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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NO. 333-20295
CS WIRELESS SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 23-2751747
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 CHISHOLM PLACE, SUITE 202
PLANO, TEXAS 75075
(Address of principal executive offices, including zip code)
(972) 633-4000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant To Section 12(g) Of The Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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.
As of March 31, 1997, 10,702,609 shares of the Registrant's Common Stock
were outstanding, 1,445,408 shares of which were held by nonaffiliates. The
Company's Common Stock has not been registered with the Securities and Exchange
Commission, and no market exists for its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CS WIRELESS SYSTEMS, INC.
TABLE OF CONTENTS
Page
FORWARD LOOKING INFORMATION AND RISK FACTORS . . . . . . . . . . . . . . . . 1
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 1. BUSINESS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. PROPERTIES.. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 17
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.. . . . . . . . . . . . . . . . . . . . 19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . 23
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . 23
Item 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 25
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 28
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . F-1
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CS WIRELESS SYSTEMS, INC.
1996 ANNUAL REPORT ON FORM 10-K
FORWARD LOOKING INFORMATION AND RISK FACTORS
CS Wireless Systems, Inc. (together with its subsidiaries, "CS" or the
"Company") or its representatives may make forward looking statements, oral or
written, including statements in this report's Management's Discussion and
Analysis of Financial Condition and Results of Operations, press releases and
filings with the Securities and Exchange Commission (the "Commission"),
regarding estimated future operating results, planned capital expenditures
(including the amount and nature thereof) and the Company's financing plans, if
any, related thereto, increases in subscribers and the Company's financial
position and other plans and objectives for future operations. There can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected effects on its business or operations. Among the factors that could
cause actual results to differ materially from the Company's expectations are
general economic conditions, competition, government regulations and other
factors set forth among the risk factors noted below or in the description of
the Company's business in Item 1 of this report, as well as factors contained in
the Company's other securities filings.
All subsequent oral and written forward looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT. As of December 31, 1996,
the Company had outstanding indebtedness of approximately $276.3 million. For
the year ended December 31, 1996, earnings were insufficient to cover fixed
charges by $43.2 million. The ability of the Company to meet its debt service
requirements will depend upon achieving significant and sustained growth in the
Company's cash flow. The Company currently anticipates that working capital and
revenues generated from the operation of its wireless cable systems should be
sufficient to make principal and interest payments on the Company's indebtedness
as they become due. However, there can be no assurance that the Company's
operations will generate sufficient cash flow to pay such obligations. The
Company's ability to generate such cash flow is subject to a number of risks and
contingencies. Accordingly, there can be no assurance as to whether or when the
Company's operations will become profitable or whether the Company will have
sufficient resources to meet its debt service obligations as they become due.
The degree to which the Company is leveraged could have important
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain additional equity or debt financing in the future for working
capital, capital expenditures, product development, acquisitions, general
corporate purposes or other purposes may be materially limited or impaired;
(ii) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness; and
(iii) the Company's high degree of leverage may make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions.
LACK OF PROFITABLE OPERATIONS; LIMITED BUSINESS HISTORY. The wireless
cable systems and assets that the Company has acquired have experienced
operating losses. The Company expects to realize additional operating and net
losses on a consolidated basis while it develops and expands its wireless cable
systems. There can be no assurance that the Company will be able to develop or
expand its wireless cable systems or that it or its individual subsidiaries will
achieve profitability in future years.
The Company has a limited operating history. Given the Company's limited
operating history, there is no assurance that the Company will be able to
achieve positive cash flow from operating activities and to compete successfully
in the subscription television industry.
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NEED FOR ADDITIONAL FINANCING FOR CAPITAL EXPENDITURES AND OPERATIONS. The
Company's business requires substantial investment to finance capital
expenditures and operating expenses for subscriber growth and systems
development. The Company has budgeted capital expenditures of approximately
$58.0 million and $120.0 million for 1997 and 1998, respectively. The Company
believes that working capital and revenues generated from operations will
provide sufficient funds to meet its needs for approximately the next 12 months.
Capital expenditures in excess of such resources may be financed, in whole or in
part, by the Company through debt or equity financings, subscriber equipment
lease financings, joint ventures or other arrangements. There is no assurance
that any additional financing necessary to expand the build-out of the Company's
wireless cable systems or to acquire new systems will be available on
satisfactory terms and conditions, if at all. Additional debt could result in a
substantial portion of the Company's cash flow from operations being dedicated
to the payment of principal and interest on such indebtedness, may render the
Company more vulnerable to competitive pressures and economic downturns and
could impose restrictions on the Company's operations. To the extent that
future financing requirements are satisfied through the issuance of equity
securities, the Company's stockholders could experience dilution. Failure to
obtain additional financing could adversely affect the growth of the Company and
its ability to compete successfully in the subscription television industry.
HIGHLY COMPETITIVE INDUSTRY. The subscription television industry is
highly competitive. The Company's principal subscription television competitors
in each market are traditional hard-wire cable, direct broadcast satellite
("DBS") and private cable operators. Hard-wire cable companies generally are
well-established and known to potential customers and have significantly greater
financial and other resources than the Company. Premium movie services offered
by cable television systems have encountered significant competition from the
home video cassette recorder ("VCR") industry. In areas where several local
off-air VHF/UHF broadcast channels can be received without the benefit of
subscription television, cable television systems also have faced competition
from the availability of broadcast signals generally and have found market
penetration to be more difficult. Legislative, regulatory and technological
developments may result in additional and significant competition, including
competition from local telephone companies and from a proposed new wireless
service known as Local Multipoint Distribution Service ("LMDS").
Digital capability is essential for wireless to compete with hard-wire
cable, which in its current analog state offers between 35 to 60 channel
offerings depending on a given market. With the deployment of digital
technology, hard-wire cable is expected to offer over 100 channels. In
addition, within each market, the Company initially must compete with others to
acquire, from the limited number of wireless cable channels issued or issuable,
rights to a minimum number of wireless cable channels needed to establish a
commercially viable system. Aggressive price competition or the passing of a
substantial number of presently unpassed households by any existing or new
subscription television service could have a material adverse effect on the
Company's results of operations and financial condition.
New and advanced delivery technologies for the subscription television
industry, including digital compression, fiber optic networks, DBS
transmission and LMDS, are in various stages of development. These
technologies are being developed and supported by entities, such as hard-wire
cable companies, telephone long distance companies, regional bell operating
companies ("RBOCs") and other large telecommunications companies, that have
significantly greater financial and other resources than the Company. These
new technologies could have a material adverse effect on the demand for
wireless cable services. There can be no assurance that the Company will be
able to compete successfully with existing hard-wire cable competitors or new
entrants in the market for subscription television services.
The Company will also face intense competition from other providers of
data transmission services if the Company implements, on a commercial basis,
such services (which it plans to do in Dallas, as of the date hereof). Such
competition is increased due to the fact that the MMDS spectrum has not
traditionally been utilized to deliver such alternative services, and
consumer acceptance of such services delivered via MMDS technology is unknown
at this time. Many of the existing providers of data transmission services,
such as regional telephone companies, have significantly greater financial
and other resources than the Company. There can be no assurance that there
will be consumer demand for alternative uses of the MMDS spectrum such as
data transmission services, including Internet access, that the Company will
be able to compete successfully against other providers of such services or
that the Company will be able to achieve profitability from such services in
future years.
NEW APPLICATIONS OF MMDS THE SPECTRUM. The Company is pursuing alternative
uses of its MMDS spectrum, many of which uses rely on technology that is
currently being developed by the Company and other MMDS operators and
vendors. There can be no assurance that such technology development will
continue, or that it will result in technologically-viable MMDS systems.
Additionally, alternative uses of MMDS spectrum have not been commercially
deployed in any meaningful manner to date by any MMDS operator. There can be
no assurance that such alternative uses can be deployed in a commercially
reasonable manner, that such uses will gain consumer acceptance, or that
alternative uses of the MMDS spectrum can be developed into a profitable
business by the Company.
COMPETITIVE PRESSURES OF RAPID CHANGES IN TECHNOLOGY. The wireless cable
industry and the subscription television industry in general are subject to
rapid and significant changes in technology which may increase competitive
pressures on the Company or require capital investments to remain competitive
that are beyond the Company's resources at the time. Because of the rapid and
high level of technological change in the industry in which the Company
competes, the effect of technological changes on the businesses of the Company
cannot be predicted.
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DIGITAL TECHNOLOGY NOT COMMERCIALLY AVAILABLE. Currently, wireless cable
companies can offer up to 33 analog channels of educational and commercial
programming. The ability to offer substantially more programming utilizing
existing wireless channel capacity is dependent on effectively applying digital
technology. Federal Communications Commission ("FCC") approval is required
before the Company's wireless cable systems can be converted to digital
technology. The FCC has recently issued a Declaratory Ruling and Order which
effectively established interim rules to govern the transition from analog to
digital technology. The FCC has yet to commence a rulemaking proceeding to
adopt permanent rules. There can be no assurance as to what permanent rules and
policies the FCC will adopt to govern the use of digital technology, which such
rules and policies will be adopted, or the Company's ability to comply with
those rules and policies. It is expected that digital technology will be
commercially available in sufficient production in 1997. It is also expected
that the cost of digital equipment will exceed the cost of analog equipment.
There can be no assurance, however, that digital converter boxes and other
equipment necessary to implement digital technology, including satellite
delivery of digital signals, will be available on this timetable. Conversion
from current analog technology to digital technology will not take place in all
markets simultaneously. The Company intends to begin the build out and
conversion of some of its markets using digital technology in 1997.
LAUNCH OF DIGITAL SYSTEMS. The Company intends to launch digital video
and Internet access services in its Dallas market in 1997. The ability of
the Company to successfully launch these services is dependent upon several
factors, including, without limitation, the availability of adequate
facilities and equipment to support a digital Multi-Channel Distribution
Service and Multipoint Multi-Channel Distribution Service (collectively,
"MMDS") system, as well as the receipt of requisite regulatory approvals.
The Company has filed a series of related modification applications with the
FCC requesting authority to operate a 50 watt digital video system in Dallas,
which applications are currently pending before the FCC. The FCC has granted
MMDS licensees the authority to offer one-way Internet access (using a
traditional telephone line return path) without any further regulatory
hurdles. The Company has applied to the FCC for developmental authority for
two-way flexible use of two channels in its Dallas market, on a test basis,
which application is also currently pending before the FCC. There can be no
assurance that the Company will be granted authority with respect to any of
its pending applications or that the commercial deployment of any new
products for which authority has been or will be granted will be successful.
Further, there can be no assurance that, even if such tests of two-way
flexible use of the MMDS spectrum are successful and permanent authority is
granted by the FCC to the Company, that two-way flexible use could be
successfully deployed in a commercial manner, and if so deployed, would be
profitable.
In order for the Company to launch a digital subscription television
service in any market in which it now has or may in the future have a digital
MMDS transport system, the Company must have access to pre-digitized,
compressed programming. The Company is currently in discussions with certain
third parties which the Company believes will be able to provide it with the
pre-digitized, compressed programming necessary to launch digital
subscription television in Dallas. As of the date hereof, no definitive
agreement has been reached with any such third party provider, and there can
be no assurance that CS will be able to reach a definitive agreement on terms
and conditions satisfactory to the Company, if at all. If the Company cannot
contract with a third party provider capable of providing CS with sufficient
digital programming to launch a digital subscription television service, the
Company would have to construct its own digital compression center. The
Company estimates the cost of constructing a digital compression center to be
approximately $8.0 million, based on information available to the Company as
of the date hereof. Access to pre-digitized, compressed programming, either
through a third party provider or construction of a digital compression
center, must be secured for each market in which CS desires to launch a
digital subscription television service.
RESTRICTIONS IMPOSED BY GOVERNMENT AND COMMUNITY REGULATION. The wireless
cable industry is regulated by the FCC. The FCC governs, among other things,
the issuance, renewal, assignment, transfer and modification of licenses
necessary for wireless cable systems to operate and the time afforded to
licensees to construct their facilities. The FCC requires fees for certain
applications and licenses, and mandates that certain amounts of educational,
instructional or cultural programming be transmitted over certain of the
channels used by the Company's existing and proposed wireless cable systems. In
the 50 largest markets, the FCC has authorized up to 33 channels (constituting a
spectrum bandwidth of 198 MHz) primarily for wireless cable transmission of
video programming. In smaller markets, the FCC has authorized up to 33 channels
(constituting a spectrum bandwidth of 196 MHz). Up to 13 MMDS channels can be
licensed by the FCC to commercial operators for full-time usage without
programming restrictions. The remaining Instructional Television Fixed Services
("ITFS") channels typically are authorized for educational purposes, although
excess capacity can be leased to wireless cable operators, subject to certain
programming restrictions. Licenses for both MMDS and ITFS channels are granted
based upon applications filed with the FCC. FCC approval also is required for
assignment of existing licenses or transfer of control of license holders. The
FCC imposes restrictions and conditions upon the use, control and operation of
channels. FCC licenses are limited in duration and subject to renewal
procedures. While current FCC rules are intended to promote development of a
competitive subscription television industry, the statutes, rules and
regulations affecting the subscription television industry could change, and any
future changes in FCC rules, regulations, policies or procedures could have a
negative impact on the industry as a whole, and on the Company in particular.
In addition, wireless cable operators are subject to regulation by the
Federal Aviation Administration ("FAA") with respect to construction of
transmission towers and to certain local zoning regulations affecting
construction of towers and other facilities. There also may be restrictions
imposed by local authorities, neighborhood
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associations and other similar organizations limiting the use of certain
types of reception equipment used by the Company. Future changes in the
foregoing regulations or any other regulations applicable to the Company
could have a material adverse effect on the Company's results of operations
and financial condition.
DEPENDENCE ON CHANNEL LEASES AND LICENSES: NEED FOR LICENSE EXTENSIONS.
ITFS licenses generally are granted for a term of 10 years and are subject to
renewal by the FCC. FCC licenses also specify construction deadlines which,
if not met, could result in the loss of the license. Requests for additional
time to construct a channel may be filed and are subject to review pursuant
to FCC rules. Certain of the Company's ITFS channel rights are subject to
pending extension requests and it is anticipated that additional extensions
will be required. There can be no assurance that the FCC will grant any
particular extension request or license renewal request. For most of its
channel rights, the Company is dependent upon leases of transmission capacity
with various third-party license holders. The Company's channel leases
typically cover four ITFS channels and/or one to four MMDS channels each.
Under the rules of the FCC, the term of leases for ITFS channels, which
constitute up to 20 of the 33 available wireless channels within any major
wireless cable market, may not exceed 10 years. There is no such restriction
on MMDS leases. Following the expiration of the initial term of a lease for
ITFS channels, the leases under which the Company operates generally provide
that, for a specified period of time, which is typically one year, the ITFS
license holders may negotiate for the lease of channel capacity for one or
more additional renewal terms with only the Company or its sublessor. In
addition, if a renewal agreement is not reached within a specified time
during which only the Company or its sublessor has the use of the channel
capacity, the Company will thereafter typically have, for an additional
specified period of time, a right of first refusal to match any competing
offers from one or more third parties. Because the ITFS license holders have
generally received their FCC licenses within the last 10 years, the Company
and other similarly situated entities in the industry have had little or no
experience negotiating renewals of ITFS channel lease agreements. The
Company anticipates, however, that it will be able to negotiate additional
renewals with either the incumbent license holder, or with successor license
holders, although there is no assurance that it will be successful in doing
so. The MMDS channel leases held by the Company generally grant the Company
the right to renew the channel lease. All ITFS and MMDS channel leases are
dependent upon the continued validity of the corresponding FCC license. The
Company anticipates that upon the expiration of the current license terms,
all such FCC licenses will be renewed following completion of the FCC review
process, although there is no assurance that such renewal applications will
be granted. The termination of or failure to renew a channel license or
lease (due to a breach by the Company or its lessor, cancellation of the
license held by a third party lessor for failure to timely construct and/or
perfect the wireless cable facility or otherwise) or the failure to grant an
application for an extension of the time to construct an authorized station,
would result in the Company being unable to deliver programming on such
channel(s) unless it were able to lease excess capacity from a successor
license holder. Such a termination or failure could have a material adverse
effect on the Company. In addition, the anticipated conversion to digital
technology and the use of channels for services other than video may require
renegotiation of the Company's channel leases, and there is no assurance that
such renegotiated leases will be on terms as favorable as the Company's
current leases.
UNCERTAINTIES OF A NEW INDUSTRY. While wireless cable television is not a
new technology, it is a new industry with a limited operating history. Many
difficulties and uncertainties are normally associated with new industries, such
as lack of consumer acceptance, difficulty in obtaining financing, increasing
competition, advances in technology and changes in laws and regulations. There
can be no assurance that the wireless cable industry will develop or continue as
a viable or profitable industry.
DEPENDENCE ON KEY INDIVIDUALS. The success of the Company is largely
dependent on the experience and knowledge of its executive officers. The loss
of the services of one or more of these individuals and the Company's inability
to attract and retain other key members of the Company's management could have a
material adverse effect upon the Company.
CABLE SUBSCRIBER CONVERSION. In each of the principal markets serviced by
the Company there is or will be significant competition for households that are
presently subscribers of hard-wire cable services. There can be no assurance
that the Company will be able to attract to its services existing cable
customers, who for a variety of reasons may be reluctant to shift from their
present cable service.
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NO ASSURANCE THAT THE COMPANY WILL MANAGE GROWTH EFFECTIVELY. If the
Company grows rapidly it may experience a significant strain on its management,
operating and financial resources. The Company's ability to manage growth
effectively will require it to continue to implement and improve its operating
and financial systems and to expand, train and manage its employee base. These
demands are expected to require the addition of new management personnel and the
development of additional expertise by existing management personnel. Managing
growth is especially challenging for a company with limited financial resources,
and the failure to effectively manage growth could have a material adverse
effect on the Company's operations. Further, the Company has been created by
combining various wireless cable systems from several different companies, and
may in the future acquire additional wireless cable systems, and there can be no
assurance that such systems can be integrated efficiently into the existing
business.
IMPACT OF RECENTLY ENACTED LEGISLATION. The recently enacted
Telecommunications Act of 1996 (the "1996 Act") could have a material impact on
the wireless cable industry and the competitive environment in which the Company
operates. The 1996 Act will result in comprehensive changes to the regulatory
environment for the telecommunications industry as a whole. The legislation
will, among other things, substantially reduce regulatory authority over cable
rates. Another provision of the 1996 Act will afford hard-wire cable operators
greater flexibility to offer lower rates to certain of their subscribers, and
would thereby permit cable operators to offer discounts on hard-wire cable
service to the Company's subscribers or prospective subscribers. The
legislation will permit telephone companies to enter the video distribution
business, subject to certain conditions. The entry of telephone companies into
the video distribution business, with greater access to capital and other
resources, could provide significant competition to the wireless cable industry,
including the Company. In addition, the legislation will afford relief to DBS
by exempting DBS providers from local restrictions on reception antennas and
preempting the authority of local governments to impose certain taxes.
CONTROL BY CAI AND HEARTLAND. In connection with the contribution of
assets and securities to the Company in exchange for shares of the Company's
common stock, par value $.001 per share ("Common Stock"), CAI Wireless
Systems, Inc. ("CAI") and Heartland Wireless Communications, Inc.
("Heartland") entered into a Stockholders' Agreement (as defined) which,
among other matters, provides that at all times prior to the Common Stock
becoming publicly traded or a sale by CAI of all or substantially all of its
Common Stock of the Company, CAI will own more shares of Common Stock than
any other stockholder and will maintain operational control of the Company.
The Stockholders' Agreement also provides that CAI and Heartland will vote
their shares of Common Stock in favor of a board of directors comprised of
four members designated by CAI and three members designated by Heartland,
thereby enabling CAI and Heartland to effectively elect and control the
Company's Board of Directors. Most major decisions require the affirmative
approval of at least 70% (seven of nine members) of the Directors of the
Company so that neither CAI nor Heartland can unilaterally control major
decisions affecting the Company.
HOLDING COMPANY STRUCTURE. The Company intends to transfer ownership of
the wireless cable television assets comprising the Company's markets to wholly
owned subsidiaries. At such time, the assets of the Company will consist of the
outstanding shares of capital stock of such subsidiaries. The Company must rely
on dividends and other advances and transfers of funds from its subsidiaries to
provide the funds necessary to meet its debt service obligations. The ability
of such subsidiaries to pay such dividends and make such advances and transfers
will be subject to applicable state laws regulating the payment of dividends.
Claims of creditors of the Company's subsidiaries, including general creditors
and lenders, will generally have priority as to the assets of such subsidiaries
over the claims of the Company and the holders of the Company's outstanding
indebtedness.
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PART I
ITEM 1. BUSINESS.
GENERAL
The Company is one of the largest wireless cable television companies in
the United States in terms of line-of-sight ("LOS") households and subscribers.
The Company's 18 markets encompass approximately 7.5 million television
households, approximately 6.2 million of which are LOS households, as estimated
by the Company. As of December 31, 1996, the Company provided service to
approximately 65,600 subscribers.
At March 31, 1997, CAI and Heartland owned 47.7% and 38.8%, respectively,
of the outstanding Common Stock of the Company. CAI is one of the largest
developers, owners and operators of wireless cable television systems in the
United States. Heartland is a leading developer, owner and operator of wireless
cable systems in small to mid-size markets located in the central United States.
CS was formed in December 1993 as ACS Ohio, Inc. On February 23, 1996 (the
"Contribution Closing"), in exchange for approximately 60% of the Company's
Common Stock, CAI, directly or indirectly, contributed to the Company the
wireless cable television assets and all related liabilities, or the stock of
subsidiaries owning wireless cable television assets, associated with the
wireless cable television markets of Bakersfield and Stockton/Modesto,
California; Charlotte, North Carolina; and Cleveland, Ohio. Simultaneously, in
exchange for approximately 40% of the Company's Common Stock, cash, a short-term
note (the "Heartland Short-Term Note") and a long-term note (the "Heartland
Long-Term Note"), Heartland, directly or indirectly, contributed or sold to the
Company the wireless cable television assets and all related liabilities
associated with the wireless cable television markets of Grand Rapids, Michigan;
Minneapolis, Minnesota; Kansas City (suburbs), Missouri; Dayton, Ohio; Dallas,
Fort Worth and San Antonio, Texas; and Salt Lake City, Utah. The Contributions
were made to the Company by CAI and Heartland pursuant to a Participation
Agreement, as amended (the "Participation Agreement"), among the Company, CAI
and Heartland. On October 11, 1996, the Company acquired all of the common
stock of USA Wireless Cable, Inc. ("USA Cable") in a merger transaction. USA
Cable provided wireless cable service in certain Midwest markets, including but
not limited to the Effingham and Wellsville, Kansas; Radcliffe, Iowa;
Scottsbluff, Nebraska; Kalispell, Montana and Rochester, Minnesota markets.
On February 23, 1996, in a private placement, the Company issued and sold
100,000 Units (the "Units"), with each Unit consisting of four 11 3/8% Senior
Discount Notes due 2006 (the "Old Notes") (each at $1,000 principal amount at
maturity) and 1.1 shares of Common Stock (the "Unit Offering"), for an aggregate
purchase price of approximately $229.5 million. The Company received
approximately $219.7 million of net proceeds from the Unit Offering.
The Company has filed two Registration Statements on Form S-1 under the
Securities Act of 1933, as amended (the "Securities Act"), with the Commission
for the registration of its 11 3/8% Series B Senior Discount Notes due 2006 (the
"New Notes"). The New Notes are identical in all material respects to the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes. Pursuant to each Registration Statement, holders of Old Notes
were able to exchange Old Notes for New Notes (the "Exchange Offer"). CS did
not receive any proceeds from the registration of the New Notes or the Exchange
Offer.
The Company is incorporated under the laws of the state of Delaware. The
Company's principal executive offices are located at 200 Chisholm Place, Suite
202, Plano, Texas 75075, and its telephone number is 972/633-4000.
INDUSTRY OVERVIEW
SUBSCRIPTION TELEVISION INDUSTRY. The subscription television industry
began in the late 1940s to serve the needs of residents in predominantly rural
areas with limited access to local broadcast television stations. The industry
expanded to metropolitan areas due to, among other things, the fact that it
offered better reception and more
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programming. Currently, such systems offer various types of programming,
which generally include basic service, enhanced basic, premium service and,
in some instances, pay-per-view service. Traditional hard-wire cable systems
transmit signals from a central transmission facility and deliver the signal
to a subscriber's location through an extensive network of fiber optic and/or
coaxial cable, amplifiers and related equipment ("Cable Plant").
A subscription television customer generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
basic service fee varies from one area to another and is a function, in part, of
the number of channels and services included in the basic service package and
the cost of such services to the television system operator. In most instances,
a separate monthly fee for each premium service and certain other specific
programming is charged to customers, with discounts generally available to
customers receiving multiple premium services. Monthly service fees for basic,
enhanced basic and premium services constitute the major source of revenue for
subscription television systems. Converter rentals, remote control rentals,
installation charges and reconnect charges for customers who were previously
disconnected are also included in a subscription television system's revenues,
but generally are not a major component of such revenues.
WIRELESS CABLE INDUSTRY BACKGROUND. Wireless cable, as an alternative to
traditional, hard-wire cable television, was made possible by a series of FCC
rule changes in the 1980s. However, regulatory and other obstacles impeded the
growth of the wireless cable industry through the remainder of the 1980s. During
the 1990s, several factors have encouraged the growth of the wireless cable
industry, including (i) regulatory reforms by Congress and the FCC to facilitate
competition with hard-wire cable, (ii) federal legislation that increased the
availability of programming for wireless cable systems on non-discretionary
terms, (iii) consumer demand for alternatives to traditional hard-wire cable
service, (iv) enhanced ability of wireless cable operators to aggregate a
sufficient number of channels in each market to create a competitive product,
and (v) increased availability of capital to wireless cable operators in the
public and private markets. According to Paul Kagan Associates Inc., there are
approximately 200 wireless cable systems currently operating in the United
States, serving approximately 850,000 subscribers at the end of 1995.
