<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1997
REGISTRATION NO. 333-20295
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CS WIRELESS SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4841 23-2751747
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
200 CHISHOLM PLACE
SUITE 202
PLANO, TEXAS 75075
(972) 509-2634
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
------------------------------
JEFFREY A. KUPP
CHIEF FINANCIAL OFFICER
200 CHISHOLM PLACE
SUITE 202
PLANO, TEXAS 75075
(972) 509-2634
(Name, address, including zip code and telephone number,
including area code of agent for service)
------------------------------
COPY TO:
M. LOUISE TURILLI, ESQ.
DAY, BERRY & HOWARD
CITYPLACE I
HARTFORD, CONNECTICUT 06103-0100
(860) 275-0178
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CS WIRELESS SYSTEMS, INC.
FORM S-1
REGISTRATION STATEMENT
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-1 ITEM CAPTION OR LOCATION
NUMBER AND CAPTION IN PROSPECTUS
------------------------------------------------------ ------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus........................ Facing Page; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Inside Front Cover Page of Prospectus; Available
Information; Outside Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges............................. Prospectus Summary; Risk Factors; Selected Historical
Financial Data
4. Use of Proceeds....................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price....................... Not Applicable
6. Dilution.............................................. Not Applicable
7. Selling Security Holders.............................. Not Applicable
8. Plan of Distribution.................................. Outside Front Cover Page of Prospectus; Plan of
Distribution; The Exchange Offer
9. Description of Securities to be Registered............ Outside Front Cover Page of Prospectus; Description of
the Notes
10. Interests of Named Experts and Counsel................ Legal Matters
11. Information with Respect to the Registrant............ Prospectus Summary; Risk Factors; The Contributions;
Capitalization; Selected Historical Financial Data;
Summary Pro Forma Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management; Stock
Ownership; Description of the Notes; Description of
Capital Stock; Registration Rights; Certain
Relationships and Related Transactions; Selection of
Accountants; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liability.......................... Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION DATED JANUARY 29, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY THEM BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF, THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
PRELIMINARY
PROSPECTUS
OFFER FOR ALL OUTSTANDING
11 3/8% SENIOR DISCOUNT NOTES DUE 2006
IN EXCHANGE FOR
11 3/8% SERIES B SENIOR DISCOUNT NOTES DUE 2006
EACH ISSUED BY
CS WIRELESS SYSTEMS, INC.
--------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1997,
UNLESS EXTENDED.
-----------------
CS Wireless Systems, Inc., a Delaware corporation (the "Company" or "CS
Wireless"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange an aggregate principal
amount at maturity of up to $13,558,000 of its 11 3/8% Series B Senior Discount
Notes due 2006 (the "New Notes") for a like principal amount of its issued and
outstanding 11 3/8% Senior Discount Notes due 2006 (the "Old Notes" and together
with the New Notes, the "Notes"). The Company will not receive any proceeds from
the Exchange Offer and will pay all the expenses incident to the Exchange Offer.
The New Notes will be issued under, and entitled to the benefits of, the
Indenture (as defined) governing the Old 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. The Company has previously
completed an exchange offer of Old Notes for New Notes in satisfaction of
certain of the Company's obligations contained in a Notes Registration Rights
Agreement dated as of February 15, 1996 (the "Notes Registration Rights
Agreement"), which exchange offer expired on December 9, 1996 (the "Original
Exchange Offer"). As an accommodation to, and at the sole cost and expense of,
certain holders of Old Notes who did not tender their Old Notes in the Original
Exchange Offer, the Company has agreed to effect the Exchange Offer for the
benefit of such holders of Old Notes.
The Notes will mature on March 1, 2006. Cash interest on the Notes will
neither accrue nor be payable prior to March 1, 2001. Commencing September 1,
2001, cash interest will be payable on the Notes semi-annually in arrears on
each March 1 and September 1 at the rate of 11 3/8% per annum. The Notes will be
redeemable at the option of the Company, in whole or in part, at any time on and
after March 1, 2001 at the redemption prices specified herein, plus accrued and
unpaid interest to the date of redemption. In addition, the Company may redeem
at its option at any time prior to March 1, 1999 up to 35% of the aggregate
outstanding principal amount of the Notes at 111% of the Accreted Value (as
defined) thereof on the date of redemption, with the net proceeds of one or more
public offerings of its Common Stock (as defined) or from the issuance or sale
of its Common Stock to a Strategic Equity Investor (as defined). In the event of
a Change of Control (as defined), each holder will have the option to require
the Company to repurchase such holder's Notes at 101% of the Accreted Value
thereof on the date of repurchase (if prior to March 1, 2001) or 101% of the
principal amount thereof (if on or after March 1, 2001) plus accrued and unpaid
interest to the repurchase date. In addition, the Company will be obligated to
make an offer to repurchase the Notes for cash at a price equal to 100% of the
Accreted Value on the date of repurchase (if prior to March 1, 2001) or 100% of
the principal amount thereof (if on or after March 1, 2001), plus accrued and
unpaid interest, if any, thereon to the date of repurchase with the net cash
proceeds of certain asset sales.
The Notes rank senior in right of payment to all existing and future
subordinated Indebtedness (as defined) of the Company and pari passu in right of
payment with all other senior Indebtedness of the Company. The Notes are
effectively subordinated to all secured Indebtedness of the Company to the
extent of the value of the assets securing such Indebtedness and are effectively
subordinated to all Indebtedness and other liabilities (including trade
payables) of subsidiaries of the Company. As of September 30, 1996, the Company
had $268.8 million of Indebtedness outstanding, of which approximately $327,000
was senior and $23.7 million was junior to the Notes. Such amounts include all
subsidiary and secured Indebtedness as of that date. See "The Contributions."
-------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY
HOLDERS OF OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Prospectus is , 1997.
<PAGE>
Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date (as defined). In the event the Company
terminates the Exchange Offer and does not accept for exchange any Old Notes,
the Company will promptly return the Old Notes to the Holders thereof. See "The
Exchange Offer."
The Old Notes were sold to Smith Barney Inc., BT Securities Corporation and
Gerard Klauer Mattison & Co., LLC (collectively, the "Initial Purchasers") in
the Unit Offering (as defined), in a transaction not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the
exemption provided in Section 4(2) of the Securities Act. The Initial Purchasers
subsequently placed the Old Notes with "qualified institutional buyers," as
defined in Rule 144A under the Securities Act and to a limited number of other
institutional "accredited investors," as defined in Rule 501(a)(1), (2), (3) and
(7) of Regulation D under the Securities Act. Accordingly, the Old Notes may not
be reoffered, resold or otherwise transferred in the United States unless so
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. The Company completed the Original Exchange
Offer on December 9, 1996, in satisfaction of certain of its obligations under
the Notes Registration Rights Agreement. As an accommodation to, and at the sole
cost and expense of, certain holders of Old Notes who did not tender such Old
Notes in the Original Exchange Offer, the Company has agreed to effect the
Exchange Offer for the benefit of such holders of Old Notes.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") issued to other issuers in similar contexts, New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by holders thereof (other
than any such holder which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
There has been no public market for the Old Notes. The Company has not
listed, and does not intend to list, the New Notes on any securities exchange or
to seek approval for quotation through any automated quotation system. An active
market for the New Notes has not developed. See "Risk Factors--Absence of a
Public Market." Moreover, to the extent that Old Notes are tendered and accepted
in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes could be adversely affected. If a market for the New Notes
should develop, the New Notes could trade at a discount from their Accreted
Value. There can be no assurance that an active public market for the New Notes
will develop.
Holders whose Old Notes are not tendered and accepted in the Exchange Offer
will continue to hold such Old Notes and will be entitled to all the rights and
preferences, and will be subject to the limitations applicable thereto under the
Indenture (as herein defined) and, with respect to transfer, under the
Securities Act. See "Risk Factors--Consequences of Failure to Exchange."
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act for the registration
of the New Notes offered hereby. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement, certain portions of which are omitted from the
Prospectus as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and financial statements and notes filed as a part thereof. Statements
made in this Prospectus concerning the contents of any documents referred to
herein are not necessarily complete. With respect to each such document filed
with the Commission as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the periodic reporting and certain other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company has agreed that, whether or not it is required
to do so by the rules and regulations of the Commission, for so long as any of
the Old Notes or the New Notes as applicable, remain outstanding, it will
furnish to the holders of the Old Notes or the New Notes, as applicable, and
file with the Commission (unless the Commission will not accept such a filing)
(i) all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports. In addition, for so long as any of the Old Notes remain outstanding,
the Company has agreed to make available to any prospective purchaser of the Old
Notes or beneficial owner of the Old Notes, in connection with any sale thereof,
the information required by Rule 144A(d)(4) under the Securities Act.
The Registration Statement and the exhibits and schedules thereto, as well
as such reports and other information filed by the Company with the Commission,
may be inspected and copied, at prescribed rates, at the public reference
facilities of the Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the Commission's regional offices at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material also can be obtained by mail from the public reference facilities
of the Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a Website that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. The address of such site is
(http://www.sec.gov).
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Jeffrey A. Kupp, Chief Financial Officer, at the
Company's principal executive offices at 200 Chisholm Place, Suite 202, Plano,
Texas 75075 or by telephone at (972) 509-2634.
3
<PAGE>
(This page has been left blank intentionally.)
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
CS Wireless Systems, Inc. (the "Company" or "CS Wireless") 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 11 markets
encompass on a pro forma basis approximately 7.4 million television households,
approximately 6.0 million of which are LOS households, as estimated by the
Company. As of December 31, 1996 the Company provided service to approximately
65,553 subscribers. See "Operating and Planned Markets" below. The Company is a
majority-owned subsidiary of CAI Wireless Systems, Inc. ("CAI"), the largest
developer, owner and operator of wireless cable television systems in the United
States in terms of LOS households and the first wireless cable operator to enter
into a strategic arrangement with Regional Bell Operating Companies ("RBOCs")
through its strategic business relationship with affiliates of Bell Atlantic
Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX"). The Company is
also affiliated with Heartland Wireless Communications, Inc. ("Heartland"), a
leading developer, owner and operator of wireless cable systems in small to
mid-size markets. See "--Company Formation."
BUSINESS STRATEGY
The Company's objective is to become a leading regional provider of
subscription television services. The Company expects to achieve its goal
through: (i) the deployment of digital wireless cable equipment in most of its
markets; (ii) the acquisition and/or swapping of wireless cable assets or
systems to increase the Company's regional concentration of markets; (iii) the
aggressive pursuit of strategic partners; and (iv) the rapid penetration of its
markets.
(i) DEPLOY DIGITAL WIRELESS CABLE EQUIPMENT. The Company expects that
digital wireless cable equipment will become commercially available in
sufficient production in 1997. Relative to this occurring, the Company intends
to begin the build out and conversion of some of its markets using digital
technology in 1997. Digital technology, capable of delivering in excess of 100
channels, will allow CS Wireless to offer more programming choices than almost
all of its hard-wire cable competitors in its markets. An upgrade to digital
technology for a wireless cable system is expected to be less expensive and
faster than that for hard-wire cable systems because new equipment need only be
installed at the subscriber site and at the head-end instead of throughout the
cable plant. The Company believes that cable subscribers are most sensitive to
programming, price, service and reliability and that digital technology will
enable the Company to offer its subscribers a service that is comparable or
superior to hard-wire cable in each of these respects. The Company's value
pricing strategy is to offer more programming than its hard-wire cable
competitors at a price level comparable to that of its hard-wire cable
competitors' expanded basic service. 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, high channel capacity may enable the Company
to use its channels for other uses, such as interactive programming, as these
services and technologies become available. CS Wireless will explore other
delivery technologies that can enhance its video services to its subscribers.
(ii) INCREASE REGIONAL CONCENTRATION. An important part of the Company's
growth strategy is to expand its markets and subscriber base through the
acquisition of wireless cable systems and channel rights in targeted markets
primarily throughout the midwest and southwest regions of the United States.
Through selected acquisitions, divestitures, asset swaps and joint ventures, the
Company will seek to increase its regional concentration of wireless cable
television systems in order to realize economies of scale and operating
efficiencies and to increase its attractiveness to strategic partners.
Consistent with this strategy,
5
<PAGE>
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 not
consistent 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.
(iii) AGGRESSIVELY PURSUE STRATEGIC RELATIONSHIPS. The Company believes
that its strategy of increasing regional concentration of wireless cable
television systems and channel rights will enhance the Company's ability to
attract potential joint venture opportunities with large strategic partners,
including RBOCs, long distance telephone companies and other large
telecommunications conglomerates. The Company also believes that such
relationships will enable it to benefit from such partners' capital,
infrastructure and brand identity, thereby increasing the Company's ability to
penetrate its markets.
(iv) RAPIDLY PENETRATE MARKETS. The Company's operating strategy focuses
on rapidly penetrating its markets through value pricing, competitive
programming offerings, commitment to digital and other technologies, responsive
customer service, signal quality and reliability, and targeted marketing. This
operating strategy is designed to attract and retain subscribers, enabling the
Company to compete effectively with hard-wire cable providers.
OPERATING AND PLANNED MARKETS
The table below outlines as of December 31, 1996 (except as indicated in
footnote (a) below) the characteristics of the Company's operational and
pre-launch markets, as well as its market under development and markets held for
sale or disposition. The Company expects that the pre-launch market and the
market under development will be operational by the end of 1998.
<TABLE>
<CAPTION>
ESTIMATED
TOTAL ESTIMATED NUMBER OF APPROXIMATE
SERVICE AREA LOS CHANNELS NUMBER OF
MARKET HOUSEHOLDS(A) HOUSEHOLDS(A) AVAILABLE(B) SUBSCRIBERS
- ---------------------------------------------------- ------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
OPERATIONAL MARKETS
Cleveland, OH (c)................................... 1,178,000 884,000 37 23,945
Dayton, OH (d)(e)(f)................................ 610,000 413,000 38 7,012
San Antonio, TX (d)................................. 550,000 440,000 38 13,443
Fort Worth, TX (d).................................. 540,000 443,000 42 1,042
Grand Rapids, MI (d)................................ 458,000 344,000 23 757
Kansas City, MO and Suburbs(g)...................... 1,065,000 800,000 29(h) 6,023
PRE-LAUNCH MARKET
Dallas, TX (d)...................................... 981,000 872,000 35 --
MARKET UNDER DEVELOPMENT
Charlotte, NC (c)................................... 580,000 472,000 13(i) --
MARKETS HELD FOR SALE OR DISPOSITION (J)
Stockton/Modesto, CA (c)............................ 350,000 300,000 32 --
Bakersfield, CA (c)................................. 162,000 151,000 42 8,553
Minneapolis, MN (d)................................. 959,000 882,000 32(k) 4,778
------------- ------------- ------
Total............................................. 7,443,000 6,001,000 65,553
------------- ------------- ------
------------- ------------- ------
</TABLE>
6
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- ------------------------
(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 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 includes 8, 8,
5, 6, 13, 7, 5, 13, 0, 6 and 10 off-air channels, and 29, 24, 33, 32, 29,
16, 24, 22, 8, 27 and 32 wireless cable channels, in Cleveland, Ohio;
Minneapolis, Minnesota; Dayton, Ohio; San Antonio, Texas; Fort Worth, Texas;
Grand Rapids, Michigan; Kansas City, Missouri and Suburbs; Dallas, Texas;
Charlotte, North Carolina; Stockton/Modesto, California; and Bakersfield,
California, respectively. The Number of Channels Available also includes
certain channels that are subject to FCC (as defined) 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) Market contributed by CAI.
(d) Market contributed by Heartland.
(e) For purposes of Estimated Total Service Area Households and Estimated LOS
Households, the Dayton, Ohio market includes Bloom Center/Napoleon, Indiana,
a suburban market adjacent to Dayton. The Bloom Center/Napoleon market is
not yet operational.
(f) 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 additional time to complete construction.
The Bloom Center/Napoleon, Indiana market has 20 channels, all of which are
the subject of currently pending requests for additional time to complete
construction.
(g) The Company's Kansas City, Missouri and Suburbs market is comprised of
Kansas City, Missouri, as well as the suburbs of Maysville (Cameron) and
Sweet Springs, Missouri, and Effingham (Nortonville) and Wellsville, Kansas.
Maysville and Sweet Springs were contributed to the Company by Heartland at
the Contribution Closing. Effingham and Wellsville, Kansas were acquired by
the Company in the USA Wireless Acquisition. Kansas City, Missouri is
expected to be received by the Company from People's Choice TV Corp.
("PCTV") in exchange for the Company's Salt Lake City market (the "PCTV
Swap"). The PCTV Swap is expected to close during the first quarter of 1997.
See "Business--Pending Acquisitions and Divestitures."
(h) The total of 29 channels available is based on 24 wireless cable channels
and 5 off-air channels for the Kansas City system. See "Business--The
Company's Markets" for a description of the number of channels in each of
the Kansas City suburban markets as defined in (g) above.
(i) The Company currently holds licenses or leases for six wireless cable
channels and also has the right to develop seven additional channels,
depending on interference considerations, in the Charlotte market as a
result of its ownership of the Charlotte BTA.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
7
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
(j) Does not include the Salt Lake City market which is expected to be
transferred to PCTV in the PCTV Swap. Does not include the Atlanta (suburbs)
market acquired by the Company on July 17, 1996 pursuant to the Heartland
Acquisition. See "Business--Pending Acquisitions and Divestitures."
(k) Does not include four channels whose authorization is the subject of a
petition for reconsideration and, in the alternative, a new station
application and four channels that are leased but no channel capacity is
available.
AFFILIATION WITH CAI AND HEARTLAND
CS Wireless believes that its affiliation with CAI and Heartland will permit
it to achieve economies of scale in the purchase of equipment and programming,
which the Company believes will facilitate meeting its objective of becoming a
leading regional provider of subscription television services. Heartland
provided certain miscellaneous administrative services to the Company, including
the maintenance of the Company's financial information, for an interim period,
which ended in July 1996. CAI has also agreed to permit two of its employees to
assist the Company with programming and licensing functions. In addition, the
affiliation provides access to management with significant experience in the
wireless cable industry, including expertise in executing strategic
relationships. See "Certain Relationships and Related Transactions."
COMPANY FORMATION
On February 23, 1996, CAI contributed to the Company (the "CAI
Contributions") wireless cable television assets or stock of subsidiaries owning
wireless cable television assets comprising four markets located in Bakersfield
and Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland,
Ohio. CAI received from the Company shares of Common Stock initially
constituting approximately 60% of the Company's common stock, $.001 par value
per share (the "Common Stock"). Simultaneously, Heartland contributed or sold to
the Company (the "Heartland Contributions" and, together with the CAI
Contributions, the "Contributions") wireless cable television assets comprising
eight markets located in Grand Rapids, Michigan; Minneapolis, Minnesota;
Maysville and Sweet Springs, Missouri; Dayton, Ohio; Dallas, Fort Worth and San
Antonio, Texas; and Salt Lake City, Utah. Heartland received from the Company
shares of Common Stock initially constituting approximately 40% of the Common
Stock, approximately $28.3 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," and together with the Heartland Short-Term Note, the
"Heartland Notes"). The Heartland Short-Term Note was repaid on March 1, 1996
with a portion of the net proceeds from the Unit Offering. See "The
Contributions." The equity interests of CAI and Heartland in the Company (i)
have been diluted by the issuance of the Common Shares to the purchasers of the
Units (as defined), the issuance of Common Stock in connection with the USA
Acquisition (as defined) and the issuance of a total of 1,000,000 shares (the
"BANX Shares") to MMDS Holdings II, Inc., an affiliate of Bell Atlantic, and
NYNEX MMDS Holding Company, an affiliate of NYNEX (collectively, the "BANX
Affiliates"), and (ii) are subject to further dilution for future issuances of
Common Stock. As of October 15, 1996, CAI owned approximately 52% of the Common
Stock, Heartland owned approximately 34% of the Common Stock, the BANX
Affiliates owned approximately 10% of the Common Stock, and the holders of the
Common Shares and certain other stockholders of the Company owned approximately
4% of the Common Stock. See "Stock Ownership" and "Business--Pending
Acquisitions and Divestitures."
THE UNIT OFFERING
On February 23, 1996, the Company issued and sold 100,000 Units (the
"Units"), with each Unit consisting of four Old Notes (each at $1,000 principal
amount at maturity) and 1.1 shares (the "Common
8
<PAGE>
Shares") of Common Stock, of the Company (the "Unit Offering"). Units were sold
pursuant to exemptions from or in transactions not subject to the registration
requirements of the Securities Act and applicable state securities laws. See
"The Exchange Offer." New Notes were offered to holders of Old Notes in the
Original Exchange Offer that expired on December 9, 1996, and pursuant to which
an aggregate principal amount of $386,442,000 of Old Notes were exchanged for a
like principal amount of New Notes.
INDUSTRY OVERVIEW
The market for subscription television has annual sales in the United States
of approximately $20 billion. According to a report issued by the Federal
Communications Commission (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. On average, hard-wire
cable subscribers pay approximately $32.50 per month for programming services,
according to Paul Kagan Associates Inc. ("Kagan").
The Company believes that wireless cable has several competitive advantages
compared with hard-wire cable television providers, including: (i) LOW COST
PROVIDER. Unlike traditional hard-wire cable systems, wireless cable does not
require extensive coaxial cable networks, amplifiers and related equipment
("Cable Plant"), thereby reducing necessary capital and maintenance expenditures
significantly. Therefore, a major percentage of wireless cable capital
expenditures are demand driven and are not made until a new subscriber is added;
(ii) HIGH RELIABILITY. Although wireless cable transmission requires a clear
line of sight, wireless cable typically enjoys a lower rate of transmission
disruption since the signal is transmitted over airwaves as opposed to through a
Cable Plant; (iii) SUPERIOR PICTURE QUALITY. An equivalent or higher quality
picture is provided as a result of the elimination of signal noise inherent in
Cable Plant; and (iv) FASTER AND LESS EXPENSIVE TO UPGRADE TO DIGITAL
TECHNOLOGY. An upgrade to digital technology for a wireless cable system is
expected to be less expensive and faster because new equipment need only be
installed at the subscriber site and at the head-end as opposed to through a
Cable Plant.
CS Wireless is a Delaware corporation. Its principal executive offices are
located at 200 Chisholm Place, Suite 202, Plano, Texas 75075. The Company's
telephone number is (972) 509-2634.
9
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered.............. Up to $13,558,000 aggregate principal amount at maturity
of the Company's 11 3/8% Series B Senior Discount Notes
due 2006 (the "New Notes").
The Exchange Offer.............. The New Notes are being offered in exchange for a like
principal amount of Old Notes. For procedures for
tendering the Old Notes, see "The Exchange Offer."
Tenders; Expiration Date;
Withdrawal.................... The Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1997, or such later date and time to
which it is extended (the "Expiration Date"). The tender
of Old Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date. Any
Old Note not accepted for exchange for any reason will be
returned without expense to the tendering holder thereof
promptly after expiration or termination of the Exchange
Offer.
Federal Income Tax
Consequences.................. The exchange pursuant to the Exchange Offer will not
result in any income, gain or loss to the holders of the
Notes or the Company for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
Use of Proceeds................. There will be no cash proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Exchange Agent.................. Fleet National Bank has agreed to act as Exchange Agent
for the Exchange Offer.
</TABLE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are substantially identical
except for certain transfer restrictions and registration rights relating to the
Old Notes.
<TABLE>
<S> <C>
Interest Rate and Payment
Dates......................... The Notes will accrete in value from the date of issuance
to March 1, 2001, at a rate of 11 3/8% per annum,
compounded semi-annually. Cash interest on the Notes will
neither accrue nor be payable prior to March 1, 2001.
Commencing September 1, 2001, cash interest will be
payable on the Notes semi-annually in arrears on each
March 1 and September 1 at the rate of 11 3/8% per annum.
Maturity........................ March 1, 2006.
Optional Redemption............. The Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after March 1, 2001
at the redemption prices set forth herein, plus accrued
and unpaid interest, if any, to the date of redemption. In
addition, at any time on or prior to March 1, 1999, the
Company may redeem up to 35% of the aggregate principal
amount of the Notes originally issued with the net
proceeds of one or more public offerings of its Common
Stock or from the sale or issuance for cash of its Common
Stock to a Strategic Equity Investor (as defined) at a
redemption price equal to 111% of the Accreted Value (as
defined) on the date of redemption; provided, however,
that immediately after giving effect to any such
redemption, not less than 65% of the aggregate principal
amount of the Notes originally issued remains outstanding.
See "Description of the Notes--Optional Redemption."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Mandatory Redemption............ There will be no sinking fund requirements.
Offers to Purchase.............. In the event of a Change of Control, each holder will have
the option to require the Company to repurchase such
holder's Notes at a price equal to 101% of the Accreted
Value on the date of repurchase (if prior to March 1,
2001) or 101% of the principal amount thereof (if on or
after March 1, 2001) plus accrued and unpaid interest, if
any, to the date of repurchase. See "Description of the
Notes--Change of Control." In addition, the Company will
be obligated to make an offer to repurchase the Notes for
cash at a price equal to 100% of the Accreted Value on the
date of repurchase (if prior to March 1, 2001) or 100% of
the principal amount thereof (if on or after March 1,
2001), plus accrued and unpaid interest, if any, thereon
to the date of repurchase with the net cash proceeds of
certain asset sales. See "Description of the
Notes--Limitation on Asset Sales."
Ranking......................... The Notes are general unsecured senior obligations of the
Company ranking senior in right of payment to all existing
and future subordinated Indebtedness of the Company,
including the Indebtedness evidenced by the Heartland
Long-Term Note, and pari passu in right of payment with
all of senior Indebtedness of the Company. The Notes are
effectively subordinated to all secured Indebtedness of
the Company to the extent of the value of the assets
securing such Indebtedness, and are effectively
subordinated to all Indebtedness and other liabilities
(including trade payables) of the subsidiaries of the
Company.
Certain Covenants............... The Indenture (as defined) imposes certain limitations on
the ability of the Company and the Restricted Subsidiaries
(as defined) to, among other things, incur additional
indebtedness, pay dividends or make certain other
restricted payments and investments, consummate certain
asset sales, enter into certain transactions with
affiliates, redesignate an Unrestricted Subsidiary (as
defined) to be a Restricted Subsidiary, designate a
Restricted Subsidiary as an Unrestricted Subsidiary, incur
liens, enter into certain sale and leaseback transactions,
engage in certain businesses, and merge or consolidate
with any other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of
its assets. The Indenture also imposes limitations on the
Company's ability to restrict the ability of its
Restricted Subsidiaries to pay dividends or make certain
payments to the Company or any of its Restricted
Subsidiaries and on the ability of the Company's
Restricted Subsidiaries to issue preferred stock. See
"Description of the Notes."
Original Issue Discount......... Because the New Notes are treated as a continuation of the
Old Notes for federal income tax purposes, the New Notes
will be treated as having been issued with original issue
discount for Federal income tax purposes. See "Certain
Federal Income Tax Considerations."
</TABLE>
For additional information regarding the Notes, see "Description of the
Notes."
RISK FACTORS
See "Risk Factors" beginning on page 13 for a discussion of certain risks
that should be considered by holders who tender their Old Notes in the Exchange
Offer.
11
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following table sets forth certain unaudited pro forma financial data of
the Company as of September 30, 1996 and for the year ended December 31, 1995
and the nine months ended September 30, 1996. The pro forma statement of
operations data gives effect to (i) the consummation of the Acquisitions (as
defined), (ii) the consummation of the Contributions, (iii) the issuance of the
Heartland Notes and the prepayment of the Heartland Short-Term Note, (iv) the
issuance of the Units and (v) the consummation of the USA Wireless Acquisition
(as defined) as if such events had occurred on January 1, 1995. The pro forma
balance sheet data gives effect to the consummation of the USA Wireless
Acquisition as if such event occurred on September 30, 1996. The pro forma
financial data does not purport to represent what the Company's results of
operations or financial position would actually have been if the aforementioned
transactions or events occurred on the dates specified or to project the
Company's results of operations or financial position for any future periods or
at any future date. The information contained in this table should be read in
conjunction with "Selected Historical Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Pro Forma
Financial Information" and the unaudited condensed consolidated financial
statements (including the notes thereto) of the Company appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 20,553 $ 18,943
Costs and expenses, excluding depreciation and
amortization............................................ 23,773 23,596
Depreciation and amortization............................. 23,201 17,914
Operating loss............................................ (26,421) (22,567)
Interest expense.......................................... (29,967) (24,776)
Interest income and other................................. 784 4,979
Net loss (1) (2).......................................... (36,305) (39,952)
EBITDA (3)................................................ (3,220) (4,653)
Ratio of earnings to fixed charges (4).................... -- --
<CAPTION>
SEPTEMBER 30,
1996
---------------
<S> <C> <C>
PRO FORMA BALANCE SHEET DATA:
Total assets.............................................. $ 425,329
Total debt................................................ 268,796
Total stockholders' equity................................ 136,494
</TABLE>
- ------------------------
(1) Pro forma net loss includes an income tax benefit of $19,299 and $2,412 for
the year ended December 31, 1995 and the nine months ended September 30,
1996, respectively.
(2) Pro forma net loss for the year ended December 31, 1995 and the period
January 1, 1996 through February 23, 1996 for the nine months ended
September 30, 1996 does not include interest income that would be earned on
cash placed in interest bearing investments until expended.
(3) 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.
(4) In calculating the ratio of earnings to fixed charges, earnings consist of
losses prior to income tax benefit and fixed charges. Fixed charges consist
of interest expense, amortization of debt issuance costs and one-third of
rental expense on operating leases (such amount having been deemed by the
Company to represent the interest portion of such payments). On a pro forma
basis, earnings were inadequate to cover fixed charges by the amount of
$55,604 and $42,364 for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively.
12
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION SET
FORTH IN THIS PROSPECTUS AND, IN PARTICULAR, SHOULD EVALUATE THE FOLLOWING RISKS
BEFORE TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER, ALTHOUGH THE RISK
FACTORS SET FORTH BELOW (OTHER THAN THE FIRST TWO FACTORS) ARE GENERALLY
APPLICABLE TO THE OLD NOTES AS WELL AS THE NEW NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not participate in the Exchange Offer will
continue to be subject to the restrictions on transfer of the Old Notes as set
forth in the legend thereon. In general, the Old Notes may not be offered or
sold, unless registered under, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register the Old
Notes under the Securities Act. Based on interpretations of the Securities Act
by the staff of the Commission, New Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold, or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement with any
person to participate in the distribution of such New Notes. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of 180 days from
the consummation of the Original Exchange Offer, it will make a prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." However, the ability of any holder to resell the New
Notes is subject to applicable state securities laws as described in "Blue Sky
Restrictions on Resale of New Notes" below.
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the New Notes in any such jurisdictions. Therefore, if
an exemption is not available in a particular state, a holder of New Notes may
not be able to resell New Notes in or from that state, depending on the state
statute. However, an exemption is generally available for sales to registered
broker-dealers and certain institutional buyers. Other exemptions under
applicable state securities laws may also be available.
COMPLIANCE WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer and to avoid the restrictions on
transfer of the Old Notes, holders of Old Notes must transmit a properly
completed Letter of Transmittal, including all other documents required by such
Letter of Transmittal, to the Exchange Agent at the address set forth below
under "The Exchange Offer--Exchange Agent" on or prior to the Expiration Date.
In addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
pursuant to the procedure
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<PAGE>
for book-entry transfer described herein, must be received by the Exchange Agent
prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described herein.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
As of September 30, 1996, the Company had outstanding Indebtedness of
approximately $268.8 million. Giving effect to the consummation of the Unit
Offering, the Contributions and the USA Wireless Acquisition, earnings were
insufficient to cover fixed charges by $55.6 million and $42.4 million for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively. The ability of the Company to meet its debt service requirements
(including in respect of the Notes) will depend upon achieving significant and
sustained growth in the Company's cash flow. The Company expects that such
growth in the cash flow will result from the successful implementation of the
Company's business and operating strategies. See "Business--Business Strategy"
and "--Operating Strategy." The Company currently anticipates that revenues
generated from the operation of its wireless cable systems in accordance with
its business and operating strategies, along with a portion of the net proceeds
of the Unit Offering, should be sufficient to make principal and interest
payments on the Notes and the Company's other Indebtedness as they become due.
However, there can be no assurance that the Company's operations will generate
sufficient cash flow to pay its obligations, including its obligations on the
Notes. 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 at any time have sufficient resources to meet its debt service obligations
as they become due, which include its ability to make principal and interest
payments on the Notes.
Certain terms of the Heartland Long-Term Note impose further restrictions on
the Company's use of proceeds from asset sales and public sales of Common Stock
and therefore restrict the Company's ability to repay the Notes from such
proceeds. To the extent so applied, such proceeds will not be available for the
Company's build-out of wireless cable systems.
The Company will be permitted to incur additional Indebtedness, subject to
certain restrictions. See "Description of the Notes--Limitation on Incurrence of
Additional Indebtedness." The degree to which the Company is leveraged could
have important consequences to holders of the Notes, including, but not limited
to, the following: (i) the Company's ability to obtain additional 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; (iii) the terms of future Indebtedness may restrict the redemption
of the Notes as required in the Indenture upon certain events, such as a Change
of Control; and (iv) the Company's high degree of leverage may make it more
vulnerable to economic downturns, may limit its ability to withstand competitive
pressures and may reduce its flexibility in responding to changing business and
economic conditions.
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 is the sole obligor on the Notes
and the Notes are not guaranteed by any subsidiary of the Company. Therefore,
the Notes will be structurally subordinated to all Indebtedness and other
liabilities (including trade payables) of subsidiaries of the Company. 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 under the Notes. 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
14
<PAGE>
over the claims of the Company and the holders of the Notes. In addition, the
Indenture restricts, but does not prohibit, future investment by the Company in
less than wholly owned subsidiaries and joint ventures, the cash flow from which
may not be readily available to the Company to service Indebtedness or meet its
other obligations.
LACK OF PROFITABLE OPERATIONS; LIMITED BUSINESS HISTORY
The wireless cable systems and assets that the Company acquired in the
Contributions have experienced operating losses through the date of the
Contribution Closing (as defined). The Company, following the Contribution
Closing, expects to realize additional 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. Prospective investors,
therefore, have limited historical financial information about the Company upon
which to base an evaluation of its performance and an investment in the
Securities. 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.
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 the net proceeds from the Unit Offering available for capital
expenditures will provide sufficient funds to meet its needs for approximately
the next 12 months. Capital expenditures in excess of such net proceeds 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
and may render the Company more vulnerable to competitive pressures and economic
downturns. Failure to obtain additional financing could adversely affect the
growth of the Company and its ability to compete successfully in the
subscription television industry. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Liquidity and Capital
Resources."
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"). See "Industry Overview--Competition."
15
<PAGE>
Digital capability is essential for wireless to compete with hard-wire
cable, which in its current analog state offers between 36 to 90 channel
offerings depending on a given market. With the deployment of digital, hard-wire
cable is expected to offer over 150 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, 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.
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.
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. 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, when 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 or that digital technology can be successfully deployed.
Conversion from current analog technology to a 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 MMDS
system, as well as the receipt of requisite regulatory approvals. The Company
has filed a modification application with the FCC requesting authority to
operate a digital video system in Dallas, which application is 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
16
<PAGE>
further regulatory hurdles. The Company has applied to the FCC for developmental
authority for two-way flexible use of 2 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.
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 top 50 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 markets below the top 50 markets, the FCC has authorized
up to 33 channels (constituting a spectrum bandwidth of 196 MHz). Up to 13
Multi-Channel Distribution Service and Multipoint Multi-Channel Distribution
Service (collectively, "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 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. See "Industry
Overview--Regulation."
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
17
<PAGE>
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 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 frame during which only the Company or its sublessor has the use of the
channel capacity, the Company will thereafter typically have 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. See
"Business" and "Industry Overview--Regulation." In addition, the anticipated
conversion to digital technology 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. Potential investors should be aware
of the difficulties and uncertainties that 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 service. 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.
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
18
<PAGE>
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
there can be no assurance that such systems can be continued and operated in
accordance with the Company's business and operating strategies.
ORIGINAL ISSUE DISCOUNT
The Old Notes were issued at a substantial discount from their principal
amount at maturity. Consequently, although cash interest will not accrue in
respect of the Notes prior to March 1, 2001, Original Issue Discount (the
difference between the stated redemption price at maturity of the Notes and the
issue price of the Notes) will accrue from the issue date of the Notes and
generally will be includable as interest income in the Note holder's gross
income for United States federal income tax purposes in advance of the cash
payments to which the income is attributable.
Furthermore, the Notes will be subject to the high yield discount obligation
rules which will defer and may in part eliminate the Company's ability to deduct
the Original Issue Discount attributable to the Notes. Accordingly, the
Company's after tax cash flow might be less than if the Original Issue Discount
on the Notes was deductible when it accrued. See "Certain Federal Income Tax
Considerations--Notes-- Applicable High Yield Discount Obligations." Similar
results may apply under state tax laws.
If a bankruptcy case were commenced by or against the Company under the
Federal Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), after the
issuance of the Notes, the claim of a holder is the sum of: (i) the initial
offering price; and (ii) that portion of the Original Issue Discount that is not
deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code.
Any Original Issue Discount that was not accrued as of the date of any such
bankruptcy filing would constitute "unmatured interest."
ABSENCE OF A PUBLIC MARKET
The Old Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkage Market by Qualified Institutional Buyers
("QIBs"). The New Notes will be new securities for which there is currently no
public market. The Company does not intend to list the New Notes on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchasers have advised the Company that they currently intend to make a market
in the New Notes but that they are not obligated to do so and, if commenced, may
discontinue such market making at any time. Therefore, there can be no assurance
that an active trading market for any of the New Notes will develop, or if one
does develop, that it will be sustained. Accordingly, no assurance can be made
as to the development or liquidity of any market for the New Notes. If an active
public market does not develop, the market, price and liquidity of the New Notes
may be adversely affected. If any of the New Notes are traded after their
initial issuance, they may trade at a discount from their initial offering
price, depending on prevailing interest rates, the market for similar securities
and other factors, including general economic conditions and the financial
condition and performance of the Company. Prospective investors in the New Notes
should be aware that they may be required to bear the financial risks of such
investment for an indefinite period of time. See "Description of the Notes."
POSSIBLE VOLATILITY OF THE STOCK MARKET
In recent years the stock market has experienced extreme price and volume
fluctuations. These fluctuations have had a substantial effect on the market
prices for many emerging growth companies, often unrelated to the operating
performance of the specific companies. Such market fluctuations could
19
<PAGE>
adversely affect the price of the Notes to the extent that the Company's
business requires additional financing.
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. The Company cannot predict the substance of rules and policies to
be adopted by the FCC in implementing the provisions of the legislation. See
"Industry Overview--Recently Enacted Legislation."
CONTROL BY CAI AND HEARTLAND
In connection with the Contributions, CAI and Heartland entered into a
Stockholders' Agreement (as defined) which, among other matters, provides that
at all times prior to an initial public offering of Common Stock 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% (7 of 9) of the Directors of the Company so
that neither CAI nor Heartland can unilaterally control major decisions
affecting the Company. See "The Contributions" and "Certain Relationships and
Related Transactions."
20
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes pursuant to this Prospectus.
THE CONTRIBUTIONS
On February 23, 1996 (the "Contribution Closing"), Heartland and its
subsidiaries 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, that Heartland owned or acquired through transactions
described more fully below (the "Acquisitions"). Simultaneous with Heartland's
contribution and sale of these assets to the Company, CAI or its subsidiaries
contributed to the Company the wireless cable television assets and all related
liabilities or 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,
all of which were held by CAI or its subsidiaries. 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.
One of the conditions to Heartland's obligation under the Participation
Agreement was the consummation of the Acquisitions, which occurred immediately
prior to the Contribution Closing. The Acquisitions consisted of: (i) the merger
of Heartland Merger Sub, Inc., a wholly-owned subsidiary of Heartland, with and
into American Wireless Systems, Inc. ("AWS"), which owned wireless cable
television assets (and equity interests in certain entities owning wireless
cable television assets) in several markets including Minneapolis, Minnesota and
Dallas and Fort Worth, Texas; (ii) Heartland's purchase of substantially all of
the assets and assumption of certain associated liabilities of Fort Worth
Wireless Cable T.V. Associates, which owned, as its principal asset, an
approximately 80% interest in a joint venture that owns and operates the Fort
Worth, Texas system (AWS owned the remaining beneficial interest in the joint
venture); (iii) Heartland's purchase of substantially all of the assets and
assumption of certain associated liabilities of Wireless Cable T.V. Associates
#38, which owned, as its principal asset, a 75% membership interest in American
Wireless System of Minneapolis LLC, the former owner and operator of the
Minneapolis, Minnesota system (AWS owned the remaining beneficial interest in
this entity); (iv) the merger of Heartland Merger Sub 2, Inc., a wholly-owned
subsidiary of Heartland, with and into CableMaxx, Inc., which owned wireless
cable television assets in several markets, including San Antonio, Texas and
Salt Lake City, Utah; and (v) Heartland's purchase of substantially all of the
assets and assumption of certain associated liabilities of Three Sixty Corp.,
which consisted of wireless cable television assets in Dayton, Ohio and other
markets.
At the Contribution Closing, CAI received shares of Common Stock initially
constituting approximately 60% of the outstanding shares of Common Stock and
Heartland received (i) shares of Common Stock initially constituting
approximately 40% of the outstanding shares of Common Stock, (ii) approximately
$28.3 million in cash payable by the Company out of the approximately $219.8
million of net proceeds of the Unit Offering, (iii) the Heartland Short-Term
Note, and (iv) 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 "The Unit Offering." The Heartland Long-Term Note (i) bears
interest at the annual rate of 10% per annum until the first anniversary of the
date thereof and 15% per annum thereafter; provided that no cash interest will
be payable until the Notes have been paid in full; (ii) requires that all of the
net proceeds received by the Company from the sale of assets shall be applied by
the Company to the repayment of the Heartland Long-Term Note; and (iii) requires
that at least 30% of the net proceeds of any public offering of Common Stock
shall be applied to the repayment of the Heartland Long-Term Note to the extent
not otherwise paid out of the proceeds of asset sales.
21
<PAGE>
The equity interests that CAI and Heartland received in the Company at the
Contribution Closing (i) have been diluted by the issuance of the Common Shares
issued as a part of the Unit Offering, the issuance of Common Stock in
connection with the USA Wireless Acquisition (as defined) and the issuance of
the BANX Shares and (ii) are subject to dilution for future issuances of shares
of Common Stock. See "Stock Ownership." The Company, CAI and Heartland are in
the process of completing certain post-closing adjustments. Components of such
adjustments will include the relative accounts payable, accounts receivable and
related working capital assets of the contributed systems, the number of granted
channels represented and actually contributed to the Company for each market,
the increase or decrease in the number of subscribers in each contributed system
from the date of the Participation Agreement until the Contribution Closing and
other related factors. Following calculation of such adjustments, (i) the
Heartland Long-Term Note may be adjusted to reflect amounts either owed by
Heartland to the Company or owed by the Company to Heartland, (ii) cash payments
may be made to reflect amounts either owed by CAI or Heartland to the Company or
owed by the Company to CAI or Heartland, (iii) CAI may issue to the Company an
unsecured promissory note with a maturity date five years following the date of
such adjustment and an interest rate equal to 10% per annum for all or part of
any amount due to the Company by CAI, (iv) shares of Common Stock may be
transferred among the Company, CAI and Heartland, in lieu of amounts otherwise
owed to or by such parties, or (v) the parties may combine one or more such
manners of payment.
In connection with the Contribution Closing, CAI, Heartland and the Company
entered into a stockholders' agreement (the "Stockholders' Agreement"). The
Stockholders' Agreement provides, among other things, that CAI and Heartland for
a period of 10 years will vote their shares of Common Stock in favor of a Board
of Directors of the Company having nine members, consisting of: (i) up to four
members designated by CAI (provided that at least one of whom cannot be an
affiliate of either CAI or Heartland and that CAI has not disposed of more than
one-half of the Common Stock it held on the Contribution Closing Date); (ii) up
to three members designated by Heartland (provided that at least one of whom
cannot be an affiliate of either CAI or Heartland and that Heartland has not
disposed of more than one-half of the Common Stock it held on the Contribution
Closing Date); (iii) the Chief Executive Officer of the Company; and (iv) the
Chief Operating Officer of the Company. The Stockholders' Agreement and the
Company's Bylaws further provide that certain transactions require the
affirmative approval of at least 70% (7 of 9) of the Directors of the Company.
Such transactions include (i) the participation of the Company in a merger or
consolidation, or the sale, lease, exchange or other disposition of all or any
substantial part of the assets of the Company, or the liquidation of all or a
substantial part of the Company; (ii) the issuance or sale by the Company of any
capital stock of the Company, including the type and amount to be issued or
sold, except for the issuances and sales contemplated by the Stockholders'
Agreement; (iii) the taking of any action by the Company in its capacity as a
stockholder of any subsidiary of the Company similar to the foregoing; (iv) any
increase or decrease in the total number of directorships of the Company; (v)
engaging in any business other than the designated business of the Company
(transmitting video, voice or data, inclusive of related activities and
services, including the use of wireless channels for any commercial purpose
permitted by the FCC) or any business that violates the MFJ (as defined); (vi)
establishing any executive or other committee of the Board of the Company; (vii)
the creation, incurrence, assumption or guaranty of or in any manner becoming
liable by the Company or any of its subsidiaries upon any obligation for money
borrowed in excess of $10 million in the aggregate principal amount at any time
outstanding or the incurrence of any obligation in excess of such amount in
connection with the acquisition of property; (viii) the making of or having
outstanding any loans or advances to any of the Company's past or present
officers, directors or stockholders or to any member of their immediate family;
(ix) the entering into, directly or indirectly, of any arrangement, contract or
agreement not in the ordinary course of business with a monetary value in excess
of $10 million; (x) the sale or other disposition (including contribution) of
assets or capital stock (by merger or otherwise) of the Company or any of its
subsidiaries, the value of which exceeds $10 million in either original cost or
appraised value within any one-year period; (xi) the acquisition of securities
or assets by the Company or
22
<PAGE>
any of its subsidiaries, the value of which exceeds $10 million in appraised
value within any one-year period; (xii) any change in the business of the
Company from its stated business; or (xiii) replacement of the Chief Executive
Officer or the Chief Financial Officer of the Company. 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 UNIT OFFERING
On February 23, 1996, in the Unit Offering, the Company issued and sold to
the Initial Purchasers 100,000 Units, with each Unit consisting of four Old
Notes (each at $1,000 principal amount at maturity) and 1.1 Common Shares for an
aggregate purchase price of approximately $229.5 million. Units were sold
pursuant to exemptions from or in transactions not subject to the registration
requirements of the Securities Act and applicable state securities laws. The
Initial Purchasers subsequently placed the Units with "qualified institutional
buyers," as defined in Rule 144A under the Securities Act and to a limited
number of other institutional "accredited investors," as defined in subsections
(a)(1), (2), (3) and (7) of Rule 501 of Regulation D under the Securities Act.
