and organizational costs . . (250,119) -
------------------------------------- ----------------------------------
Net cash used by investing activities . . . . . (893,133) (192,281)
------------------------------------- ----------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - Series A - -
Proceeds from issuance of preference stock -
net of issuance costs . . . . . . . . . . . . . - -
Proceeds from note payable. . . . . . . . . . . . - -
Payments on note payable. . . . . . . . . . . . . - -
------------------------------------- ----------------------------------
Net cash provided by financing activities . . . - -
------------------------------------- ----------------------------------
Net increase (decrease) in cash . . . . . . . . . . (1,940,138) (772,934)
Cash at beginning of period . . . . . . . . . . . . 2,660,126 5,829,299
------------------------------------- ----------------------------------
Cash at end of period . . . . . . . . . . . . . . . 719,988 5,056,365
===================================== ==================================
(Date of
Inception) to
December 31, 1998
----------------------------------
<S> <C>
Cash flows from operating activities: . . . . . . . -
Net loss. . . . . . . . . . . . . . . . . . . . . $ (9,039,088)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss on return of C block licenses. . . . . . . 2,945,785
Other non-cash adjustments. . . . . . . . . . . 495,327
----------------------------------
Net cash used by operating activities . . . . . (5,597,976)
----------------------------------
Cash flows from investing activities:
Payments for PCS licenses . . . . . . . . . . . . (15,778,898)
Payments for capitalized system costs . . . . . . (550,552)
Advanced on note receivable . . . . . . . . . . . (50,000)
Purchases of property and equipment . . . . . . . (208,210)
Payments of deposits and organizational costs . . (764,348)
----------------------------------
Net cash used by investing activities . . . . . (17,352,008)
----------------------------------
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 . . . . . . . . . . . . . 23,644,972
Proceeds from note payable. . . . . . . . . . . . 1,000,000
Payments on note payable. . . . . . . . . . . . . (1,000,000)
----------------------------------
Net cash provided by financing activities . . . 23,669,972
----------------------------------
Net increase (decrease) in cash . . . . . . . . . . 719,988
Cash at beginning of period . . . . . . . . . . . . -
----------------------------------
Cash at end of period . . . . . . . . . . . . . . . 719,988
==================================
</TABLE>
21ST CENTURY TELESIS, INC.
--------------------------
21ST CENTURY TELESIS (II), INC.
-------------------------------
21ST CENTURY TELESIS JOINT VENTURE AND
--------------------------------------
21ST CENTURY BIDDING CORPORATION
--------------------------------
(DEVELOPMENT STAGE COMPANIES)
-----------------------------
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
------------------------------------------------
1. GENERAL
-------
21st Century Telesis, Inc. ("21st I") and 21st Century Telesis (II), Inc. ("21st
II") have been in the development stage since formation as Delaware corporations
on December 6, 1994, and January 5, 1995, respectively. 21st I and 21st II
thereafter formed 21st Century Telesis Joint Venture ("21st JV") under the
general partnership law of Delaware, to serve as the entity that would
participate in the FCC auction and build and operate Personal Communications
Services ("PCS") systems under licenses obtained at the FCC auctions. 21st JV
formed a wholly owned Delaware subsidiary, 21st Century Bidding Corporation
(21st BC). Under the terms of the Joint Venture Agreement, which was executed as
of January 23, 1995, 21st I controls and manages 21st JV, for which services it
is reimbursed for all its direct and indirect costs. Profits, gains and losses
of the 21st JV are to be distributed 30% to 21st I and 70% to 21st II.
The accompanying combined financial statements reflect the combination of the
individual financial statements of 21st I, 21st II, 21st JV, and 21st BC
(collectively referred to as "the Companies"). These Companies are under common
control of 21st I, as described above, are under common management, and engage
in similar operating activities. Combination of the individual financial
statements provides a more meaningful financial presentation than would the
individual statements shown separately. Intercompany transactions and balances
have been eliminated in these combined financial statements.