Like a traditional hard-wire cable system, a wireless cable system receives
programming at a head-end. Wireless cable programming, however, is then
retransmitted by microwave transmitters operating in the 2150-2162 MHz and
2500-2686 MHz portions of the radio spectrum from an antenna typically located
on a tower associated with the head-end to a small receiving antenna located on
a subscriber's rooftop. At the subscriber's location, the signals are converted
to frequencies that can pass through conventional coaxial cable into a
descrambling converter located on top of a television set. Wireless cable
requires a clear LOS, because the microwave frequencies used will not pass
through dense foliage, hills, buildings or other obstructions. To ensure the
clearest LOS possible in the Company's markets, the Company has placed, and
plans to place, its transmit antennae on towers or tall buildings in areas
located in such markets. There exists, in each of the Company's operating and
targeted markets, a number of acceptable locations for the placement of its
transmit antennae, and the Company does not believe that the failure to secure
any one location for such placement in any single market will materially affect
the Company's operations in such market. Additionally, some LOS obstructions can
be overcome with the use of signal repeaters which retransmit an otherwise
blocked signal over a limited area. The Company believes that its coverage will
be further enhanced upon the implementation of digital technology. Since
wireless cable systems do not require an extensive Cable Plant, wireless cable
operators can provide subscribers with a reliable signal and a high quality
picture with few transmission disruptions at a significantly lower system
capital cost per installed subscriber than traditional hard-wire cable systems.
The Company expects that digital wireless equipment will become
commercially available in 1997 and expects to offer digital subscription
television service in Dallas, the Company's first digital market, in the
third quarter of 1997. Digital technology will give the Company the
capability to deliver in excess of 100 channels. The availability of
channels in excess of those used to provide a complete selection of local
television stations and cable networks will be used to provide an expanded
variety of premium and pay-per view channels. In addition, as there are
further advancements in digital compression technology, the Company will be
able to use a portion of its spectrum bandwidth for other uses, such as
Internet access and interactive programming.
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OPERATIONAL AND PLANNED MARKETS
The table below outlines as of December 31, 1996 the characteristics of the
Company's operational markets, pre-launch markets and markets under development.
The Company expects that the pre-launch markets and the markets under
development will be operational by the end of 1998.
<TABLE>
<CAPTION>
Number of Channels
Available(b)
------------------
Estimated
Total Estimated Approximate
Service Area LOS Wireless Off- Number of
Market Households(a) Households(a) Cable Air Total Subscribers
- -------------------------- ------------- ------------- -------- ---- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONAL MARKETS
Bakersfield, CA (c) 162,000 151,000 32 10 42 8,553
Cameron/Maysville, MO 65,000 59,000 24 5 29 2,350
Cleveland, OH 1,178,000 884,000 29 8 37 23,945
Dayton, OH (d) 610,000 413,000 33 5 38 7,012
Fort Worth, TX 540,000 443,000 26 13 39 1,042
Grand Rapids, MI 346,000 259,000 16 7 23 757
Minneapolis, MN (c) 959,000 882,000 28 8 34 4,778
Nortonville/Effingham, KS 53,000 48,000 21 8 29 1,725
San Antonio, TX 550,000 440,000 32 6 38 13,443
Sweet Springs, MO 61,000 55,000 20 8 28 1,948
PRE-LAUNCH MARKETS
Dallas, TX 981,000 872,000 22 13 35 -
Kansas City, MO (e) 432,000 389,000 24 5 29 -
Wellsville, KS 229,000 206,000 20 8 28 -
MARKETS UNDER DEVELOPMENT
Battle Creek/Kalamazoo, MI. 231,000 173,000 12 4 16 -
Charlotte, NC (f) 580,000 472,000 13 - 13 -
Napoleon/BloomCenter, IN (c)(d) 141,000 113,000 20 - 20 -
Rochester, MN (c) 57,000 51,000 23 4 27 -
Stockton/Modesto, CA (c) 350,000 300,000 26 6 32 -
--------- --------- ------
Total 7,525,000 6,210,000 65,553
--------- --------- ------
--------- --------- ------
</TABLE>
(a) The Estimated Total Service Area Households for each market represents the
Company's estimate of the number of households within the service area for
the primary transmitter in each market based on census data. The Estimated
LOS Households for each market represents the approximate number of
Estimated Total Service Area Households within the service area of the
primary transmitter that can receive an adequate unobstructed analog or
digital signal, as estimated by the Company, based on topographical and
engineering analyses. The service area for a market varies based on a
number of factors, including the transmitter height, transmitter power and
the proximity of adjacent wireless cable systems.
(b) The Number of Channels Available comprises analog wireless cable and local
broadcast channels that can be received by subscribers. Wireless cable
channels either are licensed to the Company or are leased to the Company
from other license holders. The Number of Channels Available also includes
certain channels that are subject to FCC approval of applications for new
station authorizations, power increases, transmitter relocations, as well
as third party interference agreements. The FCC's failure to grant one or
more new station applications could decrease the number of channels. The
FCC's failure to grant one or more power increase or transmitter relocation
applications, or the failure to obtain certain third party interference
agreements, could delay the initiation of service and/or reduce the
coverage area of the affected system or systems.
(c) These markets do not currently fit with the Company's strategy of regional
concentration and are, therefore, candidates for sale or exchange. No
prediction can be made as to if or when such dispositions will occur.
(d) When the FCC issues a station authorization, the licensee is afforded a
certain period of time to complete construction. If the licensee cannot
complete construction within the specified time frame, the licensee must
file a request with the FCC for
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additional time to complete construction. The Napoleon/Bloom Center,
Indiana market has 20 channels, all of which are the subject of
currently pending requests for additional time to complete construction.
(e) The Kansas City, Missouri market is expected to be acquired by the Company
from Peoples Choice TV Corp. ("PCTV") in connection with the PCTV Swap (as
defined). The PCTV Swap is expected to close during the second quarter of
1997.
(f) The Company currently holds licenses or leases for five wireless cable
channels and also has the right to develop nine additional channels,
depending on interference considerations, in the Charlotte market as a
result of its ownership of the Charlotte BTA.
At December 31, 1996, the Company operated wireless cable systems in
Bakersfield, California; Cleveland, Ohio; Fort Worth, Texas; Dayton, Ohio;
Grand Rapids, Michigan; Cameron/Maysville, Missouri; Nortonville/Effingham,
Kansas; Sweet Springs, Missouri; Minneapolis, Minnesota; and San Antonio,
Texas and has acquired channel rights in Charlotte, North Carolina; Dallas,
Texas and Stockton/Modesto, California. The Company also has markets in
Minneapolis, Minnesota; Stockton/Modesto, California; Bakersfield,
California; Napoleon, Indiana and Rochester, Minnesota. The Company believes
that these markets do not fit with the Company's strategy of regional
concentration, and therefore, the Company intends to sell or exchange these
systems. The Company has had preliminary discussions with potential buyers
with respect to such sales or exchanges; however, it does not have any
definitive arrangements with any such buyer and therefore cannot predict if
or when such sales or exchanges will occur.
The Company intends to expand its markets and subscriber base through the
acquisition of wireless cable systems and channel rights in targeted markets
located in the mid-west and southwest regions of the United States. Through
selected acquisitions, divestitures, asset swaps and joint ventures, the Company
seeks to increase its regional concentration of wireless cable television
systems in order to realize economies of scale and operating efficiencies. The
Company believes that its strategy of increasing regional concentration of
wireless cable television systems and channel rights will also enhance the
Company's ability to attract potential joint venture opportunities with
strategic partners. The Company also believes that these partnerships will
enable it to benefit from the partners' capital, infrastructure and brand
identity, thereby increasing the Company's ability to penetrate its markets.
Consistent with this strategy, the Company continues to explore and pursue
opportunities to acquire additional wireless cable television assets in markets
that meet the Company's selection criteria, to divest itself of wireless cable
television assets that are inconsistent with the Company's regional market
emphasis, and to continually evaluate its current markets to ensure that its
portfolio of operating systems and channel interests reflect the Company's
growth strategy. It is the Company's policy not to discuss or comment upon
negotiations regarding such transactions until a definitive agreement is signed
or other circumstances indicate a high degree of probability that a transaction
will be consummated, unless the law otherwise requires.
On October 11, 1996, the Company acquired all of the issued and
outstanding common stock ("USA Common Stock") of USA Wireless Cable, Inc.
("USA") (the "USA Wireless Acquisition"). USA provided wireless cable
service in certain Midwest markets, including but not limited to the
Effingham and Wellsville, Kansas; Radcliffe, Iowa; Scottsbluff, Nebraska;
Kalispell, Montana; and Rochester, Minnesota markets (the "USA Markets"). At
the effective time of the USA Wireless Acquisition, the outstanding shares of
USA Common Stock were converted into rights to receive an aggregate of $17.6
million, of which approximately $6.3 million was paid by the issuance of
shares of Common Stock and approximately $11.3 million consisted of
indebtedness and payables assumed by the Company. Approximately $7.2 million
of such indebtedness was paid upon consummation of the USA Wireless
Acquisition, $800,000 attributed to assumed accounts payable was paid in the
normal course of business and the remaining $3.3 million was off-set against
the note receivable of $1.3 million, extended by the Company as part of the
transaction, with the difference being paid in cash in February 1997. In
connection with this acquisition, the Company also extended a note receivable
to an affiliate of USA with a principal amount of $250,000 and an interest
rate of 12%. This note receivable is due in August 1997.
The Company has agreed to sell to Bell South (i) certain assets acquired by
the Company in the Heartland Wireless Georgia Properties, Inc. transaction (see
"Item 13. Certain Relationships and Related Transactions"), including leases and
licenses for wireless cable frequency rights for wireless cable channels
transmitting in
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Adairsville, Powers Crossroads and Rutledge, Georgia and leases for the four
tower sites in such markets for $7.3 million and (ii) the BTA licenses
relating to Atlanta, Georgia for $6.0 million, subject to adjustment. This
transaction is expected to close in the second quarter of 1997.
The Company has entered into an Asset Exchange Agreement dated as of
November 6, 1996 with PCTV and People's Choice TV of Kansas City, Inc., pursuant
to which the Company will exchange its Salt Lake City, Utah market for PCTV's
Kansas City, Missouri market. This exchange is expected to close in the second
quarter of 1997.
SERVICE OFFERINGS AND MARKETING
In 1996, the Company provided analog wireless television services in the
markets described above under "Operational and Planned Markets." The Company
employs a direct marketing approach; however, marketing expenditures to add new
analog customers and capital expenditures for new analog equipment are being
minimized in favor of investment primarily in digital markets and technology.
In the analog markets, 28 to 42 channels are offered with traditional off-air,
cable and premium programming options.
For 1997, the Company has budgeted approximately $58.0 million in capital
expenditures, including approximately $32.0 million for subscriber
installations, $10.0 million for digital head-end and transmission equipment and
$5.0 million relating to the build-out of several markets to accommodate a new
line of business, Internet access. The Company anticipates a 1997 roll-out of
digital subscription television service in its Dallas market, and plans to
offer, subject to regulatory approval, a high-speed Internet access service in
Dallas along with the subscription video service. These services will be
deployed in a controlled, direct marketing approach designed to provide a high
success rate and a high level of customer satisfaction. The digital wireless
television service is expected to offer over 100 channels, including off-air,
cable and premium programming. The digital internet access service will be
marketed initially to commercial customers and will offer access speeds over 100
times faster than today's 28.8 Kbps modems.
The equipment to deliver the digital signals will be supplied by General
Instrument ("GI"). The Company signed a letter of intent with GI in
December 1996 for the digital set-top terminals as well as the digital
headend equipment. The Company expects to sign a definitive contract in the
second quarter of 1997, although GI has been making initial deliveries of
equipment under the letter of intent. The GI contract is expected to be based
on 300,000 terminals, 200,000 of which would include cancellation penalties.
The build-out of the Dallas market is budgeted to cost $45.0 million in
total. The Company filed a series of related modification applications with
the FCC requesting authority to operate a 50 watt digital video service in
Dallas, which applications are still pending before the FCC. The FCC has
granted MMDS licensees the authority to offer one-way Internet access without
any further regulatory hurdles. The Company has applied to the FCC for
developmental authority for two-way flexible use of two channels in its
Dallas market, on a test basis, which application is still pending before the
FCC. There can be no assurance that the Company will be granted authority
with respect to any of its pending applications or that the commercial
deployment of any new products for which authority has been or will be
granted will be successful. Further, there can be no assurance that, even if
such tests of two-way flexible use of the MMDS spectrum are successful and
permanent authority is granted by the FCC to the Company, that two-way
flexible use could be successfully deployed in a commercial manner, and if so
deployed, would be profitable.
REGULATION
GENERAL. The wireless cable industry is subject to regulation by the
FCC pursuant to the Communications Act of 1934, as amended (the
"Communications Act"). The Communications Act empowers the FCC, among other
things, to issue, revoke, modify and renew licenses within the spectrum
available to wireless cable; to approve the assignment and/or transfer of
control of such licenses; to approve the location of wireless cable systems;
to regulate the kind, configuration and operation of equipment used by
wireless cable systems; and to impose certain equal employment opportunity
and other obligations and reporting requirements on wireless cable channel
license holders and operators.
The FCC has determined that wireless cable systems are not "cable
systems" for purposes of the Communications Act. Accordingly, a wireless
cable system does not require a local franchise and is subject to fewer local
regulations than a hard-wire cable system. Moreover, all transmission and
reception equipment for a wireless cable system can be located on private
property; hence, there is no need to make use of utility poles or dedicated
easements or other public rights of way. Although wireless cable operators
typically have to lease the right to use
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<PAGE>
wireless cable channels from the holders of channel licenses, unlike
hard-wire cable operators they do not have to pay local franchise fees.
Recently, legislation has been introduced in some states, including Illinois,
Maryland, Pennsylvania and Virginia, to authorize state and local authorities
to impose on all video program distributors (including wireless cable
operators) a tax on the distributors' gross receipts comparable to the
franchise fees cable operators pay. Similar legislation might be introduced
in several other states. While the proposals vary among states, the bills all
would require, if passed, as much as 5.0% of gross receipts to be paid by
wireless distributors to local authorities. Efforts are underway by the
industry trade association to preempt such state taxes through federal
legislation. In addition, the industry is opposing the state bills as they
are introduced, and, in Virginia, it has succeeded in being exempted from the
video tax that was eventually enacted into law. However, it is not possible
to predict whether new state laws will be enacted which impose new taxes on
wireless cable operators. The imposition of a gross receipts tax on the
Company could have a material adverse effect on the Company's business.
In the 50 largest markets, 33 analog channels are available for wireless
cable (in addition to any local broadcast television channels that are not
retransmitted over the microwave channels). The FCC licenses and regulates the
use of channels by license holders and system operators. In each geographic
service area of all other markets, 33 analog channels are available for wireless
cable (in addition to any local broadcast television channels that are not
retransmitted over the microwave channels). Except in limited circumstances, 20
wireless cable channels in each of these geographic service areas are generally
licensed to qualified non-profit educational organizations (commonly referred to
as ITFS channels). In general, each of these channels must be used a minimum of
20 hours per week for instructional programming. The remaining "excess air time"
on an ITFS channel may be leased to wireless cable operators for commercial use,
without further restrictions (other than the right of the ITFS license holder,
at its option, to recapture up to an additional 20 hours of air time per week
for educational programming, or such other restrictions, including the recapture
of additional hours of air time, as may be included in any lease). Lessees of
ITFS' "excess air time," including the Company, generally have the right to
transmit to their customers the educational programming provided by the lessor
at no incremental cost. The FCC recently amended its rules to permit ITFS
license holders to consolidate their educational programming on one or more of
their ITFS channels, thereby providing wireless cable operators leasing such
channels, including the Company, with greater flexibility in their use of ITFS
channels. The remaining 13 analog channels available in most of the Company's
operating and targeted markets are made available by the FCC for full-time usage
without programming restrictions.
LICENSING PROCEDURES. The actual number of wireless cable channels
available for licensing in any market is determined by the FCC's interference
protection and channel allocation rules. The FCC awards ITFS and MMDS licenses
based upon applications demonstrating that the applicant is legally, financially
and technically qualified to hold the license and that the operation of the
proposed station will not cause interference to other stations or proposed
stations entitled to interference protection.
The FCC recently conducted an auction (the "BTA Auction") of available
commercial wireless cable spectrum in 487 basic trading areas ("BTAs") and
six additional BTA-like geographic areas around the country. The winner of a
BTA has the right to develop the vacant MMDS frequencies throughout the BTA,
consistent with certain specified interference criteria that protect existing
ITFS and MMDS channels. Existing ITFS and MMDS channel rights holders also
must protect the BTA winner's spectrum from interference caused by power
increases or tower relocations. CAI was the high bidder for 32 BTA
authorizations, for a total of $48.8 million of which $12.6 million relates
to the Company's markets. Heartland was the high bidder for 93 BTA
authorizations, for a total of $19.8 million of which $5.3 million relates to
the Company's markets. CAI and Heartland are obligated to convey to the
Company, at their cost, and the Company has agreed to purchase, any rights
acquired in the BTA Auction relating to the Company's markets, as well as
certain other BTAs. Rights to BTAs for the Company's Bakersfield and
Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio
markets were acquired by CAI for approximately $5.6 million. In addition, CAI
purchased BTAs relating to Atlanta, Georgia and Louisville, Kentucky for
approximately $7.0 million. Of the aggregate $12.6 million, approximately
$12.0 million has been paid by CAI through December 31, 1996 to the FCC in
accordance with the rules of the BTA Auction for these BTAs. Heartland
purchased BTAs relating to Little Rock, Arkansas; Longview, Washington;
Oklahoma City, Oklahoma; Grand Rapids, Michigan; Dayton, Ohio; Minneapolis,
Minnesota; Dallas and San Antonio, Texas; Benton Harbor, Kalamazoo and
Muskegan, Michigan and Salt Lake City, Utah for approximately $5.3 million.
Of this amount, approximately $1.1 million has been paid by Heartland to the
FCC for these BTAs. The Company has reimbursed CAI and Heartland in the
amount of $13.1 million through December 31, 1996, and will continue to
reimburse CAI and Heartland for
11
<PAGE>
any and all costs incurred by CAI and Heartland, which total costs are
estimated to be up to $17.9 million excluding interest expense which accrues
at 9.5% per annum, in connection with these BTAs in accordance with the terms
of the Participation Agreement. The Company has a pending application on file
with the FCC to assign CAI's BTAs to the Company. The Company's ability to
increase power or relocate its transmission facilities in markets where it is
not the owner of the BTA may be limited, which could increase the cost to the
Company of, and extend the time for, developing a commercially viable system.
Under rules and policies for applications for new MMDS facilities filed
before the BTA Auction, the FCC would generally issue a conditional license that
permits the conditional licensee to commence construction of its facilities upon
the satisfaction of specified conditions. Construction of MMDS stations
generally must be completed within one year of grant of the conditional license.
In February 1995, the FCC amended its rules and established "windows"
for the filing of new ITFS applications or major modifications to authorized
ITFS facilities. The first filing "window" was October 16 through 20, 1995.
Where two or more ITFS applicants file applications for the same channels and
the proposed facilities could not be operated without impermissible
interference, the FCC employs a set of comparative criteria to select from
among the competing applicants. Construction of ITFS stations generally must
be completed within 18 months of the date of grant of the authorization.
If construction of MMDS or ITFS stations is not completed within the
authorized construction period, the licensee must file an application with the
FCC seeking additional time to construct the station and demonstrate therein
compliance with certain FCC standards. If the extension application is not filed
or is not granted, the license will be deemed forfeited. ITFS and MMDS licenses
generally have terms of 10 years. Licenses must be renewed thereafter, and may
be revoked for cause in a manner similar to other FCC licenses. FCC rules
prohibit the sale for profit of a conditional MMDS license or a controlling
interest in the conditional licensee prior to construction of the station or, in
certain circumstances, prior to the completion of one year of operation.
However, the FCC does permit the leasing of 100% of an MMDS licensee's spectrum
to a wireless cable operator and the granting of options to purchase a
controlling interest in a license even before such holding period has lapsed.
Wireless cable transmissions are subject to FCC regulations governing
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or
digital). In July 1996, the FCC issued a Declaratory Ruling setting interim
rules for the implementation of digital technology. The declaratory ruling
permits the Company to commence installation and operations in a digital mode
under existing FCC technical interference criteria. It is likely that, in the
longer term, the FCC will consider adopting both new technical and service rules
tailored to digital operations. The service rules could modify the respective
rights and obligations of the ITFS lessors and their commercial lessees of
"excess air time" in light of the increased capacity that would result from
digital compression. Even if the FCC does adopt new service rules governing the
allocation of "excess air time" in a digital environment, it is anticipated that
there would be a dramatic increase in the number of channels that will be
available to the Company following the conversion to digital transmissions. The
Company believes that the necessary FCC approvals will be obtained to permit use
of digital compression by the time it becomes commercially available; however,
there can be no assurance that these approvals will be forthcoming or timely. In
addition, such modifications filed with the FCC after the BTA Auction will be
subject to the interference protection rights of BTA Auction winners.
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the co-location of a
commercially viable number of transmitting antennas and operations with
transmission characteristics (such as power and polarity). In order to commence
the operations of certain of the Company's markets, applications have been or
will be filed with the FCC to relocate and modify existing
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transmission facilities. A total of 12, 18, 1, 5, 4 and 16 channels in Fort
Worth, Dallas and San Antonio, Texas; Salt Lake City, Utah; Charlotte, North
Carolina; and Stockton/Modesto, California, respectively, are subject to
pending applications for co-location.
Under current FCC regulations, a wireless cable operator generally may
serve subscribers anywhere within the LOS of its transmission facility,
provided that it complies with interference standards. Under rules adopted by
the FCC on June 15, 1995, an MMDS channel license holder generally has a
protected area of 35 miles around its transmitter site. The new rules became
effective on September 18, 1995. An ITFS channel license holder has
protection as to all of its receive sites, but the same protected area during
excess capacity use by a wireless cable operator as an MMDS license holder.
In launching or upgrading a system, the Company may wish to relocate its
transmission facility or increase its height or power. If such changes cause
the Company's signal to violate interference standards with respect to the
protected area of other wireless license holders, the Company would be
required to obtain the consent of such other license holders; however, there
can be no assurance that such consents would be received. The BTA license
holder may serve subscribers within its BTA provided it does not interfere
with any existing license holders' 35 mile protected service area, any
adjacent BTA and/or ITFS license holders' receive sites.
INTERFERENCE ISSUES. Interference from other wireless cable systems can
limit the ability of a wireless cable system to serve any particular point.
In licensing ITFS and MMDS systems, a primary concern of the FCC is avoiding
situations where proposed stations are predicted to cause interference with
the reception of previously authorized or proposed stations. Pursuant to FCC
rules, a wireless cable system is generally protected from interference
within a radius of 35 miles of the transmission site. In addition,
modification applications submitted after the BTA Auction are required to
protect auction winners from interference. The FCC's interference protection
standards may make one or more of these proposed modifications or new grants
unavailable. In such event, it may be necessary to negotiate interference
agreements with the licensees of the systems which would otherwise block such
modifications or grants. There can be no assurance that the Company will be
able to negotiate all necessary interference agreements that are on terms
acceptable to the Company. In the event the Company cannot obtain
interference agreements required to implement the Company's plans for a
market, the Company may have to curtail or modify operations in that market,
utilize a less optimal tower location, or reduce the height or power of the
transmission facility, any of which could have a material adverse effect on
the growth of the Company in that market. In addition, while the Company's
leases with ITFS and MMDS licensees require their cooperation, it is possible
that one or more of the Company's channel lessors may hinder or delay the
Company's efforts to use the channels in accordance with the Company's plans
for the particular market.
THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable
Act, which compels the FCC to, among other things, (i) adopt comprehensive
federal standards for the local regulation of certain rates charged by hard-wire
cable operators, (ii) impose customer service standards on hard-wire cable
operators, (iii) govern carriage of certain broadcast signals by all
multi-channel video providers, and (iv) compel non-discriminatory access to
programming owned or controlled by vertically-integrated cable operators.
The rate regulations adopted by the FCC do not regulate cable rates once
other multi-channel video providers serve, in the aggregate, at least 15% of the
households within the cable franchise area. The customer service rules adopted
by the FCC establish certain minimum standards to be maintained by traditional
hard-wire cable operators. These standards include prompt responses to customer
telephone inquiries, reliable and timely installations and repairs, and readily
understandable billing practices. These rules do not apply to wireless cable
operators, although the Company believes that it provides and will continue to
provide customer service superior to its hard-wire cable competitors.
Under the retransmission consent provisions of the 1992 Cable Act and the
FCC's implementing regulations, all multi-channel video providers (including
both hard-wire and wireless cable) seeking to retransmit certain commercial
broadcast signals must first obtain the permission of the broadcast station.
Hard-wire cable systems, but not wireless cable systems, are required under the
1992 Cable Act and the FCC's "must carry" rules to retransmit a specified number
of local commercial television or qualified low power television signals.
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The 1992 Cable Act and the FCC's implementing regulations impose limits on
exclusive programming contracts and prohibit programmers in which a cable
operator has an attributable interest from discriminating against cable
competitors with respect to the price, terms and conditions of programming.