See "The Exchange Offer." The Company received approximately $219.8 million of
net proceeds from the Unit Offering. Of this amount, $28.3 million was used to
pay Heartland in connection with the Contribution Closing, $25.0 million was
deposited into a segregated bank account to secure payment of the Heartland
Short-Term Note (and was used to repay the Heartland Short-Term Note on March 1,
1996), $4.0 million of a total of $18.9 million was paid to CAI and Heartland in
connection with the transfer by CAI and Heartland to the Company of commercial
wireless cable spectrum acquired by CAI and Heartland in the BTA Auction (as
defined herein) and the remainder is being used for capital expenditures to
build out cable systems and to add subscribers, for certain formation costs,
working capital and general corporate purposes, including reimbursement to CAI
and Heartland of the remaining $14.9 million in connection with the transfer of
spectrum referred above.
23
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company at September 30, 1996 and (ii) the combined pro forma capitalization of
the Company at September 30, 1996 after giving effect to the consummation of the
USA Wireless Acquisition. This table should be read in conjunction with the
Company's unaudited condensed consolidated financial statements and the Pro
Forma Financial Information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
HISTORICAL PRO FORMA
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................... $ 136,844 $ 127,079
--------- -----------
--------- -----------
Long-term debt:
Heartland Long-Term Note(1)........................................... $ 15,000 $ 15,000
BTA auction payable to CAI and Heartland, including current portion... 8,728 8,728
11 3/8% Series B Senior Discount Notes due 2006....................... 244,682 244,682
Other................................................................. 366 386
--------- -----------
Total long-term debt.............................................. 268,776 268,796
--------- -----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no
shares issued and outstanding....................................... -- --
Common stock, $.001 par value; 40,000,000 shares authorized;
10,110,000 shares issued and outstanding; 10,431,465 shares issued
and outstanding on a pro forma basis................................ 10 10
Additional paid-in capital............................................ 150,980 157,025
Accumulated deficit................................................... (20,541) (20,541)
--------- -----------
Total stockholders' equity........................................ 130,449 136,494
--------- -----------
Total capitalization.............................................. $ 399,225 $ 405,290
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) The interest rate of 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 Notes have been
paid in full. The principal amount of the Heartland Long-Term Note may be
adjusted (increased or decreased) based upon the results of certain
post-closing calculations. See "The Contributions" and "Certain
Relationships and Related Transactions--Heartland Notes."
24
<PAGE>
SELECTED HISTORICAL 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, 1992, 1993 and 1994, and December 31, 1994 and 1995 and for the
years ended February 28, 1992, 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 and the period from September 30,
1995 to December 31, 1995, 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") and CS Wireless Systems, Inc. and Subsidiaries and
certain assets of Atlantic Microsystems, Inc., which have been audited by
independent public accountants. The following table also sets forth selected
historical financial data for the Company as of September 30, 1996 and for the
nine months ended September 30, 1996, which have been derived from the unaudited
financial statements of the Company and which, in the opinion of management of
the Company, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such unaudited
interim periods. 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. This data should be read in conjunction with the historical
financial statements, related notes, and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
CS WIRELESS
PREDECESSOR SYSTEMS, INC.
---------------------------------------------------------------------------- -------------
MARCH 1, MARCH 9, SIX MONTHS JANUARY 1,
YEAR ENDED FEBRUARY 28, 1994 TO 1994 TO ENDED 1995 TO
------------------------------- MARCH 8, DECEMBER 31, JUNE 30, SEPTEMBER 29,
1992(1) 1993(1) 1994(1) 1994(1) 1994(2) 1995(2) 1995(2)
--------- --------- --------- ----------- ------------- --------------- -------------
(IN THOUSANDS, EXCEPT SYSTEM AND SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $ 5,290 $ 5,190 $ 5,267 $ 116 $ 4,332 $ 3,845 $ 6,170
Costs and expenses,
excluding depreciation
and amortization.......... 4,191 5,461 4,256 76 3,454 3,663 5,441
Depreciation and
amortization.............. 1,937 1,560 836 10 1,571 1,362 3,020
Operating income (loss)..... (838) (1,831) 175 30 (693) 182 (2,291)
Interest expense............ 5,923 6,356 2,846 39 62 12 233
Net loss.................... (7,039) (8,137) (2,162) (9) (576) (886) (1,875)
EBITDA(4)................... $ 1,099 $ 1,429 $ 1,011 $ 40 $ 878 $ 1,544 $ 729
Ratio of earnings to fixed
charges(5)................ -- -- -- -- -- -- --
BALANCE SHEET DATA (AT PERIOD END):
Total assets................ $ 7,532 $ 4,581 $ 3,797 $ 19,741 $ 22,611 $ 21,095
Total debt (excluding
accrued interest)......... 34,938 35,190 10,117 2,471 200 225
Total equity/(deficit)...... (50,234) (58,371) (10,846) 15,375 14,489 13,500
<CAPTION>
SEPTEMBER 30, NINE MONTHS
1995 TO ENDED
DECEMBER 31, SEPTEMBER 30,
1995(3) 1996(3)
------------- -------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $ 2,301 $ 15,994
Costs and expenses,
excluding depreciation
and amortization.......... 2,103 19,126
Depreciation and
amortization.............. 1,796 13,853
Operating income (loss)..... (1,598) (16,985)
Interest expense............ 2 17,490
Net loss.................... (1,207) (19,334)
EBITDA(4)................... $ 198 $ (3,132)
Ratio of earnings to fixed
charges(5)................ -- --
BALANCE SHEET DATA (AT PERIOD
Total assets................ $ 75,688 $ 415,310
Total debt (excluding
accrued interest)......... 112 268,776
Total equity/(deficit)...... 62,147 130,449
</TABLE>
25
<PAGE>
The following table sets forth selected historical combined financial and
other data for the Company's operational markets (including the USA Markets (as
defined)). This data should be read in conjunction with the historical financial
statements, related notes, and other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER
----------------------------------------------------- 30,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------------
(IN THOUSANDS, EXCEPT SYSTEM AND SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues (6)............................................. $ 5,386 $ 6,087 $ 8,557 $ 13,710 $ 20,553 $ 15,994
Systems in operation (at period end) (7)................. 2 3 6 7 8 8
Subscribers (at period end)(8)........................... 15,778 17,764 27,711 44,012 56,800 61,400
</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, 1991 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.
(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, CS Wireless provided wireless cable
television service to the Predecessor. The selected historical financial
information has been derived from the financial statements of CS 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 CS Wireless for the nine months ended September 30,
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.
(5) In calculating the ratio of earnings to fixed charges, earnings consists of
losses prior to income tax benefit and fixed charges. Fixed charges consists
of interest expense, amortization of debt issuance costs and one-third of
rental expense on operating leases (such amount having been deemed by the
Company to represent the interest portion of such payments). Earnings were
inadequate to cover fixed charges by $7,039, $8,137, $2,162 and $9 for the
years ended February 28, 1992, 1993 and 1994 and the period from March 1,
1994 to March 8, 1994 for combined Cablevision, MetroCable, and Metro
Satellite, respectively, $755, $2,524 and $362 for the period from March 9,
1994 to December 31, 1994 the period from January 1, 1995 to September 29,
1995 and the three months ended March 31, 1995 for ACS Ohio, respectively,
and $1,600 for the period from September 30, 1995 to December 31, 1995 for
CS Wireless Systems, Inc. and Subsidiaries and certain assets of Atlantic
Microsystems, Inc., and $29,568 for the nine months ended September 30, 1996
for CS Wireless.
(6) 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 three-year period ended February 28,
1994, respectively. The historical combined subscriber information as of
December 31, 1991, 1992 and 1993 includes combined subscriber information of
(i) Cablevision and MetroCable and (ii) Metro Satellite as of February 28,
1992, 1993 and 1994, respectively.
(7) Prior to 1990, the Company's only operational market was in Cleveland, Ohio.
Through September 30, 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 (Kansas
City, MO and Suburbs) per the USA Wireless Acquisition, began Operations in
September 1994; Grand Rapids, Michigan--September 1995; and
Maysville/Cameron and Sweet Springs, Missouri (Kansas City, MO and
Suburbs)--October 1995. The Kansas City Suburban markets are counted as one
system.
(8) 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).
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold to Initial Purchasers in the Unit Offering in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act. The Initial Purchasers
subsequently placed the Old Notes with "qualified institutional buyers," as
defined in Rule 144A under the Securities Act and to a limited number of other
institutional "accredited investors," as defined in subsections (a)(1), (2), (3)
and (7) of Rule 501 of Regulation D under the Securities Act. Accordingly, the
Old Notes may not be reoffered, resold or otherwise transferred in the United
States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Company
completed the Original Exchange Offer on December 9, 1996, in satisfaction of
certain of its obligations under the Notes Registration Rights Agreement. As an
accommodation to, and at the sole cost and expense of, certain holders of Old
Notes who did not tender such Old Notes in the Original Exchange Offer, the
Company has agreed to effect the Exchange Offer for the benefit of such holders
of Old Notes.
Based on interpretations by the staff of the Commission issued to other
issuers in similar contexts, New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder of such New Notes (other than any such holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and such holder has no arrangement
or understanding with any person to participate in the distribution of such New
Notes. Each holder is required to acknowledge in the Letter of Transmittal that
it is not engaged in, and does not intend to engage in, a distribution of the
New Notes. Any holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer will also be required to acknowledge that (i) Old Notes
tendered by it in the Exchange Offer were acquired in the ordinary course of its
business as a result of market-making or other trading activities and (ii) it
will deliver a prospectus in connection with any resale of New Notes received in
the Exchange Offer. The Letter of Transmittal will also state that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities (other than
Old Notes acquired directly from the Company). The Company has agreed that, for
a period of 180 days after consummation of the Original Exchange Offer, it will
make a prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." Notwithstanding the foregoing, based on
the above-mentioned interpretations by the staff of the Commission, the Company
believes that broker-dealers who acquired the Old Notes directly from the
Company and not as a result of market-making activities or other trading
activities cannot rely on such interpretations by the staff of the Commission
and must, in the absence of an exemption, comply with the registration and
prospectus delivery requirements of the Securities Act in connection with
secondary resales of the New Notes. Such broker-dealers may not use this
Prospectus, as it may be amended or supplemented from time to time, in
connection with any such resales of the New Notes.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for
27
<PAGE>
exchange Old Notes which are properly tendered on or prior to the Expiration
Date and not withdrawn as permitted below. As used herein, the term "Expiration
Date" means 5:00 p.m., New York City time, on , 1997; PROVIDED,
HOWEVER, that if the Company, in its sole discretion, has extended the period of
time for which the Exchange Offer is open, the term "Expiration Date" means the
latest time and date to which the Exchange Offer is extended.
As of the date of this Prospectus, $13,558,000 aggregate principal amount at
maturity of the Old Notes was outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent to all holders of Old Notes known to
the Company on or about , 1997. The Company's obligation to accept Old
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "--Certain Conditions to the Exchange Offer"
below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extension, all Old Notes previously tendered will remain subject to the Exchange
Offer and may be accepted for exchange by the Company. Any Old Notes not
accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and acceptance thereof by the Company will constitute a binding agreement
between the tendering holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a holder who wishes to tender Old Notes
for exchange pursuant to the Exchange Offer must transmit a properly completed
and duly executed Letter of Transmittal, including all other documents required
by such Letter of Transmittal, to Fleet National Bank (the "Exchange Agent"), at
the address set forth below under "Exchange Agent" on or prior to the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if such procedure is available, into the Exchange Agent's account at The
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent on or prior to the Expiration Date, or (iii) the holder must
comply with the guaranteed delivery procedures described below. THE METHOD OF
DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS
IS AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS
OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of a
registered national securities exchange, a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an officer
or correspondent in the United States (collectively, "Eligible Institutions.")
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantees
must be by an eligible guarantor institution which is a member of one of the
following recognized Medallion Signature Guarantee Programs: the Securities
Transfer Agents Medallion Program (STAMP), the New York Stock Exchange Medallion
Signature Program (MSP) or the Stock Exchanges Medallion Program (SEMP)
(collectively,
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<PAGE>
"Eligible Guarantor Institutions"). If Old Notes are registered in the name of a
person other than a signer of the Letter of Transmittal, the Old Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible Guarantor
Institution.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects, irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder; (ii) neither the holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes; and (iii) neither the holder
nor any such other person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes will also acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "--Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other
29
<PAGE>
required documents. If any tendered Old Notes are not accepted for any reason
set forth in the terms and conditions of the Exchange Offer or if Old Notes are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or non-exchanged Old Notes will be returned without expense to
the tendering holder thereof (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry procedures described below, such
non-exchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal, together with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal and Notice of Guaranteed Delivery, substantially
in the form provided by the Company (by mail or hand delivery), setting forth
the name and address of the holder of Old Notes, the certificate number or
numbers of such Old Notes and the principal amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that within five
business days after the Expiration Date, the certificates for all physically
tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation,
as the case may be, the Letter of Transmittal and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within five business days after the Expiration
Date.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn
(including the principal amount of such Old Notes), and (where certificates for
Old Notes have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing holder. If certificates
for Old Notes have been delivered or otherwise identified to the Exchange Agent,
then, prior to the release of such certificates the withdrawing holder must also
submit the serial numbers of the particular certificates to be withdrawn and a
signed notice of withdrawal with
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<PAGE>
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the procedure
for book-entry transfer described above, any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Notes and otherwise comply with the procedures
of such facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
who determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained at
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, at any time prior
to the consummation of the Exchange Offer if: (i) the Exchange Offer would
violate applicable law or any applicable interpretation of the staff of the
Commission; (ii) an action or proceeding is instituted or threatened in any
court or by any governmental agency which might materially impair the ability of
the Company to proceed with the Exchange Offer or a material adverse development
has occurred in any existing action or proceeding with respect to the Company;
or (iii) all governmental approvals which the Company deems necessary for the
consummation of the Exchange Offer have not been obtained.
EXCHANGE AGENT
Fleet National Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
BY MAIL:
Fleet National Bank
Corporate Trust Department
P.O Box 5080
CTOP 06D
Hartford, Connecticut 06120-5080
Attention: Patricia Williams
BY HAND OR OVERNIGHT DELIVERY:
Fleet National Bank
Corporate Trust Operations
150 Windsor Street
Hartford, Connecticut 06120
Attention: Patricia Williams
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
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<PAGE>
FEES AND EXPENSES
The expenses, if any, of soliciting tenders will be borne by the Company.
The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The fees and expenses incident to the Exchange Offer will be paid by the
holders of the Old Notes. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. See "Risk
Factors--Consequences of Failure to Exchange."
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value less accrued original issue discount, as reflected in the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. The expenses of the Exchange
Offer and the unamortized expenses related to the issuance of the Old Notes will
be amortized over the term of the New Notes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
This section should be read in conjunction with the pro forma financial
information of CS Wireless and with the combined financial statements of the
Predecessor, the notes thereto and other information presented elsewhere herein.
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 comprise 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 December 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.
On a pro forma basis, the Company had revenues of $20.6 million and $18.9
million, for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively. Net loss, on a pro forma basis, was $36.3
million and $39.2 million for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively. As of December 31, 1996, the
Company provided service to approximately 65,553 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 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
operating 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. 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.
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<PAGE>
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 statellite television transmission using
MMDS technology as a delivery platform and incorporating a digital television
set-top converter.
A portion of the net proceeds of the Unit Offering was used to pay $28.3
million to Heartland in connection with the Contributions, to repay the $25.0
million Heartland Short-Term Notes, and to pay for certain formation costs and
expenses associated with the Unit Offering. The Company has budgeted capital
expenditures of approximately $15.0 million for the the balance of 1996,
consisting of approximately $5.0 million for uncommitted channel acquisitions,
$5.0 million for head-end transmitters and $5.0 million for subscriber
installations. The Company used approximately $10.0 million of the net proceeds
of the Unit Offering for the USA Wireless Acquisition. The Company also
anticipates cash uses of up to an additional $5.0 to $12.0 million in
conjunction with several planned transactions ($5.0 million for the CAI and
Heartland true-up on the Contributions, and $5.0 to $7.0 million on other
acquisition transactions). The Company also anticipates a shortfall in cash from
operating activities in the foreseeable future which will require funding from a
portion of the remaining proceeds of the Unit Offering. 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. The build-out of the Dallas market is budgeted
to cost $45.0 million in total. The Company filed a modification application
with the FCC in December 1996 for authority to operate a digital video service
in Dallas, which application is still pending before the FCC. The Company has
also applied for developmental authority for two-way flexible use of two
channels in the Dallas market. The application is still pending before the FCC.
The FCC has granted MMDS licensees the authority to offer one-way Internet
access without any further regulatory hurdles. Two-way flexible use of MMDS
spectrum has only been approved on a developmental basis to certain MMDS
operators. This is the Company's first flexible use application before the FCC.
There can be no assurance that such approvals will be granted. For 1998, the
Company has budgeted approximately $120.0 million of additional capital
expenditures. Based upon the Company's current operating plans, it believes that
the net proceeds from the Unit Offering will provide sufficient funds to meet
its needs for at least the next 12 months.
On October 11, 1996, the Company acquired USA Wireless Cable, Inc., a
wireless cable service provider, pursuant to the USA Merger Agreement. The
Company was required under the terms of the USA Merger Agreement to retire
certain indebtedness of USA, estimated at approximately $10.0 million.
Capital expenditures in excess of the net proceeds from the Unit Offering
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. In the event the Company is unable to arrange equity financing or
place debt in amounts and on terms satisfactory to the Company and consistent
with its budgeted financing requirements, the ability of the Company to develop
and expand its operations and to satisfy its fixed obligations, including its
debt service and principal payment obligations in respect of the Senior Notes
(as defined), would be materially adversely affected. The ability of the Company
to take any of the foregoing steps or enter into other significant transactions
will likely require the unanimous approval of CAI and Heartland.
In 1996, net cash from financing activities of $156.3 million was partially
used by investing activities of $20.3 million and was increased by $0.7 million
provided by operating activities. At September 30, 1996, the Company has cash
and cash equivalents of approximately $136.8 million.
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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:
<TABLE>
<S> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
CS Wireless.................................. Nine months ended September 30, 1996
ACS Ohio..................................... Nine months ended September 30, 1995
TWELVE MONTHS ENDED DECEMBER 31, 1995
ACS Ohio..................................... January 1, 1995 to September 29, 1995
CS Wireless Systems, Inc. and Subsidiaries
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
TWELVE MONTHS ENDED FEBRUARY 28, 1994
Cablevision.................................. March 1, 1993 to June 3, 1993
MetroCable................................... June 4, 1993 to February 28, 1994
Metro Satellite.............................. March 1, 1993 to February 28, 1994
</TABLE>
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 of 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.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Revenue for the nine-month period ended September 30, 1996 was $16.0 million
as compared to revenue for the nine months ended September 30, 1995 of $6.2
million, an increase of 158%. The increase resulted primarily from the increase
in subscribers brought about by the February 23, 1996 contribution of markets by
CAI and Heartland to CS Wireless.
Operating expenses were $33.0 million and $8.5 million for the nine-month
periods ended September 30, 1996 and 1995, respectively. The $24.5 million
increase was attributable to increases in system operations of $7.3 million
(1996 -- $9.4 million; 1995 -- $2.1 million), marketing expense of $1.7 million
(1996 -- $2.2 million; 1995 -- $0.5 million), general and administrative costs
of $4.6 million (1996 -- $7.5 million; 1995 -- $2.9 million) and depreciation
and amortization expense of $10.9 million (1996 -- $13.9 milion; 1995 -- $3.0
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 to CS wireless.
35
<PAGE>
Other expense increased from $0.2 million in 1995 to $12.6 million in 1996,
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 $16.7 million and other interest expense of $0.8 million, partially
offset by interest income in 1996 of $4.9 million with no comparable amount in
1995.
The $19.3 million net loss for the nine months ended September 30, 1996
compares to a net loss of $1.9 million for the same period of 1995. The $17.4
million increase in net loss resulted primarily from the increase in operating
expenses, offset by an increase in deferred income tax benefits from $.3 million
for the nine months ended September 30, 1995 to $10.2 million for the same
nine-month period of 1996.
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 ITTS 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. Heartland was the high bidder for 93 BTA authorizations, for a
total of $19.8 million. 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 Bakerfield 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
million. Of the aggregate $12.6 million, approximately $9.0 million has been
paid by CAI to the FCC in accordance with the rules of the BTA Auction for these
BTAS. Heartland purchased BTAs relating to Little Rock Arkansas, Long View,
Washington, Benton Harbor, Kalamazoo, Muskegon and Grand Rapids, Michigan,
Dallas and San Antonio, Texas, Minneapolis, Minnesota, Salt Lake City, Utah,
Dayton, Ohio and Oklahoma City, Oklahoma 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, using a portion of the
proceeds from the Unit Offering, in the amount of $4.0 million, and will
continue to reimburse CAI and Heartland for any and all costs incurred by CAI
and Heartland, which costs are estimated to be up to $15 million, in connection
with these BTAs in accordance with the terms of the Participation Agreement. 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.
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 $0.3 million more than the $0.1 million 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
36
<PAGE>
programming and license fees of $1.6 million (1995--$2.8 million; 1994--$1.2
million), general and administrative expenses of $1.9 million (1995--$3.9
million; 1994--$2.0 million) and marketing expenses of $0.5 million (1995--$0.7
million; 1994--$0.2 million) 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 $0.1 million in 1994 Ten-month
Period to $0.2 million 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
$3.4 million, and an offset of $1.1 million resulting from a deferred income tax
benefit in the 1995 Twelve-month Period compared to an offset of $0.2 million
resulting from a deferred income tax benefit in the 1994 Ten-month Period.
During the 1995 Twelve-month Period CS Wireless 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.
TEN MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED FEBRUARY 28,
1994
Subscription television revenues were $4.4 million for the 1994 Ten-month
Period compared to $4.9 million in pay television revenues and $0.4 million in
other revenue, totaling $5.3 million, for the twelve-month period ended February
28, 1994 (the "1994 Twelve-month Period").
Operating expenses were $5.1 million for the 1994 Ten-month Period compared
to $5.2 million for the 1994 Twelve-month Period. The components of operating
expenses for the 1994 Ten-month Period versus the 1994 Twelve-month Period
changed as follows: programming and licensing was $1.3 million versus $1.6
million; selling, general, and administrative expense was $2.3 million versus
$2.8 million; and depreciation and amortization was $1.6 million versus $0.8
million. Programming and licensing and selling, general, and administrative
expenses were comparable relative to the 1994 Ten-month Period versus the 1994
Twelve-month Period presented. Depreciation and amortization increased by $0.8
primarily due to amortization on the step-up in basis of depreciable and
amortizable assets, including goodwill, resulting from the acquisition of Metro
Satellite and MetroCable.
Interest expenses, amounting to less than $0.1 million for the 1994
Ten-month Period were less than interest expenses of $2.8 million for the 1994
Twelve-month Period due to the settlement of prior debt occurring at the date of
acquisition. The prior year's interest expense includes interest expense to
related parties of $2.7 million.
The net loss for the 1994 Ten-month Period of $0.6 million differed from the
$2.1 million net loss for the 1994 Twelve-month Period primarily because of
related party interest expense in the 1994 Twelve-month Period with no
corresponding expense in the 1994 Ten-month Period.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company's adoption of Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," during 1996 did not have a significant effect on its
financial position or results of operations.
The Company does not plan to adopt the fair value-based measurement
methodology for employees stock options contemplated by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, this Standard is not expected to have a significant effect on the
Company's financial position or results of operations.
37
<PAGE>
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Prospectus relating to the Company's
operating results, and plans and objectives of management for future operations,
including plans or objectives relating to the Company's products and services,
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results of the Company may
differ materially from those in the forward looking statements and may be
affected by a number of factors including the receipt of regulatory approvals,
the success of the Company's implementation of digital technology, subscriber
equipment availability, tower space availability, and the absence of
interference, as well as other factors contained herein (including under the
heading "Risk Factors") and in the Company's securities filings.
The Company's future revenues and profitability are difficult to predict due
to a variety of risks and uncertainties, including (i) business conditions and
growth in the Company's existing markets, (ii) the successful launch of systems
and technologies in new and existing markets, (iii) the Company's existing
indebtedness and the need for additional financing to fund subscriber growth and
system and technological development, (iv) government regulation, including FCC
regulations, (v) the Company's dependence on channel leases, (vi) the successful
integration of future acquisitions and (vii) numerous competitive factors,
including alternative methods of distributing and receiving video transmissions.
The Company expects to continue its subscriber growth and launch additional
systems. Moderate increases in revenues and subscribers are anticipated in 1997;
however, the rate of increase cannot be estimated with precision or certainty.
The Company believes that general and administrative expenses and depreciation
and amortization expense will continue to increase to support overall growth.
Because of the foregoing uncertainties affecting the Company's future
operating results, past performance should not be considered to be a reliable
indicator of future performance, and investors should not use historical results
or trends as determinative of the Company's future performance. In addition, the
Company's participation in a developing industry employing rapidly changing
technology will result in significant volatility in the market value of the
Notes.
In addition to the matters noted above, certain other statements made in
this Prospectus are forward looking. Such statements are based on an assessment
of a variety of factors, contingencies and uncertainties deemed relevant by
management, including technological changes, competitive products and services,
management issues as well as those matters discussed specifically under the
heading "Risk Factors" and elsewhere herein. As a result, the actual results
realized by the Company could differ materially from the statements made herein.
Readers of this Prospectus are cautioned not to place undue reliance on the
forward looking statements made in this Prospectus or in the Company's other
securities filings.
38
<PAGE>
BUSINESS
The following description of the business of CS Wireless, unless
specifically stated otherwise, assumes that the Contribution Closing occurred on
December 31, 1995.
OVERVIEW
The Company is one of the largest wireless cable television companies in the
United States in terms of LOS households and subscribers. The Company's 11
markets encompass on a pro forma basis (after giving effect to the consummation
of the PCTV Swap) approximately 7.4 million television households, approximately
6.0 million of which are LOS households, as estimated by the Company. As of
December 31, 1996, the Company provided service to approximately 65,553
subscribers.
The Company is a majority-owned subsidiary of CAI. CAI is the largest
developer, owner and operator of wireless cable television systems in the United
States in terms of LOS households and the first wireless cable operator to enter
into a strategic arrangement with RBOCs. CAI's 14 markets encompass
approximately 18.0 million television households, of which approximately 13.1
million are LOS households, as estimated by CAI. CAI provided wireless cable
service to approximately 80,900 subscribers as of September 30, 1996. The
Company is also affiliated with Heartland, a leading developer, owner and
operator of wireless cable systems in small to mid-size markets. Heartland's 95
markets encompass approximately 10.3 million television households, of which
approximately 9.2 million are LOS households, as estimated by Heartland.
Heartland provided wireless cable service to approximately 221,195 subscribers
as of October 31, 1996.
Wireless cable programing is transmitted through the air via microwave
frequencies from a transmission facility to a small receiving antenna at each
subscriber's location, which generally requires an unobstructed LOS from the
transmission facility to the subscriber's receiving antenna. Traditional hard-
wire cable systems also transmit signals from a central transmission facility,
but deliver the signal to a subscriber's location through an extensive network
of fiber optic and/or coaxial cable and amplifiers. Since wireless cable systems
do not require a network of fiber optic and coaxial cable, wireless cable
operators such as the Company can provide subscribers with a high quality
picture with fewer transmission disruptions at a significantly lower capital
cost per installed subscriber than traditional hard-wire cable systems. In
addition, not having to maintain a hard-wire transmission system results in
lower ongoing maintenance costs for wireless cable systems. As a result of the
generally low capital expenditure requirements and low maintenance costs, the
Company believes it should be able to achieve positive cash flow at lower levels
of subscriber penetration than hard-wire cable companies.
BUSINESS STRATEGY
The Company's objective is to become a leading regional provider of
subscription television services. The Company expects to achieve its goal
through: (i) the deployment of digital wireless cable equipment in most of its
markets; (ii) the acquisition and/or swapping of wireless cable assets or
systems that increase the Company's regional concentration of markets; (iii) the
aggressive pursuit of strategic relationships that will enable the Company to
benefit from the capital, infrastructure and brand identity associated with such
relationships; and (iv) the rapid penetration of its markets.
The Company expects that digital wireless cable equipment will become
commercially available in 1997 and expects to convert or build most of its
markets using digital technology in 1997. Digital technology, capable of
delivering in excess of 100 channels, will allow the Company to offer more
programming choices than almost all of its hard-wire cable competitors in its
markets. The Company believes that cable subscribers are most sensitive to
programming quality and choice, price, service and reliability and that its
digital technology will enable the Company to offer its subscribers a service
that is comparable or superior to hard-wire cable in each of these respects. The
Company's value pricing strategy is to offer more programming at a price level
comparable to that of its competitors' most common service. The availability of
channels in excess of those used to provide a complete selection of local
television
39
<PAGE>
stations and cable networks will be used to provide an expanded variety of
premium and pay-per view channels. In addition, high channel capacity will
enable the Company to use its channels for other uses, such as interactive
programming, as these services and technologies become available. CS Wireless
will continue to explore other delivery technologies that can enhance its video
services to its subscribers.
RECENT ACQUISITIONS AND DIVESTITURES
An important part of the Company's growth strategy is to expand its markets
and subscriber base through the acquisition of wireless cable systems and
channel rights in targeted markets throughout the midwest and southwest regions
of the United States. Through selected acquisitions, divestitures, asset swaps
and joint ventures, the Company will seek 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 large 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 CS Wireless'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 July 17, 1996, CS Wireless 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 BellSouth (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 $7,300,000, subject to
adjustment, plus reimbursement of certain expenses and (ii) the BTA License
relating to Atlanta, Georgia for $6,000,000, subject to adjustment. The Company
expects to close the sale during the first half of 1997, however, the closing of
such sale is subject to various conditions precedent, and there can be no
assurance that such transaction will be consummated.
On October 11, 1996, CS Wireless, acquired all of the issued and outstanding
common stock ("USA Common Stock") of USA Wireless Cable, Inc. ("USA") in a
merger transaction (the "USA Wireless Acquisition") pursuant to an Agreement and
Plan of Merger, dated as of July 23, 1996 (the "USA Merger Agreement"). 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
$17,012,000, of which approximately $6,000,000 was paid in the form of CS
Wireless common stock and approximately $10,000,000 consisted of approximately
$9,000,000 of indebtedness assumed by CS Wireless and an aggregate amount of
approximately $760,000 (the "Note Amount") in the form of two promissory notes,
each payable on demand. $5,000 of the Note Amount represents payment for
Hilliard's convenant not to compete, and $755,000 of the Note Amount is in
satisfaction of an obligation from USA to Hilliard.
40
<PAGE>
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. The PCTV Swap is expected to close during the
first quarter of 1997.
LETTERS OF INTENT; AGREEMENT IN PRINCIPLE. In July, 1996, CS Wireless
entered into a letter of intent with American Telecasting, Inc. ("ATI") to
exchange CS Wireless' Minneapolis, Minnesota, Bakersfield, California and
Stockton/Modesto, California markets for ATI's Little Rock, Arkansas,
Louisville, Kentucky, Oklahoma City, Oklahoma and Wichita, Kansas markets. The
letter of intent has expired without the transaction being consummated.
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 $4.6 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 recieve 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 $3.2 million rather
than $4.6 million. The Company received the Radcliffe system and Scottsbluff and
Kalispell assets in connection with the USA Wireless Acquisition.
OPERATING STRATEGY
The Company believes that, with respect to television services, subscribers
are generally indifferent to the delivery methodology employed (such as wireless
or hard-wire cable), but are concerned with such features as programming, price,
service and reliability. The Company's operating strategy focuses on (i) value
pricing, (ii) competitive programming offerings, (iii) commitment to digital and
other technologies, (iv) responsive customer service, (v) signal quality and
reliability, and (vi) targeted marketing. This operating strategy is designed to
attract and retain subscribers, enabling the Company to compete effectively with
hard-wire cable providers.
VALUE PRICING. The Company believes that its lower capital requirements and
low operating costs will allow it to compete effectively with hard-wire cable
operators based on price. As its basic service, the Company expects to offer, at
an equal or lower price, a greater number of channels than the majority of its
hard-wire cable competitors offer as their expanded basic service.
COMPETITIVE PROGRAMMING OFFERINGS. The Company provides its subscribers
with a variety of programming choices, including local broadcast television
stations; cable television networks such as CNN, ESPN, A&E, MTV, Nickelodeon,
The Discovery Channel, HBO, Showtime and The Disney Channel; pay-per-view
programming services; and various feature films and sporting events. Upon
completion of conversion to digital technology, the Company expects to offer
more programming channels than those currently offered by the majority of
hard-wire cable providers in its markets. Additionally, the Company will have
the capacity to offer extensive pay-per-view programming opportunities to all of
its subscribers utilizing addressable converter technology.
COMMITMENT TO DIGITAL AND OTHER TECHNOLOGIES. The Company intends to
implement digital technology in most of its operating and targeted markets. The
Company estimates that digital converter boxes could be commercially available
in 1997, although it does not expect to obtain any such equipment until late
1997. Digital technology is expected to permit between four and 10 video
channels to be transmitted over each analog wireless channel. The Company
believes digital technology may provide additional uses of its wireless spectrum
and may potentially increase its total LOS household reach. The Company will
continue to evaluate new technologies and services as they become commercially
available, including anticipated developments in interactive services.
41
<PAGE>
RESPONSIVE CUSTOMER SERVICE. The Company's objective is to provide its
subscribers with a high level of efficient and responsive customer service. The
Company believes that the quality of its customer service will provide it with a
competitive advantage. The Company will seek to achieve a high level of customer
service through numerous initiatives, including maintaining extended hours of
service, providing extensive training of its customer service representatives,
implementing an automated response unit that provides after-hour assistance
(E.G., billing inquiries, account balance information) and developing other
computer-assisted customer service efficiency programs.
SIGNAL QUALITY AND RELIABILITY. The Company will strive to achieve the
highest level of quality and reliability afforded by commercially available
technology. The Company believes its microwave transmission equipment will
deliver a signal to its subscribers that meets or exceeds the signal quality
generally available from hard-wire cable service. The Company's wireless
transmission system eliminates the need for cascading signal amplifiers that
degrade television signal quality. Since there are fewer network components, the
Company's wireless system achieves greater reliability and fewer outages as
compared to most hard-wire cable systems. This reliability results in lower
operating costs and fewer customer complaints from loss of service.
TARGETED MARKETING. The Company will target its marketing efforts in
specific neighborhoods identified as being particularly attractive and
well-suited for its services. Once selected, the marketing campaign consists of
cost-effective local advertising (including billboards and local print-media),
door-to-door campaigns, direct mail and customer-referral promotions. This
targeted approach will allow the Company to control roll-out and marketing
costs. In the future, the Company may include mass marketing strategies in
conjunction with its targeted marketing strategy.
OPERATING AND PLANNED MARKETS
The table below outlines as of December 31, 1996 (except as indicated in
footnote (a) below) the characteristics of the Company's operational and
pre-launch markets, as well as its market under development and markets held for
sale or disposition. The Company expects that the pre-launch markets and the
market under development will be operational by the end of 1998.
<TABLE>
<CAPTION>
ESTIMATED
TOTAL ESTIMATED NUMBER OF APPROXIMATE
SERVICE AREA LOS CHANNELS NUMBER OF
MARKET HOUSEHOLDS(A) HOUSEHOLDS(A) AVAILABLE(B) SUBSCRIBERS
- ------------------------------------------------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
OPERATIONAL MARKETS
Cleveland, OH (c)...................................... 1,178,000 884,000 37 23,945
Dayton, OH (d)(e)(f)................................... 610,000 413,000 38 7,012
San Antonio, TX (d).................................... 550,000 440,000 38 13,443
Fort Worth, TX (d)..................................... 540,000 443,000 42 1,042
Grand Rapids, MI (d)................................... 458,000 344,000 23 757
Kansas City, MO and Suburbs(g)......................... 1,065,000 800,000 29(h) 6,023
PRE-LAUNCH MARKET
Dallas, TX (d)......................................... 981,000 872,000 35 --
MARKET UNDER DEVELOPMENT
Charlotte, NC (c)...................................... 580,000 472,000 13(i) --
MARKETS HELD FOR SALE OR DISPOSITION (J)
Stockton/Modesto, CA (c)............................... 350,000 300,000 32 --
Bakersfield, CA (c).................................... 162,000 151,000 42 8,553
Minneapolis, MN (d).................................... 959,000 882,000 32(k) 4,778
------------- ------------- ------
Total................................................ 7,443,000 6,001,000 65,553
------------- ------------- ------
------------- ------------- ------
</TABLE>
42
<PAGE>
- ------------------------
(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 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 includes 8, 8,
5, 6, 13, 7, 5, 13, 0, 6 and 10 off-air channels, and 29, 24, 33, 32, 29,
16, 24, 22, 8, 26 and 32 wireless cable channels, in Cleveland, Ohio;
Minneapolis, Minnesota; Dayton, Ohio; San Antonio, Texas; Fort Worth, Texas;
Grand Rapids, Michigan; Kansas City, Missouri and Suburbs; Dallas, Texas;
Charlotte, North Carolina; Stockton/Modesto, California; and Bakersfield,
California, respectively. The Number of Channels Available also includes
certain channels that are subject to FCC (as defined) 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) Market contributed by CAI.
(d) Market contributed by Heartland.
(e) For purposes of Estimated Total Service Area Households and Estimated LOS
Households, the Dayton, Ohio market includes Bloom Center/Napoleon, Indiana,
a suburban market adjacent to Dayton. The Bloom Center/Napoleon market is
not yet operational.
(f) 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 additional time to complete construction.
The Bloom Center/Napoleon, Indiana market has 20 channels, all of which are
the subject of currently pending requests for additional time to complete
construction.
(g) The Company's Kansas City, Missouri and Suburbs market is comprised of
Kansas City, Missouri, as well as the suburbs of Maysville/Cameron and Sweet
Springs, Missouri, and Effingham/Nortonville and Wellsville, Kansas.
Maysville and Sweet Springs were contributed to the Company by Heartland at
the Contribution Closing. Effingham and Wellsville, Kansas were acquired by
the Company in the USA Wireless Acquisition. Kansas City, Missouri is
expected to be received by the Company from PCTV in connection with the PCTV
Swap. The PCTV Swap is expected to close during the first quarter of 1997.
See "Business--Pending Acquisitions and Divestitures."
(h) The total of 29 channels available is based on 24 wireless cable channels
and 5 off-air channels for the Kansas City system. See "Business--The
Company's Markets" for a description of the number of channels in each of
the Kansas City suburban markets as defined in (g) above.
(i) The Company currently holds licenses or leases for six wireless cable
channels and also has the right to develop seven additional channels,
depending on interference considerations, in the Charlotte market as a
result of its ownership of the Charlotte BTA.
(j) Does not include the Salt Lake City market which is expected to be
transferred to PCTV in the PCTV Swap. Does not include the Atlanta (suburbs)
market acquired by the Company on July 17, 1996 pursuant to the Heartland
Acquisition. See "Business--Pending Acquisitions and Divestitures."
(k) Does not include four channels whose authorization is the subject of a
petition for reconsideration and, in the alternative, a new station
application and four channels that are leased but no channel capacity is
available.
THE COMPANY'S MARKETS
At December 31, 1996, the Company operated wireless cable systems in
Bakersfield, California; Cleveland, Ohio; Fort Worth, Texas; Dayton, Ohio; Grand
Rapids, Michigan; Kansas City, Missouri and Suburbs; Minneapolis, Minnesota; and
San Antonio, Texas and has acquired channel rights in Charlotte,
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North Carolina; Dallas, Texas and Stockton/Modesto, California. The Minneapolis,
Minnesota; Stockton/ Modesto, California and Bakersfield, California markets do
not fit with the Company's strategy of regional concentration, and therefore,
the Company intends to sell these systems. The Company has had preliminary
discussions with potential buyers with respect to such sales; however, it cannot
predict if or when such sales will occur.
Cable Penetration (defined as the number of current hard-wire cable
subscribers divided by the number of television households in a market area),
television households and homes passed data for each of the markets described
below have been derived from the 1995 edition of the TELEVISION AND CABLE
FACTBOOK; all other information, unless otherwise noted, is as of December 31,
1995.
The Company has programming agreements with a wide variety of programmers
and offers various programming packages to its subscribers in each of its
markets based largely upon subscriber viewing preferences. The Company also
rebroadcasts local television channels in certain of its markets.
OPERATIONAL MARKETS
CLEVELAND, OHIO. The Cleveland system has approximately 23,945 subscribers,
which represents 2.7% of all LOS households in this market. The Cleveland system
offers subscribers 29 wireless cable channels and eight local television
stations, for a total of 37 channels of programming. Cleveland is the largest
city in Ohio and the 13th largest Designated Market Area ("DMA") in the United
States with 1,460,000 television households. The Cleveland system encompasses an
estimated 1,178,000 television households, of which the Company estimates
884,000 television households are serviceable by wireless cable, which
represents 75% of the Estimated Total Service Area Households. The principal
hard-wire cable competitors of the Company in the Cleveland market include
Cablevision Systems Corporation and Cox Communications, Inc. Cable Penetration
in Cleveland is approximately 65%.
DAYTON, OHIO. The Dayton system has approximately 7,012 subscribers, which
represents 1.7% of all LOS households in this market. The Dayton system offers
subscribers 32 wireless cable channels and five local television stations, for a
total of 37 channels of programming. Dayton is the 4th largest city in Ohio and
the 53rd largest DMA in the United States with 515,000 television households.
The Dayton system encompasses an estimated 469,000 television households, of
which the Company estimates 300,000 television households are serviceable by
wireless cable, which represents 64% of the Estimated Total Service Area
Households. The principal hard-wire cable competitor of the Company in the
Dayton market is Continental Cablevision. Cable Penetration in Dayton is
approximately 50%. In addition to the Dayton market, the Company holds licenses
or leases the rights to 20 wireless cable channels in Bloom Center, Indiana, a
suburban market adjacent to Dayton that has an estimated 141,000 total
households, of which the Company estimates 113,000 households are serviceable by
wireless cable, which represents 80% of the Estimated Total Service Area
Households. With five local television stations available, the Company
anticipates that at least 25 channels of programming could be provided when
operational.
SAN ANTONIO, TEXAS. The San Antonio system has 13,443 subscribers, which
represents 3.1% of all LOS households in this market. The San Antonio system
currently offers 31 wireless channels, plus six local television station
channels, for a total of 37 channels of programming. San Antonio is the 39th
largest DMA in the United States with 629,000 television households. The San
Antonio system encompasses an estimated 550,000 television households, of which
the Company estimates 440,000 television households are serviceable by wireless
cable, which represents 80% of the Estimated Total Service Area Households. The
principal hard-wire cable competitor of the Company in the San Antonio market is
Paragon. Cable Penetration in San Antonio is approximately 64%.
FORT WORTH, TEXAS. The Fort Worth system has approximately 1,042
subscribers, which represents 0.2% of all LOS households in this market. The
Fort Worth system currently offers subscribers 22 wireless cable channels and 13
local television stations, for a total of 35 channels of programming. The
Company also has the rights to seven additional wireless cable channels which
must be relocated to the Company's head-end transmission facility before these
channels can be added to the Fort Worth system. Fort Worth-
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Dallas is the 8th largest DMA in the United States with approximately 1,820,700
television households. The Fort Worth system encompasses an estimated 540,000
television households, of which the Company estimates 443,000 television
households are serviceable by wireless cable, which represents 82% of the
Estimated Total Service Area Households. The principal hard-wire cable
competitors of the Company in the Fort Worth market are Marcus Cable, Arlington
Telecable and Paragon. Cable Penetration in Fort Worth is approximately 49%.
GRAND RAPIDS, MICHIGAN. The Grand Rapids, Michigan system has approximately
757 subscribers, which represents 0.2% of all LOS households in this market. The
Grand Rapids system offers subscribers 16 wireless cable channels and seven
local television stations for a total of 23 channels of programming. Grand
Rapids is the second largest city in Michigan and the 38th largest DMA in the
United States with 634,000 television households. The Grand Rapids system
encompasses an estimated 458,000 television households, of which the Company
estimates 344,000 television households are serviceable by wireless cable, which
represents 75% of the Estimated Total Service Area Households. The principal
hard-wire cable competitor of the Company in the Grand Rapids market is TCI
Cablevision of West Michigan, Inc. Cable Penetration in Grand Rapids is
approximately 59%.
KANSAS CITY, MISSOURI AND SUBURBS. The Company provides service to 6,023
subscribers in the Kansas City and Suburbs market, which represents 0.8% of all
LOS households in this market. The Kansas City adjacent suburban markets are
Maysville and Sweet Springs, Missouri and Nortonville and Wellsville, Kansas.
The Kansas City market has 24 wireless cable channels and 5 local television
stations, for a total of 29 channels of programming. The Kansas City suburban
systems offer subscribers 24 wireless cable channels and five local television
stations in Maysville, Missouri, 20 wireless cable channels and eight local
television stations in Sweet Springs, Missouri, 21 wireless cable channels and
eight local television stations in Effingham (Nortonville), Kansas and will
offer 20 wireless cable channels and eight off-air stations in Wellsville,
Kansas. The Kansas City and suburbs system encompasses an estimated 1,065,800
television households, of which the Company estimates 800,000 television
households are serviceable by wireless cable, which represents 75% of the
Estimated Total Service Area Households. The principal hard-wire cable
competitor of the Company in the Kansas City (suburbs) market is American
Cablevision. Cable Penetration in Kansas City (suburbs) is approximately 62%.