The accompanying condensed combined financial statements of the Companies have
been prepared by the Companies without audit pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the SEC. The
Company believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed combined financial statements
should be read in conjunction with the combined financial statements and notes
thereto included in the Companies' Form 10K for the year ended September 30,
1998.
In the opinion of the Companies, the accompanying unaudited condensed combined
financial statements reflect all adjustments necessary to present fairly the
combined financial position of the Companies as of December 31, 1998 and
September 30, 1998, and the combined results of operations and cash flows for
the three month periods ended December 31, 1998 and 1997 and the period from
inception to December 31, 1998. Interim results are not necessarily indicative
of fiscal year performance because of the impact of seasonal or short-term
variations.
2. EARNINGS PER SHARE
--------------------
The condensed 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. Warrants to issue 94,600 shares
of 21st II preference stock have been excluded from the computation of diluted
net loss per share as the effect of their inclusion would have been
anti-dilutive.
3. RETURN OF C BLOCK LICENSES AND DEBT RESTRUCTURING
--------------------------------------------------------
The FCC issued a reconsideration order which went into effect in April,
1998 which allowed C block PCS license holders options to restructure their
licenses and related debts to the FCC. On June 8, 1998, the Companies elected
to return one-half of the spectrum (15 MHz of its 30 MHz) for each if its C
block licenses. This dissagregation election extinguished 50% of the respective
license debt and accrued interest and prohibits the Companies from bidding for
this spectrum, or otherwise acquiring in the secondary market, for two years
from the date of the start of the re-auction. As a result of this election, the
Companies recognized a charge to operations of $2,945,785 in June 1998,
representing the forfeiture of part of the original down payment on the C block
PCS licenses.
The restructured C block license notes have a carrying value of $33,301,193
at December 31, 1998. These notes continue to bear interest at 7.0% and require
quarterly interest only payments of $773,269 beginning on October 31, 1998
through October 31, 2002. Commencing January 31, 2003, quarterly principal and
interest payments of $3,190,268 are required with any unpaid balances due on
September 17, 2006.
The Companies also have F block notes payable to the FCC with a carrying value
of $2,812,589 at December 31, 1998. These notes bear interest at 6.25% and
require interest only payments of $56,725 through April 1999 and quarterly
principal and interest payments thereafter of $145,034 through April 2007.
Pursuant to industry practices, the FCC debts have been recorded at the net
present value of the required payments based on the Companies' estimate of
borrowing costs of 13% for debt similar to that issued by the FCC.
4. COMMITMENTS AND CONTINGENCIES
-------------------------------
FCC Control Requirements
As a qualifying small business with an identified control group (certain of the
founding stockholders of 21st I), the 21st JV benefited from bidding credits and
installment financing in the FCC's C and F block auctions. The 21st JV must
continue to comply with applicable FCC small business criteria for the initial
10-year term of the licenses; failure to do so will result in an immediate
requirement to pay the unpaid balance of the license fees in cash and to
4. COMMITMENTS AND CONTINGENCIES (continued)
-------------------------------
refund the bidding credits, plus interest thereon. With FCC approval, the C and
F block licenses owned by the 21st JV may be transferred at any time to another
entity that qualifies under the FCC small business criteria. Transfers to
non-qualifying transferees are prohibited during the first five years after
license award; non-qualifying transfers from the sixth year after license award
through tenth and final year of the initial license term require the cash
payment of the unpaid balance of the license fees and the refund of the bidding
credits, plus interest thereon.
FCC Build-out Requirement
All PCS license holders are required to meet certain requirements imposed by the
FCC relating to the provision of service in each license area. C block license
holders must provide coverage to one-third of the population in each license
service area within five years of license grant and two-thirds of the population
in each license service area within ten years of license grant. F block
license holders must provide coverage to one-quarter of the population in each
license service area within five years of license grant, or make a showing of
substantial service in their license area within five years of being licensed.