Certain provisions of the 1992 Cable Act and the FCC's implementing regulations
have been challenged in the courts and the FCC. Under the 1996 Act, Congress has
directed the FCC to eliminate cable rate regulations for "small systems," as
defined in the 1996 Act, and for large systems under certain prescribed
circumstances, and for all cable systems effective three years after enactment
of the 1996 Act.
While current FCC regulations are intended to promote the development of a
competitive subscription television industry, the rules and regulations
affecting the wireless cable industry may change, and any future changes in FCC
rules, regulations, policies and procedures could have a material adverse effect
on the Company. In addition, a number of legal challenges to the 1992 Cable Act
and the regulations promulgated thereunder have been filed, both in the courts
and before the FCC. These challenges, if successful, could result in increases
in the Company's operating costs and otherwise have a material adverse effect on
the Company. The Company's costs to acquire satellite-delivered programming may
be affected by the outcome of those challenges. Other aspects of the 1992 Cable
Act that have been challenged, the outcome of which could adversely affect the
Company, include the 1992 Cable Act's provisions governing rate regulation to be
met by traditional hard-wire cable companies. The 1992 Cable Act empowered the
FCC to regulate the basic subscription rates charged by traditional hard-wire
cable operators. The FCC recently issued rules requiring such cable operators,
under certain circumstances, to reduce the rates charged for non-premium
services by as much as 17%. Should these regulations withstand court and
regulatory challenges, the extent to which wireless cable operators may continue
to maintain a price advantage over traditional hard-wire cable operators could
be diminished. On the other hand, continued strict rate regulation of cable
rates would tend to impede the ability of hard-wire cable operators to upgrade
their cable plant and gain a competitive advantage over wireless cable.
Due to the regulated nature of the subscription television industry, the
Company's growth and operations may be adversely impacted by the adoption of
new, or changes to existing, laws or regulations or the interpretations thereof.
COPYRIGHT. Under the federal copyright laws, permission from the copyright
holder generally must be secured before a video program may be retransmitted.
Under Section 111 of the Copyright Act of 1976 (the "Copyright Act"), certain
"cable systems" are entitled to engage in the secondary transmission of
programming without the prior permission of the holders of copyrights in the
programming. In order to do so, a cable system must secure a compulsory
copyright license. Such a license may be obtained upon the filing of certain
reports with and the payment of certain fees to the U.S. Copyright Office. In
1994, Congress enacted the Satellite Home Viewers Act of 1994 which enables
operators of wireless cable television systems to rely on the cable compulsory
license under Section 111 of the Copyright Act.
RETRANSMISSION CONSENT. Under the retransmission consent provisions of the
1992 Cable Act, wireless and hard-wire cable operators seeking to retransmit
certain commercial television broadcast signals must first obtain the permission
of the broadcast station in order to cover their signal. However, wireless cable
systems, unlike hard-wire cable systems, are not required under the FCC's "must
carry" rules to retransmit a specified number of local commercial television or
qualified low power television signals. Although there can be no assurances that
the Company will be able to obtain requisite broadcaster consents, the Company
believes in most cases it will be able to do so for little or no additional
cost.
RECENTLY ENACTED LEGISLATION. The 1996 Act will result in comprehensive
changes to the regulatory environment for the telecommunications industry as a
whole. The 1996 Act will, among other things, substantially reduce regulatory
authority over cable rates. The legislation affords hard-wire cable operators
greater flexibility to offer lower rates to certain of their customers and will
thereby permit hard-wire cable operators to target discounts to the Company's
current or prospective subscribers.
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The legislation will permit telephone companies to enter the video
distribution business, subject to certain conditions. The entry of telephone
companies in the video distribution business, with greater access to capital and
other resources, could provide significant competition to the wireless cable
industry, including the Company.
In addition, the legislation affords relief to wireless cable operators and
DBS by exempting them from local restrictions on reception antennae and
preempting the authority of local governments to impose certain taxes.
The FCC is still in the process of promulgating regulations that implement
the provisions of the legislation, and the Company cannot reasonably predict the
substance of rules and policies that remain to be adopted.
OTHER. Wireless cable license holders are subject to regulation by the FAA
with respect to the construction, marking, and lighting of transmission towers
and to certain local zoning regulations affecting construction of towers and
other facilities. There may also be restrictions imposed by local authorities.
There can be no assurance that the Company will not be required to incur
additional costs in complying with such regulations or restrictions.
COMPETITION
Wireless cable television operators face competition from a number of
sources, including potential competition from emerging trends and technologies
in the subscription television industry, some of which are described below.
HARD-WIRE CABLE. The Company's principal subscription television
competitors in each market are traditional hard-wire cable operators. Hard-wire
cable companies are generally well-established and known to potential customers
and have significantly greater financial and other resources than the Company.
According to a report issued by the FCC in September 1995, of the approximately
96 million total television households nationwide, approximately 85 million are
passed by hard-wire cable systems, and of those homes that are passed by cable,
approximately 62 million are hard-wire cable subscribers.
DIRECT-TO-HOME ("DTH"). DTH satellite television services originally were
available via satellite receivers which generally were 7-to-12 foot dishes
mounted in the yards of homes to receive television signals from orbiting
satellites. Until the implementation of encryption, these dishes enabled
reception of any and all signals without payment of fees. Having to purchase
decoders and pay for programming has reduced their popularity, although the
Company will to some degree compete with these systems in marketing its
services.
DIRECT BROADCAST SATELLITE ("DBS"). DBS involves the transmission of an
encoded signal direct from a satellite to the customer's home. Because the
signal is at a higher power level and frequency than most satellite-transmitted
signals, its reception can be accomplished with a relatively small (18-inch)
dish mounted on a rooftop or in the yard. DBS cannot, for technical and legal
reasons, provide local VHF/UHF broadcast channels as part of its service,
although many DBS subscribers receive such channels via standard over-the-air
receive antennas. Moreover, DBS may provide subscribers with access to broadcast
network distant signals only when such subscribers reside in areas unserved by
any broadcast station. The cost to a DBS subscriber for equipment and service is
generally substantially higher than the cost to wireless cable subscribers.
Three DBS services currently are available nationwide, and two more are expected
to commence service in 1996. AT&T Corp. has invested $137.5 million in DirecTv
Inc., a leading provider of DBS service, and MCI Communications Corp. has
entered into a DBS joint venture arrangement with The News Corporation Limited,
using a license that MCI won at a FCC auction for which it is paying a reported
$682.5 million. DBS currently has approximately 2.3 million subscribers
nationwide. This new venture has agreed to merge with Echostar, an existing DBS
provider, and has announced plans to provide local broadcasting.
PRIVATE CABLE. Private cable, also known as satellite master antenna
television, is a multi-channel subscription television service where the
programming is received by satellite receiver and then transmitted via
coaxial cable throughout private property, often MDUs, without crossing
public rights of way. Private cable operates under an agreement with a
private landowner to service a specific MDU, commercial establishment or
hotel. The FCC permits point-to-point delivery of video programming by
private cable operators and other video delivery
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systems in the 18 GHz band. Private cable operators compete with the Company
for exclusive rights of entry into larger MDUs, commercial establishments and
hotels.
TELEPHONE COMPANIES. The 1996 Act removed many of the restrictions on
the ability of local exchange carriers ("LECs"), including RBOCs, to provide
video programming directly to subscribers in their respective telephone
service areas. Thus, while there remains a prohibition against a LEC
acquiring a hard-wire cable operator within its telephone service area, LECs
can build their own hard-wire cable systems, own wireless cable systems,
and/or operate "open video" platforms. Open video platforms do not require a
local cable franchise but do require the LEC to make the platform available
to other service providers on a discriminatory basis. In addition to having
the opportunity to install traditional hard-ware cable, LECs also have the
option of installing high capacity fiber optic facilities. The Company
believes that it will continue to maintain a cost advantage over installing
hard-wire, fiber optic or open video distribution platforms due to the high
capital expenditures associated with such technologies. In July 1995, Pacific
Telesis Group ("PacTel"), a LEC based in California, acquired Cross Country
Wireless, Inc., a wireless cable system in southern California, for
approximately $175.0 million. PacTel announced that its acquisition of Cross
Country will allow PacTel to enter the market for consumer video services on
an expedited basis. More recently, Bell South announced plans to acquire
wireless cable channel rights in Atlanta, Georgia, New Orleans, Louisiana,
and Miami, Florida. The competitive effect of the entry of telephone
companies into the subscription television business, including wireless
cable, is still uncertain.
LOCAL OFF-AIR VHF/UHF BROADCASTS. Local off-air VHF/UHF broadcast
television stations (such as ABC, NBC, CBS and Fox) provide free programming to
the public. Previously, subscription television operators could retransmit these
broadcast signals without permission. However, effective October 6, 1993,
pursuant to the 1992 Cable Act, local broadcasters may require that subscription
television operators obtain their consent before retransmitting local television
broadcasts. The Company has obtained such consents for its operating systems.
The Company will be required to obtain such consents in certain of its markets
to re-broadcast any such channels. The Company believes that it will be able to
obtain such consents, but no assurance can be given that it will be able to
obtain all such consents. The FCC also has recently permitted broadcast networks
to acquire, subject to certain restriction, ownership interests in hard-wire
cable systems. In some areas, several low power television ("LPTV") stations
authorized by the FCC are used to provide multi-channel subscription television
service to the public. LPTV transmits on conventional VHF/UHF broadcast
channels, but is restricted to very low power levels, which limits the area
where a high-quality signal can be received.
LOCAL MULTI-POINT DISTRIBUTION SERVICE ("LMDS"). In 1993, the FCC
initially proposed to redesignate the 28 GHz band to create a new video
programming delivery service referred to as LMDS. In July 1995, the FCC
proposed to award licenses in each of 493 BTAs pursuant to auctions.
Sufficient spectrum for up to 49 analog channels has been designated for the
LMDS service. Two licenses will be awarded in each BTA. The LMDS licensees
will share the 28 GHz frequency band with the Mobile Satellite Service and
the 31 GHz band with state and local governments. One license would be
awarded on a primary basis for an 1150 MHz frequency block, and the other on
a co-primary basis for a 150 MHz frequency block. The FCC contemplates
allowing LMDS licensees to use the spectrum for a variety of services,
including telephony, interactive video, video distribution, data
transmission, teleconferencing, and other applications. Depending on the type
and number of services offered, the cost of the customer-premises equipment
could range from $300 (for a video receive antenna), to $1,000
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(for telephony, video and data capabilities). The FCC has issued final rules,
and announced that the auction for LMDS spectrum will take place in 1997.
EMPLOYEES
As of December 31, 1996, the Company has approximately 290 employees. The
Company has experienced no work stoppages and believes that it has good
relations with its employees.
ITEM 2. PROPERTIES.
The Company leases office sites in Dallas, Texas and Philadelphia,
Pennsylvania. The Company also leases or owns office space, transmitting
facilities, including tower space, tower sites and head-end facilities, in all
of its markets. The Company believes adequate leasehold space is available in
all locations in which the Company currently leases office or transmission
sites.
The Company owns substantially all of the equipment which is necessary to
conduct its operations, except certain vehicles and certain test equipment. A
significant portion of the Company's investment in plant and equipment consists
of subscriber equipment, which includes antennae, block-down converters, remotes
and related installation equipment, principally located at the subscribers'
premises, and the reception and transmitter equipment located at leased
transmitter sites.
ITEM 3. LEGAL PROCEEDINGS.
The Company's former President and Chief Executive Officer, Lowell Hussey,
has commenced a lawsuit against the Company in the United States District Court
for the District of Oregon. The complaint alleges, among other things, wrongful
termination and breach of the duty of good faith and fair dealing. The
complaint seeks unspecified damages. The Company believes that the lawsuit is
without merit and intends to defend it vigorously.
During the fourth quarter of 1996, the Company became aware of a dispute
involving San Antonio Wireless, Inc. ("SAW") over the Company's lease rights to
eight ITFS channels for San Antonio. SAW is the putative lessee of channel
capacity leases with two ITFS licensees and has asserted that predecessors of
the Company were required to have obtained SAW's consents to transfer sublease
rights to the channel capacity to the Company. Therefore, SAW has asserted that
the transfers of the lease rights to the Company were not valid. SAW has also
alleged that the Company failed to make monthly lease payments on a timely
basis, and that those failures constituted a material breach of the lease
agreements. SAW has purported in writing to evict the Company from the channel
leases. The Company's position has been that either SAW's consent was not
required for the transfers, or that SAW was required to give its consent
pursuant to the channel leases. The Company has also asserted that, to the
extent it might have failed to make timely payments, such a failure or failures
did not constitute a basis for SAW to terminate the Company's lease rights. If
SAW pursues the enforcement of an eviction of the Company from the use of the
eight ITFS channels, and is successful, the Company's inability to transmit on
eight channels in the San Antonio market could have a material adverse effect on
the Company's continued ability to offer subscribers in that market an
attractive programming package. In addition, SAW may pursue monetary damages
related to the Company's unwillingness to vacate the channels.
Although there can be no assurance of the final resolution of these
matters, the Company believes that, based upon its current knowledge of the
facts of each case, it has meritorious defenses to the claims made and intends
to defend each suit vigorously, and the Company does not believe that the
outcome of any of these lawsuits will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has not been registered with the Securities and
Exchange Commission, and no market exists for its Common Stock.
The Company did not pay dividends on its Common Stock during the year ended
December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data for the
Company and the Company's Cleveland, Ohio market (the "Predecessor") as of
February 28, 1993 and 1994, and December 31, 1994, 1995 and 1996 and for the
years ended February 28, 1993 and 1994, the period from March 1, 1994 to March
8, 1994, the period from March 9, 1994 to December 31, 1994, the period from
January 1, 1995 to September 29, 1995, the period from September 30, 1995 to
December 31, 1995, and the year ended December 31, 1996, which have been derived
from the financial statements of Metropolitan Cablevision, Inc. ("Cablevision"),
MetroCable, Inc. ("MetroCable"), Metropolitan Satellite Corp. ("Metro
Satellite"), ACS Ohio, Inc. and Subsidiaries ("ACS Ohio"), CS Wireless Systems,
Inc. and Subsidiaries (formerly ACS Ohio, Inc.) and certain assets of Atlantic
Microsystems, Inc. and the Company, which have been audited by independent
public accountants. Period-to-period comparisons of financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance due to the acquisition of the Predecessor on March 9, 1994 by ACS
Enterprises, Inc. ("ACS Enterprises") and the subsequent acquisition of the
Predecessor on September 29, 1995 by CAI. As a result of the acquisitions,
financial information for periods through March 8, 1994, periods from March 9,
1994 through September 29, 1995 and periods subsequent to September 29, 1995 is
presented on different cost bases and, therefore, such information is not
comparable.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------------- ------------------------
YEAR ENDED FEBRUARY 28, March 1, March 9, January 1, September Year
1994 to 1994 to 1995 to 30, 1995 to Ended
March 8, December September December December
1993(1) 1994(1) 1994(1) 31, 1994(2) 29, 1995(2) 31, 1995(3) 31, 1996(3)
--------- -------- ---------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Revenues $5,190 $5,267 $116 $4,332 $6,170 $2,301 $22,738
Costs and expenses, excluding
depreciation and amortization. 5,461 4,256 76 3,454 5,441 2,103 27,192
Depreciation and
amortization 1,560 836 10 1,571 3,020 1,796 20,345
Operating income (loss) (1,831) 175 30 (693) (2,291) (1,598) (24,799)
Interest expense 6,356 2,846 39 62 233 2 24,959
Net loss (8,137) (2,162) (9) (576) (1,875) (1,207) (28,527)
Balance Sheet data (at period end):
Total assets 4,581 3,797 -- 19,741 21,095 75,688 414,237
Total debt (excluding accrued
interest) 35,190 10,117 -- 2,471 225 112 276,276
Total equity (deficit) (58,371) (10,846) -- 15,375 13,500 60,316 124,834
Other data:
EBITDA(4) 1,429 1,011 40 878 729 198 (4,454)
</TABLE>
(1) Through March 8, 1994, the wireless cable television system serving the
Predecessor was comprised of MetroCable (and its predecessor, Cablevision)
and Metro Satellite. The selected historical financial information has been
derived from the financial statements of (i) Cablevision for the period
from March 1, 1992 to June 3, 1993 and MetroCable for the period from June
4, 1993 to March 8, 1994 and (ii) Metro Satellite for the period March 1,
1991 to March 8, 1994.
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(2) From March 9, 1994 through September 29, 1995, ACS Ohio provided wireless
cable television service to the Predecessor. The selected historical
financial information has been derived from the financial statements of ACS
Ohio for the period from March 9, 1994 to September 29, 1995.
(3) Subsequent to September 29, 1995, the Company provided wireless cable
television service as the Predecessor. The selected historical financial
information has been derived from the financial statements of CAI Wireless
Systems, Inc. and Subsidiaries and certain assets of Atlantic Microsystems,
Inc. for the period from September 30, 1995 to December 31, 1995, and the
financial statements of the Company for the year ended December 31, 1996.
(4) EBITDA means earnings before interest expense, income taxes, depreciation,
amortization and other non-cash charges. EBITDA is a financial measure
commonly used in the Company's industry and should not be considered as an
alternative to cash flow from operating activities (as determined in
accordance with generally accepted accounting principles) as an indicator
of operating performance or as a measure of liquidity.
The following table sets forth selected historical combined financial and
other data for the Company's operational markets (including the USA Markets (as
defined)).
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
------ ------ ------- ------- -------
(In thousands, except system and subscriber data)
Revenues (1) $6,087 $8,557 $13,710 $20,553 $25,687
Systems in operation (at
period end) (2) 3 6 7 8 10
Subscribers (at period
end) (3) 17,764 27,711 44,012 56,800 65,553
(1) The historical combined revenues information for each of the years in the
three-year period ended December 31, 1993 includes combined historical
financial information of (i) Cablevision and MetroCable and (ii) Metro
Satellite for each of the years in the two-year period ended February 28,
1994, respectively. The historical combined subscriber information as of
December 31, 1992 and 1993 includes combined subscriber information of (i)
Cablevision and MetroCable and (ii) Metro Satellite as of February 28, 1993
and 1994, respectively.
(2) Prior to 1990, the Company's only operational market was in Cleveland,
Ohio. Through December 31, 1996, the Company's markets began operations as
follows: Bakersfield, California-1991; Fort Worth, Texas-November 1992; San
Antonio, Texas-March 1993; Minneapolis, Minnesota-March 1993; Dayton,
Ohio-November 1993; Effingham/Nortonville and Wellsville, Kansas per the
USA Wireless Acquisition, began operations in September 1994; Grand Rapids,
Michigan-September 1995; and Maysville/Cameron and Sweet Springs, Missouri-
October 1995.
(3) Subscribers are calculated based on the number of equivalent basic unit
subscribers (includes MDU subscribers calculated by dividing the aggregate
billed monthly revenues by the normal monthly basic rate for that system).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
ACS Ohio was formed as a wholly owned subsidiary of ACS Enterprises on
March 9, 1994, for the purpose of purchasing two related companies, MetroCable
and Metro Satellite, that together comprised the wireless cable system serving
the Cleveland, Ohio metropolitan area. MetroCable was formed on June 4, 1993 as
the successor in interest to Cablevision. ACS Enterprises was acquired by CAI
on September 29, 1995. ACS Ohio became a direct subsidiary of CAI upon the
merger of ACS Enterprises with and into CAI as of September 29, 1995.
The Predecessor's revenues are derived principally from the sale of
subscription video services using wireless technology. Its principal costs of
operations are programming, license fees, and general and administrative
expenses.
The Company had revenues of $8.5 million and $22.7 million, for the years
ended December 31, 1995 and 1996, respectively. Net losses were $3.1 million
and $28.5 million for the years ended December 31, 1995 and 1996, respectively.
As of December 31, 1996, the Company provided service to approximately 65,600
subscribers.
LIQUIDITY AND CAPITAL RESOURCES
Companies within the wireless cable industry require significant
capital. Funds are required for the lease or acquisition of channel rights,
the acquisition of wireless cable systems, the construction of system
head-end and transmission equipment, the conversion of analog systems to
digital technology, start-up costs related to the
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commencement of operations and subscriber installation costs. The Company
intends to finance its capital requirements through a combination of the
issuance of debt and equity securities, the disposition of wireless cable
systems that are inconsistent with the Company's business strategy, the
incurrence of loans and the assumption of debt and other liabilities in
connection with acquisitions. Each of the operation systems that has been
contributed to the Company in connection with the Contributions has incurred
operating losses since inception. The combined cash flow from operating
activities of the Company's operating systems has to date been insufficient
to cover the combined operating expenses of such systems.
The Company estimates that the launch of a new digital wireless cable
system in a typical market will require capital expenditures of approximately
$8.0 to $10.0 million of start-up expenses for head-end and transmission
equipment and booster sites. Larger markets, such as the Dallas market, which
is scheduled to commence operations in 1997, may require additional capital
expenditures. The Company estimates that the conversion of an existing analog
wireless cable system in a typical market to a digital wireless cable system
will require the expenditure of approximately $6.0 to $8.0 million. These costs
reflect the Company's good faith estimates; however, such estimates are
speculative because to date there are no operating digital wireless cable
systems, and the Company's estimates assume the efficacy and ready availability
of digital technology. The Company estimates that the launch of a new analog
wireless cable system in a typical market requires the aggregate capital
expenditure of approximately $2.2 million. Incremental installation costs are
estimated by the Company to be approximately $750 to $1,000 per subscriber in
the case of a digital wireless system and approximately $350 to $700 per
subscriber in the case of an analog or analog converting to digital system. The
head-end and transmission expenditures must be made before programming can be
delivered to subscribers and in certain instances, booster sites will be
required to increase LOS households. Labor installation costs for a subscriber
are incurred only after that subscriber signs up for services.
The research and development of digital technology performed by the Company
to date has been de minimis. The Company, however, participated with CAI and
Heartland in a demonstration of digital satellite television transmission using
MMDS technology as a delivery platform and incorporating a digital television
set-top converter.
For 1997, the Company has budgeted approximately $58.0 million in capital
expenditures, including approximately $32.0 million for subscriber
installations, $10.0 million for digital head-end and transmission equipment and
$5.0 million relating to the build-out of several markets to accommodate a new
line of business, internet access. Subject to regulatory approval, the Company
anticipates a 1997 roll-out of digital subscription television service in its
Dallas market. The build-out of the Dallas market is budgeted to cost $45.0
million in total. For 1998, the Company has budgeted approximately $120.0
million of additional capital expenditures. Based upon the Company's current
operating plans, the Company believes that its available cash will provide
sufficient funds to meet its needs for at least the next 12 months.
The Company has signed a letter of intent and expects to sign a definitive
agreement in the second quarter of 1997 with GI for digital set-top terminal and
headend equipment. The Company may take deliveries of the equipment under the
letter of intent. The contract is expected to be based on 300,000 terminals,
200,000 of which would involve cancellation penalties. The agreement to
purchase this equipment represents a significant financial commitment on the
part of the Company. As indicated above, the Company expects to spend $58
million in capital expenditures in 1997, a significant portion of which is
related to GI equipment.
The FCC recently conducted the BTA Auction of available commercial
wireless cable spectrum in 487 BTAs and six additional BTA-like geographic
areas around the country. CAI was the high bidder for 32 BTA authorizations,
for a total of $48.8 million of which $12.6 million relates to the Company's
markets, including $6.0 million of BTA licenses to be conveyed to Bell South
(see "Operational and Planned Markets"). Heartland was the high bidder for
93 BTA authorizations, for a total of $19.8 million of which $5.3 million
relates to the Company's markets. CAI and Heartland are obligated to convey
to the Company, at their cost, and the Company has agreed to purchase, any
rights acquired in the BTA Auction relating to the Company's markets, as well
as certain other BTAs.
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Cash provided by operations was $2.4 million in 1996 compared to $2.1
million in 1995.
Cash used in investing activities was $27.2 million in 1996 compared to
$5.8 million in 1995. The increase in cash used in investing activities is
attributable to the acquisition of certain intangible assets and the issuance of
notes to affiliates in 1996 with no comparable amounts in 1995. Additionally,
the acquisition and installation of subscriber equipment increased from $5.8
million in 1995 to $13.2 million in 1996 principally due to increased subscriber
levels resulting from the February 23, 1996 contribution of markets by CAI
and Heartland to the Company.
Cash used in investing activities during 1996 was financed principally
through the net proceeds from the sale of the Old Notes, partially offset by the
payment on the BTA auction payable, payment on other notes and cash distributed
pursuant to contributions. Cash used in investing activities during 1995 was
financed through advances by CAI and ACS Ohio aggregating $3.1 million and cash
provided by operations of $2.6 million. Due to these factors, at December 31,
1996, the Company had $113.0 million cash and cash equivalents on hand, compared
to $200,000 million at December 31, 1995.
RESULTS OF OPERATIONS
With respect to the discussion of the results of operations of the Company
and the Predecessor, the results presented are comprised of financial
information for the following entities and periods:
TWELVE MONTHS ENDED DECEMBER 31, 1996
The Company Twelve months ended December 31, 1996
TWELVE MONTHS ENDED DECEMBER 31, 1995
ACS Ohio January 1, 1995 to September 29, 1995
The Company and Certain Assets of
Atlantic Microsystems, Inc. September 30, 1995 to December 31, 1995
TEN MONTHS ENDED DECEMBER 31, 1994
MetroCable March 1, 1994 to March 8, 1994
Metro Satellite March 1, 1994 to March 8, 1994
ACS Ohio March 9, 1994 to December 31, 1994
The change in year end from February 28 to December 31 occurred as a result
of the acquisition of MetroCable and Metro Satellite by ACS Ohio.