PRE-LAUNCH MARKET
DALLAS, TEXAS. Fort Worth-Dallas is the 8th largest DMA in the United States
with 1,820,700 television households. The Company expects that the Dallas market
will encompass an estimated 981,000 television households, of which the Company
estimates that 872,000 television households are serviceable by wireless cable,
which represents 89% of the Estimated Total Service Area Households. The Company
currently holds licenses or leases the rights to 22 wireless cable channels in
the Dallas market. These channels have not yet been co-located. With 13 local
television stations available, the Company anticipates that the Dallas system
could provide at least 35 channels of programming when it is operational. In
connection with the development of a system marketed to residential subscribers,
the Company intends to co-locate its channels and increase its channel capacity.
The principal hard-wire cable competitors of the Company in the Dallas market
include TCI, Telecable and Paragon. Cable Penetration in Dallas is approximately
50%.
MARKET UNDER DEVELOPMENT
CHARLOTTE, NORTH CAROLINA. The Company currently holds licenses or leases
for six wireless cable channels in the Charlotte market. CAI was also 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 authorization for one
of the six channels that the Company 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
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in the Charlotte market as a result of its ownership of the Charlotte BTA.
Charlotte is the largest city in North Carolina and the 28th largest DMA in the
United States with 793,500 television households. The Company expects that the
Charlotte market will encompass an estimated 580,000 television households, of
which the Company estimates 472,000 television households are serviceable by
wireless cable, which represents 81% of the Estimated Total Service Area
Households. The principal hard-wire cable competitor of the Company in the
Charlotte market is Cablevison of Charlotte. Cable Penetration in the Carlotte
market is approximatley 64%.
MARKETS HELD FOR SALE OR DISPOSITION
MINNEAPOLIS, MINNESOTA. The Minneapolis system has approximately 4,778
subscribers, which represents 0.5% of all LOS households in this market. The
Minneapolis system offers subscribers 20 wireless cable channels and eight local
television stations, for a total of 28 channels of programming. Minneapolis-St.
Paul is the 14th largest DMA in the United States with 1,407,000 television
households. The Minneapolis system encompasses an estimated 959,000 television
households, of which the Company estimates 882,000 television households are
serviceable by wireless cable, which represents 92% of the Estimated Total
Service Area Households. The principal hard-wire cable competitors of the
Company in the Minneapolis market are Paragon Cable, Continental Cablevision and
King Cable. Cable Penetration in Minneapolis is approximately 47%.
STOCKTON/MODESTO, CALIFORNIA. Construction of the first stage of the
Stockton/Modesto transmission facility was completed in June 1995. Following the
commercial launch of the Stockton/Modesto system, the Company will offer
subscribers at least 21 wireless cable channels, six off-air channels and
pending applications relative to 4 channels, for a total of 31 channels of
programming. Stockton/Modesto is part of the Sacramento/Stockton-Modesto DMA,
the 21st largest in the United States with 1,109,000 television households. The
Company expects that the Stockton/Modesto system will encompass an estimated
350,000 television households, of which the Company estimates 300,000 television
households are serviceable by wireless cable, which represents 86% of the
Estimated Total Service Area Households. The principal hard-wire cable
competitors of the Company in the Stockton/Modesto market include Continental
Cablevision and Post-Newsweek Cable Inc. Cable Penetration in the
Stockton/Modesto market is approximately 61%.
BAKERSFIELD, CALIFORNIA. The Bakersfield system has approximately 8,553
subscribers, which represents 5.7% of all LOS households in this market. The
Bakersfield system offers subscribers 32 wireless channels, plus 10 off-air
channels, for a total of 42 channels of programming. Bakersfield is the 15th
largest city in California and the 129th largest DMA in the United States with
171,000 television households. The Bakersfield system encompasses an estimated
162,000 television households, of which the Company estimates 151,000 television
households are serviceable by wireless cable, which represents 93% of the
Estimated Total Service Area Households. The principal hard-wire cable
competitors of the Company in the Bakersfield market are Time Warner Cable and
Cox Communications Inc. Cable Penetration in Bakersfield is approximately 72%.
EMPLOYEES
The Company has approximately 350 employees as of September 30, 1996. The
Company has experienced no work stoppages and believes that it has good
relations with its employees.
PROPERTIES
The Company leases office sites in Dallas, Texas and Philadelphia,
Pennsylvania. The Company also leases or owns 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
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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.
LITIGATION
The Company is not a party to any litigation that would have a material
adverse effect on its business, results of operations or financial condition.
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 (8) 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. Based on the
recent course of events and dealings between the Company and SAW, the estimated
range of loss, net of the Company's accrual, is $0 to $1.25 million.
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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
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.
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 Kagan, 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 and the potential
subscribers will not receive the signals. 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. See "Business--Strategy--Commitment to
Digital and Other Technologies." Since wireless cable systems do not require an
extensive Cable Plant, wireless cable operators can provide
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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.
REGULATION
GENERAL. The wireless cable industry is subject to regulation by the FCC
pursuant to 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 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 50 large 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.
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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. Heartland was the high bidder for 93 BTA authorizations, for a
total of $19.8 million. 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
million. Of the aggregate $12.6 million, approximately $9.0 million has been
paid by CAI 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, Sedalia and St.
Joseph, Missouri, Dayton, Ohio, Minneapolis, Minnesota, Dallas and San Antonio,
Texas, Benton Harbor, Kalamazoo and Muskegan, Michigan and Salt Lake City, Utah
for approximately $6.3 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, using a portion of the proceeds from the Unit Offering, in the
amount of $4.0 million, and will continue to reimburse CAI and Heartland for any
and all costs incurred by CAI and Heartland, which costs are estimated to be up
to $15 million, 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.
In order to be eligible for the BTA Auction, CAI and Heartland were required
to file, prior to the start of the auction, applications and up-front payments.
After the BTA Auction, in any markets where CAI or Heartland were the winning
bidders, they had certain post-auction filing obligations, including, but not
limited to, applications that propose new transmission facilities, exhibits
concerning their involvement in bidding consortia, and their plans to build-out
two-thirds of the market over a five-year period. Due to the unique nature of
the BTA Auction, there is no prior regulatory history regarding the scope and
nature of the information the FCC will require, or how the FCC will treat the
information.
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 16-20, 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.
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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). Current FCC regulations require wireless cable systems to transmit
only analog signals and those regulations will have to be modified, either by
rulemaking or by individual application, to permit the use of digital
transmissions. CAI and Heartland are parties to a pending petition for
declaratory ruling filed in July 1995 seeking adoption of interim regulations
authorizing digital transmission. If granted, the declaratory ruling will permit
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 transmission
facilities. A total of 8, 12, 5, 4 and 16 channels in Fort Worth and Dallas,
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 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
51
<PAGE>
FCC is avoiding situations where proposed stations are predicted to cause
interference with the reception of previously 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. See
"Industry Overview--Regulation--Retransmission Consent."
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. See "Industry Overview--Regulation--General."
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
52
<PAGE>
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, 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.
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.
53
<PAGE>
OTHER REGULATIONS
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.
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 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 Communications Act prohibits local exchange
carriers ("LECs"), including the RBOCs, from providing video programming
directly to subscribers in their respective telephone service areas. This
restriction does not apply to wireless cable, however, certain federal courts
have held that this cross-ownership ban abridges the First Amendment rights of
LECs to free expression under the
54
<PAGE>
U.S. Constitution. Such rulings cover nearly all the approximately 1,300 LECs in
the United States. The United States Supreme Court has decided to hear an appeal
on this issue. A final determination of unconstitutionality of the
cross-ownership ban would eliminate federal barriers to telephone company
provision of video service. Both the United States Senate and House of
Representatives have passed legislation that would, if enacted, lift barriers to
the provision of video service by telephone companies. The FCC already permits
LECs to provide "video dialtone" service, thereby allowing LECs to make
available to multiple service providers, on a nondiscriminatory common carrier
basis, a basic platform that will permit end users to access video program
services provided by others. Several large telephone companies have announced
plans to either (i) enhance their existing distribution plant to offer video
dialtone service, (ii) construct new plants in conjunction with a local cable
operator to offer video dialtone service, or (iii) acquire or merge with
existing hard-wire cable systems outside their telephone service areas. Some
LECs have indicated that they intend to construct or acquire separate hard-wire
cable systems within their telephone service areas if authorized. While the
competitive effect of the entry of telephone companies into the video
programming business is still uncertain, the Company believes that wireless
cable systems will continue to maintain a cost advantage over video dialtone
service and fiber optic distribution technologies due to the high capital
expenditures associated with such technologies. In July 1995, Pacific Telesis
Group ("PacTel"), an LEC based in California, acquired Cross Country Wireless,
Inc., a wireless cable system operator in southern California, for approximately
$175 million. PacTel announced that its acquisition of Cross Country will allow
PacTel to enter the market for consumer video services on an expedited basis. In
November 1995, PacTel announced it would acquire Wireless Holdings, Inc. and
Videotron Bay Area Inc., which operate wireless cable systems in San Francisco,
California, Tampa, Florida and Spokane, Washington, and own channel rights in
San Diego, California and Greenville, South Carolina, for approximately $170
million. 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.
See "Risk Factors--Restrictions Imposed by Government and Community Regulation."
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. The FCC has not
determined how many licenses it will award in each BTA, but the proposal is for
one to two licenses. It is expected that LMDS licensees will share the 28 GHz
frequency band with the Mobile Satellite Service. One license would be awarded
on a primary basis for an 850 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 (for telephony, video and data capabilities). The
FCC has yet to issue final rules, although it is anticipated that an LMDS
auction will be conducted in 1996.
55
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus with respect to the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jared E. Abbruzzese.................................. 42 Chairman of the Board
Alan Sonnenberg...................................... 43 Vice Chairman of the Board
David Webb........................................... 48 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...................................... 48 Senior Vice President of Business Development and
Licensing
James P. Ashman...................................... 41 Director
Robert D. Happ....................................... 55 Director
J.R. Holland, Jr..................................... 52 Director
D. Michael Sitton.................................... 46 Director
William W. Sprague................................... 38 Director
</TABLE>
JARED E. ABBRUZZESE, CHAIRMAN OF THE BOARD. Jared E. Abbruzzese is and has
been the Chairman, Chief Executive Officer and Director of CAI Wireless Systems,
Inc. 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, VICE CHAIRMAN OF THE BOARD. Alan 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. Mr. Sonnenberg
served as President of the Company until May 1, 1996, and currently serves as
Vice Chairman of the Board. 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, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. David Webb is
currently President, Chief Executive Officer and a Director of the Company,
positions he has held since January 22, 1997. From the Company's formation on
February 23, 1996 until January 22, 1997, Mr. Webb served as a Vice Chairman of
the Board of Directors of the Company. Mr. Webb is a co-founder and has been a
Director of Heartland since its formation in 1990. From the formation of
Heartland in 1990 until January 22, 1997, Mr. Webb held the positions of
President and Chief Executive Officer of Heartland. From 1979 to 1989, Mr. Webb
was a shareholder, director and manager of Durant Cablevision, Inc. and its
predecessor, a traditional hard-wire cable system company. Mr. Webb has been a
shareholder and director of several media/communications companies involved in
network and independent television stations, AM and FM radio stations, paging
and telephony. Mr. Webb is also a director of Wireless One, Inc.
FRANK H. HOSEA, SENIOR VICE PRESIDENT AND CHIEF OPERATING OFFICER. Frank H.
Hosea is currently Senior Vice President and Chief Operating Officer, positions
he has held 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. Prior to joining the
Company, Mr. Hosea served as Vice President of Sales/Marketing of KBLCOM Inc., a
division of Houston Industries
56
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for 6 years. From 1988 to 1990 Mr. Hosea served as Corp. Director of
Sales/Marketing for Warner Cable. From 1983 to 1988 Mr. Hosea was Vice President
of Sales/Marketing for Storer Communication Inc.
JEFFREY A. KUPP, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. Jeffrey
A. Kupp has been Senior Vice President and Chief Financial Officer since joining
the Company on January 6, 1997. Prior to joining the Company, Mr. Kupp served as
Director of Special Projects in the Corporate Finance group of DSC
Communications Corporation, a $1.4 billion telecommunications equipment
manufacturer, 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
also served in various capacities in the Audit group of Ernst & Young LLP from
July 1985 until August 1989. Mr. Kupp is a certified public accountant.
THOMAS W. DIXON, SENIOR VICE PRESIDENT OF BUSINESS DEVELOPMENT AND
LICENSING. Thomas W. Dixon is currently Senior Vice President of Business
Development and Licensing, a position he has held 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. Mr. Dixon was responsible for sales, customer service, operations and
acquisitions for 30 offices located throughout Texas, Oklahoma and Louisiana.
JAMES P. ASHMAN, DIRECTOR. James P. 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, DIRECTOR. Robert D. Happ has been a Director of CAI since
September 1995. Mr. Happ had been the Managing Partner of the Boston,
Massachusetts office of KPMG Peat Marwick LLP ("KPMG") from 1985 until his
retirement in 1994. Prior to that, Mr. Happ served in various capacities with
KPMG. Mr. Happ is also a director of Galileo Electro-Optics Corp.
J.R. HOLLAND, JR., DIRECTOR. J.R. Holland, Jr. began advising Heartland as
a consultant in October 1992 and became Chairman of the Board of Directors in
October 1993. Mr. Holland has been employed as President of Unity Hunt
Resources, Inc. since September 1991. Unity Hunt Resources is a large
international, private holding company with interests in entertainment, cable
television, retail, investments, real estate, natural resources and energy
businesses. Mr. Holland is also the President of Hunt Capital. From November
1988 to September 1991, Mr. Holland was Chairman of the Board and Chief
Executive Officer of Nedinco, Inc., a large diversified, international holding
company. Prior to that, Mr. Holland was President and a director of KSA
Industries, Inc., a private, diversified company involved in entertainment,
retail, transportation and energy businesses, and President and a director of
Western Services International, Inc., a company involved in energy services,
equipment and chemicals. Mr. Holland began his career with Booz-Allen &
Hamilton, Inc., a management consulting firm. Mr. Holland is also a director of
Wireless One, Inc.
D. MICHAEL SITTON, DIRECTOR. D. Michael 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.
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<PAGE>
WILLIAM W. SPRAGUE, DIRECTOR. William W. Sprague has been the President of
Crest International Holdings, LLC ("Crest") since February 22, 1996. Crest is a
private company whose primary focus is investing in, raising capital for, and
managing selected telecommunications projects. Mr. Sprague is also the Chief
Financial Officer of TelQuest Ventures, 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.
See "The Contributions" for a description of the provisions of the
Stockholders' Agreement between CAI and Heartland with respect to, among other
matters, the election of directors and officers of the Company and the required
director vote on certain types of transactions.
EXECUTIVE COMPENSATION
The following table discloses compensation received by the Company's
executive officers receiving compensation in excess of $100,000 for the period
indicated. Such officers received no compensation in earlier periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
NAME ANNUAL COMPENSATION SECURITIES
AND UNDERLYING
PRINCIPAL ---------------------- OPTIONS/
POSITION YEAR SALARY($) SARS(#)
- -------------------------------------------------------- --------- ----------- -------------
<S> <C> <C> <C>
Lowell Hussey, President and Chief Executive Officer.... 1996 147,115 322,581
Alan Sonnenberg, Vice Chairman.......................... 1996 157,692 215,054
Thomas W. Dixon, Senior Vice President of Operations.... 1996 110,762 53,763
</TABLE>
- ------------------------
COMPENSATION OF DIRECTORS
Directors who are not officers of the Company are paid an annual fee of
$5,000 and a fee of $625 per meeting attended (including committee meetings),
plus out-of-pocket expenses. Officers who also serve as directors do not receive
fees for serving as directors.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on options to purchase Common Stock
of the Company granted during the fiscal year ended December 31, 1996 to the
persons named in the Summary Compensation Table above.
58
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(A) (B) (C) (D) (E) (F) (G)
<CAPTION>
% OF
NUMBER OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR ($/SH) DATE 5%($) 10%($)
- ------------------------------------------- ----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lowell Hussey.............................. 322,581 38.4% 9.40 1/1/06 1,906,973 4,832,644
Alan Sonnenberg............................ 215,054 25.6% 9.40 2/23/06 1,271,315 3,221,762
Thomas W. Dixon............................ 53,763 6.4% 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 option term.
The values are calculated in accordance with the rules promulgated by the
SEC and do not reflect the Company's estimate of future stock price
appreciation.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with regard to the
outstanding options to purchase CS Wireless Common Stock as of the end of the
fiscal year ended December 31, 1996 for the persons named in the Summary
Compensation Table above.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
<S> <C> <C> <C> <C>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#) FY-END($)
---------------- -------------------
<CAPTION>
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------- ------------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Lowell Hussey................................ -- -- 107,527/215,054 (1)
Alan Sonnenberg.............................. -- -- 150,538/64,516 (1)
Thomas W. Dixon.............................. -- -- 14,934/38,829 (1)
</TABLE>
(1) The Company's Common Stock is not publicly traded, and therefore no active
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
59
<PAGE>
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 has resigned as a director and David E. Webb was appointed
President and Chief Executive Officer to succeed Mr. Hussey. The Company and Mr.
Hussey are in discussions about his providing consulting services to the
Company. In this connection, a $300,000 payment has been made to Mr. Hussey and
it is anticipated that his employment agreement will be terminated and that
severance payments to Mr. Hussey, and changes to the terms of his outstanding
stock options, will be made.
The Company and Thomas W. Dixon entered into an employment agreement
pursuant to which he became Senior Vice President of Operations of the Company.
Mr. Dixon will receive a base salary of $125,000 per year and has been granted
options to purchase 53,763 shares of Common Stock, vesting in 36 equal monthly
installments, at an exercise price of $9.40 per share.
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 60 equal monthly installments, commencing in January
1997, at an exercise price of $9.40 per share.
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STOCK OWNERSHIP
The following table sets forth certain information as of the date of this
Prospectus 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 executive
officers of the Company, and (d) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER OWNED OF CLASS
----------------------- ----------------- -----------
<S> <C> <C>
CAI Wireless Systems, Inc. .......................................................... 5,421,166 51.90%
18 Corporate Woods Blvd., 3rd Floor
Albany, New York 12211
Heartland Wireless Communications, Inc. ............................................. 3,578,834 34.26%
200 Chisholm Place, Suite 200
Plano, Texas 75075
MMDS Holdings II, Inc................................................................ 500,000(1) 4.79%
3900 Washington Street
Wilmington, Delaware 19802
NYNEX Corporation.................................................................... 500,000(1) 4.79%
1111 Westchester Avenue
White Plains, NY 10604
Alan Sonnenberg...................................................................... 166,667(2) 1.57%
18 Corporate Woods Blvd., 3rd Floor
Albany, New York 12211
Frank H. Hosea....................................................................... 2,778(2) *
200 Chisholm Place, Suite 202
Plano, Texas 75075
Jeffrey A. Kupp...................................................................... 2,000(2) *
200 Chisholm Place, Suite 202
Plano, Texas 75075
Thomas W. Dixon...................................................................... 19,414(2) *
200 Chisholm Place, Suite 202
Plano, Texas 75075
All directors and executive officers of the Company as a group
(11 persons)....................................................................... 190,859(2) 1.79%
</TABLE>
- ------------
* Less than 1%.
(1) Does not include 5,421,166 shares of Common Stock owned by CAI. The BANX
Affiliates have presently exercisable warrants and conversion rights to
acquire approximately 45% of the common stock of CAI, although CAI has the
right to acquire the interest of the BANX Affiliates in CAI.
(2) Represents shares of Common Stock issuable upon the exercise of stock
options granted by the Company which are exercisable currently or within 60
days after the date of this Prospectus.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INTERIM SERVICE AND EMPLOYEE SHARING ARRANGEMENTS
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. The Company has agreed to pay Heartland's out-of-pocket costs and to
reimburse it for its employees' time expended. At present, the Company intends
to develop the capability to provide such services for itself.
Except for two employees of CAI, both of whom CAI employs to assist with
programming and licensing functions and shares with the Company on an
appropriate cost-sharing basis, CAI does not at present expect to provide any
services to the Company.
The Company believes that the terms of the interim services and
employee-sharing arrangements are at least as favorable to the Company as it
could obtain from unrelated third parties.
BANX SHARES AND OTHER MATTERS
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 10% equity interest in the
Company (prior to dilution), in exchange for non-cash consideration. See
"Registration Rights." 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 upon the happening of
certain events. There can be no assurance that this transfer will occur.
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.
HEARTLAND NOTES
The Heartland Short-Term Note was in the principal amount of $25 million and
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
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agreement in principle between the Company and Heartland, amounts owing under
the Heartland Long-Term Note are subject to set-off as described under "--Recent
Transactions" below.
RECENT TRANSACTIONS
On July 17, 1996, CS Wireless acquired from Heartland all of the outstanding
stock of Heartland Georgia. Heartland Georgia owns (i) leases and licenses for
wireless cable frequency rights for wireless cable channels transmitting in the
Atlanta (suburbs) market, and (ii) leases for four tower sites. The purchase
price was approximately $7.2 million. The Company has agreed to sell to
BellSouth (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
$7,300,000, subject to adjustment, plus reimbursement of certain expenses and
(ii) the BTA License relating to Atlanta, Georgia for $6,000,000, subject to
adjustment. Although the Company expects to close the sale during the first half
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.
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 $4.6 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 $3.2 million rather
than $4.6 million. The Company received the Radcliffe system and Scottsbluff and
Kalispell assets in connection with the USA Wireless Acquisition.
OTHER
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 $3.0 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 obtaining the
consent of its creditors to 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. See "Industry
Overview--Regulation."
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DESCRIPTION OF THE NOTES
The Old Notes were, and the New Notes to be issued in exchange for the Old
Notes will be, issued under an indenture dated as of February 15, 1996 (the
"Indenture") between the Company and Fleet National Bank of Connecticut, as
Trustee (the "Trustee"). The following summary of the material provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the provisions of the Indenture, including the
definitions of certain terms contained therein and those terms made a part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended, as in
effect on the date of the Indenture (the "TIA"). The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions." As used below in this "Description of the Notes" section, the
"Company" means CS Wireless Systems, Inc., but not any of its subsidiaries,
unless the context otherwise requires.
GENERAL
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes.
The Notes are unsecured senior obligations of the Company. The Notes rank
senior to all subordinated Indebtedness of the Company, including the
Indebtedness evidenced by the Heartland Long-Term Note, and pari passu with all
unsecured Indebtedness of the Company which is not by its terms expressly
subordinated to the Notes. The Notes are effectively subordinated to all
Indebtedness and other liabilities (including trade payables) of the
Subsidiaries of the Company, and will be effectively subordinated to all secured
Indebtedness of the Company to the extent of the value of the assets securing
such Indebtedness. As of September 30, 1996, the Company had $23.7 million of
indebtedness outstanding ranking subordinate to the Notes.
The Notes will be issued only in registered form, without coupons, in
principal denominations of $1,000 and integral multiples thereof. Principal of,
premium, if any, and interest on the Notes will be payable, and the Notes will
be transferable, at the office of the Company's agent in the City of New York
located at the corporate trust office of the Trustee. In addition, interest may
be paid at the option of the Company, by check mailed to the person entitled
thereto as shown on the security register. No service charge will be made for
any transfer, exchange or redemption of Notes, except in certain circumstances
for any tax or other governmental charge that may be imposed in connection
therewith. Initially, the Trustee will act as paying agent and registrar for the
Notes. The Company may change any paying agent and registrar without notice to
the holders.
MATURITY, INTEREST AND PRINCIPAL
The Notes are limited to an aggregate principal amount at maturity of
$400,000,000 and will mature on March 1, 2006. For each Old Note accepted for
exchange, the holder of such Old Note will receive a New Note having a principal
amount at maturity equal to that of the surrendered Old Note. Cash interest on
the Notes will neither accrue nor be payable prior to March 1, 2001. Thereafter,
cash interest will accrue at a rate of 11 3/8% per annum and will be payable
semi-annually on each March 1 and September 1, commencing on September 1, 2001,
to the persons who are registered holders at the close of business on the
February 15 and August 15 immediately preceding the applicable interest payment
date. The Company will pay interest on overdue principal from time to time on
demand at the rate of 2% per annum in excess of the rate shown on the cover page
of this Prospectus. The Company shall, to the extent lawful, pay interest on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the rate of 2% per annum in excess of
the rate shown on the cover page of this Prospectus. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months, and, in the
case of a partial month, the actual number of days elapsed.
The Notes are not entitled to the benefit of any mandatory sinking fund.
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<PAGE>
OPTIONAL REDEMPTION
The Indenture provides that the Notes will not be redeemable prior to March
1, 2001. On and after March 1, 2001 the Notes will be redeemable, at the option
of the Company, in whole or in part, on not less than 30 nor more than 60 days'
prior notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest, if any, to the
redemption date if redeemed during the 12-month period beginning on March 1 of
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2001.............................................................................. 105.688%
2002.............................................................................. 103.792%
2003.............................................................................. 101.896%
2004 and thereafter............................................................... 100.000%
</TABLE>
The Indenture provides that in the event that on or prior to March 1, 1999,
the Company consummates one or more public offerings of its Common Stock or
issues or sells its Common Stock to a Strategic Equity Investor, the Company
may, at its option, redeem from the proceeds of such public offerings or
issuance or sale of the Company's Common Stock to a Strategic Equity Investor no
later than 60 days following the consummation of such offering or issuance or
sale up to 35% of the aggregate principal amount at maturity of the Notes
originally issued at a redemption price equal to 111% of the Accreted Value on
the date of redemption of the Notes so redeemed; provided, however, that
immediately after giving effect to any such redemption, not less than 65% of the
aggregate principal amount of the Notes originally issued remains outstanding.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, each
holder will have the right to require that the Company repurchase all or a
portion of such holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the Accreted
Value thereof on the date of purchase (if prior to March 1, 2001) or 101% of the
aggregate principal amount thereof (if on or after March 1, 2001), plus accrued
and unpaid interest, if any, to the date of repurchase.
The Indenture provides that within 30 days following the date upon which a
Change of Control occurs, the Company must send, by first class mail, a notice
to each holder, with a copy to the Trustee, which notice shall govern the terms
of the Change of Control Offer. Such notice will state, among other things, the
purchase date, which must be not less than 30 days nor more than 45 days from
the date such notice is mailed, other than as may be required by law (the
"Change of Control Payment Date"). Holders electing to have a Note purchased
pursuant to a Change of Control Offer will be required to surrender the Note,
properly endorsed for transfer together with such other customary documents as
the Company may reasonably request, to the paying agent at the address specified
in the notice prior to the close of business on the business day prior to the
Change of Control Payment Date.
The Indenture provides that the Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the purchase of Notes pursuant to a Change of Control Offer.
If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the purchase price for all Notes that
the Company might be required to purchase. In the event that the Company were
required to purchase Notes pursuant to a Change of Control Offer, the Company
expects that it would need to seek third-party financing to the extent it does
not have available funds to meet its purchase obligations. However, there can be
no assurance that the Company would be able to obtain such financing on
favorable terms, if at all.
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<PAGE>
With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction, has
no clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person and
therefore it may be unclear whether a Change of Control has occurred and whether
the Notes are subject to a Change of Control Offer.
The foregoing provisions may not necessarily afford the holders of the Notes
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving the
Company that may adversely affect the holders because (i) such transactions may
not involve a shift in voting power or beneficial ownership or, even if they do,
may not involve a shift of the magnitude required under the definition of Change
of Control to trigger the provisions or (ii) such transactions may include an
actual shift in voting power or beneficial ownership to a Strategic Equity
Investor or Permitted Holder which is excluded under the definition of Change of
Control from the amount of shares involved in determining whether or not the
transaction involves a shift of the magnitude required to trigger the
provisions.
SELECTION AND NOTICE
The Indenture provides that in the event that less than all of the Notes are
to be redeemed at any time, selection of such Notes for redemption will be made
by the Trustee PRO RATA, by lot or by such method as the Trustee shall deem fair
and appropriate; provided, however, that if the Notes are redeemed in part with
the proceeds of a public offering of Common Stock or an issuance or sale of
Common Stock to a Strategic Equity Investor, the Trustee shall select the Notes
to be redeemed by prorating, as nearly as may be, the principal amount of Notes
to be redeemed among the holders of the Notes in proportion to the principal
amount of Notes registered in their respective names. In any proration pursuant
to a public offering of Common Stock or an issuance or sale of Common Stock to a
Strategic Equity Investor, the Trustee shall make such adjustments,
reallocations and eliminations as it shall deem proper to the end that the
principal amount of Notes so prorated shall be $1,000 or a multiple thereof, by
increasing or decreasing or eliminating the amount which would be allocable to
any holder on the basis of exact proportion by an amount not exceeding $1,000.
The Trustee in its discretion may determine the particular Notes (if there are
more than one) registered in the name of any holder which are to be redeemed, in
whole or in part. No Notes of a principal amount of $1,000 or less shall be
redeemed in part. Notice of redemption shall be mailed by first-class mail at
least 30 but not more than 60 days before the redemption date to each holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon surrender for cancellation of the original Note.
On and after the redemption date, interest will cease to accrue on Notes or
portions thereof called for redemption, unless the Company defaults in the
payment of the redemption price therefor.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Indenture provides
that neither the Company nor any Restricted Subsidiary will, directly or
indirectly, create, incur, assume, guarantee, acquire or become liable,
contingently or otherwise, for (collectively "incur") any Indebtedness other
than Permitted Indebtedness. Notwithstanding the foregoing limitations, the
Company may incur Indebtedness (including, without limitation, any Acquired
Indebtedness) if after giving pro forma effect to the incurrence of such
Indebtedness and the receipt and application of the proceeds therefrom the
Company's Leverage Ratio would be less than 5.0 to 1.
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<PAGE>
The Indenture provides that any Indebtedness of an entity existing at the
time it becomes a Restricted Subsidiary (whether by merger, consolidation,
acquisition of Capital Stock or otherwise) or is merged with or into the Company
or any Restricted Subsidiary shall be deemed to be incurred as of the date such
entity becomes a Restricted Subsidiary or the date of such merger; provided,
however, that such Indebtedness shall be deemed incurred as of the last day of
the Measurement Period for purposes of calculating the Leverage Ratio with
respect to such incurrence.
The Indenture provides that the Company will not, directly or indirectly,
incur any Indebtedness that is subordinate to any other Indebtedness of the
Company unless such Indebtedness is also expressly subordinated to the Notes;
provided, however, that no Indebtedness of the Company shall be deemed to be
subordinate to any other Indebtedness of the Company solely because such other
Indebtedness is secured.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that neither the
Company nor any Restricted Subsidiary will, directly or indirectly:
(i) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of the Company
or payable by any Restricted Subsidiary to the Company or any Wholly Owned
Restricted Subsidiary of the Company) on shares of the Capital Stock of the
Company or any Restricted Subsidiary;
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or of any Restricted Subsidiary or any
warrants, rights or options to acquire shares of any class of such Capital
Stock, other than (x) the exchange of such Capital Stock or any warrants,
rights or options to acquire shares of any class of such Capital Stock for
Qualified Capital Stock of the Company or warrants, rights or options to
acquire Qualified Capital Stock of the Company or (y) to the extent that
such Capital Stock or warrants, rights or options are owned by the Company
or any Wholly Owned Restricted Subsidiary of the Company;
(iii) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness (other than the Heartland Long-Term Note) that is subordinate
or junior in right of payment to the Notes (other than any such Indebtedness
owing to the Company or any Wholly Owned Restricted Subsidiary of the
Company);
(iv) make any Investment (other than Permitted Investments) after the
Issue Date; or
(v) make any (a) principal payment on the Heartland Long-Term Note
(except to the extent permitted under clause (iii)(A) of "--Limitation on
Asset Sales" covenant below) or (b) payment of cash interest on the
Heartland Long-Term Note
(each of the foregoing prohibited actions set forth in clauses (i), (ii), (iii),
(iv) and (v) being referred to as a "Restricted Payment"), if at the time of
such Restricted Payment or immediately after giving effect thereto, (a) a
Default or an Event of Default under the Indenture shall have occurred and be
continuing or would result therefrom, (b) the Company is not able to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the Leverage Ratio described under the covenant "--Limitation on
Incurrence of Additional Indebtedness" above, or (c) the aggregate amount of
Restricted Payments made subsequent to the Issue Date (the amount expended for
such purposes, if other than in cash, being the fair market value of such
property as determined by the Board of Directors of the Company in good faith)
exceeds or would exceed the sum of:
(A) the difference between (x) Cumulative EBITDA as of the date of such
Restricted Payment, minus (y) the product of 2.0 times Cumulative Interest
Expense as of the date of such Restricted Payment, PLUS
(B) 100% of the aggregate net cash proceeds received by the Company from
any Person (other than a Restricted Subsidiary) from the issuance and sale
subsequent to the Issue Date of Qualified
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Capital Stock of the Company (excluding net cash proceeds attributable to
the equity securities comprising a part of the Units and any net proceeds
from any public offering of Common Stock or issuance or sale of Common Stock
to a Strategic Equity Investor but only to the extent used to redeem the
Notes pursuant to the second paragraph of "Optional Redemption" and
excluding (A) any Qualified Capital Stock of the Company paid as a dividend
on any Capital Stock of the Company or of any Restricted Subsidiary and (B)
any Qualified Capital Stock of the Company with respect to which the
purchase price thereof has been financed directly or indirectly using funds
(x) borrowed from the Company or from any Restricted Subsidiary, unless and
until and to the extent such borrowing is repaid or (y) contributed,
extended, guaranteed or advanced by the Company or by any Restricted
Subsidiary (including, without limitation, in respect of any employee stock
ownership or benefit plan)), PLUS
(C) without duplication of any amounts included in the immediately
preceding subclause (B), 100% of the aggregate net proceeds (determined
pursuant to the penultimate paragraph of this covenant) received by the
Company from the issuance and sale (other than to any Restricted Subsidiary)
of any Qualified Capital Stock of the Company upon the conversion of, or in
exchange for, any Indebtedness of the Company or any Restricted Subsidiary
(other than any subordinated Indebtedness outstanding immediately after the
Issue Date), PLUS
(D) an amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from cash dividends, repayments of loans or advances
in cash, or other transfers of cash, in each case to the Company or to any
Wholly Owned Restricted Subsidiary of the Company from Unrestricted
Subsidiaries (but without duplication of any such amount included in
calculating Cumulative EBITDA of the Company), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (in each case valued as
provided in the covenant described under "--Limitation on Restricted and
Unrestricted Subsidiaries" below), not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary and
which was treated as a Restricted Payment under the Indenture, PLUS
(E) without duplication of the immediately preceding subclause (D), an
amount equal to the lesser of the cost or net cash proceeds received upon
the sale or other disposition of any Investment made after the Issue Date
which had been treated as a Restricted Payment (but without duplication of
any amount included in calculating Cumulative EBITDA of the Company).
Notwithstanding the foregoing, these provisions do not prohibit:
(1) the payment of any dividend or the making of any distribution within
60 days after the date of its declaration if the dividend or distribution
would have been permitted on the date of declaration; or
(2) the acquisition of Capital Stock of the Company or any Restricted
Subsidiary or warrants, options or other rights to acquire such Capital
Stock through the application of the net proceeds of any capital
contribution (other than from a Restricted Subsidiary) or a substantially
concurrent sale for cash (other than to a Restricted Subsidiary) of
Qualified Capital Stock of the Company or warrants, options or other rights
to acquire Qualified Capital Stock of the Company; or
(3) the acquisition of Indebtedness of the Company that is subordinate
or junior in right of payment to the Notes, either (i) solely in exchange
for shares of Qualified Capital Stock of the Company (or warrants, options
or other rights to acquire Qualified Capital Stock of the Company) or for
Indebtedness of the Company which is subordinate or junior in right of
payment to the Notes, at least to the extent that the Indebtedness being
acquired is subordinated to the Notes and has a Weighted Average Life to
Maturity no less than that of the Indebtedness being exchanged or (ii)
through the application of the net proceeds of any capital contribution or a
substantially concurrent sale for cash (other than to or from a Restricted
Subsidiary) of Qualified Capital Stock of the Company (or warrants, options
or other rights to acquire Qualified Capital Stock of the Company) or
Indebtedness of the Company which is subordinate or junior in right of
payment to the Notes, at least
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to the extent and in the manner that the Indebtedness being acquired is
subordinated to the Notes and has a Weighted Average Life to Maturity no
less than that of the Indebtedness being refinanced; or
(4) the repurchase of Capital Stock of the Company (including options,
warrants or other rights to acquire such Capital Stock) from employees or
former employees of the Company or any Restricted Subsidiary for
consideration which, when added to all loans made pursuant to clause (5)
below of this paragraph during the same fiscal year and then outstanding
(determined as provided in clause (5) below) does not exceed $500,000 in the
aggregate in any fiscal year; or
(5) the making of loans and advances to employees of the Company or any
Restricted Subsidiary in an aggregate amount at any time outstanding
(including as outstanding any such loan or advance written off or forgiven)
which, when added to the aggregate consideration paid pursuant to clause (4)
of this paragraph during the same fiscal year, does not exceed $500,000 in
any fiscal year;
PROVIDED, HOWEVER, that in the case of the immediately preceding clauses (2),
(3), (4) and (5), and in the case of clause (vi) of the definition of "Permitted
Investment," no Default or Event of Default shall have occurred or be continuing
at the time of such Restricted Payment or Permitted Investment, as the case may
be, or would occur as a result thereof.
The Indenture provides that in determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date, amounts expended pursuant
to clauses (1), (2), (3) (but only to the extent that Indebtedness is acquired
in exchange for, or with the net proceeds from, the issuance of Qualified
Capital Stock of the Company or warrants, options or other rights to acquire
Qualified Capital Stock of the Company), (4) and (5) of the immediately
preceding paragraph, and clause (vi) of the definition of "Permitted
Investment," shall be included in such calculation.
The Indenture provides that for purposes of calculating the net proceeds
received by the Company from the issuance or sale of its Capital Stock either
upon the conversion of, or exchange for, Indebtedness of the Company or any
Restricted Subsidiary, such amount will be deemed to be an amount equal to the
difference of (a) the sum of (i) the principal amount or accreted value
(whichever is less) of such Indebtedness on the date of such conversion or
exchange and (ii) the additional cash consideration, if any, received by the
Company upon such conversion or exchange, less any payment on account of
fractional shares, minus (b) all expenses incurred in connection with such
issuance or sale. In addition, for purposes of calculating the net proceeds
received by the Company from the issuance or sale of its Capital Stock upon the
exercise of any options or warrants of the Company, such amount will be deemed
to be an amount equal to the difference of (a) the additional cash
consideration, if any, received by the Company upon such exercise, minus (b) all
expenses incurred in connection with such issuance or sale.
The Indenture provides that not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this covenant were computed, which
calculation may be based on the Company's latest financial statements.
LIMITATION ON ASSET SALES. The Indenture provides that neither the Company
nor any Restricted Subsidiary will, directly or indirectly, consummate any Asset
Sale unless:
(i) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of, and, in
the event such consideration is greater than $20,000,000, an opinion from a
nationally recognized investment banking firm states that such fair market
value, determined as of the date a definitive agreement has been entered
into for such Asset Sale, is fair, from a financial point of view, to the
Company or such Restricted Subsidiary;
(ii) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale is cash or
Cash Equivalents (other than in the case where the Company is exchanging all
or substantially all the assets of one or more geographic service areas
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operated by the Company or any Restricted Subsidiary (including by way of
the transfer of Capital Stock) for all or substantially all the assets
(including by way of the transfer of Capital Stock) constituting one or more
geographic service areas operated by another Person (each, a "Permitted
Exchange"), in which event the foregoing requirement with respect to the
receipt of cash or Cash Equivalents shall not apply) and is received at the
time of such disposition; and
(iii) upon the consummation of an Asset Sale (other than any Permitted
Exchange), the Company applies, or causes such Restricted Subsidiary to
apply, or enters into, or causes such Restricted Subsidiary to enter into, a
binding commitment to apply, any Net Cash Proceeds within 180 days of
receipt thereof (it being understood that any binding commitment to so apply
must be consummated within 240 days of such receipt) either (A) to prepay or
repay the Heartland Notes in accordance with the terms of the Notes and the
Participation Agreement, or (B) to reinvest in Productive Assets, or (C) to
repay or prepay Indebtedness (other than non-recourse Indebtedness) of any
Restricted Subsidiary, or (D) to repay or prepay any Indebtedness of the
Company that is secured by a Lien permitted to be incurred pursuant to
"--Limitation on Liens" below, or (E) to the extent not applied pursuant to
the immediately preceding clauses (A), (B), (C) or (D), PRO RATA (based on
the aggregate principal amount at maturity of the Notes and such other
Indebtedness then outstanding) to (I) the repayment or prepayment of any
Indebtedness of the Company (other than the Notes, and any Indebtedness
subordinated to the Notes) that is at the time redeemable or prepayable (and
is so redeemed or prepaid) and (II) purchase Notes tendered to the Company
for purchase at a price equal to 100% of the Accreted Value thereof on the
date of repurchase (if prior to March 1, 2001) or 100% of the principal
amount thereof (if on or after March 1, 2001), plus in each case accrued and
unpaid interest, if any, to the date of purchase pursuant to an offer to
purchase made by the Company as set forth below (an "Asset Sale Offer");
provided, however, that if at any time any non-cash consideration received
by the Company or any Restricted Subsidiary, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash, then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall
be applied in accordance with this clause (iii); PROVIDED, FURTHER, HOWEVER,
that the Company may defer making an Asset Sale Offer until the aggregate
Net Cash Proceeds from Asset Sales to be applied equal or exceed $5,000,000.
The Indenture provides that each notice of an Asset Sale Offer will be
mailed, by first class mail, to holders of Notes as shown on the applicable
register of holders of Notes. Such notice will specify, among other things, the
purchase date (which will be not less than 30 days nor more than 45 days from
the date such notice is mailed, except as otherwise required by law) and the
amount of Net Cash Proceeds available to repurchase Notes and will otherwise
comply with the procedures set forth in the Indenture. Upon receiving notice of
the Asset Sale Offer, holders of Notes may elect to tender their Notes in whole
or in part in integral multiples of $1,000 in principal amount at maturity. To
the extent holders properly tender Notes with an aggregate principal amount
exceeding the Net Cash Proceeds available to repurchase Notes in the Asset Sale
Offer, Notes of tendering holders will be repurchased on a PRO RATA basis (based
upon the aggregate principal amount at maturity tendered). To the extent that
the Accreted Value (if prior to March 1, 2001) or the aggregate principal amount
of Notes (if on or after March 1, 2001) tendered pursuant to an Asset Sale Offer
is less than the amount of Net Cash Proceeds available therefor, the Company may
use any remaining portion of such available Net Cash Proceeds not required to
fund the repurchase of tendered Notes for any purposes otherwise permitted by
the Indenture. Upon the consummation of any Asset Sale Offer, the amount of Net
Cash Proceeds from the Asset Sale in question to be the subject of future Asset
Sale Offers shall be deemed to be zero.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets" the successor Person shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset
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Sale; PROVIDED, HOWEVER, that to the extent that the Company is required to make
an offer to repurchase the Notes pursuant to the provisions described under
"--Change of Control" above, in connection with any transaction that would
otherwise be within the terms of this paragraph, the successor Person need not
comply with the provisions of this paragraph. In addition, the fair market value
of such properties and assets of the Company or the Restricted Subsidiaries
deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this
covenant.
The Indenture provides that the Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of Notes pursuant to an Asset Sale Offer.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that
neither the Company nor any Restricted Subsidiary will, directly or indirectly,
enter into, amend or permit or suffer to exist any transaction (including,
without limitation, the purchase, sale, lease or exchange of any property, the
guaranteeing of any Indebtedness or the rendering of any service) with or for
the benefit of any of its Affiliates (an "Affiliate Transaction"), other than
any Affiliate Transaction or Affiliate Transactions that are on terms that are
fair and reasonable to the Company and no less favorable to the Company than
those that might reasonably have been obtained at such time in a comparable
transaction by the Company on an arm's-length basis from a Person that is not an
Affiliate; PROVIDED, HOWEVER, that for a transaction or series of related
transactions involving value of $5,000,000 or more, such determination will be
made in good faith by a majority of the members of the Board of Directors of the
Company and by a majority of the disinterested members of the Board of Directors
of the Company, if any; PROVIDED, FURTHER, HOWEVER, that for a transaction or
series of related transactions involving value of $10,000,000 or more, the Board
of Directors of the Company shall have received, prior to the consummation
thereof, an opinion from a nationally recognized investment banking firm that
such Affiliate Transaction is fair, from a financial point of view, to the
Company or such Restricted Subsidiary. The foregoing provisions shall not
prohibit or restrict (a) transactions between the Company and a Wholly Owned
Restricted Subsidiary of the Company or among Wholly Owned Restricted
Subsidiaries of the Company, (b) Restricted Payments and Permitted Investments
made in accordance with the covenant described under "--Limitation on Restricted
Payments" above, (c) the payment of reasonable and customary fees to directors
of the Company who are not employees of the Company and the payment of
reasonable and customary compensation for director and Board of Director
observer fees, meeting expenses, insurance premiums and indemnities, to the
extent permitted by law, (d) making loans or advances to officers, employees or
consultants of the Company and the Restricted Subsidiaries (including travel and
moving expenses) in the ordinary course of business for bona fide business
purposes of the Company or such Restricted Subsidiary not in excess of
$1,000,000 in the aggregate at any one time outstanding, (e) rights or
agreements with respect to Affiliate Transactions contemplated by the
Participation Agreement, (f) any employment or option agreement entered into by
the Company or any Restricted Subsidiary in the ordinary course of business that
is approved by the Compensation Committee of the Board of Directors of the
Company, (g) Affiliate Transactions in existence, or for which rights or
agreements are in existence, on the Issue Date, in each case as in effect on the
Issue Date, (h) channel leases and options with Affiliates entered into after
the Issue Date provided such leases are no less beneficial to the Company or the
applicable Subsidiary than any such leases in effect on the Issue Date, and are
approved by a majority of the Board of Directors of the Company, (i) amendments
to, or renewals of, the agreements and leases referred to in clause (h) of this
sentence; PROVIDED, HOWEVER, that any such amendments or renewals are no less
beneficial to the Company or applicable Restricted Subsidiary than the agreement
or lease being amended or renewed and are approved by a majority of the Board of
Directors of the Company and (j) the issuance of stock options (and shares of
stock upon the exercise thereof) pursuant to any stock option plan approved by
the Board of Directors and shareholders of the Company.