Failure to comply with the build-out requirements could subject 21st JV to
license forfeiture or other penalties, and may have a material adverse effect on
the financial condition of 21st JV.
PCS Network Build-out and Development
Management of the Companies is negotiating with equipment vendors to acquire,
install and maintain PCS network equipment in the operating areas represented by
its PCS licenses. The development of the infrastructure necessary to offer PCS
services is subject to delays and risks, including those inherent in the general
uncertainty associated with design, acquisition, installation and construction
of wireless telephone systems. The successful development of the licenses also
depends on the Companies' ability to lease or acquire sites for the location of
equipment, some of which may be subject to zoning or other regulatory approvals
which are beyond the Companies' control. Delays in the site acquisition
process, as well as in the acquisition of equipment or in construction, could
adversely affect the timing for build-out of the Companies' licenses.
The Companies are developmental companies that have incurred net losses since
inception and expect to continue to experience net losses and cash flow
deficiencies from operations. As more fully discussed in the Management's
Discussion and Analysis, the Companies will require substantial amounts of
additional capital to design, develop and build their PCS network, meet their
FCC license debt service requirements, provide for continuing working capital
needs, and to market and promote the Companies' services. The Companies are
exploring the availability of additional capital. The ability of the Companies
to raise the necessary capital is subject to numerous uncertainties and
management can provide no assurances that such capital will be raised timely for
the built-out of the Companies' PCS system or to meet the debt service
requirements of the PCS license debts.
5. RECENT ACCOUNTING PRONOUNCEMENTS
----------------------------------
In March 1998, Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which
provides guidance on whether and under what conditions the costs of internal-use
software should be capitalized. SOP 98-1 is effective for all transactions
entered into in fiscal years beginning after December 15, 1998, however earlier
adoption is encouraged. Companies believe the adoption of SOP 98-1 will not be
material to its results of operations or cash flows.
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" was issued which
redefines how operating segments are determined and requires disclosures of
certain financial and descriptive information about operating segments. SFAS
131 is effective for fiscal periods beginning after December 15, 1997 and its
adoption may require additional disclosure of the Company's historical financial
data beginning with fiscal year ending September 30, 1999.
<PAGE>
6. 21st CENTURY TELESIS (II), INC.
-----------------------------------
As described in Note 1, the condensed combined financial statements include in
the financial statements of 21st Century Telesis (II), Inc. The condensed
balance sheets, statements of operation, and statements of cash flows for 21st
II are presented below:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
-------------- ---------------
Balance Sheets
- ------------------------------------------------------
<S> <C> <C>
- -
Assets:
Cash and cash equivalents. . . . . . . . . . . . $ 236,108 $ 249,741
Due from affiliated Company. . . . . . . . . . . 1,912,000 -
Investment in 21st Century Joint Venture . . . . 15,911,637 16,985,296
-------------- ---------------
$ 18,059,745 $ 17,235,037
============== ===============
Liabilities:
Accounts payable and accrued expenses. . . . . . $ 20,930 $ 23,995
Due to 21st Century Joint Venture. . . . . . . . 1,898,412 546
-------------- ---------------
1,919,342 24,541
-------------- ---------------
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 (6,630,569) (5,560,476)
-------------- ---------------
16,140,403 17,210,496
-------------- ---------------
$ 18,059,745 $ 17,235,037
============== ===============
</TABLE>
<PAGE>
6. 21st CENTURY TELESIS (II), INC. (continued)
-----------------------------------
<TABLE>
<CAPTION>
Three Months Three Months
ended ended Inception to
December 31, December 31, December 31,
1998 1997 1998
----------------------------------- -------------- --------------
Statements of Operations
- -----------------------------------------
<S> <C> <C> <C>
Revenues - Management fee 21st JV . . $ - $ - $ -
Loss from unconsolidated affiliate. . 1,073,659 394,187 5,991,122
Management fee to 21st I. . . . . . . - - 874,000
Miscellaneous expenses. . . . . . . . - 3,818 51,278
----------------------------------- -------------- --------------
1,073,659 398,005 6,916,400
Interest income . . . . . . . . . . . 3,566 31,505 285,831