Period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance
due to the acquisition of MetroCable and Metro Satellite on March 9, 1994 by ACS
Ohio and the subsequent acquisition on ACS Ohio on September 29, 1995 by CAI.
ACS Ohio had no operations prior to March 9, 1994, when it acquired MetroCable
and Metro Satellite in a stock acquisition accounted for under the purchase
method of accounting. MetroCable commenced operations on June 4, 1993 as
successor in interest to Cablevision. Metro Satellite had been in operation for
several years prior to its acquisition. As a result of the acquisitions,
financial information for periods through March 8, 1994, periods from March 9,
1994 through September 29, 1995 and periods subsequent to September 29, 1995 is
presented on a different cost basis and, therefore, such information is not
comparable.
TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1995
Revenue for the twelve-month period ended December 31, 1996 (the "1996
Twelve-Month Period") was $22.7 million as compared to revenue for the twelve-
month period ended December 31, 1995 (the "1995 Twelve-Month Period") of $8.5
million, an increase of $14.2 million. The increase resulted primarily from the
increase in subscribers brought about by the February 23, 1996 contribution of
markets by CAI and Heartland to the Company.
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Operating expenses were $47.5 million for the 1996 Twelve-Month Period
compared to $12.4 million for the 1995 Twelve-Month Period. The $35.1 million
increase is attributable to increases in systems operations of $10.4 million
(1996 -- $13.3 million; 1995 -- $2.9 million), increases in selling, increases
in general and administrative expenses of $9.3 million (1996 -- $13.9 million;
1995 -- $4.6 million) and increases in depreciation and amortization expense of
$15.5 million (1996 -- $20.3 million; 1995 -- $4.8 million). These increases
are primarily due to increases in the subscriber base and subscriber equipment
resulting from the February 23, 1996 contribution of markets by CAI and
Heartland, and an increase in the Company's corporate and executive staff to
support the Company's overall growth.
Other expense increased from $0.2 million in the 1995 Twelve-Month Period
to $18.4 million in the 1996 Twelve-Month Period, primarily due to the accretion
on discount notes and amortization of debt issuance costs related to the
issuance of the Units as of February 23, 1996 totaling $23.5 million and other
interest expense of $1.5 million, partially offset by interest income in the
1996 Twelve-Month Period of $6.6 million with no comparable amount in the 1995
Twelve-Month Period.
The $28.5 million net loss for the 1996 Twelve-Month Period compares to a
net loss of $3.1 million for the 1995 Twelve-Month Period. The $25.4 million
increase in net loss resulted primarily from the increase in operating losses,
offset by an increase in deferred income tax benefits from $1.0 million for the
1995 Twelve-Month Period to $14.6 million for the 1996 Twelve-Month Period.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TEN MONTHS ENDED DECEMBER 31,
1994
Revenue for the twelve-month period ended December 31, 1995 (the "1995
Twelve-month Period") was $8.5 million as compared to revenue for the ten-month
period ended December 31, 1994 (the "1994 Ten-month Period") of $4.4 million, an
increase of $4.1 million. The increase resulted primarily from the addition of
new subscribers and the two-month difference in the comparative periods. The
Company averaged 23,896 subscribers with an average $27.72 per subscriber for
the 1995 Twelve-month period as compared to an average of 16,327 subscribers
with an average $25.78 per subscriber for the 1994 Ten-month period.
Additionally, installation revenue of $0.4 million for the 1995 Twelve-month
period was $300,000 more than the $100,000 for the 1994 Ten-month
period. The Company spurred growth by lowering the basic subscription rate, but
was able to increase the per subscriber yield through higher penetration of
premium services, passing along certain programmer incentives to subscribers.
The effect of the lower basis subscription rate and the higher premium
penetration caused a lower gross profit percentage.
Operating expenses amounted to $12.4 million for the 1995 Twelve-month
Period compared to $5.1 million for the 1994 Ten-month Period. The $7.3 million
increase was attributable to increases in programming and license fees of $1.7
million (1995 -- $2.9 million; 1994 -- $1.2 million), selling, general and
administrative expenses of $1.9 million (1995 -- $3.9 million; 1994 -- $2.0
million) and marketing expenses of $.5 million (1995 -- $700,000; 1994 --
$200,000) resulting from expanding operations. Depreciation and
amortization expense represented the remaining $3.2 million in increased
operating expenses, primarily resulting from amortization of increased
subscriber installation costs.
Interest expense increased from less than $100,000 in the 1994 Ten-
month Period to $200,000 in the 1995 Twelve-month Period. This increase
resulted primarily from the increased indebtedness due to ACS Enterprises which
was subject to interest charges.
The $3.1 million net loss during the 1995 Twelve-month Period was compared
to a net loss of $0.6 million during the 1994 Ten-month Period. The $2.5
million increase in the net loss resulted from expenses rising faster than
revenues by $3.2 million, and an offset of $1.0 million resulting from a
deferred income tax benefit in the 1995 Twelve-month Period compared to an
offset of $200,000 resulting from a deferred income tax benefit in the 1994
Ten-month Period. During the 1995 Twelve-Month Period CS experienced rapid
subscriber growth which increased revenues; however, the high cost associated
with adding subscribers kept the operating income before depreciation and
amortization comparable to the 1994 Ten-month Period.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements required by this item are
included on the pages immediately following the Index to Consolidated Financial
Statements appearing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information as of the date of this
report with respect to the those persons who are currently serving as directors
and executive officers of the Company.
Name Age Position
- ---- --- --------
Jared E. Abbruzzese (1) 42 Chairman of the Board
Alan Sonnenberg. . . 45 Vice Chairman of the Board
David Webb . . . . . 50 President, Chief Executive Officer and Director
Frank H. Hosea . . . 47 Senior Vice President and Chief Operating Officer
Jeffrey A. Kupp. . . 34 Senior Vice President and Chief Financial Officer
Thomas W. Dixon. . . 49 Senior Vice President of Corporate Strategy and
Business Development
James P. Ashman (2). 42 Director
Robert D. Happ (1)(2) 56 Director
J.R. Holland, Jr. (1) 53 Director
D. Michael Sitton. . 48 Director
William W. Sprague (1) 39 Director
____________________
(1) Member of the Compensation Committee. The Compensation Committee
determines the compensation to be paid by the Company to its officers and
determines the stock options to be granted by the Company to employees.
(2) Member of the Audit Committee. The Audit Committee assists the Board of
Directors in fulfilling its responsibilities with respect to the Company's
accounting and financial reporting activities.
Jared E. Abbruzzese has been Chairman of the Board of Directors since the
Company's formation in February 1996. Mr. Abbruzzese has been the Chairman,
Chief Executive Officer and a director of CAI since its formation in 1991. From
August 1992 until September 1993, Mr. Abbruzzese served in various capacities
for the prior operator of a wireless cable system in Albany, New York. Mr.
Abbruzzese served as President of The Diabetes Institute Foundation in Virginia
Beach, VA from October 1988 until August 1991.
Alan Sonnenberg has been Vice Chairman of the Board of Directors of the
Company since May 1996 and was President of the Company from February 1996 to
May 1996. Mr. Sonnenberg has been a director of CAI since September 29, 1995.
Mr. Sonnenberg served as President of CAI from September 29,1995, upon the
acquisition of ACS Enterprises by CAI, until February 23, 1996, when he became
President of the Company. From 1988 until September 29, 1995, Mr. Sonnenberg
was Chairman of the Board of Directors and Chief Executive Officer of ACS
Enterprises. Mr. Sonnenberg also served as President of ACS Enterprises from
1987 until September 29, 1995. Since 1989, Mr. Sonnenberg has been a director of
the Wireless Cable Association International, Inc.
David Webb has been President, Chief Executive Officer and a director of
the Company since January 22, 1997. From the Company's formation on February
23, 1996 until January 22, 1997, Mr. Webb served as a Vice
23
<PAGE>
Chairman of the Board of Directors of the Company. Mr. Webb is a co-founder
of Heartland and was a director of Heartland from its formation in 1990 until
March 1997. From the formation of Heartland in 1990 until January 22, 1997,
Mr. Webb held the positions of President and Chief Executive Officer of
Heartland. Mr. Webb is also a director of Wireless One, Inc.
Frank H. Hosea has been Senior Vice President and Chief Operating Officer
since January 1997. Prior to January, Mr. Hosea held the position of Senior Vice
President of Digital Operations from October 1996 to January 1997 and was Vice
President of Operations prior to October 1996. Prior to joining the Company, Mr.
Hosea served as Vice President of Sales/Marketing of KBLCOM Inc., a division of
Houston Industries for 6 years.
Jeffrey A. Kupp has been Senior Vice President and Chief Financial Officer
since joining the Company in January 1997. Prior to joining the Company, Mr.
Kupp served as Director of Special Projects in the Corporate Finance group of
DSC Communications Corporation from August 1995 until January 1997. From June
1991 until August 1995, Mr. Kupp was employed in the Performance Improvement,
Management Consulting group of Ernst & Young LLP, most recently as Senior
Manager. Mr. Kupp is a certified public accountant.
Thomas W. Dixon has been Senior Vice President of Corporate Strategy and
Business Development since January 1997. From the Company's formation in
February 1996 to January 1997, Mr. Dixon was Senior Vice President of Operations
of the Company. Prior to joining the Company, Mr. Dixon served as Senior Vice
President of Heartland Wireless Communications. He began advising Heartland as
an Operations Consultant in March 1992 and joined Heartland in September 1993.
From 1985 to March 1992, Mr. Dixon was employed as Vice President/Marketing for
LDS, a long distance telephone company.
James P. Ashman has been a director of the Company since the Company's
formation in February 1996. Mr. Ashman has been Executive Vice President and
Chief Financial Officer of CAI since December 1995 and a director of CAI since
March 1994. Prior to his appointment as Executive Vice President and Chief
Financial Officer, Mr. Ashman was Senior Vice President and Treasurer of CAI,
positions he held since September 1994. From November 1992 to September 1994, he
was a senior advisor of, and independent consultant affiliated with, Carolina
Barnes Capital, Inc. ("CBC"), a registered broker dealer. CBC served as
financial advisor to CAI from January 1993 until September 1994. Mr. Ashman was
Vice President of Richter & Co., Inc. from June 1990 to November 1992.
Robert D. Happ has been a director of the Company since the Company's
formation in February 1996 and a director of CAI since September 1995. Mr. Happ
had been the Managing Partner of the Boston, Massachusetts office of KPMG Peat
Marwick LLP from 1985 until his retirement in 1994. Mr. Happ is also a director
of Galileo Corporation.
J.R. Holland, Jr. has been a director of the Company since May 1996. Mr.
Holland has been a director of Heartland since October 1993. Mr. Holland has
been employed as President and Chief Executive Officer of Unity Hunt Resources,
Inc. since September 1991. Mr. Holland is also the President of Hunt Capital.
Mr. Holland is also a director of Wireless One, Inc.
D. Michael Sitton has been a director of the Company since May 1996. Mr.
Sitton has been President of Sitton Properties & Co., LLC since 1995. Prior to
that, Mr. Sitton was the Executive Vice President of Sitton Motor Lines, Inc., a
company he co-founded in 1979.
William W. Sprague has been a director of the Company since the Company's
formation in February 1996. Mr. Sprague has been the President of Crest
International Holdings, LLC ("Crest") since February 22, 1996. Mr. Sprague is
also the Chief Financial Officer of TelQuest Communications, LLC. For the
previous five years, Mr. Sprague worked in the Investment Banking Department at
Smith Barney Inc., most recently as a Managing Director and head of the Media
and Telecommunications Group. Mr. Sprague is also a director of Ethan Allen
Interiors, Inc. and Centennial Communications, Inc.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain summary information concerning the
compensation paid or awarded to the Company's Chief Executive Officer and the
other executive officers receiving compensation in excess of $100,000 for the
period February 23, 1996 (Inception) through December 31, 1996 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS($) COMPENSATION SARS(#) COMPENSATION
- --------------------------- -------- -------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Lowell Hussey, President
and Chief Executive
Officer (1) $147,115 -0- (2) 322,581 -0-
Alan Sonnenberg, Vice
Chairman $157,692 -0- $16,878 215,054 -0-
Thomas W. Dixon, Senior
Vice President of
Corporate Strategy and
Business Development $110,762 -0- (2) 53,763 -0-
</TABLE>
(1) Mr. Hussey resigned as President and Chief Executive Officer of the Company
effective January 22, 1997.
(2) Other annual compensation, including Company-provided vehicle or
allowances, life insurance, or membership dues, less than the lesser of 10%
of total annual salary and bonus or $50,000 is not presented.
COMPENSATION OF DIRECTORS
Directors who are not officers of the Company are paid an annual fee of
$5,000 and a fee of $625 per meeting attended (including committee meetings),
plus out-of-pocket expenses. Officers who also serve as directors do not receive
fees for serving as directors.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on options to purchase Common
Stock of the Company granted during the fiscal year ended December 31, 1996 to
the persons named in the Summary Compensation Table above.
OPTION/SAR GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------- ----------------------
% OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING OPTIONS/ GRANTED TO OR BASE
SARS GRANTED EMPLOYEES PRICE EXPIRATION
NAME (NUMBER OF SHARES) IN 1996 ($/SH) DATE 5%($) 10%($)
- -------------------- -------------------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lowell Hussey 322,581 49.2% 9.40 1/1/06 1,906,973 4,832,644
Alan Sonnenberg 215,054 32.8% 9.40 2/23/06 1,271,315 3,221,762
Thomas W. Dixon 53,763 8.2% 9.40 2/23/06 317,826 805,433
</TABLE>
Potential realizable value is based on the assumption that the price of
the Company's Common Stock appreciates at the annual rate shown, compounded
annually, from the date of grant until the end of the ten-year
25
<PAGE>
option term. The values are calculated in accordance with the rules
promulgated by the Commission and do not reflect the Company's estimate of
future stock price appreciation.
AGGREGATE OPTION/SAR EXERCISES IN 1996 AND FISCAL YEAR-END OPTION/SAR VALUES
No executive officer named in the Summary Compensation Table exercised
options to purchase Common Stock in 1996. The following table sets forth
certain information with regard to the outstanding options to purchase Common
Stock as of the end of the year ended December 31, 1996 for the persons named in
the Summary Compensation Table above.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS AT
FY-END(#) 12/31/96 ($)
---------------------- ----------------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- ---------------------- ----------------------------
Lowell Hussey 107,527/215,054 (1)
Alan Sonnenberg 150,538/64,516 (1)
Thomas W. Dixon 53,763/0 (1)
(1) The Company's Common Stock is not publicly traded, and no market exists for
its Common Stock. Accordingly, no estimate is made regarding the value of
unexercised in-the-money options.
EMPLOYMENT AGREEMENTS
The Company and Alan Sonnenberg entered into an employment agreement, as
amended, pursuant to which Mr. Sonnenberg has agreed to serve as Vice Chairman
of the Board of the Company. Under the employment agreement, Mr. Sonnenberg
receives a base salary of $200,000 per year and has been granted options to
purchase 215,054 shares of Common Stock, with options to purchase 107,527 shares
vesting immediately and the remaining options vesting in 20 equal monthly
installments commencing in May 1996, at an exercise price of $9.40 per share.
Mr. Sonnenberg served, until the Contribution Closing, as the President of CAI.
Mr. Sonnenberg and CAI mutually agreed to terminate the employment agreement
between Mr. Sonnenberg and CAI, and Mr. Sonnenberg has surrendered all options
to purchase CAI common stock that he previously received in connection with his
employment agreement with CAI. Mr. Sonnenberg will continue to serve as a
director of CAI.
The Company and Lowell Hussey entered into an employment agreement dated
as of February 22, 1996, pursuant to which Mr. Hussey agreed to serve as
President and Chief Executive Officer of the Company. Pursuant to the
Company's Bylaws, Mr. Hussey, as Chief Executive Officer of the Company,
became a Director of the Company. Mr. Hussey received a base salary of
$150,000 per year and was granted options to purchase 322,581 shares of
Common Stock, vesting in 36 equal monthly installments, at an exercise price
of $9.40 per share. Effective January 22, 1997, Mr. Hussey resigned as a
director, President and Chief Executive Officer and David E. Webb was
appointed President and Chief Executive Officer to succeed Mr. Hussey.
Subsequently, the Company made a lump sum payment of $300,000 to Mr. Hussey
and is in full satisfaction of all of its obligations under his employment
agreement, which was terminated. Mr. Hussey's outstanding stock options
continue to be operated by the terms of his stock option agreement. Mr.
Hussey has commenced a lawsuit against the Company alleging wrongful
termination and other causes of action. See "Item 3. Legal Proceedings."
The Company and Thomas W. Dixon entered into an employment agreement
pursuant to which he became Senior Vice President of Corporate Strategy and
Business Development of the Company. Mr. Dixon will receive a base salary of
$140,000 per year and has been granted options to purchase 53,763 shares of
Common Stock, vesting 30 days from date of grant, at an exercise price of $9.40
per share.
26
<PAGE>
The Company has hired Jeffrey A. Kupp to serve as a Senior Vice President
and Chief Financial Officer of the Company. Mr. Kupp receives a base salary of
$120,000 per year and has been granted options to purchase 40,000 shares of
Common Stock, vesting in 36 equal monthly installments, commencing in January
1997, at an exercise price of $9.40 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 31, 1997
regarding the beneficial ownership of the Common Stock of the Company by (a)
each person that is the beneficial owner of more than five percent of the Common
Stock of the Company, (b) the directors of the Company, (c) the Chief Executive
Officer and the Named Executive Officers of the Company, and (d) all directors
and executive officers of the Company as a group:
NUMBER OF
SHARES
COMMON STOCK PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------------------------- ------------------ --------
CAI Wireless Systems, Inc. 5,106,898 47.72%
18 Corporate Woods Blvd., 3rd Floor
Albany, New York 12211
Heartland Wireless Communications, Inc. 4,150,303 38.78%
200 Chisholm Place, Suite 200
Plano, Texas 75075
Jared E. Abbruzzese -- *
18 Corporate Woods Blvd., 3rd Floor
Albany, New York 12211
James P. Ashman -- *
18 Corporate Woods Blvd., 3rd Floor
Albany, New York 12211
Robert D. Happ -- *
20 Old Road
Weston, Massachussetts 02193
J.R. Holland, Jr -- *
4000 Thanksgiving Tower
Dallas, Texas 75201
D. Michael Sitton -- *
2727 E. 32nd St., Suite 4
Joplin, Missouri 64804
Alan Sonnenberg 177,420(1) 1.63%
15 West Street Road, Suite A-100
Westminster, Pennsylvania 18974
William W. Sprague -- *
320 Park Avenue, 17th Floor
New York, New York 10017
David Webb 14,337(1)(2) *
200 Chisholm Place, Suite 200
Plano, Texas 75075
Lowell Hussey 107,527(1) *
200 Chisholm Place, Suite 200
Plano, Texas 75075
Thomas W. Dixon 55,985(1)(2) *
200 Chisholm Place, Suite 202
Plano, Texas 75075
All directors and executive officers 371,658(1)(2) 3.36%
of the Company as a group
(11 persons)
*Less than 1%.
(1) Represents shares of Common Stock issuable upon the exercise of stock
options granted by the Company which are exercisable currently or within 60
days.
(2) Includes stock option grants recommended to the Board of Directors and
pending formal approval.
MMDS Holdings II, Inc., an affiliate of Bell Atlantic Corporation ("Bell
Atlantic"), and NYNEX MMDS Holding Company, an affiliate of NYNEX Corporation
("NYNEX") (collectively, the "BANX Affiliates"), were each issued 500,000
shares of Common Stock, which collectively represented a 9.57% equity
interest in the Company (prior to dilution), in exchange for non-cash
consideration. Pursuant to the terms of a certain Modification Agreement
dated December 12, 1996 among CAI and various affiliates of Bell Atlantic and
NYNEX, including MMDS Holdings II, Inc. and NYNEX MMDS Holding Company, such
equity interest in the Company may be transferred to CAI under certain
circumstances. There can be no assurance that this transfer will occur.
27
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company entered into an interim services agreement with Heartland
whereby, effective as of the Contribution Closing, Heartland provided
miscellaneous administrative services to the Company, including the maintenance
of the Company's financial information for a transition period which ended in
July 1996. Amounts invoiced by Heartland to the Company pursuant to this
agreement were $220,000 for the year ended December 31, 1996.
MMDS Holdings II, Inc., an affiliate of Bell Atlantic, and NYNEX MMDS
Holding Company, an affiliate of NYNEX, were each issued 500,000 shares of
Common Stock, which collectively represented a 9.57% equity interest in the
Company (prior to dilution), in exchange for non-cash consideration. Pursuant
to the terms of a certain Modification Agreement dated December 12, 1996 among
CAI and various affiliates of Bell Atlantic and NYNEX, including MMDS Holdings
II, Inc. and NYNEX MMDS Holding Company, such equity interest in the Company may
be transferred to CAI under certain circumstances.
Under its existing contractual relationships with the BANX Affiliates, CAI
has agreed that neither it nor any of its subsidiaries, including the Company,
may take certain actions without the consent of the BANX Affiliates. These
restrictions are binding on CAI, but not necessarily on the Company, which is
not a party to such agreements. The CAI/BANX relationship also requires CAI and
its subsidiaries, including the Company, to comply with the restrictions placed
on RBOCs, such as Bell Atlantic and NYNEX and their affiliated enterprises, by
the Modification of Final Judgment entered by the United States District Court
for the District of Columbia on August 24, 1982 (the "MFJ"). The 1996 Act
repeals the MFJ; however, the legislation enacts certain restrictions on RBOCs
similar to those that were contained in the MFJ. It is unlikely that CAI and its
subsidiaries, including the Company, will be subject to these restrictions.
Until the FCC adopts implementing regulations, however, the Company cannot
predict with certainty the extent to which it and its subsidiaries will be
subject to such restrictions.
The Heartland Short-Term Note, which had a principal amount of $25 million,
was repaid on March 1, 1996, with a portion of the net proceeds from the Unit
Offering.
The Heartland Long-Term Note: (i) is in the principal amount of $15 million
and has a final maturity date that is 10 years and one day after the
Contribution Closing; (ii) bears interest at an annual rate of 10% until the
first anniversary of the Contribution Closing and 15% thereafter; (iii) requires
that all of the net proceeds received by the Company from the sale of assets be
applied to the repayment of the Heartland Long-Term Note; (iv) requires that at
least 30% of the net proceeds of any public offering of Common Stock be applied
to the repayment of the Heartland Long-Term Note; (v) provides that no cash
interest will be paid on the Heartland Long-Term Note until the Notes have been
paid in full; and (vi) is subordinated to the Notes upon the occurrence of any
event of bankruptcy or insolvency or any default by the Company in the payment
or performance of any of its obligations under or in respect of the Notes, in
accordance with subordination provisions to be set forth in the Heartland
Long-Term Note. Under an agreement in principle between the Company and
Heartland, amounts owing under the Heartland Long-Term Note are subject to
set-off as described below.
On July 17, 1996, CS acquired from Heartland all of the outstanding
stock of Heartland Wireless Georgia Properties, Inc., a Georgia corporation
("Heartland Georgia") that was a wholly-owned subsidiary of Heartland (the
"Heartland Acquisition"). Heartland Georgia owns (i) leases and licenses for
wireless cable frequency rights for wireless cable channels transmitting in
Adairsville, Powers Crossroads and Rutledge, Georgia (the "Atlanta (suburbs)
markets") and (ii) leases for four tower sites. The purchase price was $7.2
million. The Company has agreed to sell to Bell South (i) certain assets of
Heartland Georgia, such leases and licenses for wireless cable frequency
rights for wireless cable channels transmitting in the Atlanta (suburbs)
markets and leases to the four tower sites in such markets for $7.3 million,
subject to adjustment, plus reimbursement of certain expenses and (ii) the
BTA License relating to Atlanta, Georgia for $6.0 million, which CAI was the
high bidder for in the BTA auction and subsequently reimbursed for by the
Company. Although the Company expects to close the sale during the second
quarter of 1997, the closing of such sale is subject to various conditions
precedent and there can be no assurance that such transaction will be
consummated.
CAI was the high bidder for the Charlotte BTA in the BTA Auction. CAI is
obligated to convey to the Company, at cost, its rights to the Charlotte BTA.
The Company reimbursed CAI for the Charlotte BTA in 1996. The authorization
for one of the six channels that the Company
28
<PAGE>
has rights to has been deemed forfeited by the FCC, and is subject to a
pending petition for reinstatement. The Company will acquire rights to that
channel either as a result of the grant of the petition, or as a result of
its rights to that channel either as a result of the grant of the petition,
or as a result of its rights, as the Charlotte BTA winner, to available
spectrum. The Company will also have the right to develop an additional seven
channels, depending on interference considerations in the Charlotte market as
a result of its ownership of the Charlotte BTA.
The Company has reached an agreement in principle with Heartland, pursuant
to which Heartland will acquire the wireless cable operating system in
Radcliffe, Iowa, and wireless cable assets in Scottsbluff, Nebraska and
Kalispell, Montana currently held by the Company for an aggregate of
approximately $3.9 million. The purchase price to be paid by Heartland for these
assets will be paid by an equivalent reduction of the principal balance of the
Heartland Long-Term Note. As part of the agreement in principle, Heartland has
agreed to sell to the Company certain wireless channel rights in Grand Rapids,
Michigan, Heartland expects to receive from a third party in exchange for
certain other channel rights held by Heartland for $1.4 million. The Company can
elect to pay the purchase price for the Grand Rapids channel rights either in
cash or by having the Heartland Long-Term Note reduced by $2.5 million rather
than $3.9 million. The Company received the Radcliffe system and Scottsbluff and
Kalispell assets in connection with the USA Wireless Acquisition.