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LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture provides that neither the Company nor any
Restricted Subsidiary will, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to: (a) pay dividends or make any other
distributions on its Capital Stock; (b) make loans or advances or to pay any
Indebtedness or other obligation owed to the Company or any Restricted
Subsidiary; (c) guarantee any Indebtedness or any other obligation of the
Company or any Restricted Subsidiary; or (d) transfer any of its property or
assets to the Company or any Restricted Subsidiary (each of the foregoing
restrictions, a "Payment Restriction"), except for such encumbrances or
restrictions existing under or by reason of: (1) applicable law; (2) the
Indenture; (3) customary non-assignment provisions of any lease governing a
leasehold interest of the Company or any Restricted Subsidiary; (4) any
instrument governing Acquired Indebtedness, which encumbrance or restriction was
not incurred in connection with, as a result of, or in anticipation of the
incurrence of such Indebtedness and is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property or
assets of the Person, so acquired; (5) instruments governing Indebtedness of
Restricted Subsidiaries permitted under clause (j) of the definition of
Permitted Indebtedness; PROVIDED, HOWEVER, that no such encumbrance or
restriction shall be effective other than at such time as there is a payment
default or financial covenant default pursuant to the terms of the instrument
governing such Indebtedness (it being understood that such covenants shall be of
the type customarily included in the financings incurred in the ordinary course
of business); (6) agreements existing on the Issue Date as such agreements are
from time to time in effect; PROVIDED, HOWEVER, that any amendments or
modifications of such agreements which affect the encumbrances or restrictions
of the types subject to this covenant shall not result in such encumbrances or
restrictions being less favorable to the Company in any material respect, as
determined in good faith by the Board of Directors of the Company, than the
provisions as in effect before giving effect to the respective amendment or
modification; (7) an agreement effecting a refinancing, replacement or
substitution of Indebtedness issued, assumed or incurred pursuant to an
agreement described in clause (4), (5) or (6) of this covenant; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any such refinancing, replacement or substitution agreement are not
less favorable to the Company in any material respect as determined in good
faith by the Board of Directors of the Company than the provisions relating to
such encumbrance or restriction contained in agreements referred to in such
clause (4), (5) or (6) of this covenant; (8) Liens permitted under the Indenture
to the extent that such Liens restrict the transfer of the asset or assets
subject thereto; and (9) with respect to clause (d) above, purchase money
obligations for property acquired in the ordinary course of business pursuant to
ordinary business terms.
LIMITATION ON RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The Indenture
provides that the Board of Directors of the Company may (subject to the
penultimate paragraph of this covenant), if no Default or Event of Default shall
have occurred and be continuing or would arise therefrom, designate an
Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that
(i) any such redesignation shall be deemed to be an incurrence as of the date of
such redesignation by the Company and the Restricted Subsidiaries of the
Indebtedness (if any) of such redesignated Subsidiary for purposes of the
covenant described under "--Limitation on Incurrence of Additional Indebtedness"
above; and (ii) unless such redesignated Subsidiary shall not have any
Indebtedness outstanding, other than Indebtedness which would be Permitted
Indebtedness, no such designation shall be permitted if immediately after giving
effect to such redesignation and the incurrence of any such additional
Indebtedness the Company could not incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to the Leverage Ratio of the covenant
described under "--Limitation on Incurrence of Additional Indebtedness" above.
The Board of Directors of the Company also may, if no Default or Event of
Default shall have occurred and be continuing or would arise therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if (i) such
designation is at that time permitted under the covenant described under
"--Limitation on Restricted Payments" above and (ii) immediately after giving
effect to such designation, the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the
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Leverage Ratio of the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" above. Any such designation by the Board of Directors
of the Company shall be evidenced to the Trustee by the filing with the Trustee
of a certified copy of the resolution of the Company's Board of Directors giving
effect to such designation or redesignation and an Officers' Certificate
certifying that such designation or redesignation complied with the foregoing
conditions and setting forth in reasonable detail the underlying calculations.
The Indenture provides that for purposes of the covenant described under
"--Limitation on Restricted Payments" above, (i) an "Investment" shall be deemed
to have been made at the time any Restricted Subsidiary is designated as an
Unrestricted Subsidiary in an amount (proportionate to the Company's equity
interest in such Subsidiary) equal to the net worth of such Restricted
Subsidiary at the time that such Restricted Subsidiary is designated as an
Unrestricted Subsidiary; (ii) at any date the aggregate of all Restricted
Payments made as Investments since the Issue Date shall exclude and be reduced
by an amount (proportionate to the Company's equity interest in such Subsidiary)
equal to (A) the amount of Investments in any Unrestricted Subsidiary that
becomes a Wholly Owned Restricted Subsidiary after the date of such Investment
or (B) the net worth of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary, not to exceed, in
the case of any such redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the amount of Investments previously made by the Company and the
Restricted Subsidiaries in such Unrestricted Subsidiary that were treated as
Restricted Payments under the Indenture (in each case (i) and (ii) "net worth"
to be calculated based upon the fair market value of the assets of such
Subsidiary as of any such date of designation); and (iii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer.
The Indenture provides that notwithstanding the foregoing, the Board of
Directors of the Company may not designate any Subsidiary of the Company to be
an Unrestricted Subsidiary if, after such designation, (a) the Company or any
other Restricted Subsidiary (i) provides credit support for, or a guarantee of,
any Indebtedness of such Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) or (ii) is directly or indirectly
liable for any Indebtedness of such Subsidiary, (b) a default with respect to
any Indebtedness of such Subsidiary (including any right which the holders
thereof may have to take enforcement action against such Subsidiary) would
permit (upon notice, lapse of time or both) any holder of any other Indebtedness
of the Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its final scheduled maturity or (c) such Subsidiary owns any Capital Stock of,
or owns or holds any Lien on any property of, any Restricted Subsidiary which is
not a Subsidiary of the Subsidiary to be so designated.
The Indenture provides that Subsidiaries of the Company that are not
designated by the Board of Directors as Restricted or Unrestricted Subsidiaries
will be deemed to be Restricted Subsidiaries. Notwithstanding any provisions of
this covenant, all Subsidiaries of a Restricted Subsidiary will be Restricted
Subsidiaries and all Subsidiaries of an Unrestricted Subsidiary will be
Unrestricted Subsidiaries. The Board of Directors of the Company may not change
the designation of a Subsidiary of the Company more than twice in any period of
five years.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Indenture
provides that the Company will not permit any Restricted Subsidiary to, directly
or indirectly, issue any Preferred Stock (other than to the Company or to a
Wholly Owned Restricted Subsidiary of the Company) or permit any Person (other
than the Company or a Wholly Owned Subsidiary of the Company) to own any
Preferred Stock of any Restricted Subsidiary; PROVIDED, HOWEVER, that this
covenant shall not prevent the issuance of or be violated by reason of (i)
Preferred Stock of Restricted Subsidiaries to the extent that such Preferred
Stock is outstanding on the Issue Date; (ii) Preferred Stock issued by a Person
prior to the time that (a) such Person becomes a Restricted Subsidiary, (b) such
Person merges with or into a Restricted Subsidiary or (c) another Person merges
with or into such Person in a transaction in which such Person becomes a
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Restricted Subsidiary, in each case only if such Preferred Stock was not issued
in anticipation of or in connection with or as a result of such transaction; and
(iii) Preferred Stock issued in exchange for, or the proceeds of which are used
to refinance, Preferred Stock referred to in the foregoing clauses (i) or (ii)
(other than Preferred Stock which by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable) is redeemable at
the option of the holder thereof or is otherwise redeemable, pursuant to sinking
fund obligations or otherwise, prior to that date of redemption or maturity of
the Preferred Stock being so refinanced); PROVIDED, FURTHER, HOWEVER, that (a)
the liquidation value of such Preferred Stock so issued shall not exceed the
liquidation value of the Preferred Stock so refinanced and (b) the Preferred
Stock so issued (I) shall have a stated maturity not earlier than the stated
maturity of the Preferred Stock being refinanced and (II) shall have a Weighted
Average Life to Maturity equal to or greater than the remaining Weighted Average
Life to Maturity of the Preferred Stock being refinanced.
LIMITATION ON LIENS. The Indenture provides that neither the Company nor
any Restricted Subsidiary will, directly or indirectly, create, incur, assume or
suffer to exist any Liens upon any of their respective property or assets or on
any income or profits therefrom, or assign or otherwise convey any right to
receive income or profits thereon, whether owned on the date of the Indenture or
thereafter acquired, unless (x) in the case of Liens securing Indebtedness
subordinate to the Notes, the Notes are secured by a valid, perfected Lien on
such property, assets or proceeds that is senior in priority to such Liens and
(y) in all other cases, the Notes are equally and ratably secured; PROVIDED,
HOWEVER,that the foregoing shall not prohibit or restrict, and the Company need
not equally and ratably secure the Notes as a result of, Permitted Liens.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Indenture provides that
neither the Company nor any Restricted Subsidiary will, directly or indirectly,
enter into any Sale and Leaseback Transaction, except that the Company or any
Restricted Subsidiary may enter into a Sale and Leaseback Transaction if (i)
immediately prior thereto, and after giving effect to such Sale and Leaseback
Transaction (the Indebtedness thereunder being equivalent to the Attributable
Value thereof) the Company could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the Leverage Ratio of the
covenant described under "--Limitation on Incurrence of Additional Indebtedness"
above and (ii) the Sale and Leaseback Transaction constitutes an Asset Sale
effected in accordance with the requirements of the covenant described under
"--Limitation on Asset Sales" above.
LIMITATION ON LINE OF BUSINESS. The Indenture provides that for so long as
any Notes are outstanding, the Company and the Restricted Subsidiaries will
engage solely in the business of (i) transmitting video, voice or data primarily
through wireless cable transmission facilities, (ii) utilizing wireless channels
for any commercial purpose permitted by the FCC, and (iii) evaluating,
participating or pursuing any other activity or opportunity that is related to
those identified in (i) or (ii) above (including pursuant to acquisitions of
entities or divisions or lines of business of entities in the foregoing
business); notwithstanding the foregoing, however, ownership by the Company or
any Restricted Subsidiary of stock in any Unrestricted Subsidiary, or any other
entity which is not a Restricted Subsidiary, shall not be deemed to violate this
covenant.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Indenture provides that the
Company will not, in any transaction or series of transactions, merge or
consolidate with or into, or sell, assign, convey, transfer, lease or otherwise
dispose of all or substantially all of its properties and assets as an entirety
to, any Person or Persons, and the Company will not permit any Restricted
Subsidiary to enter into any such transaction or series of transactions if such
transaction or series of transactions, in the aggregate, would result in a sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of the Company or the Company and
the Restricted Subsidiaries, taken as a whole, to any other Person or Persons,
unless at the time of and after giving effect thereto (a) either (i) if the
transaction or series of transactions is a merger or consolidation involving the
Company, the Company shall be the
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surviving Person of such merger or consolidation, or (ii) the Person formed by
such consolidation or into which the Company is merged or to which the
properties and assets of the Company or such Restricted Subsidiary, as the case
may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed
of (including, with respect to the Restricted Subsidiaries, by merger or
consolidation) (any such surviving Person or Persons of such merger or
consolidation or to whom such sale, assignment, conveyance, lease or other
disposition has been made being the "Surviving Entity") shall be a corporation
organized and existing under the laws of the United States of America, any state
thereof or the District of Columbia and shall expressly assume by a supplemental
indenture executed and delivered to the Trustee, in form reasonably satisfactory
to the Trustee, all the obligations of the Company under the Notes, the
Indenture and, if then in effect, the Notes Registration Rights Agreement, and
in each case, the Indenture, and, if then in effect, the Notes Registration
Rights Agreement shall remain in full force and effect; (b) immediately before
and immediately after giving effect to such transaction or series of
transactions on a PRO FORMA basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default or Event of
Default shall have occurred and be continuing and the Company or the Surviving
Entity, as the case may be, after giving effect to such transaction or series of
transactions on a PRO FORMA basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
Leverage Ratio in the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" above; and (c) immediately after giving effect to such
transaction or series of transactions on a PRO FORMA basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Consolidated Net Worth of the Company or the Surviving Entity, as the case
may be, is at least equal to the Consolidated Net Worth of the Company
immediately before such transaction or series of transactions.
The Indenture provides that for purposes of the foregoing, the transfer (by
lease, assignment, sale or otherwise, in a single transaction or series of
related transactions) of all or substantially all of the properties and assets
of one or more Restricted Subsidiaries, the Capital Stock of which constitutes
all or substantially all of the properties and assets of the Company, will be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company.
The Indenture provides that in connection with any consolidation, merger,
sale, assignment, conveyance, transfer, lease or other disposition contemplated
hereby, the Company shall deliver, or cause to be delivered, to the Trustee, in
form and substance reasonably satisfactory to the Trustee, an officer's
certificate and an opinion of counsel, each stating that such consolidation,
merger, transfer, lease, assignment or other disposition and the supplemental
indenture in respect thereof complies with the requirements under the Indenture.
The Indenture provides that upon any consolidation or merger or any sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the assets of the Company in accordance with the foregoing,
in which the Company is not the continuing corporation, the successor
corporation formed by such a consolidation or into which the Company is merged
or to which such transfer is made shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the
same effect as if such successor corporation had been named as the Company
therein, and thereafter, except in the case of a lease, the predecessor
corporation shall be relieved of all obligations and covenants under the
Indenture, the Notes, and if then in effect, the Notes Registration Rights
Agreement; PROVIDED, HOWEVER, that solely for purposes of calculating Cumulative
EBITDA in connection with the covenant described under "--Limitation on
Restricted Payments" above, any such successor Person shall only be deemed to
have succeeded to and be substituted for the Company with respect to periods
subsequent to the effective time of such merger, consolidation or sale,
assignment, conveyance, transfer, lease or other disposition of assets.
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The Indenture provides that for all purposes of the Indenture and the Notes
(including the provisions of this covenant and the covenants described under
"--Limitation on Incurrence of Additional Indebtedness," "--Limitation on
Restricted and Unrestricted Subsidiaries" and "--Limitation on Liens"),
Subsidiaries of any Surviving Entity will, upon such transaction or series of
transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries as
provided pursuant to the covenant described under "--Limitation on Restricted
and Unrestricted Subsidiaries" and all Indebtedness, and all Liens on property
or assets, of the Company and the Restricted Subsidiaries immediately prior to
such transaction or series of transactions will be deemed to have been incurred
upon such transaction or series of transactions.
EVENTS OF DEFAULT
The Indenture provides that the following events will be defined in the
Indenture as "Events of Default":
(i) the failure to pay interest on the Notes when the same becomes due
and payable and the Default continues for a period of 30 days;
(ii) the failure to pay the principal or Accreted Value of any Note when
such principal or Accreted Value becomes due and payable, at maturity, upon
acceleration, redemption, pursuant to a required offer to purchase or
otherwise;
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Notes or the Indenture which default continues
for a period of 60 days after the Company receives written notice thereof
from the Trustee specifying the default and stating that such notice is a
"Notice of Default" under the Indenture or the Company and the Trustee
receive such notice from holders of at least 25% in aggregate principal
amount of the outstanding Notes;
(iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any Restricted Subsidiary
(or the payment of which is guaranteed by the Company or any Restricted
Subsidiary), whether such Indebtedness or guarantee now exists, or is
created after the Issue Date, which default (a) is caused by a failure to
pay when due principal on such Indebtedness within the grace period provided
in such Indebtedness (which failure continues beyond any applicable grace
period) (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $5,000,000 or more and
with respect to such clauses (a) and (b) such Payment Default or
acceleration has not been rescinded or annulled or such Indebtedness
discharged or paid in full in cash within 20 days;
(v) one or more judgments in an aggregate amount in excess of $5,000,000
(unless covered by insurance by a reputable insurer as to which the insurer
has acknowledged coverage) being rendered against the Company or any of its
Material Subsidiaries and such judgments remain undischarged or unstayed for
a period of 60 days after such judgment or judgments become final and
non-appealable;
(vi) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any of its Subsidiaries; or
(vii) any holder of at least $5,000,000 in aggregate principal amount of
Indebtedness of the Company or any Restricted Subsidiary shall foreclose
upon assets of the Company or any Restricted Subsidiary having an aggregate
fair market value, individually or in the aggregate, of at least $5,000,000
or shall have exercised any right under applicable law or applicable
security documents to take ownership of any such assets in lieu of
foreclosure.
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The Indenture provides that upon the happening of any Event of Default
specified in the Indenture, the Trustee may, or the holders of at least 25% in
principal amount of outstanding Notes may, declare the Accreted Value (if prior
to March 1, 2001), or all unpaid principal amount of, and accrued but unpaid
interest, if any, on (if on or after March 1, 2001) all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice") and upon such declaration the same shall become
immediately due and payable, notwithstanding anything contained in the Notes or
the Indenture to the contrary. If an Event of Default with respect to bankruptcy
proceedings relating to the Company occurs and is continuing, then such amount
will IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of the Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitation, holders of not less
than a majority in aggregate principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. If a Default or an
Event of Default occurs and is continuing and is known to the Trustee, the
Trustee shall mail to each holder of the Notes notice of the Default or Event of
Default within 30 days after obtaining knowledge thereof. The Trustee may
withhold from holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest or a failure to comply with the covenants and provisions
described under "--Change of Control"; "--Certain Covenants--Limitation on Asset
Sales"; and "--Merger, Consolidation and Sale of Assets" above) if it determines
that withholding notice is in their interest.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph but before a
judgment or decree of money due in respect of the Notes has been obtained, the
holders of not less than a majority in principal amount of the Notes then
outstanding by written notice to the Company and the Trustee may rescind such
declaration and its consequences if (a) the Company has paid or deposited with
the Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee
under the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, (ii) all overdue interest on
all Notes, (iii) the principal of and premium, if any, on any Notes which have
become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes, and (iv) to the extent that payment of
such interest is lawful, interest upon overdue interest and overdue principal at
the rate provided for in the Notes which has become due otherwise than by such
declaration of acceleration; (b) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction; and (c) all Events of
Default, other than the non-payment of principal of, premium, if any, and
interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. Prior to the declaration of
acceleration of the Notes, the holders of not less than a majority in principal
amount of the Notes may waive any existing Default or Event of Default under the
Indenture, and its consequences, except a default in the payment of the
principal of or interest on any Notes or any default in respect of any covenant
which cannot be amended without the consent of each holder affected.
The Indenture provides that no holder of any of the Notes has any right to
institute any proceeding with respect to the Indenture or the Notes or any
remedy thereunder, unless the holders of at least 25% in aggregate principal
amount of the outstanding Notes have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee
under the Notes and the Indenture, the Trustee has failed to institute such
proceeding within 30 days after receipt of such notice, request and offer of
indemnity and the Trustee, within such 30-day period, has not received
directions inconsistent with such written request by holders of not less than a
majority in aggregate principal amount of the outstanding Notes. Such
limitations do not apply, however, to a suit instituted by a holder of a Note
for the enforcement of the payment of the principal of, premium, if any, or
interest on such Note on or after the respective due dates expressed or provided
for in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a
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prudent man would exercise or use under the circumstances in the conduct of his
own affairs. Subject to the provisions of the Indenture relating to the duties
of the Trustee, whether or not an Event of Default shall occur and be
continuing, the Trustee under the Indenture is not under any obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the holders unless such holders shall have offered to the
Trustee reasonable security or indemnity. Subject to certain provisions
concerning the rights of the Trustee, the holders of not less than a majority in
aggregate principal amount of the outstanding Notes have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee under the
Indenture.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within ten days of any event which is, or after
notice or lapse of time or both would become, an Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Indenture provides that the Company may, at its option and at any time,
terminate the obligations of the Company with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company shall be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payment in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations to issue
temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes and maintain an office or agency for
payments in respect of the Notes, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and (iv) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to terminate
the obligations of the Company with respect to certain covenants that are set
forth in the Indenture, some of which are described under "--Certain Covenants"
above (including the covenant described under "--Change of Control" above) and
any subsequent failure to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes ("covenant defeasance").
The Indenture provides that in order to exercise either defeasance or
covenant defeasance, (i) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the holders of the Notes, cash in United States
dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes to
redemption or maturity (except lost, stolen or destroyed Notes which have been
replaced or paid); (ii) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that the holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such defeasance or covenant defeasance had not occurred (in the
case of defeasance, such opinion must refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable federal income tax laws);
(iii) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit; (iv) such defeasance or covenant defeasance shall not
cause the Trustee to have a conflicting interest with respect to any securities
of the Company; (v) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any material agreement or
instrument to which the Company is a party or by which it is bound; (vi) the
Company shall have delivered to the Trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; and (vii) the Company
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel,
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each stating that all conditions precedent under the Indenture to either
defeasance or covenant defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture provides that the Indenture will be discharged and will cease
to be of further effect (except as to surviving rights or registration of
transfer or exchange of the Notes, as expressly provided for in the Indenture)
as to all outstanding Notes when (i) either (a) all the Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or repaid, Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation (except lost, stolen or destroyed Notes which have been
replaced or paid) have been called for redemption pursuant to the terms of the
Notes or have otherwise become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
(iii) there exists no Default or Event of Default under the Indenture; and (iv)
the Company has delivered to the Trustee an officers' certificate and an opinion
of counsel stating that all conditions precedent under the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
REPORTS TO HOLDERS
The Indenture provides that the Company shall deliver to the Trustee, within
15 days after it files them with the Commission, copies of its annual report and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may by rules and regulations prescribe)
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act within the time periods prescribed under such rules
and regulations. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
or otherwise report on an annual and quarterly basis on forms provided for such
annual and quarterly reporting pursuant to rules and regulations promulgated by
the Commission, the Indenture requires the Company to continue to file with the
Commission and provide to the Trustee such annual and interim reports on Forms
10-K and 10-Q, respectively, as the Company would be required to file were it
subject to such reporting requirements within the time periods prescribed under
such rules and regulations. Upon qualification of the Indenture under the TIA,
the Company shall also comply with the provisions of TIA Section 314(a). The
Company shall not be obligated to file any such reports with the Commission if
the Commission does not permit such filings but shall remain obligated to
provide such reports to the Trustee and the holders within the periods of time
referred to in the preceding sentence. The Company shall provide to any holder
of Notes any information reasonably requested by such holder concerning the
Company (including financial statements) necessary in order to permit such
holder to sell or transfer Notes in accordance with Rule 144A promulgated under
the Securities Act.
MODIFICATION OF THE INDENTURE
The Indenture provides that the Company, when authorized by a Board
Resolution, and the Trustee may amend, waive or supplement the Indenture or the
Notes without notice to or consent of any Holder: (a) to cure any ambiguity,
defect or inconsistency; (b) to comply with "--Certain Covenants--Merger,
Consolidation, and Sale of Assets" above; (c) to provide for uncertificated
Notes in addition to certificated Notes; (d) to comply with any requirements of
the Commission in order to effect or maintain the
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qualification of the Indenture under the TIA; (e) to provide for issuance of the
New Notes (which will have terms substantially identical in all material
respects to the Old Notes except that the transfer restrictions contained in the
Old Notes will be modified or eliminated, as appropriate), and which will be
treated together with any outstanding Old Notes, as a single issue of
securities; or (f) to make any change that would provide any additional benefit
or rights to the Holders or that does not adversely affect the rights of any
Holder. Notwithstanding the foregoing, the Trustee and the Company may not make
any change that adversely affects the rights of any Holder under the Indenture.
Other modifications and amendments of the Indenture or the Notes may be made
with the consent of the holders of not less than a majority in aggregate
principal amount of the then outstanding Notes, except that, without the consent
of each holder of the Notes affected thereby, no amendment may, directly or
indirectly: (i) reduce the amount of Notes whose holders must consent to any
amendment; (ii) reduce the rate of or change the time for payment of interest,
including defaulted interest or additional interest, on any Notes; (iii) reduce
the principal amount or Accreted Value (or rate of accretion) of or change the
fixed maturity of any Notes, or change the date on which any Notes may be
subject to redemption or repurchase, or reduce the redemption or repurchase
price therefor; (iv) make any Notes payable in money other than that stated in
the Notes; (v) make any change in provisions of the Indenture protecting the
right of each holder of a Note to receive payment of principal of and interest
on such Note on or after the date thereof or to bring suit to enforce such
payment or permitting holders of a majority in principal amount of the Notes to
waive Defaults or Events of Default; (vi) subordinate in right of payment, or
otherwise subordinate, the Notes to any other Indebtedness or obligation of the
Company; or (vii) amend, alter, change or modify the obligation of the Company
to make and consummate a Change of Control Offer in the event of a Change of
Control or make and consummate an Asset Sale Offer or waive any Default in the
performance of any such offers or modify any of the provisions or definitions
with respect to any such offers.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest (as defined in such Act) it must eliminate
such conflict or resign.
GOVERNING LAW
The Indenture provides that the Indenture and the Notes will be governed by
the laws of the State of New York, without regard to the principles of conflicts
of law.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Accreted Value" means with respect to any Note, as of any date of the
determination prior to March 1, 2001, the sum of (a) $573.71 and (b) the portion
of the excess of the principal amount of such Note over the amount which shall
have been accreted thereon through such date, such amount to be so accreted on a
daily basis at the rate of 11 3/8% per annum, compounded semi-annually on each
March 1 and September 1 from the Issue Date through the date of determination.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person, including any such Indebtedness incurred by such Person in connection
with, or in anticipation or contemplation of, such Person's becoming a
Restricted Subsidiary or such acquisition, merger or consolidation.
"Affiliate" means a Person who, directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Company or any Restricted Subsidiary. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise. Notwithstanding the
foregoing, the term "Affiliate" shall not, with respect to the Company, include
any Wholly Owned Restricted Subsidiary of the Company.
"Analog Customer" means a Qualifying Customer who is not a Digital Customer.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary, (b) the acquisition by the Company or any Restricted
Subsidiary of the assets of any Person which constitute all or substantially all
of the assets of such Person or (c) the acquisition by the Company or any
Restricted Subsidiary of any division or line of business of any Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business pursuant to ordinary business terms), assignment or other transfer
or disposition for value (for purposes of this definition, each, a
"disposition") by the Company or any Restricted Subsidiary (including, without
limitation, pursuant to any Sale and Leaseback Transaction or any merger or
consolidation of any Subsidiary of the Company with or into another Person
(other than the Company or any Wholly Owned Restricted Subsidiary of the
Company) whereby such Subsidiary shall cease to be a Restricted Subsidiary) to
any Person of (i) any Capital Stock of any Restricted Subsidiary (other than in
respect of director's qualifying shares or investments by foreign nationals
mandated by applicable law); (ii) all or substantially all of the properties and
assets of any division or line of business of the Company or any Restricted
Subsidiary; or (iii) any other properties or assets of the Company or any
Restricted Subsidiary, other than in the ordinary course of business pursuant to
ordinary business terms; PROVIDED, HOWEVER, that for purposes of the covenant
described under "--Certain Covenants--Limitation on Asset Sales" above, Asset
Sales shall not include: (a) a transaction or series of related transactions for
which the Company or the applicable Restricted Subsidiary receives aggregate
consideration of less than $1,000,000 in any fiscal year; (b) transactions
complying with the covenant described under "--Certain Covenants--Merger,
Consolidation and Sale of Assets" above; (c) any disposition to the Company; (d)
any disposition to a Wholly Owned Restricted Subsidiary of the Company that is
not subject to any Payment Restriction; (e) any Lien securing Indebtedness to
the extent that such Lien is granted in compliance with the covenant described
under "--Certain Covenants--Limitation on
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Liens" above; (f) any Restricted Payment (or Permitted Investment) permitted by
the covenant described under "--Certain Covenants--Limitation on Restricted
Payments" above; and (g) any disposition of assets or property in the ordinary
course of business and on ordinary business terms to the extent such property or
assets are obsolete, worn out or no longer useful in the Company's or any
Restricted Subsidiary's business.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the total net
amount of rent required to be paid by such Person under such lease during the
initial term thereof as determined in accordance with GAAP, discounted from the
last date of such initial term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capitalized Lease
Obligation with a like term in accordance with GAAP. The net amount of rent
required to be paid under any such lease for any such period shall be the
aggregate amount of rent payable by the lessee with respect to such period after
excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges. In the case
of any lease which is terminable by the lessee upon the payment of a penalty,
such net amount shall also include the amount of such penalty, but no rent shall
be considered as required to be paid under such lease subsequent to the first
date upon which it may be so terminated. "Attributable Value" means, as to a
Capitalized Lease Obligation under which any Person is at the time liable and at
any date as of which the amount thereof is to be determined, the capitalized
amount thereof that would appear on the face of a balance sheet of such Person
in accordance with GAAP.
"BANX Affiliates" means Bell Atlantic Corporation, a Delaware corporation,
and NYNEX Corporation, a Delaware corporation, and their Affiliates.
"CAI" means CAI Wireless Systems, Inc., a Connecticut corporation.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of capital stock, including each class of common stock and Preferred
Stock of such Person and (ii) with respect to any Person that is not a
corporation, any and all partnership or other equity interests of such Person.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP, and, for purposes of the Indenture, the amount of any
such obligation at any date shall be the capitalized amount thereof at such
date, determined in accordance with GAAP.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness with
a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) certificates of deposit or acceptances with a
maturity of 180 days or less of any financial institution that is a member of
the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500,000,000; (iii) certificates of deposit with a
maturity of 180 days or less of any financial institution that is not organized
under the laws of the United States, any state thereof or the District of
Columbia that are rated at least A-1 by S&P or at least P-1 by Moody's or at
least an equivalent rating category of another nationally recognized securities
rating agency; (iv) repurchase agreements and reverse repurchase agreements
relating to marketable direct obligations issued or unconditionally guaranteed
by the government of the United States of America or issued by any agency
thereof and backed by the full faith and credit of the United States of America,
in each case maturing within 180 days from the date of acquisition; provided
that the terms of such agreements comply with the guidelines set forth in the
Federal Financial Agreements of Depository Institutions With Securities Dealers
and Others, as adopted by the Comptroller of the Currency on October 31, 1985.
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"Change of Control" means the occurrence of one or more of the following
events:
(i) any sale, lease, exchange, transfer or other disposition (in one
transaction or a series of related transactions) of all or substantially all
of the assets of the Company and the Restricted Subsidiaries to any Person
or group of related Persons for purposes of Section 13(d) of the Exchange
Act (a "Group") (whether or not otherwise in compliance with the provisions
of the Indenture), other than to any Strategic Equity Investor, in any such
event pursuant to a transaction in which immediately after the consummation
thereof the Person or Persons owning a majority of the voting power of the
Voting Stock of the Company immediately prior to the consummation of such
transaction, or a Strategic Equity Investor and the Persons owning a
majority of the Voting Stock of the Company immediately prior to such
transaction shall not own, directly or indirectly, a majority of the voting
power of the Voting Stock of the Person to whom such sale, lease, exchange,
transfer or other disposition has been made; or
(ii) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of a majority of the directors of the Company then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the Company
then in office; or
(iii) any Person or Group, excluding any Strategic Equity Investor and
any Permitted Holder, either (1) is or becomes, by purchase, tender offer,
exchange offer, open market purchases, privately negotiated purchases or
otherwise, the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, whether or not applicable, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such Person has
the right to acquire, whether such right is exercisable immediately or after
the passage of time only), directly or indirectly, of more than 50% of the
total then outstanding voting power of the Voting Stock of the Company (for
the purpose of this clause (iii), such Person or Group will be deemed to
"beneficially own" (determined as aforesaid) the voting power of the Voting
Stock of a corporation (the "specified corporation") held by any other
corporation (the "parent corporation") if such Person or Group "beneficially
owns," directly or indirectly, a majority of the voting power of the Voting
Stock of such parent corporation) or (2) otherwise has the ability to elect,
directly or indirectly, a majority of the members of the Board of Directors
of the Company (for purposes of this clause (iii), any Strategic Equity
Investor or Permitted Holder, as the case may be, will be deemed to
"beneficially own" (determined as aforesaid) the voting power of the Voting
Stock of a specified corporation held by a parent corporation so long as
such Strategic Equity Investor or Permitted Holder, as the case may be,
"beneficially owns," directly or indirectly, in the aggregate a majority of
the voting power of the Voting Stock of the parent corporation); PROVIDED,
HOWEVER, that no Change of Control shall be deemed to have occurred pursuant
to this clause (iii) solely due to a Person that on the date of acquisition
of such Voting Stock was a Strategic Equity Investor thereafter failing to
be a Strategic Equity Investor due to a change in such Person's Total Market
Capitalization; or
(iv) the Company consolidates with or merges into another Person (other
than a Strategic Equity Investor) and the stockholders immediately prior to
such merger or consolidation, or a Strategic Equity Investor and the
stockholders immediately prior to such merger or consolidation, hold less
than a majority of the voting power of the Voting Stock of the resulting
entity.
"Closing Price" means on any Trading Day with respect to the per share price
of any shares of Capital Stock the last reported sale price regular way or, in
case no such reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case on the New York Stock
Exchange or, if such shares of Capital Stock are not listed or admitted to
trading on such exchange, on the
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principal national securities exchange on which such shares are listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on Nasdaq or, if such shares are not listed or admitted to
trading on any national securities exchange or quoted on such automated
quotation system but the issuer is a Foreign Issuer (as defined in Rule 3b-4(b)
under the Exchange Act) and the principal securities exchange on which such
shares are listed or admitted to trading is a Designated Offshore Securities
Market (as defined in Rule 902(a) under the Securities Act), the average of the
reported closing bid and asked prices regular way on such principal exchange or,
if such shares are not listed or admitted to trading on any national securities
exchange or quoted on such automated quotation system and the issuer and
principal securities exchange do not meet such requirements, the average of the
closing bid and asked prices in the over-the-counter market as furnished by any
New York Stock Exchange member firm that is selected from time to time by the
Company for that purpose.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income of such Person, plus
(ii) to the extent such Consolidated Net Income has been reduced thereby, (A)
all income taxes of such Person and its Restricted Subsidiaries paid or accrued
in accordance with GAAP for such period (other than income taxes attributable to
extraordinary or nonrecurring gains or losses), (B) Consolidated Interest
Expense of such Person and (C) without duplication of any amount included in
subclause (A) or (B) of this clause (ii), Consolidated Non-Cash Charges of such
Person, all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in conformity with GAAP, less (iii) (A) all non-cash
items increasing such Consolidated Net Income for such period and (B) all cash
payments during such period relating to non-cash charges that were added back in
determining Consolidated EBITDA in any prior period, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in conformity
with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of (i) the interest expense of such Person
and its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, including, without limitation, (a) any
amortization of debt discount, (b) the net cost under Interest Swap Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation, (d) all commissions, discounts and other fees and
charges owed with respect to letters of credit, bankers' acceptance financing or
similar facilities, and (e) all accrued interest and (ii) the interest component
of Capitalized Lease Obligations paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED, HOWEVER, that there shall be excluded therefrom, without
duplication, (a) gains and losses from sales or other dispositions of assets of
such Person or any Restricted Subsidiary of such Person or of Capital Stock of
any Restricted Subsidiary of such Person or abandonments or reserves relating
thereto and the related tax effects according to GAAP, (b) items classified as
extraordinary or nonrecurring gains and losses, and the related tax effects
according to GAAP, (c) the net income of any Unrestricted Subsidiary and Persons
(other than Restricted Subsidiaries) accounted for by such Person using the
equity method of accounting, except to the extent of cash dividends or
distributions actually paid in cash to such Person or any Restricted Subsidiary
(in the case of any such payment to a Restricted Subsidiary, subject to the
limitations set forth in clause (e) of this definition), not to exceed such
Person's proportionate share of such net income for such period, (d) the net
income (or loss) of any Person acquired in a "pooling of interests" transaction
accrued prior to the date it becomes a Restricted Subsidiary of such first
referred to Person or is merged or consolidated with such Person or any of its
Restricted Subsidiaries, (e) the net income (but not loss) of any Restricted
Subsidiary of such Person for such period to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
is restricted by charter, contract, operation of law or otherwise (regardless of
any
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waiver), and (f) any gain or loss realized upon the termination of any employee
benefit plan, on an after-tax basis.
"Consolidated Net Worth" means, with respect to any Person, at any date, the
consolidated stockholders' equity of such Person and its Restricted
Subsidiaries, as determined on a consolidated basis in accordance with GAAP,
less any amounts attributable to Disqualified Capital Stock of such Person and
any Preferred Stock of any of its Restricted Subsidiaries (other than to the
extent held by such Person or any of its Wholly Owned Restricted Subsidiaries).
"Consolidated Non-Cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary or nonrecurring item).
"Consolidated Total Indebtedness" means, with respect to any Person, on any
date, without duplication, the aggregate outstanding principal amount of
Indebtedness of such Person and its Restricted Subsidiaries.
"Cumulative EBITDA" means the cumulative Consolidated EBITDA of the Company
from and after the first day of the first fiscal quarter beginning after the
Issue Date to the end of the fiscal quarter immediately preceding the date of
determination ending not more than 135 days prior to the date of determination,
or, if such cumulative Consolidated EBITDA for such period is negative, minus
the amount by which such cumulative Consolidated EBITDA is less than zero.
"Cumulative Interest Expense" means the aggregate amount of Consolidated
Interest Expense of the Company paid or accrued by the Company from and after
the first day of the first fiscal quarter beginning after the Issue Date to the
end of the fiscal quarter immediately preceding the date of determination ending
not more than 135 days prior to the date of determination.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Determination Date" shall have the meaning set forth in the definition of
Leverage Ratio.
"Digital Customer" means a Qualifying Customer who is served utilizing
digital technology.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof (except, in each case,
upon the occurrence of a Change of Control), in whole or in part, on or prior to
the final maturity date of the Notes.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Existing Qualifying Customers" means 50,000, reduced by the number of
Qualifying Customers that may be sold in connection with the sale of assets
comprising Markets Held for Sale.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between an informed and willing seller and an informed and willing and able
buyer, neither of whom is under undue pressure or compulsion to complete the
transaction. Except as provided in the Trust Indenture Act of 1939, as amended,
and except with respect to non-cash Investments not exceeding $5,000,000, fair
market value shall be determined (I) with respect to any Asset Sale involving
consideration of less than $5,000,000, by management of the Company
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and (II) in all other cases (whether or not involving an Asset Sale), by the
Board of Directors of the Company acting in good faith and shall be evidenced by
a board resolution (certified by the Secretary or Assistant Secretary of the
Company) delivered to the Trustee; PROVIDED, HOWEVER, that if (A) the aggregate
non-cash consideration to be received by the Company or any Restricted
Subsidiary from any Asset Sale shall reasonably be expected to exceed $5,000,000
or (B) if the net worth of any Restricted Subsidiary to be designated as an
Unrestricted Subsidiary shall reasonably be expected to exceed $10,000,000, then
fair market value shall be determined by a nationally recognized investment
banking firm.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable from time to
time and are consistently applied.
"guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part) (but if in part, only to the extent thereof); PROVIDED,
HOWEVER, that the term "guarantee" shall not include (A) endorsements for
collection or deposit in the ordinary course of business and (B) guarantees
(other than guarantees of Indebtedness) by the Company in respect of assisting
one or more Subsidiaries in the ordinary course of their respective businesses,
including without limitation guarantees of trade obligations and operating
leases, on ordinary business terms. The term "guarantee" used as a verb has a
corresponding meaning.
"Heartland" means Heartland Wireless Communications, Inc., a Delaware
corporation.
"Heartland Long-Term Note" means the promissory note of the Company in the
principal amount of $15.0 million, in the form issued to Heartland on the Issue
Date.
"Heartland Notes" means, collectively, the Heartland Short-Term Note and the
Heartland Long-Term Note.
"Heartland Short-Term Note" means the promissory note of the Company in the
principal amount of $25.0 million, in the form issued to Heartland on the Issue
Date.
"Heartland Short-Term Note Collateral" means $25.0 million that was
deposited in a segregated bank account or invested in a cash equivalent
investment by the Company on the Issue Date, which funds, together with the
interest thereon, shall secure the obligation of the Company to repay the
Heartland Short-Term Note.
"Incremental Qualifying Customers" means, as of the date of determination,
the aggregate number of Qualifying Customers of the Company and its Restricted
Subsidiaries minus Existing Qualifying Customers.
"incur" shall have the meaning set forth in "--Certain Covenants--Limitation
on Incurrence of Additional Indebtedness" above; and "incurrence" and "incurred"
shall have meanings correlative to the foregoing.
"Indebtedness" means with respect to any Person, without duplication, any
liability of such Person or such Person's Restricted Subsidiaries (i) for
borrowed money, (ii) evidenced by bonds, debentures, notes or other similar
instruments, (iii) constituting Capitalized Lease Obligations, (iv) incurred or
assumed as the
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deferred purchase price of property (including, without limitation, obligations
which constitute wireless channel rights obligations as they have been
calculated in the financial statements included in this Prospectus), or pursuant
to conditional sale obligations and title retention agreements (but excluding
trade accounts payable arising in the ordinary course of business), (v) for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (vi) for Indebtedness of others guaranteed by such
Person, (vii) for Interest Swap Obligations, (viii) for the higher of the
voluntary liquidation preference, involuntary liquidation preference, fixed
redemption price or repurchase price of all Disqualified Capital Stock and (ix)
for Indebtedness of any other Person of the type referred to in clauses (i)
through (viii) which is secured by any Lien on any property or asset of such
first referred to Person, whether or not such Indebtedness is assumed by such
Person or is not otherwise such Person's legal liability; PROVIDED, HOWEVER,
that if the obligations so secured have not been assumed by such Person or are
otherwise not such Person's legal liability, the amount of such Indebtedness for
the purposes of this definition shall be limited to the lesser of the amount of
such Indebtedness secured by such Lien or the fair market value of the assets or
property securing such Lien. The amount of Indebtedness of any Person at any
date shall be the outstanding principal amount of all unconditional obligations
described above, as such amount would be reflected on a balance sheet prepared
in accordance with GAAP, and the maximum liability at such date of such Person
for any contingent obligations described above.
"Interest Swap Obligations" means the obligations of any Person under any
interest rate protection agreement, interest rate future, interest rate option,
interest rate swap, interest rate cap or other interest rate hedge or
arrangement.
"Investment" by any Person means any direct or indirect (i) loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property (valued at the fair market value thereof as of the date of
transfer) to others or payments for property or services for the account or use
of others, or otherwise), (ii) purchase or acquisition of Capital Stock, bonds,
notes, debentures or other securities or evidences of Indebtedness issued by any
other Person (whether by merger, consolidation, amalgamation or otherwise and
whether or not purchased directly from the issuer of such securities or
evidences of Indebtedness) and (iii) guarantee or assumption of the Indebtedness
of any other Person (except for an assumption of Indebtedness for which the
assuming Person receives consideration with a fair market value at least equal
to the principal amount of the Indebtedness assumed). Investments shall exclude
extensions of trade credit and advances to customers and suppliers to the extent
made in the ordinary course of business on ordinary business terms. The amount
of any non-cash Investment shall be the fair market value of such Investment, as
determined conclusively in good faith by management of the Company unless the
fair market value of such Investment exceeds $5,000,000, in which case the fair
market value shall be determined conclusively in good faith by the Board of
Directors of the Company at the time such Investment is made. Notwithstanding
the foregoing, the purchase or acquisition of any securities of any other Person
to the extent effected with Qualified Capital Stock of the Company shall not be
deemed to be an Investment. The amount of any Investment shall not be adjusted
for increases or decreases in value, or write-ups, write-downs or write-offs
with respect to such Investment.
"Issue Date" means the actual date of original issuance of the Notes, which
was February 23, 1996.
"Leverage Ratio" means, as to any Person, the ratio of (i) the Consolidated
Total Indebtedness of such Person as of the date of the transaction or event
giving rise to the need to calculate the Leverage Ratio (the "Determination
Date") on a consolidated basis in accordance with GAAP to (ii) the product of
(A) the Consolidated EBITDA of such Person for the full fiscal quarter for which
financial information is available ending immediately prior to the Determination
Date (such fiscal quarter, the "Measurement Period") and (B) four.
For purposes of this definition, the Consolidated Total Indebtedness of the
Person as of the Determination Date shall be adjusted as if the Indebtedness
giving rise to the need to perform such calculation had been incurred and the
proceeds therefrom had been applied on the Determination Date.
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For purposes of calculating Consolidated EBITDA of the Company for the
Measurement Period immediately prior to the relevant Determination Date, (I) any
Person that is a Restricted Subsidiary on such Determination Date (or would
become a Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such ratio) will be deemed to
have been a Restricted Subsidiary at all times during such Measurement Period,
(II) any Person that is not a Restricted Subsidiary on such Determination Date
(or would cease to be a Restricted Subsidiary on such Determination Date in
connection with the transaction that requires the determination of such ratio)
will be deemed not to have been a Restricted Subsidiary at any time during such
Measurement Period and (III) if the Company or any Restricted Subsidiary shall
have in any manner (x) acquired (including through an Asset Acquisition or the
commencement of activities constituting such operating business) or (y) disposed
of (including by way of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
the Measurement Period or after the end of such Measurement Period and on or
prior to the Determination Date, such calculation will be made on a PRO FORMA
basis in accordance with GAAP as if, in the case of an Asset Acquisition or the
commencement of activities constituting such operating business, all such
transactions had been consummated on the first day of such Measurement Period
and, in the case of an Asset Sale or termination or discontinuance of activities
constituting such operating business, all such transactions had been consummated
prior to the first day of such Measurement Period; PROVIDED, HOWEVER, that such
pro forma adjustment shall not give effect to the Consolidated EBITDA of any
acquired Person to the extent that such Person's net income would be excluded
pursuant to clause (e) of the definition of Consolidated Net Income.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any option or other
agreement to sell, and any filing of or any agreement to give, any security
interest).
