-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DUOejoxoXsWUaRYzeZ/aGLRtCTxNMF117kcsHMggbAAMQ7hDizWufoVn6kKzPHTm duDhrOti1+DEZm5x7EIbFg== 0000947660-99-000004.txt : 19990125 0000947660-99-000004.hdr.sgml : 19990125 ACCESSION NUMBER: 0000947660-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 21ST CENTURY TELESIS II INC CENTRAL INDEX KEY: 0000947660 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24817 FILM NUMBER: 99509577 BUSINESS ADDRESS: STREET 1: 1912 BROADWAY FIRST FLOOR CITY: SANTA ANA STATE: CA ZIP: 92707 BUSINESS PHONE: 7146480401 10-K 1 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

i.e., the cost of the license divided by the total population of the market. average cost per pop. Registrant's D and F Block Licenses

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.

(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

The accompanying notes are an integral part of these statements. L I A B I L I T I E S

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 -------------------------------------------------------------------

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 -------------------------------------------------------------------

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 -------------------------------------------------------------------

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 ============= ============

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. 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:

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. 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. 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:

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:

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. 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. 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. 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:

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. 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:

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:

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. 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. 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. 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:

9. 21ST CENTURY TELESIS (II), INC. (continued) -----------------------------------

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:

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.

(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:

Does not include Mr. Hart's 5.6% limited partner interest in the H. R. Hart Communications LP. 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. Owned of record by Star Cable Partners; Mr. Roddey disclaims beneficial ownership. 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. A derived figure, representing Mr. Rasco's 11.2% limited partner's interest in the H.R. Hart Communications LP. 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 EX-10 2 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. 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 EX-10 3 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 -----END PRIVACY-ENHANCED MESSAGE-----