The Company has reimbursed CAI in the amount of $700,000 for expenses
incurred by CAI in connection with an amendment to its senior note indenture
permitting CAI to consummate the transactions contemplated by the Participation
Agreement. The Company has also reimbursed CAI in the amounts of $45,000 for
filing fees under the Hart-Scott-Rodino Act ("HSR Act") and $1.7 million for
payments made by CAI to the FCC in connection with the BTA Auction with respect
to the Company's markets. The Company has reimbursed Heartland in the amounts of
$700,000 for expenses incurred by Heartland in connection with the transactions
contemplated by the Participation Agreement, $45,000 for filing fees under the
HSR Act, $1.8 million for expenses incurred by Heartland in connection with the
Acquisitions and $1.1 million for payments made by Heartland in connection with
the BTA Auction.
In March 1997, the Company purchased $200,000 of convertible notes issued
by TelQuest Communications, Inc. a newly formed Delaware corportation. Mr.
Abbruzzese, the chairman of the board of the Company, is the principal
stockholder of TelQuest Communications, Inc.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements at Item 8.
2. Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for the Year Ended
December 31, 1996.
All other Financial Statement Schedules have been omitted because
(i) the required information is not present in amounts sufficient to
require submission of the schedule, (ii) the information required is
included in the Consolidated Financial Statements or the Notes
thereto, or (iii) the information required in the Schedules is not
applicable to the Company.
3. Exhibits:
3.1 - Amended and Restated Certificate of Incorporation of the
Company.**
3.2 - Bylaws of the Company.**
4.1 - Indenture dated as of February 15, 1996 between the Company
and Fleet National Bank of Connecticut (including the form
of 11 3/8% Senior Discount Notes and 11 3/8% Series B Senior
Discount Notes due 2006 as Exhibit A and Exhibit B,
respectively, thereto).**
29
<PAGE>
10.1 - Participation Agreement dated as of December 12, 1995 among
the Company, CAI and Heartland.***
10.2 - Amendment No. 1 to Participation Agreement dated as of
February 22, 1996 among the Company, CAI and Heartland.****
10.3 - Employment Agreement, dated as of February 22, 1996, as
amended between the Company and Alan Sonnenberg.**
10.4 - Employment Agreement dated as of February 22, 1996 between
the Company and Lowell Hussey.**
10.5 - Employment Agreement dated as of February 22, 1996 between
the Company and Thomas W. Dixon.**
10.6 - Amended and Restated Stock Option Agreement dated as of
March 19, 1996 between the Company and Alan Sonnenberg.**
10.7 - Stock Option Agreement dated as of March 19, 1996 between
the Company and Lowell Hussey.**
10.8 - Stock Option Agreement dated as of March 19, 1996 between
the Company and Thomas W. Dixon.**
10.9 - Stock Option Agreement dated as of March 19, 1996 between
the Company and John R. Bailey.**
10.10 - Incentive Stock Plan.**
10.11 - Common Share Registration Rights Agreement dated as of
February 15, 1996 between the Company and the Initial
Purchasers.**
10.12 - Form of Registration Rights Agreement dated as of
February 23, 1996 among the Company, MMDS Holdings II,
Inc. and NYNEX MMDS Holding Company.**
10.13 - Stockholders' Agreement dated as of February 23, 1996
among the Company, CAI and Heartland.**
10.14 - Market Protection Agreement dated as of February 23,
1996 between the Company and Heartland.**
10.15 - Promissory Note of the Company in the principal amount
of $15,000,000 to the order of Heartland.**
10.16 - Administrative Service Agreement dated as of February
23, 1996 between the Company and Heartland.**
10.17 - Asset Exchange Agreement dated as of November 6, 1996
between CS Wireless Systems, Inc., People's Choice TV
Corp. and People's Choice TV of Kansas City, Inc.*
21 - Subsidiaries of the Company.*
27 - Financial Data Schedule.+
+ Filed herewith.
* Incorporated by reference to Item 16 of the Company's Registration
Statement on Form S-1, File No. 333-20295.
** Incorporated by reference to Item 16 of the Company's Registration
Statement on Form S-1, File No. 333-3288.
*** Incorporated by reference Exhibit 2.1 to the Current Report on Form 8-K
dated December 12, 1995 (0-22888) of CAI Wireless Systems, Inc. ("CAI").
**** Incorporated by reference Exhibit 2.1 to the Current Report on Form 8-K
dated March 8, 1996 (0-22888) of CAI.
30
<PAGE>
(b) Reports on Form 8-K.
During the three-month period ended December 31, 1996, the Company did
not file any Current Reports on Form 8-K.
31
<PAGE>
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, hereunto duly authorized, as of March 31, 1997.
CS WIRELESS SYSTEMS, INC.
Registrant
By /s/ David Webb
---------------------------------------
David Webb
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 31, 1997 by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ Jared E. Abbruzzese /s/ Jeffrey A. Kupp
- --------------------------------- ------------------------------
Jared E. Abbruzzese Jeffrey A. Kupp
CHAIRMAN OF THE BOARD SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ James P. Ashman /s/ D. Michael Sitton
- --------------------------------- ------------------------------
James P. Ashman D. Michael Sitton
DIRECTOR DIRECTOR
/s/ Robert D. Happ /s/ Alan Sonnenberg
- --------------------------------- ------------------------------
Robert D. Happ Alan Sonnenberg
DIRECTOR VICE CHAIRMAN OF THE BOARD
/s/ J.R. Holland, Jr. /s/ William W. Sprague
- --------------------------------- ------------------------------
J.R. Holland, Jr. William W. Sprague
DIRECTOR DIRECTOR
/s/ David Webb
------------------------------
David Webb
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
32
<PAGE>
CS WIRELESS SYSTEMS, INC.
Items 8 and 14(a)
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
CS Wireless Systems, Inc. and Subsidiaries:
Independent Auditors' Report F-3
Consolidated Balance Sheet as of December 31, 1996 F-4
Consolidated Statement of Operations for the year ended December 31, 1996 F-5
Consolidated Statement of Cash Flows for the year ended December 31, 1996 F-6
Consolidated Statement of Stockholders' Equity for the year ended December 31,
1996 F-7
Notes to Consolidated Financial Statements F-8
CS Wireless Systems, Inc. and Subsidiaries (formerly ACS Ohio, Inc.) and certain
assets of Atlantic Microsystems, Inc.:
Report of Independent Auditors F-23
Combined Balance Sheet as of December 31, 1995 F-24
Combined Statement of Operations and Accumulated Deficit for the period from
September 30, 1995 to December 31, 1995 F-25
Combined Statement of Cash Flows for the period from September 30, 1995 to
December 31, 1995 F-26
Notes to Combined Financial Statements F-27
ACS Ohio, Inc. and Subsidiaries:
Report of Independent Auditors F-34
Consolidated Balance Sheets as of December 31, 1994 and September 29, 1995 F-35
Consolidated Statements of Operations and Accumulated Deficit for the period
from March 9, 1994 (date of inception) to December 31, 1994 and for the
period from January 1, 1995 to September 29, 1995 F-36
Consolidated Statements of Cash Flows for the period from March 9, 1994 (date
of inception) to December 31, 1994 and for the period from January 1, 1995 to
September 29, 1995 F-37
Notes to Consolidated Financial Statements F-38
MetroCable, Inc.:
Report of Independent Certified Public Accountants F-44
Balance Sheet as of February 28, 1994 F-45
Statement of Operations and Deficit for the period June 4, 1993 (date of
commencement of operations) through February 28, 1994 F-46
Statement of Shareholders' Equity for the period June 4, 1993 (date of
commencement of operations) through February 28, 1994 F-47
Statement of Cash Flows for the period June 4, 1993 (date of commencement of
operations) through February 28, 1994 F-48
Notes to Financial Statements F-49
</TABLE>
F-1
<PAGE>
CS WIRELESS SYSTEMS, INC.
Items 8 and 14(a)
Index to Financial Statements, Continued
<TABLE>
<CAPTION>
Page
<S> <C>
Metropolitan Satellite Corp.:
Report of Independent Certified Public Accountants F-54
Balance Sheet as of February 28, 1994 F-55
Statement of Operations and Deficit for the year ended February 28, 1994 F-56
Statement of Cash Flows for the year ended February 28, 1994 F-57
Notes to Financial Statements F-58
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CS Wireless Systems, Inc.:
We have audited the accompanying consolidated balance sheet of CS Wireless
Systems, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CS Wireless Systems,
Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 21, 1997
F-3
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996
(dollars in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $113,072
Subscriber receivables, less
allowance for doubtful accounts of $418 1,079
Notes receivable 1,510
Prepaid expenses and other 689
---------
Total current assets 116,350
Property and equipment, net (note 3) 42,955
License and leased license investment, net of
accumulated amortization of $7,681 172,953
Goodwill, net of accumulated amortization of $3,938 52,011
Assets held for sale (note 2) 19,366
Debt issuance costs and other assets,
net (note 4) 10,602
---------
$414,237
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses, including
$1,215 to affiliates $ 6,655
Current portion of long-term debt (note 5) 3,194
Current portion of BTA auction payable to affiliates
(note 5) 646
Other current liabilities 1,043
--------
Total current liabilities 11,538
Long-term debt, excluding current portion (note 5) 267,870
BTA auction payable to affiliates, excluding current
portion (note 5) 4,256
Deferred income taxes (note 8) 5,429
--------
Total liabilities 289,403
--------
Stockholders' equity (notes 2 and 7):
Preferred stock, $.01 par value; authorized
5,000,000 shares, no shares issued and outstanding -
Common stock, $.001 par value; authorized 40,000,000
shares, issued and outstanding 10,445,408 shares 10
Additional paid-in capital 154,558
Accumulated deficit (29,734)
--------
Total stockholders' equity 124,834
--------
Commitments and contingencies (notes 6 and 10) $414,237
--------
--------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
Year ended December 31, 1996
(in thousands, except share data)
Revenues $ 22,738
---------
Operating expenses:
Systems operations 13,258
Selling, general and administrative 13,934
Depreciation and amortization 20,345
---------
Total operating expenses 47,537
---------
Operating loss (24,799)
---------
Other income (expense):
Interest expense (24,959)
Interest income 6,600
---------
Other income (expense), net (18,359)
---------
Loss before income taxes (43,158)
Income tax benefit (note 8) 14,631
---------
Net loss $ (28,527)
---------
---------
Net loss per common share $ (3.06)
---------
---------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year ended December 31, 1996
(in thousands)
Cash flows from operating activities:
Net loss $ (28,527)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes (14,631)
Depreciation and amortization 20,345
Accretion on discount notes and amortization of
debt issuance costs 23,483
Non-cash interest expense on other long term debt 1,275
Changes in assets and liabilities, net of effects of
contributions and acquisitions:
Subscriber receivables (115)
Prepaid expenses and other (345)
Accounts payable, accrued expenses and other
liabilities 928
---------
Net cash provided by operating activities 2,413
---------
Cash flows from investing activities:
Purchases of property and equipment (13,243)
Additions to intangible assets (3,816)
Investment in assets held for sale (8,766)
Issuance of notes (1,510)
Other 81
---------
Net cash used in investing activities (27,254)
---------
Cash flows from financing activities:
Payments of capital lease obligations (198)
Payments on BTA auction payable and other (20,125)
Payments on Heartland Short-Term Note (25,000)
Proceeds from Unit Offering 229,484
Debt issuance costs (9,793)
Cash distributed pursuant to Contributions (note 2) (36,639)
---------
Net cash provided by financing activities 137,729
---------
Increase in cash and cash equivalents 112,888
Cash and cash equivalents at beginning of year 184
---------
Cash and cash equivalents at end of year $ 113,072
---------
---------
Cash paid for interest $ 114
---------
---------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Year ended December 31, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN DIVISION ACCUMULATED
SHARES AMOUNT CAPITAL EQUITY DEFICIT TOTAL
--------- ------- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,000 $ 1 15,950 45,572 (1,207) 60,316
Contributions to Company
(note 2) 9,999,000 9 131,503 (45,572) - 85,940
Issuance of common stock
pursuant to Unit Offering
(note 5) 110,000 - 800 - - 800
Issuance of common stock in
acquisition (note 2) 335,408 - 6,305 - - 6,305
Net loss - - - - (28,527) (28,527)
---------- ----- ------- ------- ------- -------
Balance, December 31, 1996 10,445,408 $ 10 154,558 - (29,734) 124,834
---------- ----- ------- ------- ------- -------
---------- ----- ------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(tables in thousands, except per share data)
(1) General and Summary of Significant Accounting Policies
(a) DESCRIPTION OF BUSINESS
CS Wireless Systems, Inc. and subsidiaries (the "Company" or "CS
Wireless") develop, own and operate a network of wireless cable
television systems providing subscription television services. The
Company has a portfolio of wireless cable channel rights in various
markets in the United States. The Company currently has systems in
operation in ten markets. Systems in other markets are currently under
construction and development by the Company.
Wireless cable television is a new industry within the highly
competitive subscription television industry. The Company's principal
subscription television competitors in each of its markets are
traditional hard-wire cable companies, direct broadcast satellite,
private cable companies and other alternate methods of distributing and
receiving television transmissions. Hard-wire cable companies generally
are well-established and known to potential customers and have
significantly greater financial and other resources than the Company.
As the telecommunications industry continues to evolve, the Company may
face additional competition from new providers of entertainment and data
services. In addition, until the Company can increase its channels
offered through the deployment of digital compression technology, the
Company's existing competitors have more channels to offer subscribers.
There can be no assurance that the Company will be able to compete
successfully with existing or potential competitors in the subscription
television industry.
The growth of the Company's business requires substantial continuing
investment to finance capital expenditures related to subscriber growth
and system development. Capital expenditures planned for 1997 and
beyond will be primarily targeted to the deployment of digital
technology and subscriber growth in digital markets. The company
believes that its cash and cash equivalents and cash generated from
operations will be sufficient to fund the Company's operations and
expansion at least through the first quarter of 1998. Additional funds
will be necessary to continue the deployment of digital technologies and
complete the launch/conversion, build-out and expansion of all of the
Company's wireless cable systems and to bring such systems to a mature
state. These activities may be financed in whole or in part through
debt or equity offerings, joint ventures, the sale and/or exchange of
existing wireless cable channel rights, or other arrangements. There
can be no assurance that the Company will achieve positive cash flow
from operations, that the Company will consummate the sale of any
wireless cable channel rights or that sufficient debt or equity
financing will be available to the Company. In addition, subject to
restrictions under its outstanding debt, the Company may pursue other
opportunities to acquire additional wireless cable channel rights and
businesses that may utilize the capital currently expected to be
available for its current markets. The amount and timing of the
Company's future capital requirements will depend upon a number of
factors, including programming costs, equipment costs, marketing costs,
staffing levels, subscriber growth and competitive
F-8
<PAGE>
conditions, many of which are beyond the control of the Company.
Failure to obtain any required additional financing could materially
affect the growth, cash flow or earnings/losses of the Company.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying consolidated financial information for the period from
January 1, 1996 through February 23, 1996 reflects the combined
financial position and results of operations for the Company's wireless
cable system serving the Cleveland, Ohio market. The combined financial
information for the period from January 1, 1996 through February 23,
1996 includes the accounts of the Company and certain assets of Atlantic
Microsystems, Inc. For the period subsequent to February 23, 1996, the
Company's consolidated financial statements include the results of
operations of the entities contributed to the Company on February 23,
1996 (see note 2).
On September 29, 1995, ACS Enterprises, Inc. (including ACS Ohio, Inc.,
the predecessor of the Company and a wholly-owned subsidiary of ACS
Enterprises, Inc.) was acquired by CAI Wireless Systems, Inc. ("CAI") in
a business combination accounted for as a purchase. As a result of the
acquisition, financial information related to the Company and its
predecessor for the periods through September 29, 1995 and periods
subsequent to September 29, 1995 is presented on a different cost basis
and, therefore, such information is not comparable.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization of property and equipment are computed using the straight-
line method over the estimated useful lives of the assets. Repairs and
maintenance costs are charged to expense when incurred; renewals and
betterments are capitalized.
Equipment awaiting installation consists primarily of accessories, parts
and supplies for subscriber installations and is stated at the lower of
average cost or market.
F-9
<PAGE>
(d) LICENSE AND LEASED LICENSE INVESTMENT
License and leased license investment includes costs incurred to acquire
and/or develop wireless cable channel rights. Costs incurred to acquire
channel rights issued by the Federal Communications Commission ("FCC")
are deferred and amortized ratably over estimated useful lives of 15
years beginning with inception of service in each respective market. As
of December 31, 1996, approximately $63.1 million of the license and
leased license investment was not yet subject to amortization.
(e) GOODWILL
Goodwill represents excess purchase price of acquisitions over
identifiable tangible and intangible assets. Goodwill is amortized
ratably over an estimated useful life of 15 years beginning with the
acquisition of the market.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows using a discount
rate reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
(f) LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, on January 1, 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell. The adoption of this Statement did not have a material impact on
the Company's financial position, results of operations, or liquidity.
The Company's estimates of future gross revenues and operating cash
flows, the remaining estimated lives of long-lived assets, or both could
be reduced in the future due to changes in, among other things,
technology, government regulation, available financing or competition.
As a result, the carrying amounts of long-lived assets, including
goodwill, could be reduced by amounts which would be material to the
financial statements.
F-10
<PAGE>
(g) INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable earnings. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount more likely than not to be realized. Income tax expense
is the total of tax payable for the period and the change during the
period in deferred tax assets and liabilities.
(h) REVENUE RECOGNITION
Revenues from subscribers are recognized in the period of service.
(i) SYSTEMS OPERATIONS
Systems operations expenses consist principally of programming fees,
channel lease costs, tower rental and other costs for providing service.
(j) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers
temporary cash investments purchased with original maturities of three
months or less and which are available for use in operations to be cash
equivalents. The Company had cash equivalents of $112,208,000 at
December 31, 1996.
(k) NET LOSS PER COMMON SHARE
Net loss per common share is based on the net loss applicable to the
weighted average number of common shares outstanding of 9,170,169 for
the year ended December 31, 1996. For purposes of the accompanying
consolidated financial information, the Company has retroactively
adjusted all references to the number of outstanding shares prior to
February 23, 1996 to reflect the number of shares issued to CAI on
February 23, 1996 (see note 2) related to the wireless cable television
system in Cleveland, Ohio. Shares issuable upon exercise of stock
options are anti-dilutive and have been excluded from the calculation.
Fully-diluted loss per common share is not presented as it would not
materially differ from primary loss per common share.
F-11
<PAGE>
(l) STOCK OPTION PLAN
On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and provide
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosures of SFAS No. 123. Under APB
Opinion No. 25, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded
the exercise price.
(m) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS
(a) CONTRIBUTIONS TO COMPANY
On February 23, 1996, CAI and Heartland Wireless Communications, Inc.
("Heartland") contributed to the Company (the "Contributions") certain
wireless cable television assets comprising various markets in the
United States. In connection with the Contributions, CAI and Heartland
received approximately 5.4 million and 3.6 million shares, respectively,
of the Company's newly-issued common stock. In addition, CAI received
approximately $750,000 in cash and Heartland received approximately
$30.9 million in cash, a nine-month note for $25 million (the "Heartland
Short-Term Note") and a 10-year note for $15 million (the "Heartland
Long-Term Note"). The Heartland Short-Term Note was repaid on March 1,
1996 with a portion of the net proceeds from the Unit Offering (see note
5).
Additionally, in connection with the Contributions, MMDS Holdings II,
Inc., an affiliate of Bell Atlantic, and NYNEX MMDS Holding Company, an
affiliate of NYNEX, each received 500,000 shares of common stock of the
Company for certain non-cash consideration.
The consummation of the Contributions has been accounted for at CAI's
and Heartland's historical cost basis, reduced by the amount of cash and
notes distributed to CAI and
F-12
<PAGE>
Heartland in connection with the Contributions. A substantial portion
of the net assets contributed by Heartland were purchased by Heartland
on February 23, 1996. Accordingly, Heartland's cost basis with respect
to such net assets was determined based on Heartland's allocation of
the purchase price to the net assets acquired and liabilities assumed.
In addition, the Company, CAI and Heartland are in the process of
completing certain post-closing adjustments. On November 8, 1996, the
Company made an initial payment of $5 million in cash to Heartland
that will be applied to the final amount owed to Heartland pursuant to
the Contributions. Following the completion of all post-closing
adjustments, additional shares of common stock of the Company are
expected to be issued to Heartland by the Company or CAI. The net
assets contributed to the Company consist primarily of plant and
equipment and various wireless cable channel rights. The following is
a summary of the net assets contributed to the Company on February 23,
1996 (in thousands):
Working capital $ (141)
Plant and equipment, net 25,755
License and leased license
investment and goodwill 144,340
Deferred income taxes (6,982)
Other liabilities (393)
----------
162,579
Cash and notes distributed
to CAI and Heartland 76,639
----------
Net assets contributed $ 85,940
----------
----------
(b) COMPLETED TRANSACTIONS
On July 17, 1996, the Company acquired from Heartland (i) leases and
licenses for wireless cable channel rights in Adairsville, Powers
Crossroads and Rutledge, Georgia (the "Atlanta (suburbs) markets") and
(ii) leases for four tower sites. The purchase price was $7.2 million in
cash.
On October 11, 1996, the Company acquired all of the issued and
outstanding common stock ("USA Common Stock") of USA Wireless Cable,
Inc. ("USA") (the "USA Wireless Acquisition"). USA provided wireless
cable service in certain Midwest markets, including but not limited to
the Effingham, Kansas; Wellsville, Kansas; Radcliffe, Iowa; Scottsbluff,
Nebraska; Kalispell, Montana; and Rochester, Minnesota markets (the "USA
Markets"). At the effective time of the USA Wireless Acquisition, the
outstanding shares of USA Common Stock were converted into rights to
receive an aggregate $17,635,000 of which approximately $6,305,000 was
paid in the form of CS Wireless common stock and approximately
$11,330,000 of indebtedness and payables assumed by the Company. In
connection with this acquisition, the Company extended two notes
receivable to affiliates of USA. A note receivable for $1,260,000, with
an interest rate of 12% was repaid in February 1997. A note receivable
for $250,000 with an interest rate of 12% is due in August 1997.
F-13
<PAGE>
The acquisitions discussed above were accounted for as purchases.
Accordingly, the accompanying consolidated financial statements include
the results of operations of the acquired entities from the dates of
acquisition. A summary of the net assets acquired follows:
Working capital $ (1,155)
Property and equipment 1,354
Assets held for sale (note 5) 11,800
Intangible assets 13,959
Deferred tax liability (2,333)
Notes payable assumed (10,120)
----------
Total purchase price $ 13,505
----------
----------
(c) PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
Summarized below is the unaudited pro forma information for the year
ended December 31, 1996 as if the Contributions and acquisitions
discussed above had been consummated as of the beginning of 1996, after
giving effect to certain adjustments, including amortization of
intangibles and selected income tax effects. The pro forma information
does not purport to represent what the Company's results of operations
actually would have been had such transactions or events occurred on the
dates specified, or to project the Company's results of operations for
any future period.
Revenues $ 24,202
Net loss (30,024)
Net loss per common share (3.27)
(d) PENDING TRANSACTIONS
The Company has entered into an agreement dated as of November 6, 1996
with People's Choice TV Corp. ("PCTV"), pursuant to which the Company
will exchange its Salt Lake City, Utah market for PCTV's Kansas City,
Missouri market. The PCTV Swap is expected to close during the second
quarter of 1997.
The Company has agreed to sell to BellSouth (i) certain leases and
licenses for wireless cable channel rights in the Atlanta (suburbs)
markets and leases to four tower sites in such markets for $7,300,000,
subject to adjustment, plus reimbursement of certain expenses and (ii)
the BTA (as defined) license relating to Atlanta, Georgia for
$6,000,000, subject to adjustment. Accordingly, the carrying amount of
the leases and licenses and the BTA license related to the Atlanta
market of $13.2 million and certain purchased equipment in the amount of
$1.6
F-14
<PAGE>
million has been classified as assets held for sale in the
accompanying consolidated balance sheet.
The Company has entered into a letter of intent with Heartland, pursuant
to which Heartland will acquire the wireless cable operating system in
Radcliffe, Iowa, and wireless cable channel rights in Scottsbluff,
Nebraska and Kalispell, Montana currently held by the Company for an
aggregate of approximately $3.9 million. Accordingly, the carrying
amount of such assets of $3.9 million has been classified as assets held
for sale in the accompanying consolidated balance sheet. The purchase
price to be paid by Heartland for these assets will be paid by an
equivalent reduction of the principal balance of the Heartland Long-Term
Note.
The Company expects both sales to be consummated in the second quarter
of 1997. The carrying amounts of the assets held for sale approximate
the sales prices less costs to sell.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996:
ESTIMATED
USEFUL LIFE
-------------
Equipment awaiting installation $ 4,611 -
Subscriber premises equipment and
installation costs 36,756 2 to 5 years
Transmission equipment and system
construction costs 8,825 5 years
Office furniture and equipment 1,995 5 years
Leasehold improvements 613 5 years
---------
52,800
Less accumulated depreciation and
amortization 9,845
--------
$ 42,955
--------
--------
(4) OTHER ASSETS
Other assets consist of the following at December 31, 1996:
ESTIMATED
USEFUL LIFE
-------------
Debt issuance costs $ 9,793 10 years
Oganizational costs and other 1,505 5 years
--------
11,298
Less accumulated amortization 696
--------
$ 10,602
--------
--------
F-15
<PAGE>
(5) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996:
Senior Notes $ 251,637
Heartland Long-Term Note 16,275
BTA auction payable to affiliates 4,902
Acquisition note 3,000
Capital leases and other 462
---------
Total long-term debt 276,276
Less current portion 3,840
---------
$ 272,436
---------
---------
(a) SENIOR NOTES
On February 23, 1996, the Company consummated a private placement of
100,000 units (the "Unit Offering" or "Units") consisting of $400
million aggregate principal amount of 11 3/8% Senior Discount Notes due
2006 ("Senior Notes") and 110,000 shares of common stock of the Company.