"Markets Held for Sale" means the Bakersfield and Stockton/Modesto,
California markets and related assets.
"Material Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries and each Defaulting Subsidiary
(as defined below), (i) for the most recent fiscal year of the Company accounted
for more than 10% of the consolidated revenues of the Company (exclusive of all
Unrestricted Subsidiaries) or (ii) as of the end of such fiscal year, was the
owner of more than 10% of the consolidated assets of the Company (exclusive of
all Unrestricted Subsidiaries), all as set forth on the most recently available
consolidated financial statements of the Company and its consolidated Restricted
Subsidiaries for such fiscal year prepared in conformity with GAAP. "Defaulting
Subsidiary" means any Restricted Subsidiary with respect to which an event
described under clause (v) of the first paragraph of "--Events of Default" above
has occurred and is continuing, determined as if the words "Material Subsidiary"
in such clause were the words "Restricted Subsidiary" therein.
"Measurement Period" shall have the meaning set forth in the definition of
Leverage Ratio.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents (including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents)
received by the Company or any Restricted Subsidiary from such Asset Sale net of
(i) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions, recording fees, title insurance premiums, appraisers'
fees and costs reasonably incurred in preparation of any asset or property for
sale), (ii) taxes paid or reasonably estimated to be payable (calculated based
on the combined state, federal and foreign statutory tax rates applicable to the
Company or the Restricted Subsidiary consummating such Asset Sale) and (iii)
repayment of Indebtedness secured by assets subject to such Asset Sale, (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
as a reserve, in accordance with GAAP against any liabilities associated with
such assets and retained by the Company or
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any Restricted Subsidiary after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities and liabilities related to
environmental matters and the after-tax cost of any indemnification payments
(fixed or contingent) attributable to the seller's indemnities to the purchaser
undertaken by the Company or any Restricted Subsidiary in connection with any
such Asset Sale (but excluding any payments which, by the terms of the
indemnities will not, under any circumstances, be made during the term of the
Notes) and (v) all distributions and other payments required to be made to
minority interests holders in Restricted Subsidiaries or joint ventures as a
result of such Asset Sale; PROVIDED, HOWEVER, that if the instrument or
agreement governing such Asset Sale requires the transferor to maintain a
portion of the purchase price in escrow (whether as a reserve for adjustment of
the purchase price or otherwise) or to provide for indemnification of the
transferee for specified liabilities in a maximum specified amount, the portion
of the cash or Cash Equivalents that is actually placed in escrow or segregated
and set aside by the transferor for such indemnification obligations shall not
be deemed to be Net Cash Proceeds until the escrow terminates or the transferor
ceases to segregate and set aside such funds, in whole or in part, and then only
to the extent of the proceeds released from escrow to the transferor or that are
no longer segregated and set aside by the transferor.
"Participation Agreement" means the Participation Agreement dated as of
December 12, 1995, among CAI, Heartland and the Company, as amended by Amendment
No. 1 to the Participation Agreement dated as of February 22, 1996, among CAI,
Heartland and the Company.
"Payment Restriction" shall have the meaning set forth in "--Certain
Covenants--Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" above.
"Permitted Exchange" shall have the meaning set forth in "--Certain
Covenants--Limitation on Asset Sales" above.
"Permitted Holder" means any of (i) CAI and its Affiliates; (ii) Heartland
and its Affiliates; or (iii) the BANX Affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(a) the Notes;
(b) Indebtedness of the Company evidenced by (i) the Heartland Short-Term
Note and (ii) the Heartland Long-Term Note;
(c) Indebtedness outstanding on the Issue Date less any prepayments or
repayments in respect thereof;
(d) Interest Swap Obligations; PROVIDED, HOWEVER, that such Interest Swap
Obligations are entered into to protect the Company from fluctuations in
interest rates of its Indebtedness, to the extent the notional principal amount
of such Interest Swap Obligation do not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligations relate;
(e) Indebtedness incurred by the Company the proceeds of which are to be
used to effect the acquisition of any rights relating to wireless cable
channels, or of any entity or division or line of business or geographic market
of an entity engaged in the Wireless Cable Business (including through the
acquisition of Capital Stock or all or substantially all of the assets of such
entity or division or line of business); PROVIDED, HOWEVER, that no such
Indebtedness may be incurred pursuant to this clause (e) if the aggregate amount
of Indebtedness and other payment obligations incurred in connection with such
acquisition (including in such calculation any covenants not to compete (other
than pursuant to customary employment contracts) and other deferred payment
arrangements) is in excess of 50% of the total consideration paid or payable in
connection with such acquisition;
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(f) the incurrence of additional Indebtedness by the Company and any
Indebtedness incurred by the Company to refinance any such Indebtedness;
PROVIDED, HOWEVER, that (i) the proceeds of such Indebtedness are used to fund
the build-out of the Wireless Cable Business of the Company or the Restricted
Subsidiaries (including the purchase and installation of wireless cable
equipment); and (ii) such Indebtedness does not exceed at the time of incurrence
the sum of:
(A) the product of the number of Incremental Qualifying Customers who
are Digital Customers on the date of incurrence times $650; plus
(B) the product of the number of Incremental Qualifying Customers who
are Analog Customers on the date of incurrence times $550;
(g) Refinancing Indebtedness;
(h) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in the
case of daylight overdrafts) drawn against insufficient funds in the ordinary
course of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished
within two business days of incurrence;
(i) Acquired Indebtedness of any corporation that becomes a Restricted
Subsidiary after the Issue Date which Indebtedness is existing at the time such
corporation becomes a Restricted Subsidiary; PROVIDED HOWEVER, that (A)
immediately before and immediately after giving effect to such corporation
becoming a Restricted Subsidiary (as if such Indebtedness were incurred on the
first day of the Measurement Period) the Company could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in accordance with
the Leverage Ratio of the covenant described under "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness" above, (B) such
Indebtedness is without recourse to the Company or to any Restricted Subsidiary
or to any of their respective properties or assets other than the Person
becoming a Restricted Subsidiary or its properties and assets and (C) such
Indebtedness was not incurred as a result of or in connection with or in
contemplation of such entity becoming a Restricted Subsidiary;
(j) additional Indebtedness incurred by the Company and Indebtedness of
Restricted Subsidiaries, and any Indebtedness incurred by the Company or any
Restricted Subsidiary to refinance any such Indebtedness; PROVIDED, HOWEVER,
that the aggregate principal amount of Indebtedness incurred and outstanding
pursuant to this clause (j) shall not exceed $5 million in the aggregate at any
time outstanding;
(k) Indebtedness of a Wholly Owned Restricted Subsidiary of the Company owed
to and held by the Company or another Wholly Owned Restricted Subsidiary of the
Company, in each case which is not subordinated in right of payment to any
Indebtedness of such Restricted Subsidiary, except that (i) any transfer of such
Indebtedness by the Company or a Wholly Owned Restricted Subsidiary of the
Company (other than to the Company or to a Wholly Owned Restricted Subsidiary of
the Company) and (ii) the sale, transfer or other disposition by the Company or
any Restricted Subsidiary of Capital Stock of a Wholly Owned Restricted
Subsidiary of the Company which is owed Indebtedness of another Wholly Owned
Restricted Subsidiary of the Company such that it ceases to be a Wholly Owned
Restricted Subsidiary of the Company shall, in each case, be an incurrence of
Indebtedness by such Restricted Subsidiary subject to the other provisions of
the covenant described under "--Certain Covenants--Limitation on Incurrence of
Additional Indebtedness" above;
(l) Indebtedness of the Company owed to and held by a Wholly Owned
Restricted Subsidiary of the Company which is unsecured and subordinated in
right of payment to the payment and performance of the Company's obligations
under the Indenture and the Notes, except that (i) any transfer of such
Indebtedness by a Wholly Owned Restricted Subsidiary of the Company (other than
to another Wholly Owned Restricted Subsidiary of the Company) and (ii) the sale,
transfer or other disposition by the Company or any Restricted Subsidiary of
Capital Stock of a Wholly Owned Restricted Subsidiary of the Company which holds
Indebtedness of the Company such that it ceases to be a Wholly Owned Restricted
Subsidiary of the
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Company shall, in each case, be an incurrence of Indebtedness by the Company,
subject to the other provisions of the covenant described under "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness" above;
(m) Indebtedness of the Company or any Restricted Subsidiary represented by
letters of credit for the account of the Company or such Restricted Subsidiary,
as the case may be, in order to provide security for workers' compensation
claims, payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business pursuant to ordinary business
terms; and
(n) subordinated Indebtedness incurred by the Company and owing to any
Strategic Equity Investor and any Indebtedness incurred by the Company to
refinance such Indebtedness and owing to a Strategic Equity Investor; PROVIDED,
HOWEVER, that the aggregate principal amount of Indebtedness at any time
outstanding pursuant to this clause (n) shall not exceed $100 million (or if
such Indebtedness is issued at a discount from the face amount thereof, with an
initial issue price of not more than $100 million); PROVIDED, FURTHER, HOWEVER,
that such subordinated Indebtedness shall (i) not by its terms provide for the
payment of any cash interest thereon or for any payments of principal thereof
(whether pursuant to sinking fund or otherwise) at any time prior to the date
which is six months after the earlier to occur of the Final Maturity Date or the
date on which all of the Notes are repaid in full or are no longer outstanding;
(ii) be expressly subordinated in right of payment to the Notes (and any
refinancing thereof, including any refinancing that increases the amount
thereof) and all other Indebtedness of the Company at any time outstanding
(unless such Indebtedness expressly provides that it is not senior debt in
respect of such subordinated Indebtedness) pursuant to subordination terms which
are at least substantially equivalent to those set forth as an exhibit to the
Indenture; (iii) have a stated maturity not earlier than the date which is six
months after the earlier to occur of the Final Maturity Date or the date on
which all of the Notes are repaid in full or are no longer outstanding; (iv) not
have in the documentation evidencing such Indebtedness any term, covenant,
provision or default or event of default which is materially more favorable to
the holder thereof than the terms, covenants, provisions or defaults or events
of default set forth in the Notes and the Indenture (it being expressly
understood that any such Indebtedness incurred under this clause (n) may have an
interest rate and interest terms different from the Notes); and (v) not be
secured by any Lien on any property or asset of the Company or any Restricted
Subsidiary.
"Permitted Investment" means, without duplication, each of the following:
(i) Investments arising as a result of the receipt by the Company or any
Restricted Subsidiary of non-cash consideration for an Asset Sale effected
in compliance with "--Certain Covenants-- Limitation on Asset Sales" above
(other than pursuant to a Permitted Exchange);
(ii) Investments by the Company or any Wholly Owned Restricted
Subsidiary of the Company in any Wholly Owned Restricted Subsidiary of the
Company (whether existing on the Issue Date or created thereafter) or any
Person that after such Investment and, as a result thereof, becomes a Wholly
Owned Restricted Subsidiary of the Company and Investments in the Company by
any Subsidiary of the Company;
(iii) Cash and Cash Equivalents;
(iv) Investments in securities of trade creditors, wholesalers or
customers received pursuant to any plan of reorganization or similar
arrangement;
(v) Investments existing on the Issue Date to the extent and in the
manner so existing on the Issue Date; and
(vi) Investments by the Company or any Restricted Subsidiary to acquire
the stock of or assets of a Person engaged in the subscription television
business, including transmission and related services, not to exceed the sum
of (i) $15,000,000, and (ii) the net cash proceeds of any capital
contribution
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(other than from a Restricted Subsidiary) or a substantially concurrent sale
for cash (other than to a Restricted Subsidiary) of Qualified Capital Stock
of the Company, at any time outstanding.
"Permitted Liens" means, without duplication, each of the following:
(i) Liens in favor of the Trustee in its capacity as trustee for the
Holders;
(ii) Liens existing on the Issue Date as in effect on such date;
(iii) Liens on property of the Company securing Indebtedness incurred
pursuant to clauses (e), (f) or (j) of Permitted Indebtedness;
(iv) Liens on property existing on the date of acquisition thereof;
PROVIDED, HOWEVER, that such Liens are not incurred as a result of, or in
connection with or in anticipation of, such transaction and such Liens
relate solely to the property so acquired;
(v) Liens to secure the payment of all or a part of the purchase price
or construction cost of acquired or constructed property which is to be used
by the Company exclusively in the Wireless Cable Business, including related
activities and services, after the Issue Date; PROVIDED, HOWEVER, that the
Indebtedness secured by such Liens shall not exceed the lesser of 100% of
the cost of such property or of the fair market value of such property and
such Liens shall not extend to any other property or assets of the Company
or of any Restricted Subsidiary other than the property or assets so
acquired;
(vi) Liens for taxes, assessments and governmental charges to the extent
not required to be paid under the Indenture;
(vii) statutory Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other like Liens to the
extent not required to be paid under the Indenture;
(viii) pledges or deposits to secure lease obligations or nondelinquent
obligations under workers' compensation, unemployment insurance or similar
legislation (other than the Employee Retirement Income Security Act of 1974,
as amended from time to time ("ERISA"));
(ix) Liens to secure the performance of public statutory obligations
that are not delinquent, performance bonds or other obligations of a like
nature (other than for borrowed money), in each case incurred in the
ordinary course of business pursuant to ordinary business terms;
(x) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances incurred
in the ordinary course of business pursuant to ordinary business terms not
interfering in any material respect with the business of the Company or any
Restricted Subsidiary;
(xi) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of letters of
credit or bankers' acceptances issued or created for the account of such
Person to facilitate the purchase, shipment or storage of such inventory or
other goods in the ordinary course of business pursuant to ordinary business
terms;
(xii) judgment and attachment Liens not giving rise to an Event of
Default;
(xiii) leases or subleases granted to others in the ordinary course of
business pursuant to ordinary business terms and consistent with past
practice not interfering in any material respect with the business of the
Company or any Restricted Subsidiary;
(xiv) any interest or title of a lessor in the property subject to any
lease, whether characterized as capitalized or operating other than any such
interest or title resulting from or arising out of a default by the Company
or any Restricted Subsidiary of its obligations under such lease;
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(xv) Liens arising from filing UCC financing statements for
precautionary purposes in connection with true leases of personal property
that are otherwise permitted under the Indenture and under which the Company
or any Restricted Subsidiary is a lessee;
(xvi) Liens with respect to Acquired Indebtedness incurred in
accordance with the covenant described under "--Certain
Covenants--Limitation of Incurrence of Additional Indebtedness" above;
PROVIDED, HOWEVER, that (A) such Liens secured such Acquired Indebtedness at
the time of and prior to the incurrence of such Acquired Indebtedness by the
Company and were not granted as a result of, in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the Company
and (B) such Liens do not extend to or cover any property or assets of the
Company or of any Restricted Subsidiary other than the property or assets
that secured the Acquired Indebtedness prior to the time such Indebtedness
became Acquired Indebtedness of the Company and are no more favorable to the
lienholders than those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by the Company;
(xvii) Liens to secure Capitalized Lease Obligations to the extent
arising from transactions consummated in compliance with "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness" and
"--Limitation on Sale and Leaseback Transactions" above; PROVIDED, HOWEVER,
that such Liens do not extend to or cover any property or assets of the
Company or of any Restricted Subsidiary, other than the property or assets
subject to such Capitalized Lease Obligation;
(xviii) any Lien to secure the refinancing of any Indebtedness described
in the foregoing clauses; provided, however, that to the extent any such
clause limits the amount secured or the asset subject to such Liens, no
refinancing shall increase the assets subject to such Liens or the amount
secured thereby beyond the assets or amounts set forth in such clauses; and
(xix) any Lien created by the grant of the security interest in the
Heartland Short-Term Note Collateral for the purpose of securing repayment
of the Heartland Short-Term Note.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Productive Assets" means assets of a kind used or usable by the Company and
the Restricted Subsidiaries in wireless cable television businesses or
businesses reasonably related thereto.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualifying Customers" means, as of any date of determination, the aggregate
number of Subscribers for the Company and the Restricted Subsidiaries as of the
last day of the most recent month ending not more than 45 days prior to the date
of determination; PROVIDED, HOWEVER, that the Company shall have received all
fees due from such Customer within 90 days of billing by the Company; and
PROVIDED, FURTHER, HOWEVER, that to the extent any Strategic Equity Investor is
then realizing an economic interest in the revenues of a Subscriber, whether
through contract, joint marketing arrangements, equity interests in a Restricted
Subsidiary or otherwise, such Subscriber shall not be deemed a Qualifying
Customer.
"refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part; "refinanced" and "refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any refinancing by the Company of
Indebtedness of the Company or of any Restricted Subsidiaries incurred in
accordance with "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness" above (other than pursuant to clauses (b)(i), (d), (f), (h), (j),
(k),
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(l) and (m) of the definition of Permitted Indebtedness); PROVIDED, HOWEVER,
that such Indebtedness so incurred to refinance such other Indebtedness (the
"Existing Indebtedness") (1) is not in an aggregate principal amount as of the
date of the consummation of such proposed refinancing in excess of (or if such
Indebtedness being incurred to refinance the Existing Indebtedness is issued
with original issue discount, at an original issue price not in excess of) the
sum of (i) the aggregate principal amount outstanding of the Existing
Indebtedness (provided that (a) if such Existing Indebtedness was issued with
original issue discount, in excess of the accreted amount of such Existing
Indebtedness (as determined in accordance with GAAP) as of the date of such
proposed refinancing, (b) if such Existing Indebtedness was incurred pursuant to
a revolving credit facility or any other agreement providing a commitment for
subsequent borrowings, with a maximum commitment under the agreement governing
the Indebtedness proposed to be incurred not in excess of the maximum commitment
amount under such Existing Indebtedness and (c) any amount of such Existing
Indebtedness owned or held by the Company or any of its Subsidiaries shall not
be deemed to be outstanding for the purposes hereof) as of the date of such
proposed refinancing, PLUS (ii) the amount of any premium required to be paid
under the terms of the instrument governing such Existing Indebtedness and plus
(iii) the amount of reasonable expenses incurred by the Company in connection
with such refinancing and (2) does not have (I) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the Existing
Indebtedness or (II) a final maturity earlier than the final maturity of the
Existing Indebtedness; PROVIDED, FURTHER, HOWEVER, that (y) if such Existing
Indebtedness is subordinate or junior to the Notes, then such Indebtedness
proposed to be incurred to refinance the Existing Indebtedness shall be
subordinate to the Notes at least to the same extent and in the same manner as
the Existing Indebtedness and (z) such Indebtedness proposed to be incurred to
refinance the Existing Indebtedness is not incurred more than three months prior
to the complete retirement or defeasance of the Existing Indebtedness with the
proceeds thereof.
"Restricted Payment" shall have the meaning set forth in the covenant
described under "--Certain Covenants--Limitation on Restricted Payments" above.
"Restricted Subsidiary" means any Subsidiary of the Company which, as of the
determination date, is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party providing for the leasing
to the Company or a Restricted Subsidiary of any property, whether owned by the
Company or any Restricted Subsidiary at the Issue Date or later acquired, which
has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"Stated Maturity," when used with respect to a Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Strategic Equity Investor" means (i) any Person engaged principally in the
telecommunications business which, both as of the Trading Day immediately before
the day of determination and the Trading Day immediately after the day of
determination, has a Total Market Capitalization of at least $2.0 billion (or
for purposes of the definition of "Qualifying Customers," $500 million) and (ii)
any Person which is wholly owned and controlled by any Person or Persons
referred to in clause (i) of this definition. In calculating Total Market
Capitalization for the purpose of clause (i) of this definition, the
consolidated Indebtedness of such Person, solely when calculated as of the
Trading Day immediately after the day of determination, will be calculated after
giving effect to the transactions to occur on any such date of determination
(including any Indebtedness incurred in connection with any sale of Capital
Stock to such Person) and the Closing Price of the Common Stock of such Person,
solely when calculated as of the Trading Date immediately after the day of
determination, will be deemed to be the Closing Price of such Common Stock on
such succeeding Trading Day, subject to the last sentence of the definition of
"Total
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Market Capitalization." For purposes of this definition, the date of
determination shall be the date on which any transaction which requires a
determination of whether a Person is a Strategic Equity Investor under the
Indenture shall have been consummated.
"Subscriber" means, as of any determination date, any individual customer or
bulk or commercial account (computed on an equivalent customer basis) to whom
the Company or any Restricted Subsidiary provides subscription basic programming
services as well as accounts to whom the Company or any Restricted Subsidiary
provides other wireless service for a fee (computed on an equivalent customer
basis based on the basic programming service subscriber fee), in each case as of
such date.
"Subsidiary," with respect to any Person, means (i) any corporation of which
at least a majority of the outstanding Voting Stock shall at the time be owned,
directly or indirectly, by such Person or (ii) any other Person of which at
least a majority of the outstanding Voting Stock is at the time, directly or
indirectly, owned by such Person.
"Surviving Entity" shall have the meaning set forth in the covenant
described under "--Certain Covenants--Merger, Consolidation and Sale of Assets."
"Total Market Capitalization" of any Person means, as of any day of
determination (and as modified for purposes of the definition of "Strategic
Equity Investor"), the sum of (1) the consolidated Indebtedness of such Person
and its Subsidiaries on such day, plus (2) the product of (i) the aggregate
number of outstanding primary shares of Common Stock of such Person on such day
(which shall not include any options or warrants on, or securities convertible
or exchangeable into, shares of Common Stock of such Person) and (ii) the
average Closing Price of such Common Stock over the 20 consecutive Trading Days
immediately preceding such day, plus (3) the liquidation value of any
outstanding shares of Preferred Stock of such Person on such day. If no such
Closing Price exists with respect to shares of any such class, the value of such
shares for purposes of clause (2) of the preceding sentence shall be determined
by the Company's Board of Directors in good faith and evidenced by a resolution
of such Board of Directors delivered to the Trustee.
"Trading Day" means with respect to a securities exchange or automated
quotation system, a day on which such exchange or system is open for a full day
of trading.
"Unrestricted Subsidiary" means a Subsidiary of the Company created after
the Issue Date and so designated by a resolution adopted by the Board of
Directors of the Company in accordance with the covenant described under
"--Certain Covenants--Limitation on Restricted and Unrestricted Subsidiaries"
above.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or only so long as no senior class of stock has voting power by
reason of any contingency) to vote in the election of members of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Preferred Stock at any date, the number of years obtained by dividing (a) the
then outstanding aggregate principal amount or liquidation preference of such
Indebtedness or Preferred Stock into (b) the total of the product obtained by
multiplying (i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal or liquidation
preference, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Subsidiary of
such Person of which all the outstanding Capital Stock (other than directors'
qualifying shares) are owned by such Person or any Wholly Owned Restricted
Subsidiary of such Person.
"Wireless Cable Business" means transmitting video, voice or data primarily
through wireless cable transmission facilities, utilizing wireless channels for
any commercial purpose permitted by the FCC and other activities directly
related thereto.
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DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING SUMMARY OF THE TERMS OF THE COMPANY'S CAPITAL STOCK DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
ACTUAL TERMS OF THE CAPITAL STOCK CONTAINED IN THE COMPANY'S CERTIFICATE OF
INCORPORATION (AS DEFINED).
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the issuance of up to 40,000,000
shares of Common Stock and 5,000,000 shares of preferred stock, $.01 par value
("Preferred Stock").
As of December 31, 1996, (i) 10,445,408 shares of Common Stock were issued
and outstanding and (ii) no shares of Preferred Stock were issued and
outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including elections of directors, and, except
as otherwise required by law or provided by the express provisions of any series
of Preferred Stock of the Company, the holders of such shares will exclusively
possess all voting power of the Company. There is no cumulative voting in the
election of directors, and no holder of Common Stock is entitled as such, as a
matter of right, to subscribe for or purchase any shares of Common Stock or
Preferred Stock. Subject to the preferential rights of any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends as may be declared from time to time by the Board of Directors
from funds legally available therefor. In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment or provision for
liabilities and amounts owing in respect of any outstanding Preferred Stock.
Certain agreements to which the Company is a party contain covenants which
have the effect of restricting the payment of dividends on capital stock by the
Company. In the event of a deterioration in the financial condition or results
of operations of the Company, such covenants could limit or prohibit the payment
of dividends on Common Stock. In addition, the Company intends to operate as a
holding company substantially all of whose consolidated assets will be held by
its subsidiaries, and the cash flow of the Company and the consequent ability to
pay dividends on Common Stock would be largely dependent upon the earnings of
such subsidiaries.
Fleet National Bank acts as the transfer agent for the Common Stock.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series.
Subject to limitations prescribed by Delaware law and the Certificate of
Incorporation, the Board of Directors is authorized to fix the number of shares
constituting each series of Preferred Stock and the designations, powers,
preferences and relative participating, optional or other special rights of the
shares of each such series, and the qualifications, limitations or restrictions
thereof, including, without limitation, the dividend rights, dividend rates,
conversion rights, exchange rights, voting rights, rights and terms of
redemption (including sinking and purchase fund provisions), the redemption
prices and the dissolution preferences. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely, affect the voting
power of the holders of Common Stock and, under certain circumstances, make it
more difficult for a third party to gain control of the Company and could have
the effect of delaying or preventing a merger, tender offer or other attempted
takeover of the Company. No holder of Preferred Stock shall be entitled, as a
matter of right, to subscribe for or purchase any shares of Preferred Stock or
Common Stock.
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DELAWARE ANTI-TAKEOVER STATUTE
Section 203 of the Delaware General Corporation Law (the "Delaware
Anti-Takeover Statute") applies to Delaware corporations with a class of voting
stock listed on a national securities exchange, authorized for quotation on an
inter-dealer quotation system, or held of record by 2,000 or more persons, and
restricts transactions which may be entered into by such a corporation and
certain of its stockholders. Although the Delaware Anti-Takeover Statute
currently does not apply to the Company, the Company has not opted out of the
Delaware Takeover Statute and therefore may become subject to its provisions in
the future. The Delaware Anti-Takeover Statute provides, in essence, that a
stockholder acquiring more than 15% of the outstanding voting shares of a
corporation subject to the statute (an "Interested Stockholder"), but less than
85% of such shares, may not engage in certain "Business Combinations" with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder, unless (i) prior to such date the
corporation's board of directors approved either the Business Combination or the
transaction in which the stockholder became an Interested Stockholder or (ii)
the Business Combination is approved by the corporation's board of directors and
authorized by a vote of at least 66 2/3% of the outstanding voting stock of the
corporation not owned by the Interested Stockholder.
The Delaware Anti-Takeover Statute defines the term "Business Combination"
to encompass a wide variety of transactions with or caused by an Interested
Stockholder in which the Interested Stockholder receives or could receive
benefit on other than a PRO RATA basis with other stockholders, including
mergers, certain asset sales, certain issuances of additional shares to the
Interested Stockholder, transactions with the corporation which increase the
proportionate interest of the Interested Stockholder, or transactions in which
the Interested Stockholder receives certain other benefits.
REGISTRATION RIGHTS
REGISTRATION RIGHTS OF COMMON SHARE HOLDERS AND BANX AFFILIATES
The Company and the Initial Purchasers entered into an agreement dated as of
February 15, 1996 for the registration of the Common Shares (the "Common Share
Registration Rights Agreement") pursuant to which the Company has agreed to
provide the holders of the Common Shares (the "Common Share Holders") certain
registration rights for the Common Shares. Under the Common Share Registration
Rights Agreement, after an initial public offering of Common Stock solely for
cash, the holders of at least 50% of the Common Shares at any time outstanding
are entitled to initiate one separate demand registration subject to certain
conditions and limitations. The Company shall not be required to effect a demand
registration for the period set forth in the Common Share Registration Rights
Agreement immediately following the effective date of a registered offering of
securities for its own account.
If the Company proposes to register any of its equity securities for its own
account or for other holders of its equity securities (including an initial
public offering, but excluding a registration of securities by the Company on
Form S-4 or S-8 or a registration in connection with an offer of securities
solely to existing security holders), the Common Share Holders will be entitled
to notice of such proposed registration and the opportunity to include Common
Shares in such proposed registration; PROVIDED, HOWEVER, that in the event an
underwriter's cut-back is necessary (i) in the case of a registration only for
the Company's account, the Company shall receive priority, and the holders of
the Company's common equity on the date of issuance of the Common Shares,
including the holders of the BANX Shares (the "Existing Holders"), and Common
Share Holders may participate together such that the amount to be included for
the holders of the Common Shares and the Existing Holders shall be allocated
among them on a pro rata basis (provided that the holders of the Common Shares
and the Existing Holders shall be entitled to include their securities in
priority over all other holders of equity securities of the Company), (ii) in
cases not involving registration of securities solely for the Company's own
account or for the account of the Existing Holders, securities shall be included
in the following order of priority: (x) first, securities of any person
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whose exercise of a demand registration pursuant to a contractual commitment
with the Company is the basis for the registration, and (y) second, securities
of Common Share Holders and other Existing Holders shall be included PRO RATA,
and (iii) in cases involving registration of securities at the request of the
Existing Holders, no securities of any Person other than the Existing Holders
shall be included unless no securities proposed to be included by the Existing
Holders have been excluded and no securities of any Person other than the
Existing Holders and the holders of the Common Shares shall be included unless
no securities proposed to be included by the holders of the Common Shares have
been excluded. Under the Common Share Registration Rights Agreement, the Company
agrees not to cause or permit the public sale of its Common Stock during the
30-day period prior to and during the 90-day period beginning on the
commencement of any underwritten offering pursuant to a demand by the Common
Share Holders, or a piggyback registration which has been scheduled, prior to
the Company publicly announcing its intention to effect a public offering.
Registration rights will terminate as to any Common Shares on the second
anniversary of the date upon which this Offering is consummated.
The BANX Affiliates have similar registration rights with respect to the
BANX Shares pursuant a registration rights agreement dated as of February 23,
1996 between the Company and the BANX Affiliates.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, based on current law, is a general summary of the
anticipated United States federal income tax consequences relevant to the
exchange of Old Notes for New Notes and the ownership and disposition of the New
Notes by holders acquiring New Notes pursuant to the Exchange Offer. The summary
does not address all aspects of taxation that may be relevant to particular
holders in light of their personal circumstances (including the effect of any
foreign, state or local tax laws) or to certain types of holders subject to
special treatment under federal income tax laws (including dealers in
securities, options or currencies, insurance companies, financial institutions,
persons holding Notes as part of a hedging or conversion transaction or
straddle, persons whose functional currency is not the United States dollar and
tax-exempt entities).
The discussion of the federal income tax consequences set forth below is
based upon the Internal Revenue Code of 1986, as amended (the "Code"), and
judicial decisions and administrative interpretations thereunder, as of the date
hereof, and such authorities may be repealed, revoked or modified so as to
result in federal income tax consequences different from those discussed below.
For purposes of the discussion set forth below, the term "Holder" includes a
beneficial owner of a Note. The discussion below is premised upon the assumption
that the Notes are held as capital assets. The discussion below pertains only to
Holders that are citizens or residents of the United States, corporations,
partnerships or other entities created in or under the laws of the United States
or any political subdivision thereof, or estates or trusts the income of which
is subject to United States federal income taxation regardless of its source.
EACH PROSPECTIVE HOLDER OF NOTES IS STRONGLY URGED TO CONSULT ITS OWN TAX
ADVISOR WITH RESPECT TO ITS PARTICULAR TAX SITUATION, INCLUDING THE TAX EFFECTS
OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX
LAWS.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an exchange or other taxable event for federal income
tax purposes because, under regulations proposed by the United States Treasury
Department, the New Notes should not be considered to significantly modify the
Old Notes and thus should not differ materially in kind or extent from the Old
Notes. Rather, the New Notes received by a Holder should be treated as a
continuation of the Old Notes in the hands of such Holder. As a result, there
should be no federal income tax consequences to Holders exchanging Old Notes for
New Notes pursuant to the Exchange Offer and a Holder should have the same
adjusted basis and holding period in the New Notes as it had in the Old Notes
immediately before the exchange.
ORIGINAL ISSUE DISCOUNT
The Notes were issued with original issue discount ("OID") for federal
income tax purposes. Because the New Notes will be treated as a continuation of
the Old Notes, which were issued with OID, the New Notes will have the same OID
as the Old Notes for federal income tax purposes. Accordingly, Holders will be
required to include OID in gross income as described below.
OID on each Note will equal the excess of its stated redemption price at
maturity over its issue price. A Holder of a Note must include OID in income as
ordinary interest income as it accrues on the basis of a constant yield to
maturity regardless of such Holder's method of accounting. Generally, OID must
be included in income in advance of the receipt of cash representing such
income.
Because the original purchasers of Old Notes purchased Units from the
Company which included Common Shares, the "issue price" of each Note is
determined by allocating the "issue price" of the Units between the Notes and
the Common Shares comprising such Units based on their relative fair market
values. For this purpose, the "issue price" of a Unit was the first price at
which a substantial amount of
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Units were sold (excluding sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers). For each Unit issued, the Company allocated $2,286.84 to the Notes
($571.71 per Note) and $8.00 to the Common Shares. The Company's allocation
reflects its best judgment as to the relative values of each of those
instruments at the time of issuance, but will not be binding on the Internal
Revenue Service. The Company's allocation will be binding on each Holder of a
Unit that does not explicitly disclose that its allocation of the issue price of
the Unit is different than the Company's allocation. Such disclosure must be
made on a statement attached to such Holder's timely filed federal income tax
return for its taxable year that includes the acquisition date of the Unit.
The stated redemption price at maturity of a Note will equal the sum of all
payments on the Note other than any "qualified stated interest" payments.
Qualified stated interest is stated interest that is unconditionally payable in
cash or in property (other than debt instruments of the issuer) at least
annually at a single fixed rate. Because interest on the Notes will not be paid
prior to September 1, 2001, none of the payments on the Notes will constitute
qualified stated interest. Accordingly, all payments on the Notes will be
treated as part of their stated redemption price at maturity and the Notes will
have significant OID.
The Holder of a Note must include in gross income, for all days during its
taxable year in which it holds such Note, the sum of the "daily portions" of
OID. The "daily portions" of OID are determined by allocating to each day in an
"accrual period" a pro rata portion of the OID that is allocable to such accrual
period. The amount of OID that is allocable to an accrual period is the product
of the "adjusted issue price" of the Note at the beginning of the accrual period
and its yield to maturity (determined on the basis of compounding at the end of
each accrual period and properly adjusted for the length of the particular
accrual period). The adjusted issue price of a Note is its issue price,
increased by prior accruals of OID and reduced by the total payments made with
respect to such Note in all prior accrual periods and on the first day of the
current accrual period. Accrual periods may be of any length and may vary in
length over the term of the Note, provided that each accrual period is no longer
than six months and each scheduled payment of principal or interest occurs
either on the final day of an accrual period or on the first day of an accrual
period. Each payment on a Note will be treated as a payment of OID to the extent
that OID has accrued as of the date such payment is due and has not been
allocated to prior payments, and any excess will be treated as a payment of
principal.
Because the Company failed to register the New Notes and the Exchange Offer
was not consummated within the required period of time, the Company has been
required to pay Additional Interest to Holders as liquidated damages. See
"Registration Rights--Registration Rights of Note Holders." Although the
characterization of these amounts is uncertain, such Additional Interest
probably constitutes contingent interest, which is generally not includable in
income before fixed or paid.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
Each Holder, subject to certain limitations, may elect to treat all
"interest" on any Note as OID and calculate the amount includable in gross
income under the method described above. For this purpose, "interest" includes
stated and unstated interest, OID and DE MINIMIS OID, acquisition discount,
market discount and DE MINIMIS market discount, as adjusted by any acquisition
premium. Such election, if made in respect of a market discount obligation, will
constitute an election to include market discount in income currently on all
market discount obligations acquired by such Holder on or after the first
taxable year to which the election applies. See "Market Discount" below. The
election is to be made for the taxable year in which the Holder acquires the
Note and may not be revoked without the consent of the Internal Revenue Service.
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ACQUISITION PREMIUM
Each Holder (including an original purchaser) that purchases a Note at a
purchase price greater than the adjusted issue price but less than the stated
redemption price at maturity will be considered to have purchased the Note at an
"acquisition premium" equal to such excess. In such a case, the Holder will
reduce the OID otherwise includable for each accrual period by an amount equal
to the product of (i) the amount of such OID otherwise includable for such
period, and (ii) a fraction, the numerator of which is the acquisition premium
and the denominator of which is the excess of the amounts payable on the Note
after the purchase date over the adjusted issue price.
MARKET DISCOUNT
Each Holder that purchases a Note at a purchase price less than the adjusted
issue price will be considered to have purchased the Note at a "market discount"
equal to such difference. Market discount, however, will be considered to be
zero if less than 0.25% of the stated redemption price at maturity of a Note
multiplied by the number of complete years to maturity remaining after the date
of its purchase.
Any gain realized by a Holder on disposition, retirement or partial payment
of a Note will be treated as ordinary income to the extent that there is accrued
market discount on the Note. Unless a Holder elects to accrue market discount
under a constant-interest method, accrued market discount is the total market
discount multiplied by a fraction, the numerator of which is the number of days
the Holder has held the Note and the denominator of which is the number of days
from the date the Holder acquired the Note until its maturity. Each Holder may
be required to defer a portion of its interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry a
Note purchased with market discount. Any such deferred interest expense would
not exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includable in income. If the Holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by the Holder in that taxable year or thereafter, the interest deferral
rule described above will not apply.
SALE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement of a Note, the Holder generally will
recognize gain or loss equal to the difference between the amount realized on
the sale, exchange or retirement and the Holder's adjusted tax basis in the
Note. A Holder's adjusted tax basis in the Note will equal the portion of the
Holder's cost for a Unit that is properly allocable to the Note (See
"Description of the Notes--Original Issue Discount") increased by any OID or
market discount previously included in income by such Holder with respect to
such Note and decreased by any payments received thereon.
Gain or loss realized on the sale, exchange or retirement of a Note will be
capital (subject to the market discount rules, discussed above), and will be
long-term if at the time of sale, exchange or retirement the Note has been held
for more than one year. The deductibility of capital losses is subject to
limitations.
APPLICABLE HIGH-YIELD DISCOUNT OBLIGATIONS
The Notes will be subject to the "applicable high yield discount obligation"
provisions of the Code. Because the yield of the Notes is at least five
percentage points above the applicable federal rate for the month in which the
Notes are issued (6% for February 1996), the Company will not be able to deduct
any OID accruing thereon until such interest is actually paid. In addition, if
the yield of the Notes is more than six percentage points above the applicable
federal rate, then (i) a portion of such interest corresponding to the yield in
excess of six percentage points above the applicable federal rate will not be
deductible by the Company at any time, and (ii) a corporate Holder may be
entitled to treat the portion of the interest that is not deductible by the
Company as a dividend, which may then qualify for the dividends received
deduction
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provided for by the Code. In such event, corporate Holders of Notes should
consult with their own tax advisors as to the applicability of the dividends
received deduction.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under current United States federal income tax law, (i) information
reporting requirements apply to "reportable payments," which include interest,
principal payments and dividends made to, OID accruing to and the proceeds of
sales by, certain noncorporate Holders of Notes or Common Shares and (ii) a
Holder of Notes or Common Shares may be subject to backup withholding at the
rate of 31% with respect to reportable payments in respect of Notes or Common
Shares. Backup withholding will not apply to payments to corporations and
certain other exempt recipients, such as tax-exempt organizations, which
demonstrate their entitlement to exemption when required. The payor will be
required to deduct and withhold (at the rate of 31%) if (i) the payee fails to
furnish a taxpayer identification number ("TIN") to the payor in the manner
required by the Code and applicable Treasury regulations, (ii) the Internal
Revenue Service notifies the payor that the TIN furnished by the payee is
incorrect, (iii) there has been a "notified payee underreporting" described in
Section 3406(c) of the Code or (iv) there has been a failure of the payee to
certify under penalty of perjury that the payee is not subject to withholding
under Section 3406(a)(1)(C) of the Code. Amounts withheld under these rules do
not constitute an additional tax and will be credited against the Holder's
federal income tax liability, so long as the required information is provided to
the Internal Revenue Service. The Company will report to the Holders of Notes or
Common Shares and to the Internal Revenue Service the amount of any "reportable
payments" for each calendar year and the amount of tax withheld, if any, with
respect to such payments.
PLAN OF DISTRIBUTION
Any broker-dealer who holds Old Notes that are restricted securities and
that were acquired for its own account as a result of market-making activities
or other trading activities (other than restricted securities acquired directly
from the Company) may exchange such Old Notes for New Notes pursuant to the
Exchange Offer. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that for a period
of 180 days after consummation of the Exchange Offer (or such longer period as
may be required under the Securities Act) the Company will make available a
prospectus meeting the requirements of Securities Act to Participating
Broker-Dealers and other persons, if any, with similar prospectus delivery
requirements for use in connection with any resale of such New Notes. In
addition, until January 27, 1997, all dealers effecting transactions in the New
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchases to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal
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states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after consummation of the Exchange Offer, or such
longer period as may be required under the Securities Act, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents.
The Company has agreed to pay all expenses incident to the Exchange Offer other
than commissions or concessions of any brokers or dealers and will indemnify the
holders of the Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth in the next paragraph, the Old Notes that were resold as
set forth herein were comprised of two global notes (the "Original Global
Notes"). The Original Global Notes were deposited on the date of the
Contribution Closing with, or on behalf of, The Depository Trust Company ("DTC")
and registered in the name of Cede & Co., as original nominee of the DTC. If all
of the participants (as defined) having an interest in the Original Global Notes
elect to exchange Old Notes for New Notes, such New Notes will also initially be
issued in the form of two Global Notes ("Global Notes"). The Global Notes will
be subject to certain restrictions on transfer set forth therein and will bear
the legend regarding such restrictions set forth under the heading "Transfer
Restrictions" herein.
Old Notes that (i) were originally purchased by or transferred to "foreign
purchasers" or Institutional Accredited Investors who are not qualified
institutional buyers (in each case, as defined in "Transfer Restrictions"), or
held by qualified institutional buyers who elected to take physical delivery of
their certificates instead of holding their interest through the Original Global
Notes (and which are thus ineligible to trade through DTC) (collectively
referred to herein as the "Non-Global Purchasers") and (ii) are exchanged for
New Notes will be issued, in registered form, without interest coupons (the
"Certificated Notes"). Upon a permitted transfer to a qualified institutional
buyer of such Certificated Notes initially issued to a Non-Global Purchaser,
such Certificated Notes will, unless the transferee requests otherwise or the
Global Notes have previously been exchanged in whole for such Certificated
Notes, be exchanged for an interest in the applicable Global Notes.
THE GLOBAL CERTIFICATES. The Company expects that pursuant to procedures
established by DTC (i) upon deposit of the Global Notes, DTC or its custodian
will credit, on its internal system, the accounts of persons who have accounts
with such depositary who previously had interests in the Original Global Notes
with the equivalent portions of the principal amount of the Global Notes and
(ii) ownership of the Global Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC or
its nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
Ownership of beneficial interests in the Global Notes will be limited to persons
who have accounts with DTC ("participants") or persons who hold interests
through participants. Qualified institutional buyers may hold their interests in
the Global Certificates directly through DTC if they are participants in such
system, or indirectly through organizations which are participants in such
system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee will be considered the sole owner or holder of the
Notes represented by the applicable Global Note for all purposes under the
Indenture. No beneficial owner of an interest in the Global Notes will be able
to transfer such interest except in accordance with DTC's applicable procedures
in addition to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on, the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any paying agent will have any responsibility or liability for any
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aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium (if any) and interest (including Additional Interest)
on the Global Notes will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Note, as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
any such Global Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell New Notes to persons in states which require physical delivery
of such securities or to pledge such securities, such holder must transfer its
interest in the applicable Global Note in accordance with the normal procedures
of DTC and including with respect to the Notes, with the procedures set forth in
the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the applicable Global Note is credited and
only in respect of such portion of the aggregate principal amount of New Notes
as to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will exchange
the applicable Global Notes for Certificated Notes, which it will distribute to
its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Trustee or the Transfer Agent
will have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to
continue as a depositary for any Global Notes and a successor depositary is not
appointed by the Company within 90 days, the Company will issue Certificated
Notes in exchange for the Global Notes.
LEGAL MATTERS
The validity of the New Notes offered hereby has been passed upon for the
Company by Day, Berry & Howard, Hartford, Connecticut.
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SELECTION OF ACCOUNTANTS
On September 17, 1996, in connection with the formation of the Company, KPMG
Peat Marwick LLP was engaged as principal accountants for the Company. Ernst &
Young LLP had previously served as the principal independent auditors for the
Predecessor to the Company. The decision to engage KPMG Peat Marwick LLP was
approved by the audit committee and the board of directors of the Company on
September 17, 1996.
In connection with the audits of the Predecessor as of December 31, 1995 and
for the period from September 30, 1995 to December 31, 1995, and as of December
31, 1994 and for the period from March 9, 1994 to September 29, 1995, and the
subsequent interim period through September 17, 1996, there were no
disagreements with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures.
The audit reports of Ernst & Young LLP on the financial statements of the
Predecessor as of December 31, 1995 and for the period from September 30, 1995
to December 31, 1995 and as of December 31, 1994 and for the period from March
9, 1994 to September 29, 1995, did not contain any adverse opinion or disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope,
or accounting principles.
The Company has requested Ernst & Young LLP to furnish it a letter addressed
to the Commission stating whether it agrees with the above statements. A copy of
that letter, dated September 26, 1996 is filed as Exhibit 16 to the Company's
Registration Statement on Form S-1, of which this Prospectus is a part.