----------------------------------- -------------- --------------
Net income. . . . . . . . . . . . . . ($1,070,093) ($366,500) ($6,630,569)
=================================== ============== ==============
Condensed Statements of Cash Flows
- -----------------------------------------
Cash flows from operating activities:
Net losses. . . . . . . . . . . . . ($1,070,093) ($366,500) ($6,630,569)
Losses from 21st JV . . . . . . . . 1,073,659 394,187 5,991,122
Changes in operating assets
and liabilities . . . . . . . . . (3,065) (48,062) 20,930
----------------------------------- -------------- --------------
501 (20,375) (618,517)
Cash flows from investing activities:
Investments in 21st JV. . . . . . . - (744,750) (21,902,759)
Cash flows from financing activities:
Payments of loan payable - net. . . (14,134) (3,175,000) (13,588)
Proceeds from issuance of stock . . - - 22,770,972
----------------------------------- -------------- --------------
Net change in cash. . . . . . . . . . (13,633) (3,940,125) 236,108
Cash at beginning of period . . . . . 249,741 5,784,145 -
----------------------------------- -------------- --------------
Cash at end of period . . . . . . . . $ 236,108 $ 1,844,020 $ 236,108
=================================== ============== ==============
</TABLE>
Item 2. 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
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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 quarter ended December
31, 1998 was $16,053 compared to $60,132 for the quarter ended December 31,
1997. The decrease in interest income is attributable to a decrease in available
cash resulting from operations.
Total expenses for the quarter ended December 31, 1998 totaled $1,544,080
compared to $410,375 for the quarter ended December 31, 1997. The increases in
expenses for the quarter ended December 31, 1998 were attributable primarily to
increased salaries and 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 quarter ended December 31, 1998, the
Companies expensed $965,000 of financing costs incurred related to a financing
opportunity which management has determined is no longer viable. The Companies
have also paid a non-refundable $250,000 financing fee to Banco Paribus pursuant
to a senior secured financing commitment that has been recorded as a deposit in
the Companies' December 31, 1998 balance sheet. The future realizability of this
deferred cost is dependent upon the successful completion of this financing
commitment.
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 Stringybark-Carlson which was repaid in full during the year ended
September 30, 1997. Since September 30, 1997, the Companies have not incurred
any new debt or raised 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 $3,630,447related
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 and $571,950 during the quarter ended December 31, 1998
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 December 31, 1998, the Companies owed the FCC
$47,817,211 (undischarged) and accrued interest payable of approximately
$1,560,149.
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 $68,433 during the quarter ended December 31, 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 $719,988 at
December 31, 1998 and $2,660,126 at September 30, 1998. Cash available to the
Companies declined materially in the quarter ended December 31, 1998 due
primarily to the payment of interest due to the FCC, legal and professional
costs related to securing financing and contracts, payment of commitment fees
and related financing costs, including the write-off of costs related to
financing opportunities no longer considered viable, and salaries and
administrative costs. As a consequence of these expenditures, which are
substantially greater than management had previously anticipated, the Companies'
remaining cash is insufficient to make the FCC license payments due by April 29,
1999, or to fund continuing operations past mid-April, 1999. 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.
At December 31, 1998, the Companies had current liabilities of $1,876,530 and
$1,529,561 at September 30, 1998. The Companies' total liabilities were
$37,812,315 at December 31, 1998 and reflect 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 Banco
Paribus 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. As of the date of this filing, no additional equity has
been subscribed or received by the Companies.
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.
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Part II. Other Information
N/a.
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Signatures
Pursuant to the requirements 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.
Date: February 17, 1999
By: Philip J. Chasmar, Executive Vice President/Secretary
Dion Whitman, Acting Chief Financial Officer