The Senior Notes will mature on March 1, 2006. The issue price of the
Senior Notes represents a yield to maturity of 11 3/8% per annum
computed on a semi-annual bond equivalent basis. Cash interest on the
Senior Notes will not be payable prior to March 1, 2001. Commencing
September 1, 2001, cash interest on the Senior Notes will be payable on
March 1 and September 1 of each year at a rate of 11 3/8% per annum. The
issuance of the Units resulted in net proceeds to the Company of
approximately $219.7 million, including amounts attributable to the
common stock and after underwriting discounts and other debt issuance
costs aggregating approximately $9.8 million. For financial reporting
purposes, the shares of common stock were valued at $800,000.
The Senior Notes were issued pursuant to an Indenture which contains
certain restrictive covenants and limitations. Among other things, the
Indenture limits the incurrence of additional indebtedness, limits the
making of restricted payments (as defined) including the declaration
and/or payment of dividends, places limitations on dividends and other
payments by the Company's subsidiaries, prohibits the Company and its
subsidiaries from engaging in any business other than the transmission
of video, voice and data and related businesses and services, and places
limitations on liens, certain asset dispositions and merger/sale of
assets activity.
F-16
<PAGE>
(b) HEARTLAND LONG-TERM NOTE
In connection with the Contributions on February 23, 1996, Heartland
received the Heartland Long-Term Note. The Heartland Long-Term Note has
a final maturity date that is 10 years and one day after the closing
after the Contributions. The interest rate on the Heartland Long-Term
Note increases from 10% to 15% if the Heartland Long-Term Note is not
repaid within one year of issuance, with interest accruing and added to
the balance annually. No cash interest will be paid on the Heartland
Long-Term Note until after the Senior Notes (see above) have been paid
in full.
(c) BTA AUCTION PAYABLE TO AFFILIATES
The FCC recently concluded auctions for the award of initial commercial
wireless cable licenses for "Basic Trading Areas" or "BTAs" (the "BTA
Auction"). Pursuant to an agreement among CAI, Heartland and the
Company, CAI and Heartland are obligated to convey to the Company, at
their cost, and the Company has agreed to purchase, any rights acquired
in the BTA Auction relating to the Company's markets, as well as certain
other BTAs. CAI and Heartland were the winning bidders in the amount of
approximately $17.9 million with respect to BTAs that will be conveyed
to the Company. As of December 31, 1996, the accompanying consolidated
balance sheet reflects a BTA auction payable to CAI and Heartland of
$646,000 and $4.3 million, respectively, representing the remaining
unpaid balances with respect to BTAs to be conveyed to the Company. The
BTA auction payable to Heartland bears interest at 9.5% and will be paid
over a 10-year period commencing in the fourth quarter of 1996. The
Company will be required to make quarterly interest-only payments for
the first two years and quarterly payments of principal and interest
over the remaining eight years.
(d) ACQUISITION NOTE
In connection with the acquisition of USA (note 2), the Company assumed
a note payable of $3,000,000. The note, which had an interest rate of
12%, was paid in full in February 1997.
The Company is currently highly leveraged, and it is expected to continue to
have a high level of debt for the foreseeable future. As a result of its
leverage and in order to repay existing indebtedness, the Company will be
required to generate substantial operating cash flow. The ability of the
Company to meet these requirements will depend on, among other things,
prevailing economic conditions and financial, business and other factors,
some of which are beyond the control of the Company.
F-17
<PAGE>
Aggregate maturities of long-term debt as of December 31, 1996 for the five
years ending December 31, 2001 are as follows:
1997 $ 3,840
1998 175
1999 430
2000 462
2001 483
Thereafter 270,886
(6) LEASES AND FCC LICENSES
The Company is dependent on leases with third parties for most of its
wireless cable channel rights. Under FCC rules, the base term of each lease
cannot exceed the term of the underlying FCC license. FCC licenses for
wireless cable channels generally must be renewed every ten years, and there
is no automatic renewal of such licenses. The use of such channels by the
lessors is subject to regulation by the FCC and, therefore, the Company's
ability to continue to enjoy the benefits of these leases is dependent upon
the lessors' continuing compliance with applicable regulations. The
remaining initial terms of most of the Company's channel leases range from 5
to 10 years, although certain of the Company's channel leases have initial
terms expiring in the next several years. Most of the Company's leases
provide that the lessor may negotiate lease renewals with only the Company
and, if a renewal agreement is not reached within a specified time, grant
the Company a right of first refusal to match any competing offers. Although
the Company does not believe that the termination of or failure to renew a
single channel lease would adversely affect the Company, several of such
terminations or failures in one or more markets that the Company actively
serves could have a material adverse effect on the Company. Channel rights
lease agreements generally require payments based on the greater of
specified minimums or amounts based upon various subscriber levels.
Additionally, FCC licenses also specify construction deadlines, which, if
not met, could result in the loss of the license. Requests for additional
time to construct may be filed and are subject to review pursuant to FCC
rules.
Payments under the channel rights lease agreements generally begin upon the
completion of construction of the transmission equipment and facilities and
approval for operation pursuant to the rules and regulations of the FCC.
However, for certain leases, the Company is obligated to begin payments upon
grant of the channel rights. Channel rights lease expense was approximately
$1,810,000 for the year ended December 31, 1996.
The Company also has certain operating leases for office space, equipment
and transmission tower space. Rent expense incurred in connection with
other operating leases was approximately $950,000 for the year ended
December 31, 1996.
F-18
<PAGE>
Future minimum lease payments due under channel rights leases and other
noncancellable operating leases at December 31, 1996 are as follows:
YEAR CHANNEL OTHER
ENDING RIGHTS OPERATING
DECEMBER 31, LEASES LEASES
-------------- --------- ----------
1997 $ 2,453 $ 875
1998 2,652 692
1999 2,720 500
2000 2,806 301
2001 2,860 282
(7) STOCKHOLDERS' EQUITY
(a) PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock which can
be issued in series with varying preferences and conversion features as
determined by the Board of Directors of the Company. At December 31,
1996, no shares of preferred stock were issued.
(b) STOCK OPTIONS
The Company established in 1996 the CS Wireless Systems, Inc. Incentive
Stock Plan ("Stock Plan") which provides for the issuance of stock
options to officers and other key employees of the Company and its
subsidiaries. The Stock Plan makes available for issuance 752,688
shares of common stock. Options issued under the Stock Plan have
varying vesting periods as provided in separate stock option agreements
and generally carry an expiration date of ten years subsequent to the
date of issuance. Options issued are required to have an exercise price
of not less than fair market value of the Company's common stock on the
date of issuance.
The Company applies APB Opinion No. 25 in accounting for its Stock Plan
and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the
F-19
<PAGE>
grant date for its stock options under SFAS No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated below:
Net loss:
As reported $(28,527)
Pro forma (30,069)
Loss per common share:
As reported (3.11)
Pro forma (3.23)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996: dividend yield of 0%; risk-
free interest rate of 6.0% and an expected life of 5 years.
During 1996, the Company granted 645,161 options with an exercise price
of $9.40 and a weighted average grant-date fair value of $2.39. The
following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------- ---------------------------
Number Weighted
outstanding average Weighted Number Weighted
at remaining average exercisable at average
Exercise December 31, contractual exercise December 31, exercise
price 1996 life price 1996 price
- ------------------- ----------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 9.40 645,161 9.2 years $ 9.40 365,591 $ 9.40
------ ------- --------- ------ ------- ------
------ ------- --------- ------ ------- ------
</TABLE>
(8) Income Taxes
Income tax benefit of $14,631,000 for the year ended December 31, 1996
consists of a deferred tax benefit.
Total income tax benefit for the year ended December 31, 1996 differed from
the amount computed by applying the U.S. federal statutory income tax rate
of 35% to loss before income taxes as a result of the following:
Computed "expected" tax benefit $ (15,105)
Amortization of goodwill 1,260
State income taxes (863)
Other, net 77
----------
$ (14,631)
----------
----------
F-20
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 are
presented below:
Deferred tax assets:
Net operating loss carryforwards $ 15,645
Other 45
--------
Total gross deferred tax assets 15,690
--------
Deferred tax liabilities:
License and leased license investment 20,977
Property and equipment 142
--------
Total deferred tax liabilities 21,119
--------
Net deferred tax liability $ 5,429
--------
--------
Deferred tax assets and liabilities are computed by applying the U.S.
federal income tax rate in effect to the gross amounts of temporary
differences and other tax attributes, such as net operating loss
carryforwards. Deferred tax assets and liabilities relating to state income
taxes are not material.
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The Company
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon these considerations, the Company has recognized
deferred tax assets to the extent such assets can be realized through future
reversals of existing taxable temporary differences.
At December 31, 1996, the Company has net operating loss carryforwards
available of approximately $42 million which begin to expire in 2010.
Approximately $870,000 of the net operating loss carryover is subject to an
annual limitation and the separate return limitation year rules.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Senior Notes at December 31, 1996 was approximately
$140 million (carrying amount of $252 million) and is based on market quotes
obtained from dealers. The carrying amounts of the Heartland Long-Term
Note, the Acquisition Note and the BTA auction payables approximate fair
value as these notes bear interest at current market rates.
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturity of
these instruments.
F-21
<PAGE>
(10) COMMITMENTS AND CONTINGENCIES
The Company has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire through
2000. The agreements generally require monthly payments based upon the
number of subscribers to the Company's systems, subject to certain minimums.
The Company has signed a letter of intent and expects to sign a definitive
contract to purchase approximately $70 million in total value of digital
subscriber premises equipment with deliveries over a three-year period
ending in March 2000. The contract is expected to include certain
cancellation penalties which if incurred could be material to the Company.
The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a material
adverse effect on the Company's consolidated financial position, operating
results or liquidity.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CAI WIRELESS SYSTEMS, INC.
We have audited the accompanying combined balance sheet of CS Wireless
Systems, Inc. and subsidiaries (formerly ACS Ohio, Inc.) and certain assets of
Atlantic Microsystems, Inc. as of December 31, 1995 and the related combined
statements of operations and accumulated deficit and cash flows for the period
from September 30, 1995 to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 CS Wireless
Systems, Inc. and subsidiaries (formerly ACS Ohio, Inc.) and certain assets of
Atlantic Microsystems, Inc. at December 31, 1995, and the combined results of
their operations and their cash flows for the period from September 30, 1995 to
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 1, 1996
F-23
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1995
(000S, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................. $ 184
Accounts receivable,
less allowance for doubtful accounts of $138................................... 370
Other current assets............................................................. 35
---------
Total current assets............................................................... 589
Plant and equipment, net........................................................... 12,220
Wireless channel rights, net....................................................... 29,500
Goodwill, net...................................................................... 33,379
---------
$ 75,688
---------
---------
LIABILITIES AND EQUITY
Current liabilities:
Capital lease obligations........................................................ $ 52
Accounts payable and accrued expenses............................................ 2,286
Customer deposits and billings received in advance............................... 398
---------
Total current liabilities.......................................................... 2,736
Capital lease obligations.......................................................... 60
Due to CAI Wireless Systems, Inc................................................... 1,831
Deferred income taxes.............................................................. 10,745
Equity:
Preferred Stock--par value $.01 per share, authorized 5,000,000, none issued..... --
Common stock--par value $.001 per share, authorized 40,000,000, issued 1,000
shares......................................................................... 1
Additional paid-in capital....................................................... 15,950
Divisional equity................................................................ 45,572
Accumulated deficit.............................................................. (1,207)
---------
Total equity....................................................................... 60,316
---------
$ 75,688
---------
---------
</TABLE>
See accompanying notes.
F-24
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
COMBINED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE PERIOD FROM SEPTEMBER 30, 1995 TO DECEMBER 31, 1995
(000S, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Revenues:
Pay television revenues....................................................... $ 2,301
Expenses:
Programming and license fees.................................................. 795
Marketing..................................................................... 222
General and administrative, including $151,000 to CAI Wireless Systems,
Inc. ....................................................................... 1,086
Depreciation and amortization................................................. 1,796
-----------
3,899
-----------
(1,598)
Interest expense, net........................................................... (2)
-----------
Loss before tax benefit......................................................... (1,600)
Benefit from income taxes....................................................... 393
-----------
Net loss........................................................................ $ (1,207)
Accumulated deficit:
Beginning of period........................................................... --
-----------
End of period................................................................. $ (1,207)
-----------
-----------
Per share data:
Net loss per common share....................................................... $ (1,207)
-----------
-----------
Weighted average common shares outstanding...................................... 1,000
-----------
-----------
</TABLE>
See accompanying notes.
F-25
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 30, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
(000S)
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................................................ $ (1,207)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes........................................................................... (393)
Depreciation and amortization................................................................... 1,796
Changes in assets and liabilities:
Accounts receivable........................................................................... (24)
Other operating assets........................................................................ 14
Accounts payable and accrued expenses......................................................... (887)
Other operating liabilities................................................................... (37)
------------
Net cash used in operating activities............................................................... (738)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................................................................ (1,037)
------------
Net cash used in investing activities............................................................... (1,037)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations............................................................... (2)
Advances from CAI Wireless Systems, Inc............................................................. 1,831
------------
Net cash provided by financing activities........................................................... 1,829
------------
Net increase in cash................................................................................ 54
Cash, beginning of period........................................................................... 130
------------
Cash, end of period................................................................................. $ 184
------------
------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
CS Wireless Systems, Inc. (CS) (formerly ACS Ohio, Inc.), a wholly-owned
subsidiary of CAI Wireless Systems, Inc. (CAI), operates a wireless subscription
television system in Cleveland, Ohio through its two subsidiaries (MetroCable,
Inc. and Metropolitan Satellite Corporation). CS was incorporated in December
1993 and remained dormant until March 1994 when CS, through its parent, ACS
Enterprises, Inc. (ACS) acquired its two subsidiaries. CAI acquired ACS on
September 29, 1995 (see Note 7). The wireless channel rights and goodwill
associated with the Cleveland system were transferred to Atlantic Microsystems,
Inc. (AMI), a wholly owned subsidiary of CAI, upon CAI's acquisition of ACS
Ohio, Inc. and have been included in the accompanying combined financial
statements. The assets presented herein have been contributed by CAI into a
joint venture with Heartland Wireless Communications, Inc. (Heartland) in
accordance with a Participation Agreement which closed on February 23, 1996 (see
note 8).
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of CS and its two
subsidiaries and certain assets of AMI (the Company). All material intercompany
accounts and transactions have been eliminated in combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Subscriber revenue is recognized at the time payments are due. Customer
payments received in advance of the due date are classified as deferred income.
Bad debt expense was approximately $108,000 for the period from September 30,
1995 to December 31, 1995 (1995).
PLANT AND EQUIPMENT
Plant and equipment are carried at historical cost if purchased or
constructed by the Company, or allocated cost if acquired as part of a business
acquisition. Depreciation is calculated on the straight-line method for
financial and tax reporting purposes. Costs of maintenance and repairs are
charged to income as incurred; significant renewals and betterments are
capitalized. The Company capitalizes subcontractor and internal labor and
overhead incurred to construct and install its television reception and
transmission equipment.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Materials and supplies are
carried at the lower of cost, determined on the weighted average method (which
approximates the first-in, first-out method), or market.
F-27
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUITY
The common stock and additional paid-in capital represent the equity
contribution of CAI into CS Wireless Systems, Inc. The Divisional equity
represents the Company's permanent investment in AMI.
AUTHORIZED SHARES
In December 1995, the Company increased its authorized shares of common
stock from 1,000 to 40,000,000 and changed the par value per share from $1 to
$.001. The Company also authorized 5,000,000 shares of Preferred Stock with a
par value of $.01 per share.
GOODWILL AND WIRELESS CHANNEL RIGHTS
Goodwill consists of costs of acquired businesses in excess of fair market
value allocated to specific assets. Goodwill is amortized on a straight-line
basis over its estimated useful life of fifteen years. Wireless channel rights
are being amortized over fifteen years.
The carrying value of the goodwill and wireless channel rights are reviewed
on an ongoing basis. If the review indicates that these assets are not
recoverable, as determined based on undiscounted future cash flows, the
Company's carrying value of these assets is reduced to its estimated fair value.
No such reduction to these assets was made in 1995.
LOSS PER SHARE
Loss per share is based on the average number of common shares outstanding
during the period.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" is
effective for fiscal years beginning after December 15, 1995. The Company will
adopt the standard, as required on January 1, 1996. Management believes that the
adoption will not have a material effect on the Company's financial position or
results of operations.
F-28
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
2. PLANT AND EQUIPMENT
Plant and equipment consisted of the following (000s):
<TABLE>
<CAPTION>
DECEMBER 31, LIFE
CLASSIFICATION 1995 (YEARS)
- --------------------------------------------------------------------- ------------ ---------
<S> <C> <C>
Vehicles............................................................. $ 12 3
Office and computer.................................................. 530 5
Transmission equipment............................................... 806 10
Television and other equipment....................................... 10,794 2 to 7
Materials and Supplies............................................... 976 2 to 10
------------ ---------
13,118
Less accumulated depreciation........................................ (898)
------------
$ 12,220
------------
------------
</TABLE>
Capitalized overhead costs were approximately $164,000 in 1995. Depreciation
expense was approximately $727,000 in 1995.
3. GOODWILL AND WIRELESS CHANNEL RIGHTS
Goodwill consisted of the following (000s):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Costs of acquired businesses in excess of fair
market values allocated to specific assets.................................... $ 33,945
Less accumulated amortization................................................... (566)
------------
$ 33,379
------------
------------
</TABLE>
Wireless channel rights consisted of the following (000s):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Wireless channel rights......................................................... $ 30,000
Less accumulated amortization................................................... (500)
------------
$ 29,500
------------
------------
</TABLE>
4. DUE TO CAI WIRELESS SYSTEMS, INC.
The Due to CAI Wireless Systems, Inc. amount included in the balance sheet
represents a balance as the result of various transactions between the Company
and CAI. The $1,831,000 balance at December 31, 1995 is classified as a
long-term liability in the accompanying Combined balance sheet because it is not
expected to be repaid within the upcoming twelve months (see Note 8).
F-29
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. DUE TO CAI WIRELESS SYSTEMS, INC. (CONTINUED)
The Company utilizes various CAI personnel such as accounting staff and
certain officers as well as administrative functions including professional
services. For these services, the Company was charged $151,000 in 1995.
5. LEASES
The Company is the licensee of one of the Federal Communications Commission
("FCC") licensed channels available in the Cleveland area, and leases
twenty-four of the remaining thirty-two FCC licenses.
Generally, channel leases provide for monthly rentals based on subscriber
revenue, or the number of subscribers served by the channels being leased. These
amounts were between $0.025 to $0.04 per subscriber per channel per month.
Additionally, certain leases provide for minimum lease payments which do not
significantly increase the total channel license fees payable under the leases
at the present level of subscribers being served. Pursuant to FCC rules, leases
for channel usage cannot extend beyond ten years. Each lease generally provides
for renewal options, or for the parties to negotiate renewals in good faith.
A summary of channel lease terms at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
LEASE EXTENSION
CHANNELS LESSOR EXPIRATION TERMS
- ----------- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C> <C>
A1 Parma Board of Education January 2005 CAI 10-year option
A2-C4 ETAMC April 2002 Auto 5-year option
D1-D4 Rockne Educ. Telev. March 2005 CAI 10-year option
E1-E4 Lawrence Brandt August 2012 Unspecified
F1-F4 Krisar, Inc. August 1998 CAI 10-year option
H2 Via./Net Cos. December 1995 Auto 5-year option
</TABLE>
Expense incurred under channel lease agreements aggregated approximately
$57,000 in 1995. The Company leases its transmitter tower. This lease expires in
June 2005 and provides for monthly lease payments of $5,500.
All of the above leases are accounted for as operating leases.
The Company leases office space, automobiles, trucks, and office equipment.
The office space, trucks, and certain office equipment leases have also been
classified as operating leases. The leases covering the remaining office
equipment are classified as capital leases.
Plant and equipment includes the following capitalized values and
accumulated amortization for property under capital leases (000s):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Office and computer............................................................. $ 142
Less accumulated amortization................................................... (6)
------------
$ 136
------------
------------
</TABLE>
F-30
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
5. LEASES (CONTINUED)
The following is a schedule of the present value of future minimum capital
lease payments and the future minimum operating lease payments with initial or
remaining terms in excess of one year.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1996..................................................................... $ 64 $ 382
1997..................................................................... 63 336
1998..................................................................... 9 296
1999..................................................................... -- 296
2000..................................................................... -- 296
2001 and beyond.......................................................... -- 960
----- -----------
Total minimum lease payments............................................. 136 $ 2,566
-----------
-----------
Less amount representing interest........................................ (24)
-----
Present value of minimum lease payments.................................. $ 112
-----
-----
</TABLE>
Expense incurred under non-channel operating leases approximated $48,000 in
1995.
6. INCOME TAXES
The Company and its wholly-owned subsidiaries are included in the
consolidated federal tax return of CAI. The Company had no current state or
federal income tax expenses for the period from September 30, 1995 to December
31, 1995.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as calculated on a stand-alone
basis were as follows (000s):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1995
------------- ------------
<S> <C> <C>
Deferred tax liabilities:
Basis difference on property and equipment.................... $ 577 $ 527
Gain on transfer of wireless channel rights................... 11,519 11,335
------------- ------------
Total deferred tax liabilities.................................. 12,096 11,862
Deferred tax assets:
Net operating loss carryforwards.............................. 855 1,106
Other......................................................... 103 11
------------- ------------
Total deferred tax assets....................................... 958 1,117
------------- ------------
Net deferred tax liabilities.................................... $ 11,138 $ 10,745
------------- ------------
------------- ------------
</TABLE>
F-31
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
6. INCOME TAXES (CONTINUED)
The Company has available net operating loss carryforwards of approximately
$2,764,000 for tax reporting purposes to offset future taxable income, the
primary difference from financial reporting losses being the difference in the
basis of wireless channel rights and in depreciation methods for financial and
tax reporting purposes. The net operating loss carryforwards expire through
2010.
7. SYSTEM ACQUISITION
Effective September 30, 1995, CAI consummated the acquisition of 100% of the
outstanding common stock of ACS Enterprises, Inc. (ACS) for $232,000,000 of CAI
common stock and cash.
CAI allocated the purchase price, based upon estimated fair values of assets
and liabilities at the date of acquisition to each of the markets acquired in
the acquisition. The purchase price allocation to the Cleveland market was as
follows (000s):
<TABLE>
<S> <C>
Operating assets................................................................... $ 525
Plant and equipment................................................................ 12,024
Goodwill........................................................................... 33,945
Wireless channel rights............................................................ 30,000
Liabilities........................................................................ (14,971)
---------
Net assets acquired................................................................ $ 61,523
---------
---------
</TABLE>
Plant and equipment from the acquisition consist primarily of customer
acquisition costs (material, installation labor and overhead). These costs are
being depreciated over their estimated useful lives of two to seven years.
Goodwill and wireless channel rights acquired in the acquisition are being
amortized on a straight-line basis over fifteen years.
8. SUBSEQUENT EVENT
On February 23, 1996, CAI and Heartland contributed the assets and
liabilities of certain wireless subscription television systems to the Company
in for certain consideration. CAI's ownership of the Company, which operates the
subscriber television system in Cleveland, OH, was diluted from 100% to
approximately 54%. Additionally, CAI contributed the Charlotte, NC, Bakersfield,
CA and Stockton/ Modesto, CA systems for 5,421,166 shares of common stock of the
Company. Heartland contributed the Minneapolis, MN, Dayton, OH, San Antonio, TX,
Fort Worth, TX, Grand Rapids, MI, Kansas City (suburbs), MO, Dallas, TX, and
Salt Lake City, UT systems for $28.3 million in cash, $25 million in the form of
a short term note, $15 million in the form of a long term note and 3,578,834
shares of common stock of the Company.
In order to attract and retain highly qualified persons, the Company adopted
the 1996 CS Wireless Systems, Inc. Incentive Plan (the "Plan") to be effective
as of February 23, 1996, subject to shareholder approval within twelve months of
the effective date. The Board of Directors of the Company designated a committee
to administer the Plan. The Plan provides for the grant of incentive stock
options (qualifying
F-32
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY ACS OHIO, INC.)
AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
8. SUBSEQUENT EVENT (CONTINUED)
under Section 422 of the Internal Revenue Code), non-qualfied stock options,
stock appreciation rights, performance shares and restricted stock or any
combination of the foregoing, as the committee may determine. Terms and
conditions, including vesting provisions, exercise periods and forms of award,
are determined by the committee at the grant date. Shares available for the Plan
is limited to 752,688. The Plan will terminate on February 22, 2006. In March
1996, options were granted to four persons, aggregating 645,161 shares subject
to those options with a $9.40 per share exercise price. The options vest monthly
over 24 to 36 months and the exercise periods end on December 31, 2005 or
February 22, 2006.
Additionally, MMDS Holdings II, Inc., an affiliate of Bell Atlantic, and
NYNEX MMDS Holding Company, an affiliate of NYNEX, each received 500,000 shares
of common stock of the Company, for non-cash consideration.