EXPERTS
The financial statements of Dayton System (A Division of Technivision, Inc.)
as of May 31, 1995 and 1994 and for the years then ended have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering Dayton System's financial
statements contains an explanatory paragraph stating that Dayton System's
recurring losses from operations and excess of current liabilities over current
assets raise substantial doubt about the entity's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
The financial statements of Metropolitan Cablevision, Inc. for the period
from March 1, 1993 to June 3, 1993 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
authority of said firm as experts in accounting and auditing. The report of KPMG
Peat Marwick LLP covering Cablevision's financial statements contains an
emphasis paragraph stating that subsequent to period end, Cablevision's
creditors foreclosed on and sold the assets of Cablevision. As a result,
Cablevision recorded a write-down in the year ended February 28, 1993 to reflect
the permanent impairment of its assets.
The financial statements of American Wireless Systems, Inc. included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing. Reference is made to said report which includes an explanatory
paragraph that describes factors raising substantial doubt about the Company's
ability to continue as a going concern.
The financial statements of Fort Worth Wireless Cable T.V. Associates
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing. Reference is made to said report which
includes an explanatory paragraph that describes factors raising substantial
doubt about the Company's ability to continue as a going concern.
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The financial statements of Wireless Cable T.V. Associates #38 included in
this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing. Reference is made to said report which includes an explanatory
paragraph that describes factors raising substantial doubt about the Company's
ability to continue as a going concern.
The statements of net assets of CableMaxx, Inc.--San Antonio Division as of
June 30, 1994 and 1995 and December 31, 1995 and the related statements of
revenues and expenses, changes in net assets and cash flows for the period from
December 18, 1992 to June 30, 1993, and for the years ended June 30, 1994 and
1995, and for the six month period ended December 31, 1995 included in this
Prospectus have been audited by Coopers & Lybrand L.L.P., independent certified
public accountants, as indicated in their report with respect thereto, which
includes an explanatory paragraph which states that specified circumstances
raise substantial doubt about CableMaxx, Inc.'s and therefore, its San Antonio
Division's ability to continue as going concerns, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The statements of net assets of CableMaxx, Inc.--Utah Division as of June
30, 1995 and December 31, 1995 and the related statements of revenues and
expenses, changes in net assets and cash flows for the period from February 28,
1995 ("acquisition") to June 30, 1995 and for the six month period ended
December 31, 1995, included in this Prospectus have been audited by Coopers &
Lybrand L.L.P., independent certified public accountants, as indicated in their
report with respect thereto, which includes an explanatory paragraph which
states that specified circumstances raise substantial doubt about CableMaxx,
Inc.'s and therefore, its Utah Division's ability to continue as going concerns,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
The combined financial statements of CS Wireless Systems, Inc. and
Subsidiaries (formerly ACS Ohio, Inc.) and certain assets of Atlantic
Microsystems, Inc. at December 31, 1995 and for the period from September 30,
1995 to December 31, 1995 and the consolidated financial statements of ACS Ohio,
Inc. at September 29, 1995 and for the period from January 1, 1995 to September
29, 1995 and at December 31, 1994 and for the period from March 9, 1994 through
December 31, 1994, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of ACS California, Inc. and subsidiary
as at December 31, 1995 and for the period from September 30, 1995 to December
31, 1995 and as at September 29, 1995 and December 31, 1994 and for the period
from January 1, 1995 to September 29, 1995 and for the period from March 11,
1994 (date of inception) to December 31, 1994, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of USA Wireless Cable, Inc. included in this
Prospectus have been audited by McGladrey & Pullen, LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing. Reference is made to said report which includes an explanatory
paragraph that describes factors raising substantial doubt about USA's ability
to continue as a going concern.
The financial statements of MetroCable, Inc. and Metropolitan Satellite
Corp. as of February 28, 1994 and 1993 and for each of the years in the
three-year period ended February 28, 1994 have been included herein and in this
Registration Statement in reliance upon the reports of Lewandowski Zalick &
Company, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
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CS WIRELESS SYSTEMS, INC.
INDEX TO PRO FORMA FINANCIAL INFORMATION AND FINANCIAL STATEMENTS
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PRO FORMA FINANCIAL INFORMATION
CS Wireless Systems, Inc.:
Introduction to Unaudited Pro Forma Condensed
Combined Financial Information....................................................................... F-5
Unaudited Pro Forma Condensed Combined
Balance Sheet as of September 30, 1996............................................................... F-6
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 1996................. F-7
Unaudited Pro Forma Condensed Combined
Statement of Operations for the nine months ended September 30, 1996................................. F-8
Unaudited Pro Forma Condensed Combined
Statement of Operations--CAI Systems for the period from January 1, 1996 to February 23, 1996........ F-9
Unaudited Pro Forma Condensed Combined
Statement of Operations--Heartland Systems for the period from January 1, 1996 to February 23,
1996................................................................................................. F-10
Notes to Unaudited Pro Forma Condensed
Combined Statement of Operations for the nine months ended September 30, 1996........................ F-11
Unaudited Pro Forma Condensed Combined
Statement of Operations for the year ended
December 31, 1995.................................................................................... F-13
Unaudited Pro Forma Condensed Combined
Statement of Operations--CAI Systems for
the year ended December 31, 1995..................................................................... F-14
Unaudited Pro Forma Condensed Combined
Statement of Operations--Heartland Systems
for the year ended December 31, 1995................................................................. F-15
Notes to Unaudited Pro Forma Condensed
Combined Statement of Operations for the year ended December 31, 1995................................ F-16
FINANCIAL STATEMENTS
CS Wireless Systems, Inc. and Subsidiaries:
Condensed Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited)....... F-18
Condensed Consolidated Statements of Operations for the nine months ended September 30, 1995 and 1996
(unaudited).......................................................................................... F-19
Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 1995 and 1996
(unaudited).......................................................................................... F-20
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1996
(unaudited).......................................................................................... F-21
Notes to Condensed Consolidated Financial Statements (unaudited)....................................... F-22
CS Wireless Systems, Inc. and Subsidiaries (formerly ACS Ohio, Inc.) and certain assets of Atlantic
Microsystems, Inc.:
Report of Independent Auditors......................................................................... F-27
Combined Balance Sheet as of December 31, 1995......................................................... F-28
Combined Statement of Operations and Accumulated Deficit for the period from September 30, 1995 to
December 31, 1995.................................................................................... F-29
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Combined Statement of Cash Flows for the period from September 30, 1995 to December 31, 1995........... F-30
Notes to Combined Financial Statements................................................................. F-31
ACS Ohio, Inc. and Subsidiaries:
Report of Independent Auditors......................................................................... F-38
Consolidated Balance Sheets as of December 31, 1994 and September 29, 1995............................. F-39
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
(unaudited).......................................................................................... F-40
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 (unaudited).................. F-41
Notes to Consolidated Financial Statements............................................................. F-42
MetroCable, Inc.:
Report of Independent Certified Public Accountants..................................................... F-48
Balance Sheet as of February 28, 1994.................................................................. F-49
Statement of Operations and Deficit for the period June 4, 1993 (date of commencement of operations)
through February 28, 1994............................................................................ F-50
Statement of Shareholders' Equity for the period June 4, 1993 (date of commencement of operations)
through February 28, 1994............................................................................ F-51
Statement of Cash Flows for the period June 4, 1993 (date of commencement of operations) through
February 28, 1994.................................................................................... F-52
Notes to Financial Statements.......................................................................... F-53
Metropolitan Cablevision, Inc.
Independent Auditors' Report........................................................................... F-58
Statement of Operations for period from March 1, 1993 to June 3, 1993.................................. F-59
Statement of Stockholders' Deficit for the period from March 1, 1993 to June 3, 1993................... F-60
Statement of Cash Flows for the period from March 1, 1993 to June 3, 1993.............................. F-61
Notes to Financial Statements.......................................................................... F-62
Metropolitan Satellite Corp.:
Report of Independent Certified Public Accountants..................................................... F-65
Balance Sheet as of February 28, 1994.................................................................. F-66
Statements of Operations and Deficit for the year ended February 28, 1994.............................. F-67
Statements of Cash Flows for the year ended February 28, 1994.......................................... F-68
Notes to Financial Statements.......................................................................... F-69
ACS California, Inc. and Subsidiary:
Report of Independent Auditors......................................................................... F-74
Consolidated Balance Sheet as of December 31, 1995..................................................... F-75
Consolidated Statements of Operations and Accumulated Deficit for the period from September 30, 1995 to
December 31, 1995 and for the period from January 1, 1996 to February 23, 1996 (unaudited)........... F-76
Consolidated Statements of Cash Flows for the period from September 30, 1995 to December 31, 1995 and
for the period from January 1, 1996 to February 23, 1996 (unaudited)................................. F-77
Notes to Consolidated Financial Statements............................................................. F-78
ACS California, Inc. and Subsidiary:
Report of Independent Auditors......................................................................... F-84
Consolidated Balance Sheets as of September 29, 1995 and December 31, 1994............................. F-85
</TABLE>
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Consolidated Statements of Operations and Accumulated Deficit for the period from January 1, 1995 to
September 29, 1995 and for the period from March 11, 1994 (date of inception) to December 31, 1994... F-86
Consolidated Statements of Cash Flows for the period from January 1, 1995 to September 29, 1995 and the
period from March 11, 1994 (date of inception) to December 31, 1994.................................. F-87
Notes to Consolidated Financial Statements............................................................. F-88
American Wireless Systems, Inc.:
Report of Independent Public Accountants............................................................... F-94
Balance Sheets as of December 31, 1994 and 1995........................................................ F-95
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for the period from
January 1, 1996 to February 23, 1996 (unaudited)..................................................... F-96
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and for the
period from January 1, 1996 to February 23, 1996 (unaudited)......................................... F-97
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the period from
January 1, 1996 to February 23, 1996 (unaudited)..................................................... F-98
Notes to Financial Statements.......................................................................... F-99
Fort Worth Wireless Cable T.V. Associates:
Report of Independent Public Accountants............................................................... F-112
Consolidated Balance Sheets as of December 31, 1994 and 1995........................................... F-113
Consolidated Statements of Operations for the years ended December 31, 1993, 1994, and 1995 and for the
period from January 1, 1996 to February 23, 1996 (unaudited)......................................... F-114
Consolidated Statements of Partners' Equity for the years ended December 31, 1993, 1994, and 1995 and
for the period from January 1, 1996 to February 23, 1996 (unaudited)................................. F-115
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995 and for the
period from January 1, 1996 to February 23, 1996 (unaudited)......................................... F-116
Notes to the Consolidated Financial Statements......................................................... F-117
Wireless Cable T.V. Associates #38:
Report of Independent Public Accountants............................................................... F-123
Consolidated Balance Sheets as of December 31, 1994 and 1995........................................... F-124
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for the
period from January 1, 1996 to February 23, 1996 (unaudited)......................................... F-125
Consolidated Statements of Partners' Equity for the years ended December 31, 1993, 1994 and 1995 and
for the period from January 1, 1996 to February 23, 1996 (unaudited)................................. F-126
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the
period from January 1, 1996 to February 23, 1996 (unaudited)......................................... F-127
Notes to the Consolidated Financial Statements......................................................... F-128
CableMaxx, Inc.--San Antonio Division:
Report of Independent Accountants...................................................................... F-134
Statements of Net Assets as of June 30, 1994 and 1995, and December 31, 1995........................... F-135
Statements of Revenues and Expenses from December 18, 1992 to June 30, 1993, the years ended June 30,
1994 and 1995, the six month periods ended December 31, 1994 (unaudited) and 1995 and for the period
from January 1, 1996 to February 23, 1996 (unaudited)................................................ F-136
Statements of Changes in Net Assets for the period from December 18, 1992 to June 30, 1993, the years
ended June 30, 1994 and 1995, the six month period ended December 31, 1995 and for the period from
January 1, 1996 to February 23, 1996 (unaudited)..................................................... F-137
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Statements of Cash Flows for the period from December 18, 1992 to June 30, 1993, the years ended June
30, 1994 and 1995, the six month periods ended December 31, 1994 (unaudited) and 1995 and for the
period from January 1, 1996 to February 23, 1996 (unaudited)......................................... F-138
Notes to Financial Statements.......................................................................... F-139
CableMaxx, Inc.--Utah Division:
Report of Independent Accountants...................................................................... F-147
Statements of Net Assets as of June 30, 1995 and December 31, 1995..................................... F-148
Statements of Revenues and Expenses from February 28, 1995 (acquisition) to June 30, 1995, the six
month period ended December 31, 1995 and for the period from January 1, 1996 to February 23, 1996
(unaudited).......................................................................................... F-149
Statements of Changes in Net Assets for the period from February 28, 1995 (acquisition) to June 30,
1995, the six month period ended December 31, 1995 and for the period from January 1, 1996 to
February 23, 1996 (unaudited)........................................................................ F-150
Statements of Cash Flows for the period from February 28, 1995 (acquisition) to June 30, 1995, the six
month period ended December 31, 1995 and for the period from January 1, 1996 to February 23, 1996
(unaudited).......................................................................................... F-151
Notes to Financial Statements.......................................................................... F-152
Dayton System (A Division of Technivision, Inc.):
Independent Auditors' Report........................................................................... F-157
Balance Sheets as of May 31, 1994 and 1995 and November 30, 1995 (unaudited)........................... F-158
Statements of Operations and System Equity for the years ended May 31, 1994 and 1995, the six months
ended November 30, 1994 (unaudited) and the period from June 1, 1995 to February 23, 1996
(unaudited).......................................................................................... F-159
Statements of Cash Flows for years ended May 31, 1994 and 1995, the six months ended November 30, 1994
(unaudited) and the period from June 1, 1995 to February 23, 1996 (unaudited)........................ F-160
Notes to Financial Statements.......................................................................... F-161
USA Wireless Cable, Inc.:
Independent Accountant's Report on the Financial Statements............................................ F-165
Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited).............................. F-166
Statements of Operations for the year ended December 31, 1995 and the nine months ended September 30,
1995 and 1996 (unaudited)............................................................................ F-167
Statements of Stockholder's Deficit for the year ended December 31, 1995 and the nine months ended
September 30, 1996 (unaudited)....................................................................... F-168
Statements of Cash Flows for the year ended December 31, 1995 and the nine months ended September 30,
1995 and 1996 (unaudited)............................................................................ F-169
Notes to Financial Statements.......................................................................... F-170
</TABLE>
F-4
<PAGE>
PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Financial Information
consists of an Unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1996 and Unaudited Pro Forma Condensed Combined Statements of
Operations for the nine months ended September 30, 1996 and the year ended
December 31, 1995 (collectively, the "Pro Forma Statements"). With respect to
the Pro Forma Condensed Combined Statement of Operations presentation, the Pro
Forma Statements include a summary pro forma financial statement of CS Wireless
Systems, Inc., the CAI and Heartland Systems and USA Wireless Cable, Inc.
combined followed by separate pro forma financial statements for the CAI Systems
and Heartland Systems. The Unaudited Pro Forma Condensed Combined Balance Sheet
gives effect to the consummation of the USA Wireless Acquisition as if such
event occurred on September 30, 1996. The Pro Forma Statements of Operations
give effect to (i) the consummation of Heartland's Acquisitions, (ii) the
consummation of the Contributions, (iii) the issuance of the Heartland Notes and
the prepayment of the Heartland Short-Term Note, (iv) the issuance of the Units
and (v) the consummation of the USA Wireless Acquisition as if such events had
occurred on January 1, 1995.
The consummation of the Contributions has been accounted for at CAI's and
Heartland's historical cost bases from the assumed effective date of such
transaction. With respect to the historical cost bases, the substantial majority
of the assets and liabilities comprising the Contributions were recently
acquired by CAI and Heartland in transactions accounted for under the purchase
method of accounting. As a result, management believes that such costs are
representative of current values. The USA Wireless Acquisition has been
accounted for by the purchase method of accounting. With respect to the USA
Wireless Acquisition, the purchase price has been allocated on a preliminary
basis to the assets acquired and liabilities assumed based on the estimated fair
values of such assets and liabilities.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1995 has been determined utilizing the historical
unaudited statement of operations of Dayton System (A Division of Technivision,
Inc.) for the year ended November 30, 1995. The Dayton System historical
statement of operations for the year ended November 30, 1995 has been derived
utilizing Dayton System's historical audited statement of operations for the
year ended May 31, 1995 and historical unaudited statements of operations for
the six months ended November 30, 1994 and 1995. The CableMaxx, Inc.-San Antonio
Division historical statement of operations for the year ended December 31, 1995
has been derived utilizing CableMaxx, Inc. San Antonio Division's historical
audited statements of operations for the year ended June 30, 1995 and for the
six months ended December 31, 1995, and the historical unaudited statement of
operations for the six months ended December 31, 1994. The CableMaxx, Inc.-Utah
Division historical statement of operations for the year ended December 31, 1995
has been derived utilizing CableMaxx, Inc.-Utah Division's historical audited
statements of operations for the six months ended June 30, 1995 and the period
from February 28, 1995 (acquisition) to June 30, 1995. No material adjustments
were recorded in determining such amounts.
The Pro Forma Statements and accompanying notes should be read in
conjunction with the historical financial statements of CS Wireless Systems,
Inc. and Subsidiaries; CS Wireless Systems, Inc. and Subsidiaries and certain
assets of Atlantic Microsystems, Inc.; ACS Ohio, Inc. and Subsidiaries; ACS
California, Inc. and Subsidiary; American Wireless Systems, Inc.; Fort Worth
Wireless Cable T.V. Associates; Wireless Cable T.V. Associates #38; CableMaxx,
Inc. San Antonio Division; CableMaxx, Inc. Utah Division; Dayton System (A
Division of Technivision, Inc.); and USA Wireless Cable, Inc. in each case,
including the notes thereto, appearing elsewhere in this Prospectus. The Pro
Forma Statements do not purport to represent what the Company's results of
operations would actually have been if the aforementioned transactions or events
occurred on the date specified or to project the Company's results of operations
for any future periods. The pro forma adjustments are based upon available
information and certain adjustments that management believes are reasonable. In
the opinion of management, all adjustments have been made that are necessary to
present fairly the Pro Forma Statements.
F-5
<PAGE>
CS WIRELESS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
SEPTEMBER 30, 1996
(IN 000'S)
<TABLE>
<CAPTION>
CS WIRELESS PRO FORMA
SYSTEMS, USA WIRELESS PRO FORMA COMBINED
INC. CABLE, INC. ADJUSTMENTS AS ADJUSTED
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 136,844 $ 32 $ (9,797)(D) $ 127,079
Other current assets................................. 2,674 1,499 (1,441)(A) 2,732
------------ ------------- ----------- -----------
Total current assets......................... 139,518 1,931 (11,238) 129,811
Plant and equipment, net............................. 41,076 2,661 43,737
License and leased license investment, net........... 172,668 6,629 7,591(B) 186,888
Goodwill, net........................................ 51,746 -- 2,809(C) 54,555
Other assets, net.................................... 10,302 36 10,338
------------ ------------- ----------- -----------
$ 415,310 $ 10,857 $ (838) $ 425,329
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
LIABILITIES AND EQUITY
Current portion of long-term debt.................... $ 186 $ 8,583 $ (6,797)(D) $ 186
(1,786)(A)
Current portion of BTA auction payable............... 4,469 -- 4,469
Accounts payable and accrued expenses................ 6,773 1,119 (50)(A) 7,842
Other current liabilities............................ 644 3,076 (3,000)(D) 720
------------ ------------- ----------- -----------
Total current liabilities.................... 12,072 12,778 (11,633) 13 217
Long-term debt, less current portion................. 259,862 48 (28)(A) 259,882
BTA auction payable, less current portion............ 4,259 4,259
Deferred income taxes................................ 8,668 -- 2,809(C) 11,477
Stockholders' equity................................. 130,449 (1,969) 423(A) 136,494
6,044(B)
1,547(B)
------------ ------------- ----------- -----------
$ 415,310 $ 10,857 $ (838) $ 425,329
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
</TABLE>
See accompanying notes to Pro Forma Statements.
F-6
<PAGE>
CS WIRELESS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(A) Reflects the elimination from the Unaudited Pro Forma Condensed Combined
Balance Sheet of historical assets and liabilities relating to the Kearney,
Nebraska market that is not included in the USA Wireless Acquisition.
(B) Reflects the elimination of the historical stockholders' deficit of USA and
the issuance of approximately 330,000 shares of CS Wireless common stock at
an estimated fair value of $18.80 per share to consummate the USA Wireless
Acquisition. The adjustment also reflects the fair value of approximately
$14.3 million assigned to license and leased license investment, net of
historical balances. Historical balances of working capital are assumed to
approximate their fair values. Management has evaluated the propriety of the
carrying amount of license and leased license investment with respect to
each market based on management's estimate of the fair value of each market
and expected future operating cash flows from subscribers in an individual
market, and believes such amounts to be recoverable.
(C) Reflects the recognition of deferred income taxes at an estimated 37%
effective tax rate on excess book value over tax basis relating to the net
assets acquired and the related increase in goodwill, which will be
amortized over 15 years. Management has evaluated the propriety of the
carrying amount of goodwill based on management's estimate of the fair value
of the Company's markets and expected future operating cash flows from
subscribers, and believes such amount to be recoverable.
(D) Reflects the retirement of certain indebtedness of USA by the Company upon
consummation of the USA Wireless Acquisition.
F-7
<PAGE>
CS WIRELESS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN 000'S)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE PERIOD JANUARY 1,
SEPTEMBER 30, 1996 TO FEBRUARY 23, 1996
1996 ------------------------- PRO FORMA
----------------- PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
CS WIRELESS CAI HEARTLAND USA WIRELESS ---------------------- COMBINED
SYSTEMS, INC. (A) SYSTEMS (A) SYSTEMS (A) CABLE, INC. (A) OFFERING OTHER AS ADJUSTED
----------------- ----------- ----------- --------------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues........ $ 15,994 $ 540 $ 1,485 $ 1,464 $ -- $ (540)(C) $ 18,943
-------- ----------- ----------- ------- -------- ------- -----------
Operating expenses:
Systems
operations........ 9,400 428 1,201 683 (236)(C) 11,476
Selling, general and
administrative.... 9,726 97 1,977 595 (275)(C) 12,120
Depreciation and
amortization...... 13,853 510 2,162 981 (340)(C) 17,914
748(D)
-------- ----------- ----------- ------- -------- ------- -----------
Total operating
expenses...... 32,979 1,035 5,340 2,259 -- (103) 41,510
-------- ----------- ----------- ------- -------- ------- -----------
Operating
loss........ (16,985) (495) (3,855) (795) -- (437) (22,567)
Interest expense...... (17,490) (1) (5) (792) (6,628)(B) 664(F) (24,776)
128(C)
(652)(E)
Interest income and
other............... 4,907 -- (2) 90 (16)(C) 4,979
-------- ----------- ----------- ------- -------- ------- -----------
Loss before
income
taxes......... (29,568) (496) (3,862) (1,497) (6,628) (313) (42,364)
Income tax benefit.... 10,234 145 1,429 -- (9,396)(G) 2,412
-------- ----------- ----------- ------- -------- ------- -----------
Net loss........ $(19,334) $ (351) $(2,433) $(1,497) $ (6,628) $(9,709) $(39,952)
-------- ----------- ----------- ------- -------- ------- -----------
-------- ----------- ----------- ------- -------- ------- -----------
</TABLE>
See accompanying notes to Pro Forma Statements
F-8
<PAGE>
CS WIRELESS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS--CAI SYSTEMS
PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 23, 1996
(IN 000'S)
<TABLE>
<CAPTION>
CAI
-------------------------------------------
ACS
CALIFORNIA, PRO FORMA
INC. AND CAI CAI
SUBSIDIARY (A) DIVISION (A) SYSTEMS
--------------- ------------- -----------
<S> <C> <C> <C>
Total revenues.................................................................... $ 540 $ -- $ 540
----- --- -----------
Operating expenses:
Systems operations.............................................................. 428 -- 428
Selling, general and administrative............................................. 97 -- 97
Depreciation and amortization................................................... 459 51 510
----- --- -----------
Total operating expenses.................................................... 984 51 1,035
----- --- -----------
Operating loss............................................................ (444) (51) (495)
Interest expense.................................................................. (1) -- (1)
----- --- -----------
Loss before income taxes.................................................... (445) (51) (496)
Income tax benefit................................................................ 145 -- 145
----- --- -----------
Net loss.................................................................... $ (300) $ (51) $ (351)
----- --- -----------
----- --- -----------
</TABLE>
See accompanying notes to Pro Forma Statements
F-9
<PAGE>
CS WIRELESS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS--HEARTLAND SYSTEMS
PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 23, 1996
(IN 000'S)
<TABLE>
<CAPTION>
HEARTLAND
--------------------------------------------------------------------------------------------------
AMERICAN FORT WORTH
CABLEMAXX, INC. CABLEMAXX, INC. WIRELESS WIRELESS WIRELESS
SAN ANTONIO UTAH SYSTEMS, CABLE T.V. CABLE T.V. DAYTON
DIVISION (A) DIVISION (A) INC. (A) ASSOCIATES (A) ASSOCIATES #38 (A) SYSTEM (A)
--------------- ------------------ -------- -------------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues...... $ 814 $-- $ 15 $ 85 $ 148 $ 244
------- ----- -------- ----- ----- -----
Operating expenses:
Systems
operations...... 377 -- -- 86 480 192
Selling, general
and
administrative... 1,032 17 317 96 218 171
Depreciation and
amortization.... 495 112 21 117 172 102
------- ----- -------- ----- ----- -----
Total operating
expenses...... 1,904 129 338 299 870 465
------- ----- -------- ----- ----- -----
Operating
loss........ (1,090) (129) (323) (214) (722) (221)
Interest expense.... (28) (83) (12) -- -- (5)
Equity in losses of
investees......... -- -- (38) -- --
Interest income and
other............. -- -- (2) 8 30 --
------- ----- -------- ----- ----- -----
Loss before
income
taxes......... (1,118) (212) (375) (206) (692) (226)
Income tax
benefit........... -- -- -- -- -- --
------- ----- -------- ----- ----- -----
Net loss........ ($1,118) $ (212) $(375) $(206) $(692) $(226)
------- ----- -------- ----- ----- -----
------- ----- -------- ----- ----- -----
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------ PRO FORMA
HEARTLAND PURCHASE HEARTLAND
DIVISION (A) ACCOUNTING OTHER SYSTEMS
------------ ---------- ------- ---------
<S> <C> <C> <C> <C>
Total revenues...... $ 194 $ $ (15)(J) $ 1,485
----- ---------- ------- ---------
Operating expenses:
Systems
operations...... 66 1,201
Selling, general
and
administrative... 141 (15)(J) 1,977
Depreciation and
amortization.... 98 1,045(H) 2,162
----- ---------- ------- ---------
Total operating
expenses...... 305 1,045 (15) 5,340
----- ---------- ------- ---------
Operating
loss........ (111) (1,045) -- (3,855)
Interest expense.... -- 123(K) (5)
Equity in losses of
investees......... -- (158)(I) 196(L) --
Interest income and
other............. -- 158(I) (196)(L) (2)
----- ---------- ------- ---------
Loss before
income
taxes......... (111) (1,045) 123 (3,862)
Income tax
benefit........... -- 1,429(G) 1,429
----- ---------- ------- ---------
Net loss........ $(111) $(1,045) $ 1,552 $(2,433)
----- ---------- ------- ---------
----- ---------- ------- ---------
</TABLE>
See accompanying notes to Pro Forma Statements
F-10
<PAGE>
CS WIRELESS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(A) The following table provides a reconciliation between the historical
financial information included in the Unaudited Pro Forma Condensed Combined
Statement of Operations for the nine months ended September 30, 1996 and the
Company's markets:
<TABLE>
<CAPTION>
ENTITY MARKET
- --------------------------------------------- ------------------------------------------------
<S> <C>
CS Wireless Systems, Inc.:
CS Wireless Systems, Inc. and
Subsidiaries............................. Cleveland, Ohio and, subsequent to the
Contributions, all markets
CAI Systems:
ACS California, Inc. and Subsidiary........ Bakersfield, California
CAI Division............................... Stockton/Modesto, California and Charlotte,
North Carolina
Heartland Systems:
CableMaxx, Inc. San Antonio Division....... San Antonio, Texas
CableMaxx, Inc. Utah Division.............. Salt Lake City, Utah
American Wireless Systems, Inc. ........... Dallas, Texas
Fort Worth Wireless Cable T.V.
Associates............................... Fort Worth, Texas
Wireless Cable T.V. Associates #38......... Minneapolis, Minnesota
Dayton System (A Division of Technivision,
Inc.).................................... Dayton, Ohio
Heartland Division......................... Grand Rapids, Michigan and Kansas City
(Suburbs), Missouri
USA Wireless Cable, Inc...................... Radcliffe, Iowa, Effingham, Kansas and
Wellsville, Kansas
</TABLE>
(B) Reflects additional interest expense at a rate of 11 3/8%, amortization of
debt issuance costs of $8.4 million associated with the Notes and
amortization of debt discount resulting from the issue price allocated to
the Common Shares.
(C) Reflects the elimination from the Unaudited Pro Forma Condensed Combined
Statement of Operations of historical operating results relating to the
Kearney, Nebraska market that is not included in the USA Wireless
Acquisition.
(D) Reflects the incremental amortization of license and leased license
investment and goodwill associated with the USA Wireless Acquisition.
Amortization of license and leased license investment is calculated
beginning with inception of service in each respective market over a useful
life of 15 years. Goodwill is amortized over 15 years.
(E) Reflects additional interest expense at a rate of 10% during the first year
and 15% thereafter, with interest accruing and added to the balance
annually, on the Heartland Long-Term Note.
(F) Reflects the elimination of historical interest expense of USA associated
with indebtedness retired by the Company upon consummation of the USA
Wireless Acquisition.
F-11
<PAGE>
CS WIRELESS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
(G) Reflects the adjustment of deferred income tax benefit at an assumed rate of
37%. Income tax benefit reflects the recognition of deferred tax assets to
the extent such assets can be realized through future reversals of existing
taxable temporary differences.
(H) Reflects the adjustment of amortization of license and leased license
investment and goodwill associated with Heartland's acquisitions as follows
(in 000's):
<TABLE>
<CAPTION>
FOR THE PERIOD JANUARY
1,
1996 TO FEBRUARY 23,
MARKET 1996
- ---------------------------------------------------------------- -----------------------
<S> <C>
San Antonio..................................................... $ 316
Salt Lake City.................................................. (110)
Dallas.......................................................... --
Fort Worth...................................................... 283
Minneapolis..................................................... 396
Dayton.......................................................... 160
------
$ 1,045
------
------
</TABLE>
Amortization of license and leased license investment is calculated
beginning with inception of service in each respective market over 15 years.
The Dallas and Salt Lake City markets are nonoperating and, accordingly, no
amortization of license and leased license investment has been reflected in
the Unaudited Pro Forma Condensed Combined Statement of Operations. Goodwill
is amortized over 15 years.
(I) Reflects the adjustment of minority interest and equity in losses of
investees attributable to additional losses in Fort Worth Wireless Cable
T.V. Associates and Wireless Cable T.V. Associates #38.
(J) Reflects the elimination of AWS management fee charged to Wireless Cable
T.V. Associates #38.
(K) Reflects the elimination of interest expense associated with debt not
assumed by the Company.
(L) Reflects the elimination of equity in losses of investees and minority
interest relating to the AWS investment in Fort Worth Wireless Cable T.V.
Associates and Wireless Cable T.V. Associates #38, since the Company,
subsequent to the Contributions, owns 100% of the Fort Worth and Minneapolis
markets.
F-12
<PAGE>
CS WIRELESS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN 000'S)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA USA WIRELESS ADJUSTMENTS
CAI HEARTLAND CABLE, INC. ---------------------
SYSTEMS (A) SYSTEMS (A) (A) OFFERING OTHER PRO FORMA
----------- ----------- ------------ -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues................................ $12,046 $ 8,147 $ 862 $ -- $ (502)(C) $ 20,553
----------- ----------- ------------ -------- ------- -----------
Operating expenses:
Systems operations.......................... 4,767 5,331 641 (355)(C) 10,384
Selling, general and administrative......... 6,717 6,187 720 (235)(C) 13,389
Depreciation and amortization............... 10,728 11,051 676 (308)(C) 23,201
1,054(D)
----------- ----------- ------------ -------- ------- -----------
Total operating expenses................ 22,212 22,569 2,037 -- 156 46,974
----------- ----------- ------------ -------- ------- -----------
Operating loss........................ (10,166) (14,422) (1,175) -- (658) (26,421)
Interest expense.............................. (673) (33) (521) (27,761)(B) (1,500)(E) (29,967)
106(C)
415(F)
Interest income and other..................... -- 765 27 (8)(C) 784
----------- ----------- ------------ -------- ------- -----------
Loss before income taxes................ (10,839) (13,690) (1,669) (27,761) (1,645) (55,604)
Income tax benefit............................ 2,826 4,890 449 11,134(G) 19,299
----------- ----------- ------------ -------- ------- -----------
Net loss................................ $(8,013) $ (8,800) $ (1,220) $(27,761) $ 9,489 $(36,305)
----------- ----------- ------------ -------- ------- -----------
----------- ----------- ------------ -------- ------- -----------
</TABLE>
See accompanying notes to Pro Forma Statements
F-13
<PAGE>
CS WIRELESS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS--CAI SYSTEMS
YEAR ENDED DECEMBER 31, 1995
(IN 000'S)
<TABLE>
<CAPTION>
CAI
------------------------------------------------------------------------------------------
ACS
ACS CALIFORNIA, ACS
OHIO, INC. AND INC. AND CALIFORNIA,
SUBSIDIARIES CS WIRELESS SUBSIDIARY (A) INC. AND
JANUARY 1, 1995 TO SYSTEMS, INC. JANUARY 1, 1995 TO SUBSIDIARY
SEPTEMBER 29, 1995 SEPTEMBER 30, 1995 TO SEPTEMBER 29, 1995 SEPTEMBER 30, 1995 TO
(A) DECEMBER 31, 1995 (A) (A) DECEMBER 31, 1995 (A)
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Total revenues................. $ 6,170 $ 2,301 $ 2,600 $ 975
------- ------- ------- -------
Operating expenses:
Systems operations........... 2,107 795 1,385 480
Selling, general and
administrative............. 3,334 1,308 1,396 679
Depreciation and
amortization............... 3,020 1,796 2,043 737
------- ------- ------- -------
Total operating
expenses............... 8,461 3,899 4,824 1,896
------- ------- ------- -------
Operating loss......... (2,291) (1,598) (2,224) (921)
Interest expense............... (233) (2) (436) (2)
------- ------- ------- -------
Loss before income
taxes.................. (2,524) (1,600) (2,660) (923)
Income tax benefit............. 649 393 -- 307
------- ------- ------- -------
Net loss................. $ (1,875) $ (1,207) $ (2,660) $ (616)
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------- PRO FORMA
CAI PURCHASE CAI
DIVISION (A) ACCOUNTING OTHER SYSTEMS
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Total revenues................. $ -- $ -- $ 12,046
----- ----------- --------- -----------
Operating expenses:
Systems operations........... -- 4,767
Selling, general and
administrative............. -- 6,717
Depreciation and
amortization............... 84 3,048(H) 10,728
----- ----------- --------- -----------
Total operating
expenses............... 84 3,048 22,212
----- ----------- --------- -----------
Operating loss......... (84) (3,048) (10,166)
Interest expense............... -- (673)
----- ----------- --------- -----------
Loss before income
taxes.................. (84) (3,048) (10,839)
Income tax benefit............. -- 1,477(G) 2,826
----- ----------- --------- -----------
Net loss................. $ (84) $ (3,048) $ 1,477 $ (8,013)
----- ----------- --------- -----------
----- ----------- --------- -----------
</TABLE>
See accompanying notes to Pro Forma Statements
F-14
<PAGE>
CS WIRELESS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS--HEARTLAND SYSTEMS
YEAR ENDED DECEMBER 31, 1995
(IN 000'S)
<TABLE>
<CAPTION>
HEARTLAND
---------------------------------------------------------------------------------------------------------
AMERICAN FORT WORTH WIRELESS
CABLEMAXX, INC. CABLEMAXX, INC. WIRELESS WIRELESS CABLE T.V.
SAN ANTONIO UTAH SYSTEMS, CABLE T.V. ASSOCIATES DAYTON HEARTLAND
DIVISION (A) DIVISION (A) INC. (A) ASSOCIATES (A) #38 (A) SYSTEM (A) DIVISION (A)
--------------- --------------- -------- -------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues...... $ 5,266 $-- $ 100 $ 597 $ 982 $ 1,188 $ 114
------- ------- -------- ------- ---------- ------------- ------
Operating expenses:
Systems
operations...... 2,434 -- -- 526 1,435 866 70
Selling, general
and
administrative... 1,724 93 2,123 768 735 633 211
Depreciation and
amortization.... 3,314 618 83 779 1,072 682 99
------- ------- -------- ------- ---------- ------------- ------
Total operating
expenses...... 7,472 711 2,206 2,073 3,242 2,181 380
------- ------- -------- ------- ---------- ------------- ------
Operating
loss........ (2,206) (711) (2,106) (1,476) (2,260) (993) (266)
Interest expense.... (260) (515) (161) -- -- (33) --
Equity in losses of
investees......... -- -- (188) -- -- -- --
Interest income and
other............. -- -- 763 59 131 -- --
------- ------- -------- ------- ---------- ------------- ------
Loss before
income
taxes....... (2,466) (1,226) (1,692) (1,417) (2,129) (1,026) (266)
Income tax
benefit........... -- -- -- -- -- -- --
------- ------- -------- ------- ---------- ------------- ------
Net loss...... $(2,466) $(1,226) $(1,692) $(1,417) $(2,129) $(1,026) $ (266)
------- ------- -------- ------- ---------- ------------- ------
------- ------- -------- ------- ---------- ------------- ------
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------- PRO FORMA
PURCHASE HEARTLAND
ACCOUNTING OTHER SYSTEMS
---------- ------ ---------
<S> <C> <C> <C>
Total revenues...... $ -- $ (100)(K) $ 8,147
---------- ------ ---------
Operating expenses:
Systems
operations...... 5,331
Selling, general
and
administrative... (100)(K) 6,187
Depreciation and
amortization.... 4,404(I) 11,051
---------- ------ ---------
Total operating
expenses...... 4,404 (100) 22,569
---------- ------ ---------
Operating
loss........ (4,404) -- (14,422)
Interest expense.... 936(L) (33)
Equity in losses of
investees......... (538)(J) 726(M) --
Interest income and
other............. 538(J) (726)(M) 765
---------- ------ ---------
Loss before
income
taxes....... (4,404) 936 (13,690)
Income tax
benefit........... 4,890(G) 4,890
---------- ------ ---------
Net loss...... $(4,404) $5,826 $ (8,800)
---------- ------ ---------
---------- ------ ---------
</TABLE>
See accompanying notes to Pro Forma Statements
F-15
<PAGE>
CS WIRELESS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(A) The following table provides a reconciliation between the historical
financial information included in the Unaudited Pro Forma Condensed Combined
Statement of Operations for the year ended December 31, 1995 and the
Company's markets:
<TABLE>
<CAPTION>
ENTITY MARKET
- --------------------------------------------- ------------------------------------------------
<S> <C>
CAI Systems:
CS Wireless Systems, Inc. and Subsidiaries
and certain assets of Atlantic
Microsystems............................. Cleveland, Ohio
ACS Ohio, Inc. and Subsidiaries............ Cleveland, Ohio
ACS California, Inc. and Subsidiary........ Bakersfield, California
CAI Division............................... Stockton/Modesto, California and Charlotte,
North Carolina
Heartland Systems:
CableMaxx, Inc. San Antonio Division....... San Antonio, Texas
CableMaxx, Inc. Utah Division.............. Salt Lake City, Utah
American Wireless Systems, Inc............. Dallas, Texas
Fort Worth Wireless Cable T.V.
Associates............................... Fort Worth, Texas
Wireless Cable T.V. Associates #38......... Minneapolis, Minnesota
Dayton System (A Division of Technivision,
Inc.).................................... Dayton, Ohio
Heartland Division......................... Grand Rapids, Michigan and Kansas City
(Suburbs), Missouri
USA Wireless Cable, Inc. .................... Radcliffe, Iowa, Effingham, Kansas and
Wellsville, Kansas
</TABLE>
(B) Reflects additional interest expense at a rate of 11 3/8%, amortization of
debt issuance costs of $8.4 million associated with the Notes and
amortization of debt discount resulting from the issue price allocated to
the Common Shares.
(C) Reflects the elimination from the Unaudited Pro Forma Condensed Combined
Statement of Operations of historical operating results relating to the
Kearney, Nebraska market that is not included in the USA Wireless
Acquisition.
(D) Reflects the incremental amortization of license and leased license
investment and goodwill associated with the USA Wireless Acquisition.
Amortization of license and leased license investment is calculated
beginning with inception of service in each respective market over a useful
life of 15 years. Goodwill is amortized over 15 years.
(E) Reflects additional interest expense at a rate of 10% during the first year
and 15% thereafter, with interest accruing and added to the balance
annually, on the Heartland Long-Term Note.
(F) Reflects the elimination of historical interest expense of USA associated
with indebtedness retired by the Company upon consummation of the USA
Wireless Acquisition.
F-16
<PAGE>
(G) Reflects the adjustment of deferred income tax benefit at an assumed rate of
37%. Income tax benefit reflects the recognition of deferred tax assets to
the extent such assets can be realized through future reversals of existing
taxable temporary differences.
(H) Reflects incremental amortization of license and leased license investment
and goodwill associated with CAI's September 1995 acquisition of certain
operating systems and wireless cable channel rights contributed to the
Company as follows (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED
MARKET DECEMBER 31, 1995
- --------------------------------------------------------------------------- -----------------
<S> <C>
Cleveland.................................................................. $ 2,658
Bakersfield................................................................ 124
Stockton/Modesto........................................................... 266
------
$ 3,048
------
------
</TABLE>
Amortization of license and leased license investment is calculated
beginning with inception of service in each respective market over a useful
life of 15 years. The Stockton/Modesto and Charlotte markets are
nonoperating and, accordingly, no amortization of license and leased license
investment has been reflected in the Unaudited Pro Forma Condensed Combined
Statement of Operations. Goodwill is amortized over 15 years.
(I) Reflects the adjustment of amortization of license and leased license
investment and goodwill associated with Heartland's acquisitions as follows
(in 000's):
<TABLE>
<CAPTION>
YEAR ENDED
MARKET DECEMBER 31, 1995
- --------------------------------------------------------------------------- -----------------
<S> <C>
San Antonio................................................................ $ 1,347
Salt Lake City............................................................. (535)
Dallas..................................................................... 548
Fort Worth................................................................. 960
Minneapolis................................................................ 1,382
Dayton..................................................................... 702
------
$ 4,404
------
------
</TABLE>
Amortization of license and leased license investment is calculated
beginning with inception of service in each respective market over 15 years.
The Dallas and Salt Lake City markets are nonoperating and, accordingly, no
amortization of license and leased license investment has been reflected in
the Unaudited Pro Forma Condensed Combined Statement of Operations. Goodwill
is amortized over 15 years.
(J) Reflects the adjustment of minority interest and equity in losses of
investees attributable to additional losses in Fort Worth Wireless Cable
T.V. Associates and Wireless Cable T.V. Associates #38.
(K) Reflects the elimination of AWS management fee charged to Wireless Cable
T.V. Associates #38.
(L) Reflects the elimination of interest expense associated with debt not
assumed by the Company.
(M) Reflects the elimination of equity in losses of investees and minority
interest relating to the AWS investment in Fort Worth Wireless Cable T.V.
Associates and Wireless Cable T.V. Associates #38, since the Company,
subsequent to the Contributions, owns 100% of the Fort Worth and Minneapolis
markets.
F-17
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 184 $ 136,844
Subscriber receivables, net....................................................... 370 2,232
Prepaid expenses and other........................................................ 35 442
------------ -------------
Total current assets.......................................................... 589 139,518
------------ -------------
Plant and equipment, net............................................................ 12,220 41,076
License and leased license investment, net.......................................... 29,500 172,668
Goodwill, net....................................................................... 33,379 51,746
Debt issuance costs and other assets, net........................................... -- 10,302
------------ -------------
$ 75,688 $ 415,310
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................................. $ 2,286 $ 6,773
Current portion of long-term debt................................................. 52 186
Current portion of BTA auction payable (note 4)................................... -- 4,469
Other current liabilities......................................................... 398 644
------------ -------------
Total current liabilities..................................................... 2,736 12,072
------------ -------------
Long-term debt, less current portion (notes 2 and 3)................................ 60 259,862
BTA auction payable, less current portion (note 4).................................. -- 4,259
Due to CAI Wireless Systems, Inc.................................................... 1,831 --
Deferred income taxes............................................................... 10,745 8,668
Stockholders' equity:
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; 10,110,000 shares in 1996 and 3,254,326 shares in 1995............. 3 10
Additional paid-in capital........................................................ 61,520 150,980
Accumulated deficit............................................................... (1,207) (20,541)
------------ -------------
Total stockholders' equity.................................................... 60,316 130,449
------------ -------------
------------ -------------
$ 75,688 $ 415,310
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-18
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
NINE MONTHS NINE MONTHS
ENDED ENDED
------------- -------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenue............................................................................. $ 6,170 $ 15,994
Operating expenses:
Systems operations................................................................ 2,107 9,400
Marketing......................................................................... 471 2,165
General and administrative........................................................ 2,863 7,561
Depreciation and amortization..................................................... 3,020 13,853
------------- -------------
Total operating expenses...................................................... 8,461 32,979
------------- -------------
Operating loss................................................................ (2,291) (16,985)
------------- -------------
Other income (expense):
Interest income................................................................... -- 4,907
Interest expense.................................................................. (233) (17,490)
------------- -------------
Total other income (expense), net............................................. (233) (12,583)
------------- -------------
Loss before income taxes...................................................... (2,524) (29,568)
Income tax benefit.................................................................. 649 10,234
------------- -------------
Net loss...................................................................... $ (1,875) $ (19,334)
------------- -------------
------------- -------------
Net loss per common share........................................................... $ (0.58) $ (2.21)
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-19
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................. $ (19,334) $ (1,875)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization...................................................... 13,853 3,020
Deferred income taxes.............................................................. (10,235) (649)
Accretion on discount notes and amortization of debt issuance costs................ 16,390 --
Non-cash interest expense on other long term debt.................................. 1,036 --
Changes in assets and liabilities, net of effects of contributions:
Subscriber receivables........................................................... (1,317) (169)
Prepaid expenses and other....................................................... (122) 7
Accounts payable, accrued expenses and other liabilities......................... 386 2,533
----------- -----------
Net cash provided by operating activities...................................... 657 2,867
----------- -----------
Cash flows from investing activities:
Purchases of plant and equipment..................................................... (9,817) (4,792)
Additions to license and leased license investment................................... (11,230) --
Other................................................................................ 745 --
----------- -----------
Net cash used in investing activities.......................................... (20,302) (4,792)
----------- -----------
Cash flows from financing activities:
Payments on notes and BTA Auction payable............................................ (30,739) (20)
Advances from Parent................................................................. -- 1,365
Proceeds from Unit Offering.......................................................... 229,484 --
Debt issuance and organizational costs............................................... (10,792) --
Cash distributed to stockholders..................................................... (31,648) --
----------- -----------
Net cash provided by financing activities...................................... 156,305 1,345
----------- -----------
Net increase (decrease) in cash and cash equivalents................................... 136,660 (580)
Cash at beginning of period............................................................ 184 710
----------- -----------
Cash and cash equivalents at end of period............................................. $ 136,844 $ 130
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-20
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- 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 9 134,230 (45,572) -- 88,667
Issuance of common stock pursuant to Unit
Offering (note 3)....................... 110,000 -- 800 -- -- 800
Net loss.................................. -- -- -- -- (19,334) (19,334)
------------ --- ----------- --------- ------------ ---------
Balance, September 30, 1996............... 10,110,000 $ 10 150,980 -- (20,541) 130,449
------------ --- ----------- --------- ------------ ---------
------------ --- ----------- --------- ------------ ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-21
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) GENERAL
(a) DESCRIPTION OF BUSINESS
CS Wireless Systems, Inc. and subsidiaries (the "Company" or "CS Wireless")
develops, owns and operates 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. As of
September 30, 1996, the Company had systems in operation in eight markets.