Concurrent with the contributions of the wireless subscription television
systems and issuance of common stock to CAI, Heartland, MMDS Holdings II, Inc.
and NYNEX MMDS Holdings Company, the Company completed the issuance of 100,000
units consisting of $400,000,000 11 3/8% Senior Discount Notes due 2006 and
110,000 shares of common stock. The net proceeds of the issuance of the units
was approximately $221,000,000, net of discounts and expenses of approximately
$9,000,000. These notes contain covenants restricting the incurrence of
additional debt and limit the ability of the Company to pay dividends or redeem
capital stock. The Company cannot declare or pay dividends.
Net assets held for sale consist of an operating wireless cable system in
Bakersfield, California and wireless cable channel rights in Stockton/Modesto,
California, which the Company expects to sell by the end of 1996. For financial
reporting purposes, the net assets held for sale are recorded at the lower of
the carrying amount of fair value less cost to sell. In addition, the Company is
not depreciating or amortizing such net assets while they are held for sale.
As of March 31, 1996, the Company's registration statement had not yet been
declared effective by the Commission. Subsequent to June 24, 1996, the Company
will be required to pay additional interest on the outstanding Senior Notes. The
amount of additional interest will increase by an additional 0.50% per annum for
each subsequent 90-day period until such obligations are complied with, up to a
maximum amount of additional interest of 2.00% per annum.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CAI Wireless Systems, Inc.
We have audited the accompanying consolidated balance sheets of ACS Ohio,
Inc. and subsidiaries as of December 31, 1994 and September 29, 1995 and the
related consolidated statements of operations and accumulated deficit and cash
flows for the period from March 9, 1994 (date of inception) to December 31, 1994
and for the period from January 1, 1995 to September 29, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ACS Ohio, Inc. and subsidiaries at December 31, 1994 and September 29, 1995, and
the consolidated results of their operations and their cash flows for the period
from March 9, 1994 (date of inception) to December 31, 1994 and for the period
from January 1, 1995 to September 29, 1995, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 1, 1996
F-34
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 29,
1994 1995
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................ $ 710 $ 130
Accounts receivable,
less allowance for doubtful accounts of $113 and $9 in 1995 and 1994,
respectively.............................................................. 177 346
Other current assets............................................................ 56 49
------------ -------------
Total current assets................................................................ 943 525
Plant and equipment, net............................................................ 10,015 12,275
Channel acquisition costs, net...................................................... 1,299 1,203
Goodwill, net....................................................................... 7,484 7,092
------------ -------------
$ 19,741 $ 21,095
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of capital lease obligations................................. $ 81 $ 81
Accounts payable and accrued expenses........................................... 810 3,344
Customer deposits and billings received in advance.............................. 436 435
------------ -------------
Total current liabilities........................................................... 1,327 3,860
Capital lease obligations........................................................... 164 144
Due to ACS Enterprises, Inc......................................................... 2,226 3,591
Deferred income taxes............................................................... 649 --
Stockholder's equity:
Common stock--par value $1 per share, authorized and issued 1,000 shares............ 1 1
Additional paid-in capital.......................................................... 15,950 15,950
Accumulated deficit................................................................. (576) (2,451)
------------ -------------
Total stockholder's equity.......................................................... 15,375 13,500
------------ -------------
$ 19,741 $ 21,095
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-35
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 9, 1994 PERIOD FROM
(DATE OF JANUARY 1, 1995
INCEPTION) TO SEPTEMBER
TO DECEMBER 31, 29,
1994 1995
----------------- ---------------
<S> <C> <C>
Revenues:
Pay television revenues.................................................... $ 4,332 $ 6,170
Expenses:
Programming and license fees............................................... 1,239 2,107
Marketing.................................................................. 221 471
General and administrative................................................. 1,994 2,863
Depreciation and amortization.............................................. 1,571 3,020
------ -------
5,025 8,461
------ -------
(693) (2,291)
Interest expense, net........................................................ (62) (233)
------ -------
Loss before income taxes..................................................... (755) (2,524)
Benefit from income taxes.................................................... 179 649
------ -------
Net loss..................................................................... $ (576) $ (1,875)
Accumulated deficit:
Beginning of period........................................................ -- (576)
------ -------
End of period.............................................................. $ (576) $ (2,451)
------ -------
------ -------
Per share data:
Net loss per common share.................................................... $ (576) $ (1,875)
------ -------
------ -------
Weighted average common shares outstanding................................... 1,000 1,000
------ -------
------ -------
</TABLE>
See accompanying notes.
F-36
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 9, 1994 PERIOD FROM
(DATE OF JANUARY 1, 1995
INCEPTION) TO SEPTEMBER
TO DECEMBER 31, 29,
1994 1995
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net loss..................................................................... $ (576) $ (1,875)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Deferred income taxes.................................................... (179) (649)
Depreciation and amortization............................................ 1,571 3,020
Changes in assets and liabilities:
Accounts receivable.................................................... 104 (169)
Other operating assets................................................. 73 7
Accounts payable and accrued expenses.................................. 438 2,534
Other operating liabilities............................................ (184) (1)
------- -------
Net cash provided by operating activities.................................... 1,247 2,867
------- -------
Cash flows from investing activities
Capital expenditures......................................................... (2,608) (4,792)
Purchase of Channel rights................................................... (519) --
------- -------
Net cash used in investing activities........................................ (3,127) (4,792)
------- -------
Cash flows from financing activities
Payments of capital lease obligations........................................ (32) (20)
Advances from ACS Enterprises, Inc........................................... 2,226 1,365
------- -------
Net cash provided by financing activities.................................... 2,194 1,345
------- -------
Net (decrease) increase in cash.............................................. 314 (580)
Cash, beginning of period.................................................... 396 710
------- -------
Cash, end of period.......................................................... $ 710 $ 130
------- -------
------- -------
</TABLE>
See accompanying notes.
F-37
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
ACS Ohio, Inc. (the "Company") was formed on March 9, 1994 upon the purchase
of two related companies that together comprise the wireless cable system
serving the Cleveland, Ohio metropolitan area and is a wholly owned subsidiary
of ACS Enterprises, Inc. ("ACS"). ACS is a wholly owned subsidiary of CAI
Wireless Systems, Inc. (see Note 8). The consolidated financial statements
include the accounts of ACS Ohio, Inc. and its wholly owned subsidiaries,
MetroCable, Inc. ("MetroCable") and Metropolitan Satellite, Inc. ("Metro
Satellite"). All material intercompany balances and transactions within ACS
Ohio, Inc. have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those esimates.
REVENUE RECOGNITION
Subscriber revenue is recognized at the time payments are due. Customer
payments received in advance of the due date are classified as deferred income.
Bad debt expense was approximately $263,000 and $85,000 for the period from
January 1, 1995 to September 29, 1995 (1995) and for the period from March 9,
1994 to December 31, 1994 (1994), respectively.
PLANT AND EQUIPMENT
Plant and equipment are carried at historical cost if purchased or
constructed by the Company, or at allocated cost if acquired as part of a
business acquisition. Depreciation is calculated on the straight-line method for
financial and tax reporting purposes. Costs of maintenance and repairs are
charged to income as incurred; significant renewals and betterments are
capitalized. The Company capitalizes subcontractor and internal labor and
overhead incurred to construct and install its television reception and
transmission equipment.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Materials and supplies are
carried at the lower of cost, determined on the weighted average method (which
approximates the first-in, first-out method), or market.
GOODWILL AND CHANNEL ACQUISITION COSTS
Goodwill consists of costs of acquired businesses in excess of fair market
value allocated to specific assets. Goodwill is amortized on a straight-line
basis over its estimated useful life of fifteen years. Channel acquisition costs
are being amortized over ten years.
The carrying value of the goodwill and channel acquisition costs is reviewed
on an ongoing basis. If the review indicates that these assets are not
recoverable, as determined based on undiscounted future cash flows, the
Company's carrying value of these assets is reduced to its estimated fair value.
No such reduction was made in 1995 or 1994.
F-38
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
Loss per share is based on the average number of common shares outstanding
during the period.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" is
effective for fiscal years beginning after December 15, 1995. The Company will
adopt the standard, as required on January 1, 1996. Management believes that the
adoption will not have a material effect on the Company's financial position or
results of operations.
2. PLANT AND EQUIPMENT
Plant and equipment consisted of the following (000s):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 29, LIFE
CLASSIFICATION 1994 1995 (YEARS)
- ------------------------------------------------------ ------------ ------------- ---------
<S> <C> <C> <C>
Vehicles.............................................. $ 172 $ 185 3
Office and computer................................... 558 682 5
Transmission equipment................................ 748 846 10
Television and other equipment........................ 8,792 13,167 2 to 7
Materials and supplies................................ 839 727 2 to 10
------------ ------------- ---------
11,109 15,607
Less accumulated depreciation......................... (1,094) (3,332)
------------ ------------- ---------
$ 10,015 $ 12,275
------------ ------------- ---------
------------ ------------- ---------
</TABLE>
Capitalized overhead costs were approximately $266,000 and $447,000 in 1994
and 1995, respectively. Depreciation expense was approximately $1,063,000 and
$2,482,000 in 1994 and 1995.
3. GOODWILL AND CHANNEL ACQUISITION COSTS
Goodwill consisted of the following (000s):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 29,
1994 1995
------------- -------------
<S> <C> <C>
Costs of acquired businesses in excess of fair market values
allocated to specific assets.................................. $ 7,472 $ 7,472
Organization and other costs.................................... 408 411
------ ------
7,880 7,883
Less accumulated amortization................................... (396) (791)
------ ------
$ 7,484 $ 7,092
------ ------
------ ------
</TABLE>
F-39
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. GOODWILL AND CHANNEL ACQUISITION COSTS (CONTINUED)
Channel acquisition costs consisted of the following (000s):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 29,
1994 1995
------------- -------------
<S> <C> <C>
Licenses........................................................ $ 1,000 $ 1,000
Channel rights.................................................. 397 406
------ ------
1,397 1,406
Less accumulated amortization................................... (98) (203)
------ ------
$ 1,299 $ 1,203
------ ------
------ ------
</TABLE>
4. DUE TO ACS ENTERPRISES, INC.
The Due to ACS Enterprises, Inc. amount included in the balance sheet
represents a balance as the result of various transactions between the Company
and ACS. The balance is primarily the result of the Company's participation in
ACS' cash management system, wherein cash infusions needed to meet current
operating requirements and for capital expenditures accrue interest at rates
established by ACS, which approximates ACS' external borrowing costs. Interest
charged on this balance was approximately $51,000 and $212,000 in 1994 and 1995,
respectively. The balances at December 31, 1994 and September 29, 1995 of
$2,226,000 and $3,591,000 are classified as long-term liabilities in the
accompanying consolidated balance sheet because the balances are not expected to
be repaid within the upcoming twelve months (see Note 8).
The Company utilizes various ACS personnel such as accounting staff and
certain officers as well as administrative functions including professional
services. It is ACS' policy to charge these expenses and all other central
operating costs, first on the basis of direct usage when identifiable, with the
remainder allocated among ACS' subsidiaries based on the average of respective
percentages of revenues, payroll costs, and average assets. For these services,
the Company was charged $38,000 and $76,000 in 1994 and 1995, respectively.
5. LEASES
The Company is the licensee of one of the Federal Communications Commission
("FCC") licensed channels available in the Cleveland area, and leases
twenty-four of the remaining thirty-two FCC licenses.
Generally, channel leases provide for monthly rentals based on subscriber
revenue, or the number of subscribers served by the channels being leased. These
amounts were between $0.025 to $0.04 per subscriber per channel per month.
Additionally, certain leases provide for minimum lease payments which do not
significantly increase the total channel license fees payable under the leases
at the present level of subscribers being served. Pursuant to FCC rules, leases
for channel usage cannot extend beyond ten years. Each lease generally provides
for renewal options, or for the parties to negotiate renewals in good faith.
F-40
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LEASES (CONTINUED)
A summary of channel lease terms at September 29, 1995 is as follows:
<TABLE>
<CAPTION>
LEASE EXTENSION
CHANNELS LESSOR EXPIRATION TERMS
- ---------- ------------------------------------------ ------------------ ------------------------------------
<S> <C> <C> <C>
A1 Parma Board of Education January 2005 ACS 10-year option
A2--C4 ETAMC April 2002 Auto 5-year option
D1--D4 Rockne Educ. Telev. March 2005 ACS 10-year option
E1--E4 Lawrence Brandt August 2012 Unspecified
F1--F4 Krisar, Inc. August 1998 ACS 10-year option
H2 Via./Net Cos. December 1995 Auto 5-year option
</TABLE>
Expense incurred under channel lease agreements aggregated approximately
$153,000 and $85,000 in 1995 and 1994, respectively. The Company leases its
transmitter tower. This lease expires in June 2005, and provides for monthly
lease payments of $5,500.
All of the above leases are accounted for as operating leases.
The Company leases office space, automobiles, trucks, and office equipment.
The office space, and certain office equipment leases have also been classified
as operating leases. The leases covering trucks and the remaining office
equipment are classified as capital leases.
Plant and equipment includes the following capitalized values and
accumulated amortization for property under capital leases (000s):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 29,
1994 1995
--------------- ---------------
<S> <C> <C>
Office and computer............................................. $ 105 $ 159
Vehicles........................................................ 172 172
----- -----
277 331
Less accumulated amortization................................... (24) (82)
----- -----
$ 253 $ 249
----- -----
----- -----
</TABLE>
The following is a schedule of the present value of future minimum capital
lease payments and the future minimum operating lease payments with initial or
remaining terms in excess of one year.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1996..................................................................... $ 127 $ 316
1997..................................................................... 111 300
1998..................................................................... 22 296
1999..................................................................... -- 296
2000..................................................................... -- 296
2001 and beyond.......................................................... -- 1,033
----- -----------
Total minimum lease payments............................................. 260 $ 2,537
Less amount representing interest........................................ (35)
----- -----------
Present value of minimum lease payments.................................. $ 225
----- -----------
----- -----------
</TABLE>
F-41
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LEASES (CONTINUED)
Expense incurred under non-channel operating leases approximated $172,000
and $143,000 in 1994 and 1995, respectively.
6. INCOME TAXES
The Company and its wholly-owned subsidiaries are included in the
consolidated federal tax return of ACS. The Company had no current state or
federal income tax expenses for 1995 and 1994.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as calculated on a stand-alone
basis were as follows (000s):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 29,
1994 1995
--------------- ---------------
<S> <C> <C>
Deferred tax liabilities--
Basis difference on property and equipment...................... $ 726 $ 577
----- -----
Deferred tax assets:
Net operating loss carryforwards.............................. 60 855
Other......................................................... 17 103
----- -----
Total deferred tax assets....................................... 77 958
----- -----
Valuation allowance for deferred tax assets..................... -- (381)
----- -----
Net deferred tax liabilities.................................... $ 649 $ --
----- -----
----- -----
</TABLE>
The Company has available net operating loss carryforwards of approximately
$2,138,000 for tax reporting purposes to offset future taxable income, the
primary difference from financial reporting losses being the difference in
depreciation methods for financial and tax reporting purposes. The net operating
loss carryforwards expire in 2010.
7. SYSTEM ACQUISITION
On March 9, 1994, ACS purchased the two related companies that together
comprised the wireless cable system serving the Cleveland, Ohio metropolitan
area for a total of $16,000,000. ACS formed ACS Ohio, Inc. to purchase 100% of
MetroCable, an Ohio corporation, for approximately $8,600,000 cash, and 100% of
MetroSatellite, an Ohio corporation, for approximately $7,400,000 cash.
The above acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the results of these entities have been
consolidated with ACS since March 9, 1994.
F-42
<PAGE>
ACS OHIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SYSTEM ACQUISITION (CONTINUED)
The Company allocated the purchase price, based upon estimated fair values
of assets and liabilities at the date of acquisition, as follows (000s):
<TABLE>
<S> <C>
Operating assets................................................... $ 806
Plant and equipment................................................ 8,206
Goodwill........................................................... 7,472
Other intangibles.................................................. 1,287
Liabilities........................................................ (1,820)
---------
Net assets acquired................................................ $ 15,951
---------
---------
</TABLE>
Plant and equipment from the acquisition consist primarily of customer
acquisition costs (material, installation labor, and purchase price premium).
These costs are being depreciated over their estimated useful lives of two to
seven years.
Goodwill acquired in the acquisitions is being amortized on a straight-line
basis over fifteen years.
8. SUBSEQUENT EVENTS
Effective at the close of business on September 29, 1995, a definitive
merger agreement between ACS and CAI Wireless Systems, Inc. ("CAI") was
consummated wherein CAI acquired 100% of the outstanding common stock of ACS for
$232,000,000 of CAI common stock and cash.
On February 23, 1996, CAI and Heartland contributed the assets and
liabilities of certain wireless subscription television systems to CS Wireless
Systems, Inc. ("CS Wireless") in for certain consideration. CAI's ownership of
CS Wireless, which operates the subscriber television system in Cleveland, OH,
was diluted from 100% to approximately 54%. Additionally, CAI contributed the
Charlotte, NC, Bakersfield, CA and Stockton/Modesto, CA systems for 5,420,166
shares of common stock of the Company. Heartland contributed the Minneapolis,
MN, Dayton, OH, San Antonio, TX, Fort Worth, TX, Grand Rapids, MI, Kansas City
(suburbs), MO, Dallas, TX and Salt Lake City, UT systems for $28.3 million in
cash, $25 million in the form of a short term note, $15 million in the form of a
long term note and 3,578,834 shares of common stock of CS Wireless.
Additionally, MMDS Holdings II, Inc., an affiliate of Bell Atlantic, and
NYNEX MMDS Holding, an affiliate of NYNEX, each received 500,000 shares of
common stock of CS Wireless, for non-cash consideration.
Concurrent with the contributions of the wireless subscription television
systems and issuance of common stock to CAI, Heartland, MMDS Holdings II, Inc.
and NYNEX MMDS Holdings Company, CS Wireless completed the issuance of 100,000
units consisting of $400,000,000 11 3/8% Senior Discount Notes due 2006 and
110,000 shares of common stock. The net proceeds of the issuance of the units
was approximately $221,000,000, net of discounts and expenses of approximately
$9,000,000.
F-43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
METROCABLE, INC.
Cleveland, Ohio
We have audited the accompanying balance sheet of MetroCable, Inc. as of
February 28, 1994, and the related statements of operations and deficit,
shareholders' equity, and cash flows for the period from June 4, 1993 (date of
commencement of operations) to February 28, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of February
28, 1994 and the results of its operations and its cash flows for the period
from June 4, 1993 (date of commencement of operations) to February 28, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 8, in March 1994, a wholly-owned subsidiary of ACS
Enterprises, Inc. acquired 100% of the outstanding common stock of MetroCable,
Inc.
LEWANDOWSKI ZALICK & COMPANY
May 4, 1994
Cleveland, Ohio
F-44
<PAGE>
METROCABLE, INC.
BALANCE SHEET
FEBRUARY 28, 1994
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................ $ 127,081
Certificates of deposit......................................................... 50,000
Accounts receivable, trade...................................................... 164,563
Other current assets............................................................ 7,691
Installation materials.......................................................... 80,333
---------
TOTAL CURRENT ASSETS.................................................... 429,668
PROPERTY AND EQUIPMENT, NET..................................................... 856,808
OTHER ASSETS
Deferred charges, net of accumulated amortization of $1,688................... 39,645
---------
$1,326,121
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Shareholder notes............................................................. $ 800,000
Accrued liabilities
Interest.................................................................... 59,333
Programming costs........................................................... 38,670
Professional fees........................................................... 15,105
Property taxes.............................................................. 14,000
Workers' compensation....................................................... 12,750
Other....................................................................... 21,039
Accounts payable
Trade....................................................................... 47,654
Affiliate................................................................... 17,135
Customer deposits and deferred revenue.......................................... 178,085
---------
TOTAL CURRENT LIABILITIES............................................... 1,203,771
SHAREHOLDERS' EQUITY
Common stock, no par value, 750 shares authorized, 100 shares issued and
outstanding................................................................. 200,000
Accumulated deficit........................................................... (77,650)
---------
122,350
---------
$1,326,121
---------
---------
</TABLE>
See accompanying notes.
F-45
<PAGE>
METROCABLE, INC.
STATEMENT OF OPERATIONS AND DEFICIT
FOR THE PERIOD JUNE 4, 1993 (DATE OF COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 1994
<TABLE>
<S> <C>
REVENUES
Pay television revenues....................................................... $1,360,636
Rental of equipment, affiliate................................................ 75,858
Other......................................................................... 66,539
---------
1,503,033
EXPENSES
Programming and license fees.................................................. 512,897
Commissions................................................................... 41,117
Depreciation and amortization................................................. 67,787
Selling, general and administrative........................................... 900,756
---------
1,522,557
---------
OPERATING LOSS BEFORE OTHER INCOME (EXPENSE).............................. (19,524)
OTHER INCOME (EXPENSE)
Interest expense, including $59,333 to shareholders........................... (60,143)
Interest income............................................................... 2,017
---------
(58,126)
---------
NET LOSS AND ACCUMULATED DEFICIT AT END OF PERIOD......................... $ (77,650)
---------
---------
NET LOSS PER COMMON SHARE OUTSTANDING........................................... $ (777)
---------
---------
</TABLE>
See accompanying notes.
F-46
<PAGE>
METROCABLE, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JUNE 4, 1993 (DATE OF COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 1994
<TABLE>
<CAPTION>
COMMON ACCUMULATED SHAREHOLDERS'
STOCK DEFICIT EQUITY--NET
---------- ------------ -------------
<S> <C> <C> <C>
Issuance of common stock in exchange for
net assets acquired.................................................... $ 200,000 $ -- $ 200,000
Net loss for the period.................................................. -- (77,650) (77,650)
---------- ------------ -------------
Balances at February 28, 1994............................................ $ 200,000 $ (77,650) $ 122,350
---------- ------------ -------------
---------- ------------ -------------
</TABLE>
See accompanying notes.
F-47
<PAGE>
METROCABLE, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD JUNE 4, 1993 (DATE OF COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 1994
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................................... $ (77,650)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization................................................ 67,787
(Increase) decrease in assets................................................
Accounts receivable.......................................................... (81,745)
Other current assets......................................................... (7,691)
Installation materials....................................................... (14,806)
Increase (decrease) in liabilities
Accrued liabilities.......................................................... 160,897
Trade accounts payable....................................................... 47,654
Accounts payable--affiliate.................................................. 17,135
Customer deposits and deferred revenue....................................... 43,435
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 155,016
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................................... (170,932)
Proceeds from disposal of property and equipment............................... 44,500
Channel rights acquired........................................................ (9,581)
Cash acquired with the purchase of the assets of Metropolitan Cablevision,
Inc.......................................................................... 108,078
---------
NET CASH USED BY INVESTING ACTIVITIES...................................... (27,935)
---------
INCREASE IN CASH AND CASH AT END OF PERIOD................................. $ 127,081
---------
---------
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITY
On June 4, 1993, the Company acquired the net assets of Metropolitan
Cablevision, Inc. in exchange for $800,000 of shareholder notes and $200,000 of
common stock.
See accompanying notes.
F-48
<PAGE>
METROCABLE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JUNE 4, 1993 (DATE OF COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 1994
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
MetroCable, Inc. was incorporated in the State of Ohio in May 1993. After
the acquisition of the assets of Metropolitan Cablevision, Inc., the Company
began providing Multi-channel, Multipoint Distribution Services ("MMDS") to
private residences and multi-unit housing complexes, in the City of Cleveland,
Ohio and surrounding suburbs.
On June 4, 1993, MetroCable, Inc. ("MetroCable") acquired all of the assets
of Metropolitan Cablevision, Inc., from the shareholders of Metropolitan
Cablevision, Inc. for $1,000,000. The acquisition was financed through the
issuance of $800,000 of demand shareholder notes and $200,000 of common stock.
This transaction was accounted for as a reorganization of entities under common
control; accordingly, the consideration was allocated to the assets acquired
based on their respective historical values as of the acquisition date. Both
MetroCable and Metropolitan Cablevision, Inc. operate on March to February
fiscal years.
The net assets acquired were as follows:
<TABLE>
<S> <C>
Cash............................................................ $ 108,078
Certificate of deposit.......................................... 50,000
Accounts receivable............................................. 82,818
Installation materials.......................................... 65,527
Property and equipment.......................................... 796,475
Deferred charges................................................ 31,752
---------
Gross assets acquired........................................... 1,134,650
Liabilities assumed--customer deposits and deferred revenue..... (134,650)
---------
Net assets acquired............................................. $1,000,000
---------
---------
</TABLE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL INSTRUMENTS
Trade accounts receivable principally represent amounts due for services
from approximately 5,000 subscribers, and they are substantially secured by
service deposits held by the Company.
INVENTORIES
Inventories of installation materials are carried at the lower of cost,
determined on the weighted average method, which approximates the first-in,
first-out method, or market.
F-49
<PAGE>
METROCABLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JUNE 4, 1993 (DATE OF COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 1994
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at allocated cost and are depreciated on
the straight-line method over the useful lives of the assets as follows:
<TABLE>
<S> <C>
Reception and transmission facilities............................ 12.5 years
Installation hookups............................................. 5 years
Computerized equipment........................................... 5 years
Leasehold improvements and office equipment...................... 5 years
</TABLE>
Maintenance and repair costs are expensed as incurred; significant renewals
and betterments are capitalized. For disposals of property and equipment, the
gross carrying value and the related accumulated depreciation are removed from
the accounts and are included in determining gain or loss on such disposal.
Depreciation expense was $66,099 for the period from June 4, 1993 through
February 28, 1994.
DEFERRED CHARGES
Deferred charges consist of costs incurred in the acquisition of channel
rights. The deferred charges are amortized over 15 years (the life of the
channel rights leases), using the straight-line method. Amortization expense was
$1,688 for the period from June 4, 1993 through February 28, 1994.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax assets and liabilities on temporary differences
between the tax and financial statement bases for assets and liabilities,
measured at the current tax rates.
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all
investments purchased with original maturities of three months or less to be
cash equivalents.
NET LOSS FOR COMMON SHARE OUTSTANDING
The net loss per common share outstanding is based on the weighted average
number of common shares outstanding of 100 for the period from June 4, 1993 to
February 28, 1994.
NOTE 3--RELATED PARTY TRANSACTIONS
The Company has an operating lease for installation hookup equipment with an
affiliated company, Metropolitan Satellite Corp. Rental income was $75,858 for
the period from June 4, 1993 to February 28, 1994. The operating lease is a
month-to-month lease with variable fees based on subscriber levels. The Company
also shares various administrative costs with the affiliate which resulted in a
payable of $17,135 at February 28, 1994.
F-50
<PAGE>
METROCABLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JUNE 4, 1993 (DATE OF COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 1994
NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)
The $800,000 shareholders' loans, plus accrued interest at 10% per annum,
are due on demand. The shareholders' loans are collateralized by substantially
all assets of the Company. Interest expense on the shareholders' loans totalled
$59,333 for the period from June 4, 1993 to February 28, 1994. These notes were
repaid in full, together with accrued interest thereon, in March 1994 upon
acquisition of the Company by ACS Ohio, Inc. (see Note 8).
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at February 28, 1994:
<TABLE>
<CAPTION>
DESCRIPTION
- ----------------------------------------------------------------------------------
<S> <C>
Reception and transmission facilities............................................. $ 653,113
Installation hookups.............................................................. 191,454
Computerized equipment............................................................ 11,083
Leasehold improvements and office equipment....................................... 67,257
----------
922,907
Less accumulated depreciation..................................................... (66,099)
----------
Property and equipment, net....................................................... $ 856,808
----------
----------
</TABLE>
NOTE 5--INCOME TAXES
For the period from June 4, 1993 to February 28, 1994, the Company incurred
a net operating loss for tax return and financial reporting purposes. No tax
benefit from the net operating loss has been recognized in 1994 due to the
uncertainty of future utilization of the net operating loss carryforward.
At February 28, 1994, the Company had a net operating loss carryforward for
federal income tax purposes of approximately 75,000 which, if not used, will
expire in 2009.
F-51
<PAGE>
METROCABLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD JUNE 4, 1993 (DATE OF COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 1994
NOTE 6--COMMITMENTS AND CONTINGENCIES
The Company is a party to numerous leases for programming, broadcast
channels, towers, and vehicles. All leases will expire within five years;
however, many include automatic extensions. Future minimum annual rental
commitments for noncancelable operating leases with fixed lease payments are as
follows:
<TABLE>
<CAPTION>
CHANNELS TOWER VEHICLES TOTAL
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
1995.......................................... $ 66,000 $ 78,600 $ 12,133 $ 156,733
1996.......................................... 66,000 25,200 12,133 103,333
1997.......................................... 66,000 -- 3,861 69,861
1998.......................................... 66,000 -- -- 66,000
1999.......................................... 66,000 -- -- 66,000
---------- ---------- --------- ----------
$ 330,000 $ 103,800 $ 28,127 $ 461,927
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
In addition, the Company is a party to certain channel leases and
programming agreements which include variable fees based on subscriber levels.
Expense incurred under operating leases and programming agreements
approximated $583,500 for the period from June 4, 1993 to February 28, 1994.
As required by certain of these lease agreements, the Company has obtained a
letter of credit for $50,000 which expires March 2, 1994 and is secured by the
certificate of deposit of $50,000.
NOTE 7--CONCENTRATION OF CREDIT RISK
The Company's cash balances periodically exceed federally insured limits.
NOTE 8--SUBSEQUENT EVENT
On March 9, 1994, ACS Ohio, Inc., a wholly-owned subsidiary of ACS
Enterprises, Inc., acquired 100% of the outstanding common shares of MetroCable
for an aggregate purchase price of approximately $8,600,000 cash, including an
$861,111 contribution to capital, which was used to repay the $800,000
shareholder notes, together with accrued interest thereon, through March 9,
1994.
F-52
<PAGE>
NOTE 8--SUBSEQUENT EVENT (CONTINUED)
The following is condensed operating and cash flow information for the
period March 1 to March 8, 1994:
METROCABLE, INC.
CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 1 TO MARCH 8, 1994
<TABLE>
<S> <C> <C>
Revenues.................................................................. $ 43,978
Expenses:
Programming and license fees............................................ $ 14,148
Selling, general, and administrative.................................... 20,557
Depreciation and amortization........................................... 2,750
--------- ---------
Total expenses............................................................ 37,455
---------
Operating income.......................................................... 6,523
Interest expense.......................................................... (1,778)
---------
Net income................................................................ $ 4,745
---------
---------
</TABLE>
METROCABLE, INC.
CONDENSED STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 1 TO MARCH 8, 1994
<TABLE>
<S> <C> <C>
Cash Flows from Operating Activities:
Net income............................................................ $ 4,745
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization......................................... $ 2,750
Increase in operating assets.......................................... 28,815
Increase in operating liabilities..................................... (47,191)
--------- ---------
Total Adjustments....................................................... (15,626)
---------
Net Cash Used by Operating Activities................................... (10,881)
---------
Net decrease in cash.................................................... (10,881)
Cash at beginning of period............................................. 177,081
---------
Cash at end of period................................................... $ 166,200
---------
---------
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest................................................ $ --
---------
---------
</TABLE>
F-53
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
METROPOLITAN SATELLITE CORP.
Cleveland, Ohio
We have audited the accompanying balance sheets of Metropolitan Satellite
Corp. as of February 28, 1994, and the related statements of operations and
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of February
28, 1994 and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
As discussed in Note 13, the Company merged with a wholly-owned subsidiary
of ACS Enterprises, Inc. in March 1994.
LEWANDOWSKI ZALICK & COMPANY
May 4, 1994
Cleveland, Ohio
F-54
<PAGE>
METROPOLITAN SATELLITE CORP.
BALANCE SHEET
FEBRUARY 28, 1994
<TABLE>
<CAPTION>
1994
--------------
<S> <C>
ASSETS
Cash.............................................................................................. $ 611,699
Subscriber receivables............................................................................ 56,033
Other receivables................................................................................. 3,499
Prepaid expenses.................................................................................. 19,567
Advances to affiliated company.................................................................... 17,135
Reception and distribution facilities, less accumulated depreciation of $4,566,204................ 545,995
Equipment and fixtures, less accumulated depreciation of $184,478................................. 99,833
Installation materials............................................................................ 109,996
Purchased license agreements, less accumulated amortization of $1,241,085......................... 1,013,915
Miscellaneous..................................................................................... 10,748
--------------
$ 2,488,420
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
Demand note payable to bank..................................................................... $ 234,500
Subordinated notes payable to related party..................................................... 8,782,078
Other notes payable and installment obligations................................................. 300,000
Trade accounts payable.......................................................................... 156,218
Accrued liabilities
Interest...................................................................................... 3,581,759
Other......................................................................................... 99,741
Subscriber deposits and advance payments........................................................ 301,963
--------------
13,456,259
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common shares at stated value of $266.67 a share--500 shares authorized; 213.75 shares issued,
34.5 shares in treasury, and 179.25 shares outstanding........................................ 47,800
Additional paid-in capital...................................................................... 183,200
Deficit......................................................................................... (11,198,839)
--------------
(10,967,839)
--------------
$ 2,488,420
--------------
--------------
</TABLE>
See accompanying notes.
F-55
<PAGE>
METROPOLITAN SATELLITE CORP.
STATEMENT OF OPERATIONS AND DEFICIT
FOR THE YEAR
ENDED FEBRUARY 28, 1994
<TABLE>
<CAPTION>
1994
--------------
<S> <C>
OPERATING REVENUES
Basic channels.................................................................................. $ 2,016,747
Bulk............................................................................................ 342,085
Pay-TV.......................................................................................... 683,813
Installation.................................................................................... 73,130
Converter charges............................................................................... 204,922
Other........................................................................................... 62,472
Less refunds and service credits................................................................ (43,042)
--------------
3,340,127
OPERATING EXPENSES
Programming, including $100,381 to affiliated company........................................... 889,276
Selling, general and administrative............................................................. 1,516,293
Depreciation and amortization................................................................... 569,313
--------------
2,974,882
--------------
OPERATING INCOME BEFORE OTHER (INCOME) EXPENSE.............................................. 365,245
OTHER (INCOME) EXPENSE
Interest
Current.......................................................................................
Related party............................................................................... 394,084
Bank and other.............................................................................. 101,432
Deferred--related party....................................................................... 1,007,410
Other income.................................................................................... (1,577)
Gain on sale of fixed assets...................................................................... (505,566)
--------------
995,783
--------------
NET LOSS.................................................................................... (630,538)
DEFICIT AT BEGINNING OF PERIOD.................................................................... (10,568,301)
--------------
DEFICIT AT END OF PERIOD.................................................................... $ (11,198,839)
--------------
--------------
NET LOSS PER COMMON SHARE OUTSTANDING............................................................. $ (3,518)
--------------
--------------
</TABLE>
See accompanying notes.
F-56
<PAGE>
METROPOLITAN SATELLITE CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR
ENDED FEBRUARY 28, 1994
<TABLE>
<CAPTION>
1994
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................................................... $ (630,538)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................................ 569,313
Deferred interest expense.................................................................... 1,007,410
Gain on disposal of fixed assets............................................................. (505,566)
(Increase) decrease in assets:
Subscriber and other receivables............................................................. 84,523
Prepaid expenses and miscellaneous........................................................... 14,718
Advances to affiliated company............................................................... 25,649
Increase (decrease) in liabilities:
Trade accounts payable....................................................................... 134,025
Accrued liabilities
Interest................................................................................... 431,385
Other...................................................................................... (11,846)
Subscriber deposits and advance payments..................................................... (80,083)
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................................ 1,038,990
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................................................. (68,882)
Proceeds from disposal of fixed assets........................................................... 560,223
-------------
NET CASH PROVIDED BY INVESTING ACTIVITIES................................................ 491,341
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of Demand note payable to bank.......................................................... (1,643,000)
Other notes payable.............................................................................. --
-------------
NET CASH USED BY FINANCING ACTIVITIES.................................................... (1,643,000)
-------------
(DECREASE) IN CASH....................................................................... (112,669)
CASH AT BEGINNING OF YEAR.......................................................................... 724,368
-------------
CASH AT END OF YEAR...................................................................... $ 611,699
-------------
-------------
</TABLE>
See accompanying notes.
F-57
<PAGE>
METROPOLITAN SATELLITE CORP.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR
ENDED FEBRUARY 28, 1994
NOTE 1--ORGANIZATION AND OPERATIONS
Metropolitan Satellite Corp. was incorporated in the State of Ohio in
September 1981. The Company provides television service using various
distribution methods to multi-unit housing complexes, primarily in Northeastern
Ohio.
The Company shares facilities and leases converters from an affiliated
company, MetroCable, Inc. and its predecessor, Metropolitan Cablevision, Inc.
Management believes that the allocation of expenses between companies is
reasonable and is based upon actual expenses incurred.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY
Property is stated at cost. Maintenance and repair costs are charged to
expense in the year incurred. Depreciation is computed using the straight-line
method over estimated useful lives as follows:
<TABLE>
<S> <C>
Reception and distribution facilities............................ 5-10 years
Equipment and fixtures........................................... 5 years
</TABLE>
Reception and distribution facilities include in-wall wiring installed by
and used by the Company at certain housing complexes. The license agreements
state that the owner of these housing complexes is the owner of this wiring and
will have the right to use the in-wall wiring after termination of the license
agreement.
Depreciation expense was $455,498 for the year ended February 28, 1994.
PURCHASED LICENSE AGREEMENT
Purchase license agreements are recorded at cost and are being amortized
over the lives of the license agreements of 18 to 20 years.
Amortization expense was $112,740 for the year ended February 28, 1994.
STATEMENT OF CASH FLOWS
Interest paid was $64,131 for the year ended February 28, 1994.
INCOME TAXES
Income taxes were provided under the provisions of Accounting Principles
Board Opinion No. 11, "Accounting for Income Taxes" in 1993. Effective for the
fiscal year ended February 28, 1994, the Company has adopted the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes." Adoption of SFAS 109 has no effect on the financial statements,
due to the uncertainty of realizing the benefits of the net operating loss
carryforward.
NET LOSS PER COMMON SHARE OUTSTANDING
The net loss per common share outstanding is based on the weighted number of
common shares outstanding of 179.25 for the year ended February 28, 1994.
F-58
<PAGE>
METROPOLITAN SATELLITE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR
ENDED FEBRUARY 28, 1994
NOTE 3--DEMAND NOTE PAYABLE TO BANK
The demand note payable to bank is a term loan that was converted to a
demand note in 1988. It provides for interest payable monthly at the bank's
prime rate (6% at February 28, 1994) plus 2.25%. The note is collateralized by a
first priority security interest in all tangible and intangible personal
property and by all other assets of the Company and the rights under a license
agreement owned by the affiliated company. Owners of the common shares of the
Company have also assigned their shares as collateral. The note and accrued
interest was paid off in connection with the merger of the Company in March 1994
with a wholly-owned subsidiary of ACS Enterprises, Inc. (Note (13).
NOTE 4--SUBORDINATED NOTES PAYABLE
The Subordinated notes payable are due to the majority shareholders of the
Company and consist of the following at February 28:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Subordinated notes.............................................................. $ 2,850,000
Subordinated Demand notes....................................................... 425,000
Deferred Interest notes......................................................... 5,257,078
Variable Interest notes......................................................... 250,000
------------
TOTAL..................................................................... $ 8,782,078
------------
------------
</TABLE>
Subordinated notes with a balance of $2,400,000 were due in January 1994 and
provide for interest at 17.5% of which 12% is payable monthly and 5.5% is added
to the principal balance of the Deferred Interest notes. Other Subordinated
notes with a balance of $450,000 provide for interest at 16.625%. This interest
is added to the principal balance of the Deferred Interest notes.
Subordinated Demand notes with a balance of $325,000 provide for interest at
14%, payable quarterly. Subordinated Demand notes with a balance of $100,000
provide for interest at 16.5%.
The Deferred Interest notes were due in January 1994. Interest at 17.5% is
also added quarterly to the outstanding principal balance of these notes.
The Variable Interest notes were due in January 1994 and provide for
interest at 17.375%, payable quarterly.
All subordinated notes are collateralized by a security interest in
substantially all assets of the Company, subordinated to the demand note payable
to bank (Note 3) had the note payable to a former shareholder (Note 5).
As further discussed at Note 13, the shareholders forgave $5,607,716 of
notes payable and accrued interest as a contribution to capital in March 1994.
The remainder of the notes payable and accrued interest was repaid in March
1994, in conjunction with the merger with a wholly-owned subsidiary of ACS
Enterprises, Inc.
F-59
<PAGE>
METROPOLITAN SATELLITE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR
ENDED FEBRUARY 28, 1994
NOTE 5--OTHER NOTES PAYABLE AND INSTALLMENT OBLIGATIONS
Other notes payable and installment obligations consists of a note payable
to a former shareholder with a balance of $300,000 which was issued in
conjunction with the purchase of 30 shares of the Company's common stock. The
note provides for interest at 10%, compounded annually. The note is
collateralized by substantially all assets of the Company, subordinated to the
demand note payable to bank (Note 3).
The note and accrued interest are due in October 1995; however, the note,
together with accrued interest, totalling $415,163 were repaid in conjunction
with the merger of the Company in March 1994 with a wholly-owned subsidiary of
ACS Enterprises, Inc.
NOTE 6--LICENSE AGREEMENTS
The Company has license agreements covering 27 multi-unit housing complexes.
Each license agreement requires a royalty of 5% of net revenues, as defined, to
be paid to the owner of the complex. The royalty can be increased if certain
cash flow measurements are attained related to the operating results of the
individual complex. The owners of 10 of the complexes have provisions in their
agreements that in the event of a sale of the Company, they will receive 15% of
the sale price attributed to the complex. The merger of the Company with a
wholly-owned subsidiary of ACS Enterprises, Inc. in March 1994 requires that
agreement be reached with these complex owners within a year of closing of the
merger. As of May 4, 1994, five owners have waived their right to equity
participation and will continue to receive royalty payments. Three owners
received a settlement of equity participation in March 1994 totalling $20,380
and will no longer receive royalty payments. Agreement has not yet been reached
with the remaining two complex owners. The terms of each license agreement is 15
years from the date the service commences. Royalty expense under these license
agreements was $44,269 for the year ended February 28 1994.
NOTE 7--INCOME TAXES
At February 28, 1994, the Company had tax net operating losses of
$11,500,000 and investment tax credits for $300,000 available as carryforwards
to reduce future taxable income and tax liabilities. These carryforwards expire
in varying accounts through the year 2005.
NOTE 8--LEASE AGREEMENTS
The Company leases its office facility for $4,800 per month under a lease
agreement that is accounted for as an operating lease. The lease commenced in
December 1990 and expires in December 1995. A portion of the cost of this lease
is charged to the affiliated company.
F-60
<PAGE>
METROPOLITAN SATELLITE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR
ENDED FEBRUARY 28, 1994
NOTE 8--LEASE AGREEMENTS (CONTINUED)
Future annual minimum required rental payments for the office lease and
other property leased under operating lease agreements are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING IN: AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1995.............................................................................. $ 111,400
1996.............................................................................. 79,300
1997.............................................................................. 9,700
1998.............................................................................. 400
----------
TOTAL........................................................................... $ 200,800
----------
----------
</TABLE>
Rent expense, net of the portion ($28,000 for the year ended February 28,
1994) charged to the affiliated company, was $66,000 for the year ended February
28, 1994.
NOTE 9--RELATED PARTY TRANSACTIONS
The Company paid or accrued expenses of $100,381 for the year ended February
28, 1994, to the affiliated company for converter rentals. The lease is a
month-to-month lease with fees based on subscriber levels.
NOTE 10--CONCENTRATION OF CREDIT RISK
The Company's cash balances periodically exceed federally insured limits.
NOTE 11--LITIGATION SETTLEMENT
In November 1993, the Company paid $150,000 to a company in settlement of
litigation brought against the Company in November 1993 by a potential buyer as
a result of a failed attempt to purchase the Company in October 1993. This
expense was recognized in fiscal 1994.
NOTE 12--SALE OF FIXED ASSETS
In March 1993, the Company sold a reception and distribution facility and
related equipment to an unrelated third party in exchange for cash of $560,223.
The gain on sale was $505,566.
NOTE 13--SUBSEQUENT EVENT
On March 9, 1994, ACS Cleveland, Inc., a Delaware Corporation and a
wholly-owned subsidiary of ACS Ohio, Inc., merged with and into Metropolitan
Satellite Corp. As a result of the merger, the shareholders of Metropolitan
Satellite Corp. received an agreement of approximately $7,400,000 cash,
primarily as repayment of the balance due on subordinated notes and accrued
interest, and ACS Ohio, Inc. became the sole shareholder of Metropolitan
Satellite Corp. ACS Ohio, Inc. is a wholly-owned subsidiary of ACS Enterprise,
Inc.
Also, the shareholders of the Company forgave $5,607,716 of balances due on
subordinated notes payable and accrued interest thereon, in conjunction with
this transaction.
F-61
<PAGE>
NOTE 13--SUBSEQUENT EVENT (CONTINUED)
The following is condensed operating and cash flow information for the
period March 1 to March 8, 1994:
METROPOLITAN SATELLITE CORP.
CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 1 TO MARCH 8, 1994
<TABLE>
<S> <C> <C>
Revenues................................................................. $ 72,054
Expenses:
Programming and license fees........................................... $ 19,678
Selling, general, and administrative................................... 21,538
Depreciation and amortization.......................................... 7,452
--------- ---------
Total expenses........................................................... 48,668
---------
Operating income......................................................... 23,386
Interest expense......................................................... (37,192)
---------
Net loss................................................................. $ (13,806)
---------
---------
</TABLE>
METROPOLITAN SATELLITE CORP.
CONDENSED STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 1 TO MARCH 8, 1994
<TABLE>
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................................. $ (13,806)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization........................................ $ 7,452
Increase in operating assets......................................... (78,196)
Increase in operating liabilities.................................... 69,026
---------
---------
Total Adjustments...................................................... (2,018)
---------
Net Cash Used by Operating Activities.................................. (15,824)
Cash Flows from Investing Activities:
Deferred charges related to merger with ACS Enterprises, Inc......... (276,660)
---------
Net decrease in cash................................................... (292,484)
Cash at beginning of period............................................ 611,699
---------
Cash at end of period.................................................. $ 319,215
---------
---------
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest............................................... $ --
---------
---------
Supplemental Disclosure of Non-Cash Financing Activity:
Prior to the sale of assets to ACS Enterprises, Inc., TA Associates,
the subordinated lender, forgave debt totaling $5,607,716 as a
contribution to capital.
</TABLE>
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CS Wireless Systems, Inc.:
Under the date of March 21, 1997, we reported on the consolidated balance sheet
of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended, which are included in the Company's annual report
on Form 10-K. In connection with our audit of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
as listed in the index at item 14(a)2. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audit.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
March 21, 1997
S-1
<PAGE>
Schedule II
-----------
CS WIRELESS SYSTEMS, INC.
Valuation and Qualifying Accounts
(In thousands)
Additions
---------------------
Balance at Charged to Balance at
beginning costs and Charged to end of
Description of period expenses other Writeoffs period
----------- --------- --------- ---------- --------- ---------
Year ended December 31,
1996:
Allowance for
doubtful accounts $138 971 - (691) 418
---- --- --- ---- ---
---- --- --- ---- ---
S-2
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 - Amended and Restated Certificate of Incorporation of the
Company.**
3.2 - Bylaws of the Company.**
4.1 - Indenture dated as of February 15, 1996 between the Company and
Fleet National Bank of Connecticut (including the form of 11 3/8%
Senior Discount Notes and 11 3/8% Series B Senior Discount Notes
due 2006 as Exhibit A and Exhibit B, respectively, thereto).**
10.1 - Participation Agreement dated as of December 12, 1995 among the
Company, CAI and Heartland.***
10.2 - Amendment No. 1 to Participation Agreement dated as of February
22, 1996 among the Company, CAI and Heartland.****
10.3 - Employment Agreement, dated as of February 22, 1996, as amended
between the Company and Alan Sonnenberg.**
10.4 - Employment Agreement dated as of February 22, 1996 between the
Company and Lowell Hussey.**
10.5 - Employment Agreement dated as of February 22, 1996 between the
Company and Thomas W. Dixon.**
10.6 - Amended and Restated Stock Option Agreement dated as of March 19,
1996 between the Company and Alan Sonnenberg.**
10.7 - Stock Option Agreement dated as of March 19, 1996 between the
Company and Lowell Hussey.**
10.8 - Stock Option Agreement dated as of March 19, 1996 between the
Company and Thomas W. Dixon.**
10.9 - Stock Option Agreement dated as of March 19, 1996 between the
Company and John R. Bailey.**
10.10 - Incentive Stock Plan.**
10.11 - Common Share Registration Rights Agreement dated as of
February 15, 1996 between the Company and the Initial
Purchasers.**
10.12 - Form of Registration Rights Agreement dated as of February
23, 1996 among the Company, MMDS Holdings II, Inc. and NYNEX
MMDS Holding Company.**
10.13 - Stockholders' Agreement dated as of February 23, 1996 among
the Company, CAI and Heartland.**
10.14 - Market Protection Agreement dated as of February 23, 1996
between the Company and Heartland.**
10.15 - Promissory Note of the Company in the principal amount of
$15,000,000 to the order of Heartland.**
10.16 - Administrative Service Agreement dated as of February 23,
1996 between the Company and Heartland.**
10.17 - Asset Exchange Agreement dated as of November 6, 1996
between CS Wireless Systems, Inc., People's Choice TV Corp.
and People's Choice TV of Kansas City, Inc.*
21 - Subsidiaries of the Company.*
27 - Financial Data Schedule.+
+ Filed herewith.
* Incorporated by reference to Item 16 of the Company's Registration
Statement on Form S-1, File No. 333-20295.
** Incorporated by reference to Item 16 of the Company's Registration
Statement on Form S-1, File No. 333-3288.
<PAGE>
*** Incorporated by reference Exhibit 2.1 to the Current Report on Form 8-K
dated December 12, 1995 (0-22888) of CAI Wireless Systems, Inc. ("CAI").
**** Incorporated by reference Exhibit 2.1 to the Current Report on Form 8-K
dated March 8, 1996 (0-22888) of CAI.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 113,072
<SECURITIES> 0
<RECEIVABLES> 1,079
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 116,350
<PP&E> 52,800
<DEPRECIATION> 9,845
<TOTAL-ASSETS> 414,237
<CURRENT-LIABILITIES> 11,538
<BONDS> 272,126
0
0
<COMMON> 10
<OTHER-SE> 124,824
<TOTAL-LIABILITY-AND-EQUITY> 414,237
<SALES> 22,738
<TOTAL-REVENUES> 22,738
<CGS> 0
<TOTAL-COSTS> 47,537
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,959
<INCOME-PRETAX> (43,158)
<INCOME-TAX> (14,631)
<INCOME-CONTINUING> (28,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,527)
<EPS-PRIMARY> (3.06)
<EPS-DILUTED> (3.06)
</TABLE>