Systems in other markets are currently under construction and development by the
Company.
(b) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial information
includes financial information of the Company and ACS Ohio, Inc. ("ACS Ohio").
Financial information for the nine months ended September 30, 1995 reflects the
results of operations of ACS Ohio, the predecessor of the Company and a
wholly-owned subsidiary of ACS Enterprises, Inc. ("ACS Enterprises"). ACS Ohio
owned and operated the wireless cable television system serving the Cleveland,
Ohio metropolitan area. Financial information as of December 31, 1995 and for
the period 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 metropolitan area. The combined financial
information for the period 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 (including ACS Ohio) 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 for 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.
In the opinion of management, the accompanying unaudited condensed
consolidated financial information of the Company contains all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of September 30, 1996, and the
results of operations and cash flows for the nine months ended September 30,
1996 and 1995. These results are not necessarily indicative of the results to be
expected for the full fiscal year.
(c) COMMON SHARES OUTSTANDING AND 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 8,758,882 and 3,254,326
for the nine-month periods ended September 30, 1996 and 1995, respectively. For
purposes of the accompanying condensed 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
F-22
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
(1) GENERAL (CONTINUED)
to the wireless cable television system in Cleveland, Ohio. Fully-diluted loss
per common share is not presented as it would not materially differ from primary
loss per common share.
(2) 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 3). 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 note
3) have been paid in full.
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 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 preliminary estimates of the fair
value of such net assets. In addition, subsequent to the Contributions, the
Company, CAI and Heartland will complete certain post-closing adjustments that
could result in an adjustment to the net assets contributed to the Company.
Subsequent to September 30, 1996 the Company distributed an additional $5
million to Heartland as a part of the equity true-up per the provisions of the
agreement governing the Contributions. 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):
<TABLE>
<S> <C>
Working capital................................................... $ 911
Plant and equipment, net.......................................... 25,755
License and leased license investment and goodwill................ 143,497
Deferred income taxes............................................. (8,212)
Other liabilities................................................. (1,636)
---------
160,315
Cash and notes distributed to CAI and Heartland................... 71,648
---------
Net assets contributed.......................................... $ 88,667
---------
---------
</TABLE>
The condensed consolidated financial statements of the Company for the nine
months ended September 30, 1996 include the results of operations from February
23, 1996 of the net assets contributed
F-23
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
(2) CONTRIBUTIONS TO COMPANY (CONTINUED)
to the Company in the Contributions. Summarized below is unaudited pro forma
financial information as if the Contributions and Unit Offering (see note 3) had
been consummated as of the beginning of 1996. The pro forma financial
information does not purport to represent what the Company's results of
operations actually would have been had such transactions occurred on January 1,
1996, or to project the Company's results of operations for any future period.
<TABLE>
<CAPTION>
(IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
Revenues....................................................................... $ 17,649
Net loss....................................................................... (21,195)
Net loss per common share...................................................... (2.39)
</TABLE>
(3) UNIT OFFERING
On February 23, 1996, the Company consummated a private placement of 100,000
units (the "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 $218.7 million,
including amounts attributable to the common stock and after underwriting
discounts and other debt issuance costs aggregating approximately $10.8 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.
(4) BTA AUCTION
The Federal Communications Commission (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 $18.9 million with respect to BTAs that will be conveyed to the
Company. As of September 30, 1996, the Company's condensed consolidated balance
F-24
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
(4) BTA AUCTION (CONTINUED)
sheet reflects a BTA Auction payable to CAI and Heartland of approximately $8.7
million representing the remaining estimated unpaid balance with respect to BTAs
to be conveyed to the Company.
(5) ACQUISITIONS
On July 17, 1996, the Company 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 in cash. The Company has agreed to sell BellSouth (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 $7,300,000, subject to
adjustment, plus reimbursement of certain expenses and (ii) the BTA License
relating to Atlanta, Georgia for $6,000,000, subject to adjustment. Although the
Company expects to close the sale during the first quarter of 1977, the closing
of such sale is subject to various conditions precedent and there can be no
assurance that such transaction will be consummated.
(6) SUBSEQUENT EVENTS
On October 11, 1996, CS Wireless, acquired all of the issued and outstanding
common stock ("USA Common Stock") of USA Wireless Cable, Inc. ("USA") in a
merger transaction (the "USA Wireless Acquisition") pursuant to an Agreement and
Plan of Merger, dated as of July 23, 1996 (the "USA Merger Agreement"). 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
$17,012,000, of which approximately $6,000,000 was paid in the form of CS
Wireless common stock and approximately $10,000,000, consisting of approximately
$9,000,000 of indebtedness assumed by CS Wireless and an aggregate amount of
approximately $760,000 (the "Note Amount") in the form of two promissory notes,
each payable on demand. $5,000 of the Note Amount represents payment for
Hilliard's convenant not to compete, and $755,000 of the Note Amount is in
satisfaction of an obligation from USA to Hilliard.
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. The PCTV Swap is expected to close during the
first quarter of 1997.
In July, 1996, CS Wireless entered into a letter of intent with American
Telecasting, Inc. ("ATI") to exchange CS Wireless' Minneapolis, Minnesota,
Bakersfield, California and Stockton/Modesto, California
F-25
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
(6) SUBSEQUENT EVENTS (CONTINUED)
markets for ATI's Little Rock, Arkansas, Louisville, Kentucky, Oklahoma City,
Oklahoma and Wichita, Kansas markets. The letter of intent has expired without
the transaction being consummated.
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 $4.6 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 recieve 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 $3.2 million rather
than $4.6 million. The Company received the Radcliffe system and Scottsbluff and
Kalispell assets in connection with the USA Wireless Acquisition.
F-26
<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-27
<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-28
<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-29
<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-30
<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-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
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-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
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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
CS Wireless Systems, Inc.:
We have audited the accompanying statement of operations, stockholders'
deficit and cash flows of Metropolitan Cablevision, Inc. for the period from
March 1, 1993 to June 3, 1993. 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.
As discussed in note 2 to the financial statements, the Company suffered
significant recurring losses from operations and was unable to meet its
obligations. In June 1993, based on the Company's inability to repay its
obligations, the Company's creditors foreclosed on the assets of the Company and
subsequently sold the assets to MetroCable, Inc. for $1 million. As a result,
the Company recorded a write-down of $1.7 million in the year ended February 28,
1993 to reflect the permanent impairment of its assets.
In our opinion, the financial statements referred to above present fairly,
in all material respects the results of operations and cash flows of
Metropolitan Cablevision, Inc., from March 1, 1993 to June 3, 1993 in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
March 22, 1996
F-58
<PAGE>
METROPOLITAN CABLEVISION, INC.
STATEMENT OF OPERATIONS
PERIOD FROM MARCH 1, 1993 TO JUNE 3, 1993
<TABLE>
<S> <C>
REVENUES:
Pay television revenues....................................................... $ 454,155
Rental of equipment - affiliate............................................... 25,550
Other......................................................................... 44,839
----------
524,444
----------
EXPENSES:
Programming and license fees.................................................. 173,765
Commissions................................................................... 11,222
Depreciation.................................................................. 198,802
Selling, general and administrative........................................... 309,980
----------
693,769
Operating loss............................................................ (169,325)
----------
Interest expense (note 3)....................................................... 1,283,417
----------
NET LOSS.................................................................. $(1,452,742)
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
METROPOLITAN CABLEVISION, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM MARCH 1, 1993 TO JUNE 3, 1993
<TABLE>
<CAPTION>
COMMON STOCK
CLASS A TREASURY STOCK TOTAL
---------------- ACCUMULATED -------------- STOCKHOLDERS'
SHARES AMOUNT DEFICIT SHARES AMOUNT DEFICIT
------ ------- ------------ ----- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, February 28, 1993... 400 $53,100 $(48,087,217) (87) $(44) $ (48,034,161)
Net loss.................... -- -- (1,452,742) -- -- (1,452,742)
------ ------- ------------ ----- ------ -------------
Balances, June 3, 1993........ 400 $53,100 $(49,539,959) (87) $(44) $ (49,486,903)
------ ------- ------------ ----- ------ -------------
------ ------- ------------ ----- ------ -------------
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
METROPOLITAN CABLEVISION, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM MARCH 1, 1993 TO JUNE 3, 1993
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss...................................................................... $(1,452,742)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................ 198,802
Accrued interest on stockholders' loans..................................... 1,283,417
Changes in operating assets and liabilities:
Accounts receivable....................................................... 13,607
Inventories............................................................... 27,589
Other current assets...................................................... (26,161)
Accounts payable and accrued expenses..................................... (32,489)
Customer deposits and deferred billings................................... (21,056)
----------
Cash flows used in operating activities......................................... (9,033)
----------
Cash flows from investing activities--capital expenditures...................... (5,070)
----------
Net decrease in cash............................................................ (14,103)
Cash at beginning of period..................................................... 228,801
----------
Cash at end of period........................................................... $ 214,698
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE>
METROPOLITAN CABLEVISION, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM MARCH 1, 1993 TO JUNE 3, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Metropolitan Cablevision, Inc. (the "Company") was incorporated in the State
of Ohio in November 1984 and commenced operations in March 1985. In January
1986, the Company began providing Multi-Channel, Multi-Point Distribution
Television Services ("MMDS") to private residences and multi-unit housing
complexes, primarily in the City of Cleveland, Ohio and surrounding suburbs.
(b) FINANCIAL INSTRUMENTS
The Company has no financial instruments with significant off-balance sheet
or concentration of credit risk. Trade accounts receivable principally represent
amounts due for service from in excess of 5,000 subscribers and they were
substantially secured by service deposits held by the Company.
(c) INVENTORIES
Inventories were carried at the lower of cost, determined on the weighted
average method, which approximated the first-in, first-out method, or market.
(d) PLANT AND EQUIPMENT
Plant and equipment was stated at cost and was 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 to 8 years
Computerized equipment......................................... 5 years
Leasehold improvements and office equipment.................... 5 years
Tools and test equipment....................................... 10 years
</TABLE>
Maintenance and repairs, subcontractor, employee labor and overhead costs
incurred in connection with the construction and installation of the Company's
television reception and transmission equipment were expensed as incurred;
significant renewals and betterments were capitalized. For disposals of plant
and equipment, the gross carrying value and the related accumulated depreciation
were removed from the accounts and included in determining gain or loss on such
disposals.
(e) DEFERRED CHARGES
Deferred charges consisted of costs incurred in the acquisition of channel
rights. The deferred charges were amortized over 20 years (the life of the
channel rights leases), using the straight-line method.
(f) INCOME TAXES
The Company provides for deferred taxes under the asset and liability method
of Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXES. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax
F-62
<PAGE>
METROPOLITAN CABLEVISION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM MARCH 1, 1993 TO JUNE 3, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered.
(g) LOSS PER SHARE OF COMMON STOCK
Loss per share of common stock was calculated using net loss divided by the
average number of shares of common stock outstanding of 313 in 1993.
(h) CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considered all
investments purchased with original maturities of three months or less to be
cash equivalents.
(2) FORECLOSURE ON ASSETS
The Company suffered significant recurring losses and was unable to meet its
obligations. The stockholders requested repayment of the stockholders' loans to
the Company and accrued interest during fiscal 1993. In June 1993, based on the
Company's inability to repay the loans, the stockholders foreclosed on the
assets of the Company. On June 4, 1993, the stockholders sold the assets of the
Company to MetroCable, Inc. for $1,000,000. As a result, the Company recorded a
write-down of $1.7 million in the year ended February 28, 1993 to reflect the
permanent impairment of its assets.
MetroCable, Inc. was incorporated in the State of Ohio on May 27, 1993 and
the stockholders of MetroCable, Inc. are primarily the former stockholders of
the Company.
(3) RELATED PARTY TRANSACTIONS
The Company had an operating lease for installation hookup equipment with an
affiliated company. Rental income from the converter boxes recognized was
$25,550 for the period from March 1, 1993 to June 3, 1993. This operating lease
was a month-to-month lease with variable fees based on subscriber levels.
Interest expense on the loans outstanding to stockholders at June 3, 1993
amounted to $1,283,417 for the period from March 1, 1993 to June 3, 1993.
(4) INCOME TAXES
For the period from March 1, 1993 to June 3, 1993, the Company incurred net
operating losses for tax return and financial reporting purposes. No tax benefit
from such net operating losses has been recognized in the statement of
operations due to the uncertainty of future utilization of the net operating
loss carryforwards. As a result of the foreclosure of assets discussed in note
2, the Company has no remaining net operating loss carryforwards. In addition,
there were no deferred taxes at June 3, 1993.
Effective March 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The standard did not have a material effect on the financial
position or result of operations of the Company.
F-63
<PAGE>
METROPOLITAN CABLEVISION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM MARCH 1, 1993 TO JUNE 3, 1993
(5) COMMITMENTS AND CONTINGENCIES
The Company was a party to numerous leases for broadcast channels, building
and equipment. All leases expired within five years, however, many included
automatic extensions. Future minimum annual rental commitments for
noncancellable operating leases in effect at June 3, 1993 were approximated as
follows:
<TABLE>
<CAPTION>
CHANNEL RIGHTS OTHER OPERATING
LEASE LEASES
------------------- --------------------
<S> <C> <C>
June 4, 1993 to February 28, 1994.................. $ 42,375 $ 15,900
1995............................................... 49,000 14,600
1996............................................... 24,000 10,400
1997............................................... 24,000 1,300
1998............................................... 24,000 --
1999............................................... 24,000 --
-------- -------
$ 187,375 $ 42,200
-------- -------
-------- -------
</TABLE>
Expense incurred under operating leases approximated $201,000 for the period
from March 1, 1993 to June 3, 1993.
As required by certain of these lease agreements, the Company obtained a
letter of credit for $50,000, which was to expire on March 2, 1994, and was
secured by a certificate of deposit for $50,000.
The Company had a lawsuit outstanding at June 3, 1993 with former employees.
However, management believes that any resulting liability not recorded as of
June 3, 1993 would not materially affect the financial position or results of
operations of the Company.
F-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CAI WIRELESS SYSTEMS, INC.
We have audited the accompanying consolidated balance sheet of ACS
California, Inc. and subsidiary as of December 31, 1995 and the related
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ACS California, Inc. and subsidiary at December 31, 1995, and the consolidated
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.
Philadelphia, Pennsylvania
/s/ Ernst & Young LLP
April 1, 1996
F-74
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(000S, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................. $ 112
Accounts receivable:
Trade, less allowance for doubtful accounts of $135............................ 134
Other current assets............................................................. 39
---------
Total current assets............................................................... 285
Plant and equipment, net........................................................... 6,577
Wireless channel rights, net....................................................... 4,917
Goodwill, net...................................................................... 8,692
---------
$ 20,471
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of notes payable and capital lease obligations................ $ 42
Accounts payable and accrued expenses............................................ 1,070
Customer deposits and billings received in advance............................... 116
---------
Total current liabilities.......................................................... 1,228
Notes payable and capital lease obligations........................................ 57
Due to CAI Wireless Systems, Inc. ................................................. 1,625
Deferred income taxes.............................................................. 381
Stockholder's equity:
Common stock--par value $1 per share, authorized and issued 1,000 shares......... 1
Additional paid-in capital....................................................... 17,795
Accumulated deficit.............................................................. (616)
---------
Total stockholder's equity......................................................... 17,180
---------
$ 20,471
---------
---------
</TABLE>
See accompanying notes.
F-75
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
SEPTEMBER 30, 1995 JANUARY 1, 1996,
TO DECEMBER 31, 1995 TO FEBRUARY 23,1996
--------------------- -------------------
<S> <C> <C>
(UNAUDITED)
Revenues:
Pay television revenues.......................... $ 975 $ 540
Expenses:
Programming and license fees................... 480 260
Marketing...................................... 60 23
General and administrative..................... 619 242
Depreciation and Amortization.................. 737 459
------ -------
1,896 984
------ -------
(921) (444)
Interest expense, net.............................. (2) (1)
------ -------
Loss before tax benefit............................ (923) (445)
Benefit from income taxes.......................... 307 145
------ -------
Net loss........................................... $ (616) (300)
Accumulated deficit:
Beginning of period............................ -- (616)
------ -------
End of period.................................. $ (616) $ (916)
------ -------
------ -------
Per share data:
Net loss per common share.......................... $ (616) $ (300)
------ -------
------ -------
Weighted average common shares outstanding......... 1,000 1,000
------ -------
------ -------
</TABLE>
See accompanying notes.
F-76
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000S)
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 30, 1995 FOR THE PERIOD
TO DECEMBER 31, JANUARY 1, 1996
1995 TO FEBRUARY 23, 1996
------------------- ---------------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................... $ (616) $ (300)
Adjustments to reconcile net loss to net cash used in operating
activities:
Deferred income taxes................................................ (307) (145)
Depreciation and amortization........................................ 737 459
Changes in assets and liabilities:
Accounts receivable................................................ 20 21
Other operating assets............................................. 9 (11)
Accounts payable and accrued expenses.............................. (1,063) (170)
Other operating liabilities........................................ (5) (9)
------- -----
Net cash used in operating activities.................................. (1,225) (155)
Cash flows from investing activities
Capital expenditures................................................... (448) (158)
------- -----
Net cash used in investing activities.................................. (448) (158)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of notes payable and capital lease obligations................ (9) (8)
Advances from CAI Wireless Systems, Inc. .............................. 1,625 229
------- -----
Net cash provided by financing activities.............................. 1,616 221
------- -----
Net decrease in cash................................................... (57) (92)
Cash, beginning of period.............................................. 169 112
------- -----
Cash, end of period.................................................... $ 112 $ 20
------- -----
------- -----
</TABLE>
See accompanying notes.
F-77
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
ACS California, Inc. (the "Company") was formed on March 11, 1994 upon the
purchase of a company that operates the wireless cable system serving
Bakersfield, California and the surrounding area and is a wholly owned
subsidiary of ACS Enterprises, Inc. ("ACS"). On September 29, 1995, ACS became a
wholly owned subsidiary of CAI Wireless System, Inc. (see Note 8). The
consolidated financial statements include the accounts of ACS California, Inc.
and its wholly owned subsidiary, Valley Wireless Cable, Inc. ("Valley
Wireless"). All material intercompany balances and transactions within the
Company 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 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 $91,000 for the period 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 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 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. Channel acquisition costs
are being amortized over fifteen years.
The carrying value of the goodwill and wireless channel rights 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 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.
F-78
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited financial
information of the Company contains all adjustments, consisting only of those of
a recurring nature, necessary to present the results of its operations and cash
flows for the period January 1, 1996 to February 23, 1996. These results are not
necessarily indicative of the results to be expected for the full fiscal year.
2. PLANT AND EQUIPMENT
Plant and equipment consisted of the following (000s):
<TABLE>
<CAPTION>
DECEMBER 31, LIFE
CLASSIFICATION 1995 (YEARS)
- ---------------------------------------------------------------------- ------------- ---------
<S> <C> <C>
Vehicles.............................................................. $ 76 3
Office and computer................................................... 169 5
Transmission equipment................................................ 1,418 5
Television and other equipment........................................ 4,790 2 to 5
Materials and supplies................................................ 707 2 to 5
------
7,160
Less accumulated depreciation......................................... (583)
------
$ 6,577
------
------
</TABLE>
Capitalized overhead costs were approximately $38,000 in 1995. Depreciation
expense approximated accumulated depreciation 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............................................................... $ 8,840
Less accumulated amortization................................................... (148)
------
$ 8,692
------
------
</TABLE>
F-79
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DUE TO CAI WIRELESS SYSTEMS, INC.
The Due to CAI Wireless Systems, Inc. ("CAI") amount included in the balance
sheet represents a balance as the result of various transactions between the
Company and CAI. The $1,625,000 balance at December 31, 1995 is classified as a
long-term liability in the accompanying consolidated balance sheet because it is
not expected to be repaid within the upcoming twelve months (see Note 9).
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 $101,000 in 1995.
5. DEBT
Debt consisted of the following (000s):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
---------------
<S> <C>
Notes payable--vehicles......................................................... $ 57
Less current maturities......................................................... (24)
---
$ 34
---
---
</TABLE>
The notes payable at December 31, 1995 is due to Ford Motor Credit Corp. for
the purchase of five vehicles used for servicing and installing customers. These
notes are due in monthly installments through March 15, 1998 and bears interest
at 8.6%.
6. LEASES
The Company is the licensee of nine of the Federal Communications Commission
("FCC") licensed channels available in the Bakersfield area, and leases the
twenty-four remaining FCC licenses.
Generally, channel leases provide for monthly rentals based on the number of
subscribers served by the channels being leased, in amounts ranging from $0.025
to $0.05 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--A4 Cal State Bakersfield December 2001 Good Faith
B1--B4 Kern CC September 2001 Good Faith
C1--C4 Kern HS Distr.--Bakersfield October 2001 Good Faith
D1--D4 Panama-Buena Vista Union School
Distr. April 2002 Good Faith
E1--E4 Haddonfield Wireless Co. July 2001 CAI 5-year option
G1--G4 Kern Cty. Super. of Schools November 2001 Good Faith
</TABLE>
F-80
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEASES (CONTINUED)
Expense incurred under channel lease agreements aggregated approximately
$47,000 in 1995.
The Bakersfield transmitter tower is owned by the Company and is situated on
a site leased from the City of Bakersfield under a twenty-year lease expiring in
December 2010. The annual lease payment is currently $3,500, and is subject to a
5% annual inflation increase.
All of the above leases are accounted for as operating leases.
The Company leases office space, automobiles, trucks, and office equipment.
The office space, automobiles, 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............................................................. $ 51
Less accumulated amortization................................................... (4)
---
$ 47
---
---
</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......................................................................................... $ 24 $ 114
1997......................................................................................... 21 113
1998......................................................................................... 1 111
1999......................................................................................... -- 111
2000......................................................................................... -- 111
2001 and beyond.............................................................................. -- 283
-----
Total minimum lease payments................................................................. 46 $ 843
-----
-----
Less amount representing interest............................................................ (5)
---
Present value of minimum lease payments...................................................... $ 41
---
---
</TABLE>
Expense incurred under non-channel operating lease approximated $11,000 in
1995.
F-81
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The Company and its wholly-owned subsidiary are included in the consolidated
federal tax return of CAI. The Company had no current state or federal income
tax expenses for 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.............................................. $ 1,820 $ 1,787
Tax over book depreciation.................................... 113 80
------ ------
Total deferred tax liabilities.................................. 1,933 1,867
Deferred tax assets:
Net operating loss carryforwards.............................. 1,133 1,477
Other......................................................... 112 9
------ ------
Total deferred tax assets....................................... 1,245 1,486
------ ------
Net deferred tax liabilities.................................... $ 688 $ 381
------ ------
------ ------
</TABLE>
The Company has available net operating loss carryforwards of approximately
$3,693,000 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.
8. 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 Bakersfield market was as
follows (000s):
<TABLE>
<S> <C>
Operating assets................................................... $ 370
Plant and equipment................................................ 6,636
Goodwill........................................................... 8,840
Wireless channel rights............................................ 5,000
Liabilities........................................................ (3,050)
---------
Net assets acquired................................................ $ 17,796
---------
---------
</TABLE>
F-82
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SYSTEM ACQUISITION (CONTINUED)
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.
9. SUBSEQUENT EVENT
On February 23, 1996, CAI Wireless Systems Inc. contributed the Company and
certain other markets owned by CAI to CS Wireless Systems, Inc. (CS) in exchange
for approximately 54% of the outstanding common stock of CS.
F-83
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CAI WIRELESS SYSTEMS, INC.
We have audited the accompanying consolidated balance sheets of ACS
California, Inc. and subsidiary as of September 29, 1995 and December 31, 1994
and the related consolidated statements of operations and accumulated deficit
and cash flows for the period from January 1, 1995 to September 29, 1995 and for
the period from March 11, 1994 (date of inception) to December 31, 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 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 California, Inc. and subsidiary at September 29, 1995 and December 31, 1994,
and the consolidated results of their operations and their cash flows for the
period from January 1, 1995 to September 29, 1995 and for the period from March
11, 1994 (date of inception) to December 31, 1994, in conformity with generally
accepted accounting principles.
/S/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 1, 1996
F-84
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(000S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 169 $ 83
Accounts Receivable:
Trade, less allowance for doubtful accounts of $238
and $12 in 1995 and 1994, respectively........................................ 154 116
Other current assets.............................................................. 48 39
------------- ------------
Total current assets................................................................ 371 238
Plant and equipment, net............................................................ 6,856 5,993
Channel acquisition costs, net...................................................... 450 486
Goodwill, net....................................................................... 8,862 9,400
------------- ------------
$ 16,539 $ 16,117
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of notes payable and capital lease obligations................. $ 42 $ 44
Accounts payable and accrued expenses............................................. 2,486 1,402
Customer deposits and billings received in advance................................ 121 59
------------- ------------
Total current liabilities........................................................... 2,649 1,505
Notes payable and capital lease obligations......................................... 66 94
Due to ACS Enterprises, Inc. ....................................................... 5,570 3,604
Stockholder's equity:
Common stock--par value $1 per share, authorized and issued 1,000 shares.......... 1 1
Additional paid-in capital.......................................................... 12,305 12,305
Accumulated deficit................................................................. (4,052) (1,392)
------------- ------------
Total stockholder's equity.......................................................... 8,254 10,914
------------- ------------
$ 16,539 $ 16,117
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
F-85
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 29, 1995 AND FOR THE PERIOD
FROM
MARCH 11, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
(000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Revenues:
Pay television revenues.................................................................... $ 2,600 $ 1,584
Expenses:
Programming and license fees............................................................... 1,385 724
General and administrative................................................................. 1,239 747
Selling.................................................................................... 157 78
Depreciation and amortization.............................................................. 2,043 1,201
--------- ---------
4,824 2,750
--------- ---------
(2,224) (1,166)
Interest expense, net........................................................................ (436) (226)
--------- ---------
Net loss..................................................................................... $ (2,660) $ (1,392)
Accumulated deficit:
Beginning of period........................................................................ (1,392) --
--------- ---------
End of period.............................................................................. $ (4,052) $ (1,392)
--------- ---------
--------- ---------
Per share data:
Net loss per common share.................................................................... $ (2,660) $ (1,392)
--------- ---------
--------- ---------
Weighted average common shares outstanding................................................... 1,000 1,000
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-86
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 29, 1995 AND FOR THE PERIOD
FROM
MARCH 11, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
(000S)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss..................................................................................... $ (2,660) $ (1,392)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.............................................................. 2,043 1,201
Changes in assets and liabilities:
Accounts receivable...................................................................... (38) (51)
Other operating assets................................................................... (9) 17
Accounts payable and accrued expenses.................................................... 1,084 335
Other operating liabilities.............................................................. 62 59
--------- ---------
Net cash provided by operating activities.................................................... 482 169
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures......................................................................... (2,332) (2,934)
Purchase of channel rights................................................................... -- (338)
--------- ---------
Net cash used in investing activities........................................................ (2,332) (3,272)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of notes payable and capital lease obligations...................................... (30) (554)
Advances from ACS Enterprises, Inc........................................................... 1,966 3,604
Proceeds from note payable................................................................... -- 94
--------- ---------
Net cash provided by financing activities.................................................... 1,936 3,144
--------- ---------
Net increase in cash......................................................................... 86 41
Cash, beginning of period.................................................................... 83 42
--------- ---------
Cash, end of period.......................................................................... $ 169 $ 83
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-87
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
ACS California, Inc. (the "Company") was formed on March 11, 1994 upon the
purchase of a company that operates the wireless cable system serving
Bakersfield, California and the surrounding area and is a wholly owned
subsidiary of ACS Enterprises, Inc. ("ACS"). On September 29, 1995, ACS became a
wholly owned subsidiary of CAI Wireless Systems, Inc. (see Note 9). The
consolidated financial statements include the accounts of ACS California, Inc.
and its wholly owned subsidiary, Valley Wireless Cable, Inc. ("Valley
Wireless"). All material intercompany balances and transactions within ACS
California, 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 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 $165,000 and $76,000 for the period from
January 1, 1995 to September 29, 1995 (1995) and for the period from March 11,
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 reductions were made to these assets in 1995 or 1994.
F-88
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
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>
SEPTEMBER 29, DECEMBER 31, LIFE
CLASSIFICATION 1995 1994 (YEARS)
- -------------------------------------------------- ----------------- ------------- ---------
<S> <C> <C> <C>
Vehicles.......................................... $ 141 $ 141 3
Office and computer............................... 167 95 5
Transmission equipment............................ 1,596 1,568 10
Television and other equipment.................... 6,248 3,571 2 to 7
Materials and supplies............................ 796 1,247 2 to 10
------ ------
8,948 6,622
Less accumulated depreciation..................... (2,092) (629)
------ ------
$ 6,856 $ 5,993
------ ------
------ ------
</TABLE>
Capitalized overhead costs were approximately $267,000 and $227,000 in 1995
and 1994 respectively. Depreciation expense was approximately $1,466,000 and
$602,000 in 1995 and 1994.
3. GOODWILL AND CHANNEL ACQUISITION COSTS
Goodwill consisted of the following (000s):
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 31,
1995 1994
------------- -------------
<S> <C> <C>
Costs of acquired businesses in excess of fair market values
allocated to specific assets.................................. $ 9,621 $ 9,621
Organization costs.............................................. 334 334
------ ------
9,955 9,955
Less accumulated amortization................................... (1,093) (555)
------ ------
$ 8,862 $ 9,400
------ ------
------ ------
</TABLE>
F-89
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. GOODWILL AND CHANNEL ACQUISITION COSTS (CONTINUED)
Channel acquisition costs consisted of the following (000s):
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 31,
1995 1994
--------------- ---------------
<S> <C> <C>
Channel rights.................................................. $ 532 $ 529
Less accumulated amortization................................... (82) (43)
----- -----
$ 450 $ 486
----- -----
----- -----
</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 $428,000 and $222,000 in 1995 and
1994, respectively. The balances at September 29, 1995 and December 31, 1994 of
$5,570,000 and $3,604,000 are classified as a long-term liabilities in the
accompanying consolidated balance sheet because the balances are not expected to
be repaid within the upcoming twelve months.
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 $91,000 and $92,000 in 1995 and 1994, respectively. In
the opinion of management, this method of allocation is reasonable.
5. DEBT
Debt consisted of the following (000s):
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 31,
1995 1994
--------------- ---------------
<S> <C> <C>
Notes payable--vehicles......................................... $ 63 $ 79
Less: current maturities........................................ (24) (22)
--- ---
$ 39 $ 57
--- ---
--- ---
</TABLE>
The notes payable at September 29, 1995 and December 31, 1994 are due to
Ford Motor Credit Corp. for the purchase of five vehicles used for servicing and
installing customers. These notes are due in monthly installments through March
15, 1998 and bear interest at 8.6%.
6. LEASES
The Company is the licensee of nine of the Federal Communications Commission
("FCC") licensed channels available in the Bakersfield area, and leases the
twenty-four remaining FCC licenses.
F-90
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEASES (CONTINUED)
Generally, channel leases provide for monthly rentals based on the number of
subscribers served by the channels being leased, in amounts ranging from $0.025
to $0.05 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
the parties to negotiate renewals in good faith.
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--A4 Cal State Bakersfield December 2001 Good Faith
B1--B4 Kern CC September 2001 Good Faith
C1--C4 Kern HS Distr.--Bakersfield October 2001 Good Faith
D1--D4 Panama-Buena Vista Union School April 2002 Good Faith
Distr.
E1--E4 Haddonfield Wireless Co. July 2001 ACS 5-year option
G1--G4 Kern Cty. Super. of Schools November 2001 Good Faith
</TABLE>
Expense incurred under channel lease agreements aggregated approximately
$93,000 and $48,000 in 1995 and 1994, respectively.
The Bakersfield transmitter tower is owned by the Company and is situated on
a site leased from the City of Bakersfield under a twenty-year lease expiring in
December 2010. The annual lease payment is currently $3,500, and is subject to a
5% annual inflation increase.
All of the above leases are accounted for as operating leases.
The Company leases office space, automobiles, trucks, and office equipment.
The office space, automobiles, 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>
SEPTEMBER 29, DECEMBER 31,
1995 1994
----------------- -----------------
<S> <C> <C>
Office and computer............................................ $ 63 $ 63
Less accumulated amortization.................................. (12) (2)
--- ---
$ 51 $ 61
--- ---
--- ---
</TABLE>
F-91
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 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........................................................................................ 25 114
1997........................................................................................ 21 113
1998........................................................................................ 4 111
1999........................................................................................ -- 111
2000........................................................................................ -- 111
2001 and beyond............................................................................. -- 308
--- -----
Total minimum lease payments................................................................ 50 $ 868
-----
-----
Less amount representing interest........................................................... (5)
--- -----
Present value of minimum lease payments..................................................... $ 45
---
---
</TABLE>
Expense incurred under non-channel operating leases approximated $33,000 and
$26,000 in 1995 and 1994, respectively.
7. INCOME TAXES
The Company and its wholly-owned subsidiary are included in the consolidated
federal tax return of ACS Enterprises, Inc. 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>
SEPTEMBER 29, DECEMBER 31,
1995 1994
-------------- ---------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................... $ 113 $ 50
------- -----
Deferred tax assets:
Net operating loss carryforwards............................. 1,133 312
Other........................................................ 112 58
------- -----
Total deferred tax assets...................................... 1,245 370
Valuation allowance for deferred tax assets.................... (1,132) (320)
------- -----
Net deferred tax liabilities................................... $ -- $ --
------- -----
------- -----
</TABLE>
F-92
<PAGE>
ACS CALIFORNIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The Company has available net operating loss carryforwards of approximately
$2,833,000 for tax reporting purposes to offset future taxable income, the
primary difference from financial reporting losses being the basis difference
for goodwill for financial and tax reporting purposes. The net operating loss
carryforwards expire through 2010.
8. SYSTEM ACQUISITION
On March 11, 1994, ACS purchased all of the outstanding shares of Valley
Wireless, a California corporation that operates the wireless cable system
serving Bakersfield, California and the surrounding area for approximately
$12,300,000 cash. Concurrently, ACS formed ACS California, Inc. as the holding
company of Valley Wireless. The above acquisition has been accounted for using
the purchase method of accounting and, accordingly, the results of this entity
have been consolidated with ACS since March 11, 1994.
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................................................... $ 163
Plant and equipment................................................ 3,584
Goodwill........................................................... 9,621
Other intangibles.................................................. 525
Operating liabilities.............................................. (1,067)
Notes payables..................................................... (520)
---------
Net assets acquired................................................ $ 12,306
---------
---------
</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.
9. 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 Wireless Systems Inc. contributed the Company and
certain other markets owned by CAI to CS Wireless Systems, Inc. (CS) for
approximately 54% of the outstanding common stock of CS.
F-93
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
AMERICAN WIRELESS SYSTEMS, INC.:
We have audited the accompanying balance sheets of AMERICAN WIRELESS
SYSTEMS, INC. (a Delaware corporation) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1993, 1994 and 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 financial statements referred to above present fairly,
in all material respects, the financial position of American Wireless Systems,
Inc. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for the years ended December 31, 1993, 1994 and 1995, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses since inception and
expects to incur additional losses until it is able to generate sufficient
income to cover operating expenses. The Company currently does not have
sufficient cash reserves to cover such anticipated losses. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's current plans are also discussed in Note 1. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Arthur Andersen LLP
Phoenix, Arizona
February 23, 1996
F-94
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 2)................................................ $ 376,621 $ 342,329
Prepaid expenses and other current assets......................................... 186,242 71,230
-------------- --------------
Total current assets...................................................... 562,863 413,559
PROPERTY AND EQUIPMENT, at cost, net (Note 2)..................................... 431,790 205,920
INVESTMENT IN AND ADVANCES TO JOINT VENTURES (Notes 1, 2 and 4)................... 3,436,048 2,985,654
INVESTMENT IN WIRELESS CABLE SYSTEMS (Notes 1, 2 and 4)........................... 2,430,866 3,179,852
LICENSE DEPOSITS AND OTHER ASSETS (Note 2)........................................ 88,333 165,350
-------------- --------------
$ 6,949,900 $ 6,950,335
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 482,342 $ 412,266
Accrued liabilities............................................................. 170,237 242,621
Severance liability, current (Note 6)........................................... 174,826 354,636
Note payable, current........................................................... -- 35,000
-------------- --------------
Total current liabilities................................................. 827,405 1,044,523
Severance liability, long-term (Note 6)......................................... 354,636 --
Note payable, long-term......................................................... -- 1,830,695
-------------- --------------
Total liabilities......................................................... 1,182,041 2,875,218
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 1, 3, 7, 8, 9 and 10): Common stock, $.01 par value,
40,000,000 shares authorized, 5,709,187 shares outstanding in 1994 and 1995..... 57,092 57,092
Additional paid-in capital...................................................... 20,239,069 20,239,069
Accumulated deficit............................................................. (14,528,302) (16,221,044)
-------------- --------------
Total stockholders' equity................................................ 5,767,859 4,075,117
-------------- --------------
$ 6,949,900 $ 6,950,335
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-95
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1996
------------------------------------- TO FEBRUARY 23,
1993 1994 1995 1996
----------- ----------- ----------- -------------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUE:
Management fees...................................... $ -- $ 83,333 $ 100,000 $ 15,000
----------- ----------- ----------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation......................................... 1,502,006 1,920,002 767,889 130,810
Outside services..................................... 476,008 1,111,104 552,449 104,218
Other................................................ 780,920 1,127,356 885,472 102,666
----------- ----------- ----------- ----------
Total expenses................................. 2,758,934 4,158,462 2,205,810 337,694
----------- ----------- ----------- ----------
LOSS FROM OPERATIONS................................... (2,758,934) (4,075,129) (2,105,810) (322,694)
----------- ----------- ----------- ----------
LOSS FROM OPERATIONS OF JOINT
VENTURES............................................. (184,906) (200,436) (188,381) (38,516)
----------- ----------- ----------- ----------
OTHER INCOME (EXPENSE), net
Interest expense..................................... (775,525) (976,867) (161,324) (12,101)
Exclusivity fees (Notes 1 and 9)..................... -- -- 210,000 --
Gain on sale of wireless cable television assets
(Notes 1 and 4).................................... -- -- 748,851 --
Other (Note 7)....................................... 69,205 (474,348) (196,078) (1,693)
----------- ----------- ----------- ----------
(706,320) (1,451,215) 601,449 (13,794)
----------- ----------- ----------- ----------
NET LOSS............................................... $(3,650,160) $(5,726,780) $(1,692,742) $(375,004)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
NET LOSS PER SHARE..................................... $ (1.16) $ (1.26) $ (.30) $ (.07)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING.................... 3,159,397 4,540,362 5,709,187 5,709,187
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-96
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 23, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
---------- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........................ 3,118,666 $ 31,187 $ 7,766,470 $ (5,151,362) $ 2,646,295
Private placements of common stock, net of
offering costs of $361,123 (Note 1)........... 346,666 3,466 2,547,411 -- 2,550,877
Redemption of common stock owned by Wireless
California (Note 3)........................... (258,333) (2,583) (2,167,417) -- (2,170,000)
Contribution of income tax receivable (Note
10)........................................... -- -- 401,316 -- 401,316
Conversion of notes............................. 126,509 1,265 973,982 -- 975,247
Common stock issued............................. 13,333 133 149,867 -- 150,000
Net loss........................................ -- -- -- (3,650,160) (3,650,160)
---------- ----------- ------------- -------------- -------------
BALANCE, December 31, 1993........................ 3,346,841 33,468 9,671,629 (8,801,522) 903,575
Private placements of common stock, net of
offering costs of $48,990 (Note 1)............ 240,000 2,400 1,964,610 -- 1,967,010
Conversion of notes............................. 2,105,679 21,057 8,542,356 -- 8,563,413
Exercise of common stock warrants at $3.75...... 667 7 2,493 -- 2,500
Exercise of common stock warrants at $3.00...... 13,333 133 39,867 -- 40,000
Common stock issued............................. 2,667 27 29,973 -- 30,000
Contribution of income tax receivable (Note
10)........................................... -- -- (11,859) -- (11,859)
Net loss........................................ -- -- -- (5,726,780) (5,726,780)
---------- ----------- ------------- -------------- -------------
BALANCE, December 31, 1994........................ 5,709,187 57,092 20,239,069 (14,528,302) 5,767,859
Net loss........................................ -- -- -- (1,692,742) (1,692,742)
---------- ----------- ------------- -------------- -------------
BALANCE, December 31, 1995........................ 5,709,187 $ 57,092 $ 20,239,069 $ (16,221,044) $ 4,075,117
---------- ----------- ------------- -------------- -------------
Net loss (unaudited)............................ -- -- -- (375,004) (375,004)
---------- ----------- ------------- -------------- -------------
BALANCE, February 23, 1996 (unaudited)............ 5,709,187 $ 57,092 $ 20,239,069 $ (16,596,048) $ 3,700,113
---------- ----------- ------------- -------------- -------------
---------- ----------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-97
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996
---------------------------------------- TO FEBRUARY 23,
1993 1994 1995 1996
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss................................................. $ (3,650,160) $ (5,726,780) $ (1,692,742) $ (375,004)
Adjustments to reconcile net loss to cash used for
operating activities:
Depreciation and amortization........................ 442,933 637,049 83,100 11,364
Loss on disposal of assets........................... 16,136 55,043 205,444 --
Gain on sale of wireless cable television assets..... -- -- (748,851) --
Loss from operations of joint ventures............... 184,906 200,436 188,381 38,516
Repricing of common stock warrants (Note 7).......... -- 425,000 -- --
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other
assets............................................. (198,332) 438,793 115,012 36,394
Increase in accounts payable and accrued
liabilities........................................ 530,142 232,831 2,308 292,665
Increase(decrease) in severance liability............ -- 529,462 (174,826) --
------------ ------------ ------------ ---------------
Net cash used for operating activities........... (2,674,375) (3,208,166) (2,022,174) 3,935
------------ ------------ ------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.................... (77,055) (287,291) (43,308) --
Investment in wireless cable systems..................... (755,271) (3,820,312) (932,488) (215,726)
Purchases of marketable securities....................... (2,318,252) -- -- --
Proceeds from sale of wireless cable television assets... -- -- 1,250,000 --
Proceeds from sales of marketable securities............. -- 2,438,604 -- --
Deposits made on license acquisitions.................... (69,122) -- (77,017) --
------------ ------------ ------------ ---------------
Net cash (used for) provided by investing
activities..................................... (3,219,700) (1,668,999) 197,187 (215,726)
------------ ------------ ------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes payable...... 8,736,000 -- -- --
Proceeds from issuance of notes payable.................. -- -- 2,800,000 --
Proceeds from sale of common stock....................... 2,550,877 2,009,511 -- --
Redemption of common stock............................... (2,170,000) -- -- --
Deferred debt issuance costs............................. (1,083,371) -- -- --
Cash received from affiliates............................ 525,000 -- -- --
Payment of notes payable................................. -- -- (1,009,305) (7,148)
------------ ------------ ------------ ---------------
Net cash provided by financing activities........ 8,558,506 2,009,511 1,790,695 (7,148)
------------ ------------ ------------ ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 2,664,431 (2,867,654) (34,292) (218,939)
CASH AND CASH EQUIVALENTS, beginning of year............... 579,844 3,244,275 376,621 342,329
------------ ------------ ------------ ---------------
CASH AND CASH EQUIVALENTS, end of year..................... $ 3,244,275 $ 76,621 $ 342,329 $ 123,390
------------ ------------ ------------ ---------------
------------ ------------ ------------ ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest................... $ -- $ 351,510 $ 186,221 $ --
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS: During 1993 and
1994, respectively, 126,509 and 2,105,679 shares of the Company's common stock
were issued pursuant to the conversion of $975,247 and $8,563,413 in principal
amount of convertible notes payable plus accrued interest.
------------
The accompanying notes are an integral part of these statements.
F-98
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) BACKGROUND, ORGANIZATION AND OPERATIONS:
BACKGROUND AND ORGANIZATION
American Wireless Systems, Inc. (the "Company") was originally incorporated
in Minnesota in 1988 as Short Takes, Inc. The Company ceased its prior business
activities in April 1991, at which time the Company began searching for a
suitable business for acquisition or merger. Its sole asset was cash of $669,000
on December 17, 1992, when it acquired certain operating assets and liabilities
of AWS, Inc. (formerly American Wireless Systems, Inc.), a California
corporation ("Wireless California") in exchange for 2,572,000 shares of common
stock which represented 82.5% of the outstanding common stock of the Company.
For accounting purposes, this transaction has been treated as an issuance of
common stock for cash by Wireless California (the reverse acquisition). See Note
3 for additional discussion of this transaction.
In April 1993, the stockholders approved changing the Company's name from
Short Takes, Inc. to American Wireless Systems, Inc. In addition, the Company
was reincorporated in the State of Delaware and declared a reverse stock split
of 1-for-2.5. On October 18, 1994, the stockholders of the Company approved a
reverse stock split of 1-for-3. The accompanying financial statements have been
retroactively restated to reflect these reverse stock splits.
OPERATIONS
The Company currently owns an interest in and manages the operations of
wireless cable television systems in Minneapolis, Minnesota and Fort Worth,
Texas and holds an interest in or owns the rights to certain wireless cable
television channels in Los Angeles, Dallas, Memphis and formerly Pittsburgh.
Wireless cable is an emerging business that provides television programming to
subscribers by transmitting a signal via microwave frequencies licensed by the
Federal Communications Commission ("FCC") to antennae located at the
subscriber's premises.
The Company's wireless cable systems are all in either the initial
development stage or in the early operating stage; therefore, significant
additional investment will be required to develop those systems to a level which
will provide positive cash flow.
During 1993 and 1994, the Company raised an aggregate of approximately
$13,664,000, including $8,736,000 of convertible subordinated notes (the
"Notes") through three private placements of common stock and notes. The Notes
matured July 15, 1994, and have been converted into shares of the Company's
common stock (see Note 7).
In April 1994, the Company filed a Registration Statement on Form SB-2 in
connection with a proposed public offering, which was amended to include the
offer and sale of 2,500,000 units, each unit consisting of two shares of common
stock and one warrant to purchase one share of common stock. For a variety of
reasons, the Company elected not to proceed with the proposed offering.
Since January 1995, the Company has been pursuing various financing options
which culminated in the signing of an Agreement Of Merger with Heartland
Wireless Communications, Inc. ("Heartland") on September 11, 1995 (the "Merger
Agreement"). The Merger Agreement provides for the Company's stockholders to
exchange their stock in the Company for stock in Heartland. The Merger with
Heartland will give the Company's stockholders $34,000,000 in Heartland common
stock, of which $30,750,000 will be distributed immediately and $3,250,000 will
be held in escrow for one year to indemnify Heartland for potential liabilities
(Note 9). The conversion ratio into Heartland common stock will be the trading
price
F-99
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(1) BACKGROUND, ORGANIZATION AND OPERATIONS: (CONTINUED)
of Heartland stock based on the average closing price for the 10 trading days
ending on the fifth day before consummation of the Merger, provided Heartland's
trading price is at least $20 per share and not greater than $26 per share. If
Heartland's trading price is below $20 per share, the exchange price will be $20
per share; if the trading price is above $26 per share, the exchange price will
be $26 per share.
In February and April 1995, the Company obtained loans totaling $1,000,000
from a shareholder of the Company. These loans carried an interest rate of 15%
per annum, were secured by various assets of the Company and were paid off in
September 1995.
In connection with the Merger Agreement, the Company received a $200,000
nonrefundable deposit as consideration for a nonsolicitation covenant contained
in the Merger Agreement ("exclusivity fees") and a loan for $1,800,000 (the "AWS
loan"). The promissory note, dated May 26, 1995 and amended August 17, 1995, is
due 12 months after the Heartland Merger Agreement is consummated or abandoned,
carries an interest rate of 2% above the prime rate with interest payable
quarterly, and is secured by a security interest in the Company's wireless
channel rights in the Dallas market. The Merger Agreement provides that
specified amounts are to be periodically offset against the AWS loan as
additional consideration for the nonsolicitation covenant contained in the
Merger Agreement. As of December 31, 1995, the AWS loan has been reduced by
$800,000 pursuant to the provisions of the Merger Agreement. However, due to
certain contingencies, no amounts have been recognized as income in the
accompanying statement of operations in accordance with Statement of Financial
Accounting Standards No. 5, ACCOUNTING FOR CONTINGENCIES, (SFAS No. 5) (Note 9).
On September 29, 1995, the Company sold its assets in the Pittsburgh market
for $1,250,000 in cash.
The Company is currently negotiating to sell its assets in the Memphis
market for $3,900,000. The Company is involved in litigation with the same
company that has offered to purchase this market. According to the proposed
agreement, at the time of closing of this transaction, all litigation between
the two parties will be withdrawn and all claims will be waived (Note 9).
(2) SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements reflect the application of the
following accounting policies:
CASH EQUIVALENTS
The Company considers all highly liquid investments and time deposits with
an initial maturity of three months or less to be cash equivalents.
DEBT ISSUANCE COSTS
The costs associated with the issuance of debt are deferred and amortized
over the life of the respective debt using the effective interest rate method.
Amortization of debt issuance costs for the years ended December 31, 1993 and
1994, was approximately $405,000 and $592,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment represent corporate furniture and equipment unrelated
to the wireless cable television systems. Property and equipment are recorded at
cost and are depreciated using the straight-line method over the estimated
useful lives of the related assets.
F-100
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
DEPRECIABLE
LIFE (YEARS) 1994 1995
--------------- ----------- -----------
<S> <C> <C> <C>
Computer equipment................................. 5 $ 112,083 $ 105,072
Furniture and fixtures............................. 7 58,093 26,369
Office and other equipment......................... 5-7 384,782 213,507
----------- -----------
554,958 344,948
Less- Accumulated depreciation..................... (123,168) (139,028)
----------- -----------
$ 431,790 $ 205,920
----------- -----------
----------- -----------
</TABLE>
INVESTMENT IN JOINT VENTURES
The Company accounts for its investments in joint ventures under the equity
method of accounting.
INVESTMENT IN WIRELESS CABLE SYSTEMS
Investment in wireless cable systems consists principally of payments for
channel rights which are amortized over their estimated useful life once placed
in service.
LICENSE DEPOSITS
License deposits represent deposits made under agreements to acquire FCC
frequency rights.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES.
NET LOSS PER SHARE
The calculation of net loss per share is based on the weighted average
number of shares outstanding. Common stock equivalents are not considered as
their effect would be anti-dilutive.
UNAUDITED INFORMATION
The unaudited financial information as of February 23, 1996 and for the
period from January 1, 1996 to February 23, 1996 have been prepared without
audit. The information furnished herein reflects, in the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
fairly state the financial position and results of operations for such period.
(3) THE REVERSE ACQUISITION:
Wireless California, the predecessor to certain of the Company's wireless
cable operations, was incorporated in April 1991 to acquire and subsequently
sell or develop wireless cable systems in various markets in the United States.
In accordance with the terms of the asset purchase agreement between Wireless
California and the Company, only the assets and liabilities related solely to
the Wireless California wireless cable systems development and operations were
acquired by the Company. The
F-101
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(3) THE REVERSE ACQUISITION: (CONTINUED)
transaction specifically excluded any assets or liabilities related to Wireless
California's activities in selling its interests in the wireless cable systems
(see Note 9).
Subsequent to the reverse acquisition, Wireless California began to wind
down its affairs until, on August 30, 1993, its remaining net assets (consisting
primarily of common stock of the Company) were distributed to its shareholders
who then contributed such assets, except for the common stock of the Company, to
a limited liability corporation, AWS Liquidating, L.L.C. ("AWS LLC").
In connection with its private placements in 1993, the Company redeemed
138,333 shares of common stock owned by Wireless California and 120,000 shares
of common stock of the Company owned by the shareholders of Wireless California.
The redemption price of $8.40 per share was equal to the offering price in the
private placements. A substantial amount of the proceeds were used to discharge
the remaining obligations of Wireless California (Note 5).
(4) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND WIRELESS CABLE
SYSTEMS:
Investments in and advances to joint ventures and wireless cable systems
represent the historical costs incurred to develop the wireless cable systems,
including the acquisition of the FCC frequency rights and the head-end
transmission equipment and consists of the following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Jointly Owned Systems:
Minneapolis/St. Paul, Minnesota..................................................... $ 436,446 $ 308,233
Advances to Minneapolis/St. Paul, Minnesota......................................... 2,050,882 2,101,203
Ft. Worth, Texas.................................................................... 243,054 182,888
Advances to Ft. Worth, Texas........................................................ 253,177 393,330
Pittsburgh, Pennsylvania............................................................ 452,489 --
------------ ------------
$ 3,436,048 $ 2,985,654
------------ ------------
------------ ------------
Wholly-Owned Systems:
Los Angeles, California............................................................. $ 972,653 $ 1,645,274
Memphis, Tennessee.................................................................. 733,153 819,263
Dallas, Texas....................................................................... 725,060 715,315
------------ ------------
$ 2,430,866 $ 3,179,852
------------ ------------
------------ ------------
</TABLE>
JOINTLY OWNED SYSTEMS
The Company currently owns an equity interest in operating wireless cable
systems in Minneapolis, Minnesota (AWS-Minneapolis) (25% interest) and Ft.
Worth, Texas (AWS-Ft. Worth) (20% interest) and formerly owned an equity
interest in a wireless cable system under development in Pittsburgh,
Pennsylvania (25% interest).
The Minneapolis system has been in operation since March 1993. The Company's
joint venture partner is a general partnership which was formed to acquire an
interest in and jointly develop and operate the Minneapolis wireless cable
system. In accordance with the terms of the joint venture agreement, losses
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<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(4) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND WIRELESS CABLE
SYSTEMS: (CONTINUED)
are to be allocated in accordance with contributed capital and profits are to be
allocated (i) in accordance with contributed capital to the extent of previously
allocated losses and then (ii) 25% to the Company and 75% to the general
partnership.
In April 1994, the Company loaned the Minneapolis general partnership
$2,000,000 to fund additional development of the system. The loan bears interest
at 8% per annum and was originally payable in full in 18 months. Prior to the
due date, the Company agreed to extend the maturity of the loan until the
earlier of (i) February 28, 1996 or (ii) the abandonment of the Heartland Merger
Agreement. In the event that the loan is not repaid by the due date, the Company
will receive an additional equity interest in the Minneapolis joint venture of
approximately 10%.
AWS-Minneapolis received additional funding in May 1995 of $550,000 from
Tsunami Capital Corporation (Tsunami). The loan was made by Tsunami in
anticipation of a reverse merger between AWS-Minneapolis and Tsunami. The loan
was paid in October 1995.
The Minneapolis system does not have enough subscribers to provide positive
cash flow. Additionally, neither the joint venture nor the Minneapolis
Partnership has sufficient funds to support the installation of additional
subscribers to enable the joint venture to reach positive cash flow.
On October 4, 1995, the Company's joint venture partner signed a contract to
sell its 75% interest in AWS-Minneapolis to Heartland (the "Minneapolis
Agreement") (Note 11). As part of the Minneapolis Agreement, Heartland agreed to
loan AWS-Minneapolis up to $1,575,000, of which $575,000 was used to repay
Tsunami and the remainder can be used to fund subscriber growth.
The Ft. Worth system has been in operation since November 1992. The
Company's joint venture partner is a general partnership which was formed to
acquire an interest in and jointly develop and operate the Ft. Worth wireless
cable system. The Ft. Worth system has been operated through an informal joint
venture agreement. The accompanying financial statements include an estimate of
the Company's PRO RATA losses in this system.
AWS-Ft. Worth does not have sufficient funds to continue development of the
system. The Company's joint venture partner also does not have funds to
contribute to the joint venture and has expressed its belief that either
Wireless California or the Company is obligated to provide additional funds to
develop the system to a positive cash flow position. Neither Wireless California
nor the Company believes it has such an obligation; however, the Company is
negotiating the terms of additional funding to continue development of the
system in conjunction with definitive joint venture and management agreements.
In order to protect the Company's interest in the assets of AWS-Ft. Worth, the
Company has advanced $393,330 through December 31, 1995, to fund negative cash
flow of the system and maintain the current subscriber base.
On October 4, 1995, the Company's joint venture partner in AWS-Ft. Worth
signed a contract with Heartland to sell its 80% interest in AWS-Ft. Worth (the
Fort Worth Agreement). Pursuant to the Fort Worth Agreement, Heartland has
agreed to assume up to $570,000 of amounts due to the Company. Additionally,
Heartland has agreed to loan the Ft. Worth partnership $500,000 secured by its
interest in AWS-Ft. Worth (Note 11).
The Pittsburgh system is still in its initial development stage. On
September 29, 1995, the Company sold all of its interest in the assets of the
Pittsburgh market for $1,250,000 in cash.
F-103
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(4) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND WIRELESS CABLE
SYSTEMS: (CONTINUED)
Selected combined balance sheet data related to the Company's jointly owned
operating systems is as follows as of December 31 (in 000's):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Current assets............................................................. $ 402 $ 470
Total assets............................................................... 10,846 9,388
Total liabilities.......................................................... 790 2,201
Members equity............................................................. 10,056 7,187
AWS' interest.............................................................. 525 335
</TABLE>
Selected combined operating data related to the Company's jointly owned
operating systems is as follows for the years ended December 31 (in 000's):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues.................................................. $ 1,064 $ 1,187 $ 1,577
Operating expenses........................................ (3,814) (4,363) (4,830)
--------- --------- ---------
Net loss.................................................. $ (2,750) $ (3,176) $ (3,253)
--------- --------- ---------
AWS' interest............................................. $ (185) $ (200) $ (188)
--------- --------- ---------
--------- --------- ---------
</TABLE>
WHOLLY-OWNED SYSTEMS
The Company's investment in wholly owned systems consists primarily of the
costs to acquire the rights to FCC licenses in Dallas (16), Los Angeles (9) and
Memphis (22). The lease agreements provide for the Company to pay for the excess
airtime use, new transmission equipment and all other operating expenses of the
channels including co-location costs.
The Company is currently negotiating a contract to sell its assets in the
Memphis market for $3,900,000 to TruVision Cable, Inc. ("TruVision") (Note 9).
(5) RELATED PARTIES:
WIRELESS CALIFORNIA
Since the reverse acquisition on December 17, 1992, the Company has entered
into certain transactions with Wireless California, including the redemption of
258,333 shares of common stock owned by Wireless California and the shareholders
of Wireless California (see Note 3), certain transactions related to income
taxes (see Note 10), the purchase of additional FCC licenses not covered by the
original acquisition agreement for $80,000 and the payment of certain lease
expenses related to the Pittsburgh wireless cable system. In 1994, the Company
advanced $35,000 to pay administrative penalties assessed Wireless California by
the State of Arizona (see Note 9). The members of AWS L.L.C. reimbursed the
Company $35,000 in February 1996 after the sale of the escrowed shares (see Note
8). All transactions with Wireless California subsequent to August 1993 have
been approved by a majority of the independent directors of the Company.
F-104
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(5) RELATED PARTIES: (CONTINUED)
AWS-FT. WORTH AND AWS-MINNEAPOLIS
The Company serves as the manager and operator of the Minneapolis joint
venture. The terms of the Management Agreement which was signed in April 1994,
provide for annual management service fees equal to the greater of 5% of
collected gross revenues or $100,000.
The Company also serves as the manager to the Ft. Worth joint venture
although no formal management agreement exists. No management service fees have
been accrued relative to the Ft. Worth system.
In its capacity as manager, the Company contracted for subscriber
installation services and subscriber equipment on behalf of AWS-Ft. Worth and
AWS-Minneapolis to Wireless Technologies, Inc. ("WTI"), a Texas corporation
engaged in the business of providing subscriber installation services and
distributing subscriber equipment with respect to traditional and wireless cable
systems. WTI is a wholly owned subsidiary of North American Cable Corporation
("NACC"), a Texas corporation engaged in the engineering, construction and
maintenance of cable television systems, local area networks, fiber optic
networks and wireless cable television systems, with operations and business
experience in the United States, England and several other countries around the
world. A former officer and director of the Company beneficially owns 50% of the
stock of North American Cable Corporation.
WTI purchased certain of the subscriber equipment that it sold to AWS-Ft.
Worth and AWS-Minneapolis from Micom Products, Ltd., a Delaware limited
liability company engaged in the distribution of subscriber equipment for
wireless cable systems. Micom is owned by the beneficial owners of approximately
32% of the Company's common stock.
In 1993 and 1994, payments were made by the Company, Wireless California and
the joint ventures to WTI of $924,054 and $74,449, respectively, for
installation services and related subscriber equipment. In 1993 and 1994,
payments were made by WTI to Micom of $114,644 and $2,766, respectively, for
subscriber equipment. No payments were made by the Company or the joint ventures
to WTI during 1995.
AMERICAN WIRELESS SYSTEMS, INC.
In connection with the acquisition of the rights to utilize the FCC licenses
in Los Angeles (Note 4), the Company agreed to pay a finder's fee of $75,000 to
the president of NACC as consideration for the introduction of the Company to
the license holder of the eight channels.
In February and April 1995, the Company obtained loans totaling $1,000,000
from a shareholder of the Company who is a principal in the firm which served as
the placement agent for the Company's private offerings in 1993 and 1994 (Note
1). In addition, this individual and certain other related entities are
shareholders of the Company's common stock.
(6) SEVERANCE LIABILITY:
Effective August 1994, an individual who held the position of Chairman of
the Board, President and Chief Financial Officer resigned. In connection with
such resignation, this individual entered into a severance agreement with the
Company, whereby the Company agreed to pay this individual his annual base
salary, as provided by the terms of his employment agreement, a bonus, if any,
consistent with the bonuses awarded to certain other officers and certain other
expenses for a period of three years. As a
F-105
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(6) SEVERANCE LIABILITY: (CONTINUED)
result, the Company recognized approximately $566,000 of expense in the third
quarter of 1994. Upon the consummation of the merger with Heartland (Note 1),
the unpaid portion becomes due and payable in full.
In September 1994, this individual resigned as a director of the Company. In
connection with such resignation, the Company granted this individual a warrant
to acquire 33,333 shares of common stock at $8.40 per share. This warrant was
granted on October 1, 1994, has a ten-year term and became fully exercisable on
April 1, 1994.
(7) CONVERTIBLE SUBORDINATED NOTES PAYABLE:
At December 31, 1993, the Company had $7,707,000 in convertible subordinated
notes ("Notes") outstanding. Through May 1994, $462,000 in principal amount of
the Notes had been converted into shares of the Company's common stock. The
remaining $7,245,000 in Notes were called for prepayment by the Company in May
1994. Holders of $4,232,000 in principal amount of the Notes elected to receive
cash payment for their investment as opposed to converting their Notes into
shares of the Company's common stock. Because the Company did not anticipate the
relatively high level of repayment, the Company did not have adequate funds
available to pay all of the Noteholders who elected repayment. In accordance
with the terms of the Notes, the conversion price of the Notes was adjusted from
$8.40 per share to $3.75 per share. Following the redemption date, the Company
agreed to permit all of the Noteholders, including the Noteholders that had
elected repayment, to elect repayment or to convert their Notes into shares of
the Company's common stock at the adjusted conversion price of $3.75 per share.
Holders of all but $703,500 in principal amount of the Notes agreed to convert
their Notes into shares of the Company's common stock at $3.75 per share. The
placement agent for the Notes arranged for the holders of the remaining $703,500
in principal amount of the Notes to sell their Notes to certain accredited
investors who converted such Notes into shares of common stock at $3.75 per
share by September 30, 1994.
As consideration for services rendered in connection with the conversion of
the Notes, the Company agreed to adjust the exercise price of existing warrants
held by certain affiliates of the placement agent to acquire 169,333 shares of
common stock. As a result, the Company recognized other expense of approximately
$425,000 in the third quarter of 1994.
In connection with the issuance of the Notes in 1993, the Company also
granted contingent warrants (see Note 8).
F-106
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY:
OUTSTANDING WARRANTS
As of December 31, 1995, the Company had outstanding warrants as follows:
<TABLE>
<S> <C>
Warrants to acquire common stock assumed in the reverse acquisition; exercisable at
$10.08 through November 1996..................................................... 27,066
Warrants to acquire common stock issued to the placement agent in connection with
the 1993 private placements; exercisable at $3.75 through August and November
1998............................................................................. 138,666
Contingent warrants to acquire common stock issued to the Noteholders in connection
with the 1993 private placements; exercisable at $12.00 through July 1996........ 330,833
Warrants to acquire common stock issued to a third party for services provided to
the Company; exercisable at $6.75 through August 2004............................ 8,333
Warrants to acquire common stock issued to a private investor; exercisable at
$12.00 through July 1996......................................................... 60,000
Warrants to acquire common stock issued to a former officer and director of the
Company in connection with a severance agreement; exercisable at $8.40 through
September 2004................................................................... 33,333
</TABLE>
ESCROWED SHARES
Approximately 1.88 million shares of the Company's outstanding common stock,
which were owned by the former owners of Wireless California, were released from
escrow in February 1995. The shares were pledged by the former shareholders to
secure the indemnification of the Company by Wireless California for potential
losses incurred from claims arising out of the prior offerings of general
partnership interests by Wireless California (see Note 9). In December 1994, the
Company made a $35,000 claim on the escrowed shares for an advance to Wireless
California (see Note 5) which was paid in February 1996. All but 50,000 shares
were released from escrow and distributed to the members of AWS L.L.C. in
February 1995. The remaining 50,000 shares have been retained to potentially
fund a claim made by the Company which is currently being disputed by AWS L.L.C.
The shares will remain in escrow until the dispute is resolved. No other claims
were made on the escrowed shares.
STOCK OPTION PLAN
In April 1993, the Company adopted the 1993 Stock Option Plan (the "Plan")
which reserved 416,666 shares of common stock to be issued to officers,
directors, key employees and independent consultants who provide valuable
services to the Company. The terms of the options are to be established by the
Board of Directors on the date of grant.
F-107
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY: (CONTINUED)
Activity in the Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
----------- --------------
<S> <C> <C>
Options outstanding at December 31, 1993....................... 151,666 $ 6.75-$15.75
Granted...................................................... 25,000 $ 15.75
Canceled..................................................... (13,333) $ 6.75-$15.75
-----------
Options outstanding at December 31, 1994....................... 163,333 $ 6.75-$15.75
Canceled..................................................... (48,338) $ 6.75-$8.40
-----------
Options outstanding at December 31, 1995....................... 114,995 $ 6.75-$15.75
-----------
-----------
Options available for grant.................................... 301,671
-----------
-----------
Exercisable at end of year..................................... 103,746
-----------
-----------
</TABLE>
Prior to the completion of the merger with Heartland, the Company intends to
terminate the Plan.
(9) COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases office space, equipment and licenses under various
operating leases. Future obligations under these leases are as follows for years
ending December 31:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
1996............................................................................ $ 370,000
1997............................................................................ 366,000
1998............................................................................ 344,000
1999............................................................................ 48,000
2000............................................................................ 48,000
Thereafter...................................................................... 24,000
------------
$ 1,200,000
------------
------------
</TABLE>
PRIOR OFFERINGS OF GENERAL PARTNERSHIP INTERESTS BY WIRELESS CALIFORNIA
Prior to the sale of certain assets by Wireless California to the Company,
approximately $29,000,000 was raised in connection with the offering of general
partnership interests in three general partnerships, each of which was formed
for the purpose of acquiring an interest in the rights to develop and operate a
wireless cable television system in Ft. Worth, Minneapolis and Pittsburgh.
Through an affiliate, Wireless California participated in the offer and sale of
the general partnership interests without registration under any federal or
state securities laws based on the belief that the general partnership interests
did not constitute securities under federal and applicable state laws. Certain
current and former officers and directors of the Company were formerly officers
and directors of Wireless California.
Following an investigation by the Securities and Exchange Commission (the
"Commission") involving the activities of Wireless California in connection with
the offer and sale of the general partnership interests as described above, the
Company and certain of its current and former officers, without admitting
F-108
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
or denying any wrongdoing, agreed to consent to an order of the Commission to
cease and desist from committing or causing any violation and any future
violations of the securities registration provisions of the 1933 Act and the
broker-dealer registration provisions of the Exchange Act.
Securities administrators in 22 states also have conducted or are presently
conducting investigations of the activities related to the unregistered sale of
the general partnership interests described above. The actions taken by the
various state securities administrators range from no action taken to the
issuance of 15 cease and desist orders and consent orders pursuant to which
Wireless California, the issuing general partnerships, and certain officers of
Wireless California were required to cease selling general partnership interests
without registration, to offer rescission to individuals who purchased general
partnership interests and, in certain cases, to pay administrative penalties. In
addition, AWS L.L.C. has entered into a consent order with the State of Illinois
pursuant to which AWS L.L.C. agreed to cease and desist from selling general
partnership interests without registration, to pay an administrative penalty,
and to cause a rescission offer to be made to Illinois residents. Following an
investigation by the State of Arizona, AWS L.L.C. and current and former
officers of the Company consented to an order of the Arizona Corporation
Commission to cease and desist from selling securities unless the sale is
registered or exempt from registration and to the imposition of an
administrative penalty against AWS L.L.C. The Company also consented to a
separate order that requires the Company to make an offer of rescission to all
general partners who are Arizona residents or who were offered and sold their
interests from Arizona. To the knowledge of the Company, there are no other
active federal or state regulatory proceedings or investigations.
The Company is currently attempting to amend the Arizona order to provide
for alternatives to rescission, although there can be no assurance that the
Company will be successful in this regard. The Arizona order currently provides
that if the rescission offers are not made, the Company will be required to pay
to the Arizona Corporation Commission an amount equal to the amount of the
investment made by all general partners who are Arizona residents, or
approximately $566,000, plus interest from the time of investment. There can be
no assurance that the Company will be able to satisfy the Arizona rescission
order.
Since October 31, 1992, Wireless California, the general partnerships and
the current and former officers of the Company have ceased all activities
involving the offer and sale of general partnership interests, although one of
the general partnerships continued to raise funds through capital calls to
existing general partners after such date. In addition to the rescission offer
described above, Wireless California and the general partnership issuers
voluntarily elected to offer to purchase the general partnership interests of
certain general partners in exchange for cash in an amount equal to the funds
contributed by such general partners. As of December 31, 1995, approximately
1,170 of the approximately 1,930 purchasers of general partnership interests had
been offered rescission or a return of their investment by Wireless California
or the general partnership issuers and approximately 80 had accepted the offer,
all of which have been paid. None of such offers, however, were necessarily
conducted in accordance with the statutory requirements of the various states.
To the extent such requirements were not met, potential securities liability
arising from the offer and sale of the general partnership interests will not be
statutorily eliminated until the statutes of limitation with respect to such
claims have expired or an offer is made in accordance with the statutory
rescission requirements of any state.
In September 1995, AWS and the Pittsburgh general partnership sold all of
their wireless cable assets in the Pittsburgh market to a publicly held wireless
cable company. As consideration for the sale of its
F-109
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
assets in the Pittsburgh market, the Pittsburgh general partnership received
approximately $11,250,000 in cash and short-term notes, which amount exceeded
the aggregate amount that would have been required if all Pittsburgh general
partners were offered and accepted rescission.
There can be no assurance that current general partners or any governmental
agency will not institute proceedings against Wireless California or the Company
as the successor to Wireless California based on a failure to register the
general partnership interests in connection with a public offering or for
damages based on alleged omissions or misrepresentations of material information
in connection with the sale of such interests. In connection with the
acquisition of certain assets of Wireless California, the Company expressly
disclaimed any liabilities of Wireless California arising out of the offer and
sale of the general partnership interests described above. There is a
possibility, however, that a successful claim against Wireless California could
be asserted against the Company based on a number of theories involving
successor liability. The institution of legal action against the Company arising
out of the offer and sale of general partnership interests by Wireless
California could result in substantial defense costs to the Company and the
diversion of efforts by the Company's management, and the imposition of
liabilities which could have a material adverse effect on the Company. Based on
its experience to date, however, taking into account the status of
investigations by various state securities administrators, the absence of any
asserted claim for rescission having been instituted by any of the general
partners against any of the general partnerships, Wireless California or the
Company, the Company's assessment of the current value of the general
partnership interests, the relatively small number of general partners who have
accepted previous offers by Wireless California or its shareholders to purchase
general partnership interests, the existence of a number of possible defenses to
any claims asserted against it, the existence and terms of the agreements
between the Fort Worth and Minneapolis general partnerships and Heartland (Note
4) and other factors, the Company does not believe the ultimate resolution of
this matter will have a material impact on its financial condition or its
results of operations.
GAIN CONTINGENCY
As discussed in Note 1, the Merger Agreement provides that specified amounts
are to be periodically offset against the AWS loan as additional consideration
for the nonsolicitation covenant contained in the Merger Agreement. As of
December 31, 1995, the AWS loan has been reduced by $800,000 pursuant to the
provisions of the Merger Agreement. However, due to certain contingencies, no
amounts have been recognized as income in the accompanying statement of
operations in accordance with SFAS No. 5.
OTHER CONTINGENCIES
On May 16, 1995, William R. Jenkins, the former Chief Executive Officer of
the Company, filed a lawsuit in Arizona state court alleging breach of his
employment contract and requesting as damages all amounts due under the
employment contract, treble damages under the Arizona statute, attorney's fees
and costs. Subsequent to December 31, 1995, the Company paid Mr. Jenkins
$120,000 to settle this lawsuit. This amount is included in accrued liabilities
and other expense in the accompanying financial statements.
On June 21, 1995, TruVision, with whom the Company had entered into a letter
of intent relating to the sale of the Company's Memphis assets, filed a lawsuit,
as amended on June 29, 1995, in the state of Mississippi alleging that the
Company breached the letter of intent, that the parties entered into a binding
agreement which was breached, and that the Company committed fraud and negligent
misrepresentation. The Company disputes these claims based on the position that
it lawfully terminated the letter of intent.
F-110
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Amended Complaint requests damages in the amount of $28,196,642 and punitive
damages in the amount of $20,000,000, together with interest and all costs of
court. The Company believes it has adequate grounds to successfully defend this
lawsuit. The Company is currently negotiating with TruVision to sell its assets
in the Memphis market under a new contract. According to the terms of the new
contract, at the time of closing, each party will sign a release of all claims
against the other.
The Company is also the subject of two threatened lawsuits. American
Telecasting, Inc. ("ATI") has sent letters to the Company claiming that the
Company breached a term sheet and has requested payment of $1,800,000 as the
alleged termination fee owed to ATI under the term sheet, plus expenses. The
Company has responded to ATI and disputes all of ATI's claims. The Company
believes that ATI's claims are without merit and would vigorously defend any
lawsuit filed.
By letter dated January 31, 1995, Laidlaw Holdings, Inc. ("Laidlaw"), the
underwriter of the Company's proposed public offering, claims that the Company
owes Laidlaw $182,165 as accountable expenses under a Letter Agreement between
the parties dated November 20, 1994. A follow-up letter was sent to the Company
on July 13, 1995. By letter dated February 3, 1995, from the Company to Laidlaw,
the Company asserted that Laidlaw terminated the Letter Agreement and believes
that if a claim is filed by Laidlaw, the Company has adequate grounds to
successfully defend the claim.
(10) INCOME TAXES:
In connection with the reverse acquisition, the basis in the assets acquired
and liabilities assumed by the Company were substantially the same for book and
tax purposes.
For income tax reporting purposes, the Company was included in the
consolidated tax returns of Wireless California through August 13, 1993, the
date that Wireless California's ownership interest in the Company dropped below
80%. As a result, the net operating losses generated by the Company from
December 18, 1992 (the date subsequent to the reverse acquisition) through
August 13, 1993, of approximately $1,000,000 were utilized by Wireless
California to reduce its tax obligations and to recapture approximately $310,000
of previously paid taxes. In exchange, Wireless California agreed to contribute
this refund to the capital of the Company. Approximately $517,000 in net
operating losses were utilized to offset taxable income in prior year
consolidated tax returns filed with Wireless California.
As of December 31, 1995, the Company has approximately $7,897,000 in net
operating loss carryforwards available for financial reporting and income tax
purposes which expire in 2010.
In 1995 there were no material temporary differences between financial
reporting and income tax reporting. As a result, at December 31, 1995, the
Company has a net deferred tax asset of approximately $3,159,000 which relates
primarily to its available net operating loss carryforwards. As the
realizability of this tax asset is solely dependent on the Company's ability to
generate future taxable income, this asset has been fully reserved.
(11) SUBSEQUENT EVENT:
Effective February 23, 1996, the Merger Agreement described in Note 1 and
the Minneapolis and Fort Worth Agreements described in Note 4 were consummated.
F-111
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee and Partners of
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES:
We have audited the accompanying consolidated balance sheets of FORT WORTH
WIRELESS CABLE T.V. ASSOCIATES (WCTVA or the Partnership) as of December 31,
1994 and 1995, and the related consolidated statements of operations, partners'
equity and cash flows for the years ended December 31, 1993, 1994 and 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of WCTVA as of December 31,
1994 and 1995, and the results of operations and their cash flows for the years
then ended December 31, 1993, 1994 and 1995, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Partnership will continue as a going concern. As discussed in
Note 1 to the financial statements, the Partnership has incurred losses since
inception and expects to incur additional losses until it is able to generate
sufficient income to cover operating expenses. The Partnership currently does
not have sufficient cash reserves to cover such anticipated losses. These
factors raise substantial doubt about the Partnership's ability to continue as a
going concern. The Partnership's current plans are also discussed in Note 1. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Arthur Andersen LLP
Phoenix, Arizona
February 23, 1996
F-112
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1)................................................ $ 21,836 $ 108,527
Accounts receivable............................................................... 51,750 10,730
Prepaid expenses and other current assets......................................... 23,923 16,602
------------- -------------
Total current assets........................................................ 97,509 135,859
INVESTMENT IN WIRELESS SYSTEMS AND EQUIPMENT, at cost, net (Notes 1 and 4).......... 3,763,423 2,986,566
------------- -------------
$ 3,860,932 $ 3,122,425
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.......................................... $ 300,047 $ 442,473
Advances from affiliates (Note 1)................................................. 471,613 710,661
Notes payable (Note 1)............................................................ -- 355,657
------------- -------------
Total current liabilities................................................... 771,660 1,508,791
------------- -------------
MINORITY INTEREST (Note 1).......................................................... 143,792 84,329
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 6)
PARTNERS' EQUITY (Note 2):
General partners' equity.......................................................... 6,064,497 4,648,322
Less-syndication costs............................................................ (3,119,017) (3,119,017)
------------- -------------
Total partners' equity...................................................... 2,945,480 1,529,305
------------- -------------
$ 3,860,932 $ 3,122,425
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-113
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996
------------------------------------- TO FEBRUARY 23,
1993 1994 1995 1996
----------- ----------- ----------- -------------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Subscriber...................................... $ 646,745 $ 650,214 $ 581,799 $ 79,336
Installation.................................... 84,554 7,517 6,408 3,550
Other........................................... 60,578 9,529 9,281 1,678
----------- ----------- ----------- ----------
Total revenues............................ 791,877 667,260 597,488 84,564
----------- ----------- ----------- ----------
OPERATING EXPENSES:
Operating and installation...................... 594,747 567,461 525,908 86,387
Selling and marketing........................... 101,089 3,206 4,501 696
General and administrative...................... 412,652 692,784 764,186 94,844
Depreciation and amortization................... 754,116 786,572 778,532 116,860
----------- ----------- ----------- ----------
Total operating expenses.................. 1,862,604 2,050,023 2,073,127 298,787
----------- ----------- ----------- ----------
NET LOSS FROM OPERATIONS.......................... (1,070,727) (1,382,763) (1,475,639) (214,223)
MINORITY INTEREST IN LOSSES....................... 57,689 62,281 59,464 8,497
----------- ----------- ----------- ----------
NET LOSS.......................................... $(1,013,038) $(1,320,482) $(1,416,175) $(205,726)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-114
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995, AND
THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 23, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL TOTAL
PARTNERS' SYNDICATION PARTNER'S
EQUITY COSTS EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1992........................................... $ 8,410,517 $ (3,119,017) $ 5,291,500
Return of capital.................................................. (12,500) -- (12,500)
Net loss........................................................... (1,013,038) -- (1,013,038)
------------- ------------- -------------
BALANCE, December 31, 1993........................................... 7,384,979 (3,119,017) 4,265,962
Net loss........................................................... (1,320,482) -- (1,320,482)
------------- ------------- -------------
BALANCE, December 31, 1994........................................... 6,064,497 (3,119,017) 2,945,480
Net loss........................................................... (1,416,175) -- (1,416,175)
------------- ------------- -------------
BALANCE, December 31, 1995........................................... 4,648,322 (3,119,017) 1,529,305
------------- ------------- -------------
Net loss (unaudited)............................................... (205,726) -- (205,726)
------------- ------------- -------------
BALANCE, February 23, 1996 (unaudited)............................... $ 4,442,596 $ (3,119,017) $ 1,323,579
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-115
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1996 TO
------------------------------------------- FEBRUARY 23,
1993 1994 1995 1996
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (1,013,038) $ (1,320,482) $ (1,416,175) $ (205,726)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization....................... 754,116 786,572 778,532 116,860
Gain on sale of equipment........................... -- -- (9,049) --
Minority interest in losses......................... (57,689) (62,281) (59,464) (8,497)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.......... (42,123) 36,708 41,020 3,990
Decrease (increase) in prepaid expenses and other
current assets.................................... 5,940 (5,693) 7,321 (2,512)
(Decrease) increase in accounts payable and accrued
liabilities....................................... (155,594) 214,596 142,426 80,965
------------- ------------- ------------- ------------
Net cash used for operating activities.......... (508,388) (348,580) (515,389) (14,920)
------------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in wireless systems and equipment............ (738,967) (86,365) (23,028) --
Proceeds from sale of equipment......................... -- -- 30,403 --
------------- ------------- ------------- ------------
Net cash (used for) provided by investing
activities.................................... (738,967) (86,365) 7,375 --
------------- ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash returned to partners............................... (12,500) -- -- --
Proceeds from issuance of notes payable and accrued
interest.............................................. -- -- 355,657 156,932
Net advances from affiliates............................ 366,984 361,883 239,048 (378)
------------- ------------- ------------- ------------
Net cash provided by financing activities....... 354,484 361,883 594,705 156,554
------------- ------------- ------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...... (892,871) (73,062) 86,691 141,634
CASH AND CASH EQUIVALENTS, beginning of year.............. 987,769 94,898 21,836 108,527
------------- ------------- ------------- ------------
CASH AND CASH EQUIVALENTS, end of year.................... $ 94,898 $ 21,836 $ 108,527 $ 250,161
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-116
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION:
BACKGROUND, NATURE OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Fort Worth Wireless Cable T.V. Associates (the Partnership), a California
general partnership, was formed as of July 1, 1992. The Partnership is comprised
of certain partners of Wireless Cable T.V. Associates #34 (WCTVA), a California
general partnership, which was formed in 1991, who exchanged their interest in
WCTVA for an interest in the Partnership, and some new partners who were
admitted to the Partnership upon contributing cash thereto. Upon its formation,
the Partnership acquired the assets and assumed the operations of WCTVA.
Wireless cable television is an emerging business that provides television
programming to subscribers by transmitting a signal via microwave frequencies
licensed by the Federal Communications Commission (FCC) to antennae located at
the subscriber's premises.
Concurrent with its formation, WCTVA entered into a Services and Acquisition
Agreement (the Services Agreement) with American Wireless Systems, Inc., a
California corporation (Wireless California). Under the terms of the Services
Agreement, Wireless California was obligated to provide various services
including assistance with FCC filings, market projections, and engineering
services involving equipment assurances and new market evaluation assistance. In
addition, Wireless California was to coordinate construction of broadcast
facilities (commonly referred to as head-end equipment) and assign to WCTVA a
75% interest in certain FCC licenses.
The development and operations of the system have been conducted through an
informal joint venture relationship between the Partnership and American
Wireless Systems, Inc., a Delaware corporation (AWS-Delaware), which acquired
its interest in the informal joint venture from Wireless California in December
1992. American Wireless Systems of Ft. Worth (AWS-Ft. Worth), a general
partnership, has been established through which the operations of the informal
joint venture have been conducted. AWS-Ft. Worth was initially capitalized
through the contributions of WCTVA and Wireless California of their respective
interests in the FCC licenses and head-end equipment. Subsequent to the
formation of AWS-Ft. Worth, the Partnership acquired an additional 4.99%
interest in AWS-Ft. Worth such that the ownership is now 79.99% for the
Partnership and 20.01% for AWS-Delaware.
OPERATIONS
The system had approximately 1,800 and 1,500 subscribers at December 31,
1994 and 1995, respectively, which is not sufficient to provide positive cash
flow. Additionally, neither the joint venture nor the Partnership has sufficient
funds to support the installation of additional subscribers to enable the joint
venture to reach positive cash flow. The Partnership's joint venture partner,
AWS-Delaware, has indicated that it is not required to provide any funding to
support system growth, however, AWS-Delaware has advanced $471,613 from May 1,
1993 to December 31, 1994, and an additional $239,048 during 1995 to fund
negative cash flow. Such advances are included in advances from affiliates in
the accompanying consolidated financial statements.
On September 11, 1995, AWS-Delaware and Heartland Wireless Communications,
Inc. (Heartland) executed an Agreement and Plan of Merger (the Merger
Agreement), pursuant to which a wholly-owned subsidiary of Heartland would be
merged into AWS and AWS would become a wholly-owned subsidiary of Heartland
(Note 7). On October 4, 1995, the Partnership and Heartland executed an Asset
Purchase
F-117
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION: (CONTINUED)
Agreement (the Fort Worth Agreement or the Asset Purchase Agreement) pursuant to
which Heartland would purchase the Partnership's 79.99% interest in AWS-Ft.
Worth. Pursuant to the Fort Worth Agreement, Heartland has agreed to assume up
to $570,000 of liabilities associated with its joint venture interest. The
consideration to be paid to the Partnership under the Fort Worth Agreement is
$13.3 million payable in Heartland common stock, based upon an exchange value
equal to the average trading price of Heartland common stock over the ten-day
period ending five business days prior to closing; provided that if such closing
average is in excess of $23.00 per share, then the exchange value will be $23.00
per share. Subject to approval of two-thirds of the partners, the Partnership
has agreed to effectuate the Agreement and Plan of Liquidation and, in
connection therewith, liquidate shares of Heartland common stock having an
aggregate exchange value in an amount necessary to satisfy certain known and
contingent liabilities of the Partnership (Note 7).
In connection with the Fort Worth Agreement, Heartland has funded an Escrow
Agreement with a third-party escrow agent in the amount of $100,000 and is
obligated to fund an additional $55,000 per month starting November 1, 1995,
until the transaction closes. In addition, Heartland agreed to loan the
Partnership up to $500,000 secured by the Partnership's interest in AWS-Ft.
Worth. The loan carries an interest rate of 10% per annum prior to maturity and
is due in accordance with the terms of the documents evidencing and securing the
loan. As of December 31, 1995, the amount outstanding on the loan, plus accrued
interest, was $355,657.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Partnership and AWS-Ft. Worth. All significant intercompany accounts have
been eliminated in consolidation.
CASH EQUIVALENTS
The Partnership considers all highly liquid instruments and time deposits
with an initial maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
FREQUENCY RIGHTS
Included in investment in wireless systems and equipment is $3,231,364 of
frequency rights as of December 31, 1994 and 1995, which are being amortized
over a ten-year period.
REVENUE RECOGNITION
Subscription revenues are recognized in the period of service. Installation
fees are recognized as revenues upon subscriber hook-up.
F-118
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION: (CONTINUED)
INCOME TAXES
No income tax liability or benefit is presented in the accompanying
consolidated financial statements as it will accrue to the partners.
UNAUDITED INFORMATION
The unaudited financial information as of February 23, 1996 and for the
period from January 1, 1996 to February 23, 1996 have been prepared without
audit. The information furnished herein reflects, in the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
fairly state the financial position and results of operations for such period.
(2) PARTNERS' EQUITY:
In 1991, WCTVA sold 800 general partnership units at $6,250 each, which
provided capital of $5,000,000. Subsequent to their initial contribution,
certain partners requested a return of their capital; therefore, $40,483 of the
gross proceeds were returned. The initial offer and sale of WCTVA interests were
made by Wireless California (see Note 6). Approximately $2,424,000 was paid for
costs incurred in connection with the offering. Such costs are reflected as an
offset to equity in the accompanying consolidated financial statements.
As discussed in Note 1, the Partnership was formed in July 1992. The
partners of WCTVA were given the option to either exchange their interest in
WCTVA for an interest in the Partnership or to receive a return of their initial
contribution. The owners of 88 WCTVA partnership units elected to receive a
return of their contribution. An additional 747 units of the Partnership were
sold which provided additional capital of $4,668,750. The offer and sale of the
Partnership units were also made by Wireless California. Approximately $695,000
was paid for costs incurred in connection with this offering. Such costs are
reflected as an offset to equity in the accompanying consolidated financial
statements.
(3) JOINT VENTURE:
As indicated in Note 1, AWS-Ft. Worth has been operated through an informal
joint venture agreement (the Joint Venture Agreement). Key aspects of the Joint
Venture Agreement utilized in the development of the accompanying consolidated
financial statements are as follows.
INITIAL CAPITAL CONTRIBUTIONS
Each member contributed to AWS-Ft. Worth their respective interests in the
wireless cable system assets to the joint venture in exchange for their initial
ownership interests of 79.99% (the Partnership) and 20.01% (AWS-Delaware). The
accompanying consolidated financial statements reflect such contributed assets
at their respective owners' historical cost which does not directly correlate to
the ownership interests.
F-119
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(3) JOINT VENTURE: (CONTINUED)
ALLOCATIONS OF PROFIT AND LOSSES
Profits and losses are to be allocated in accordance with the respective
ownership percentages (the initial ownership percentages as adjusted for
additional cash contributions).
MANAGEMENT
Wireless California and its successor, AWS-Delaware, have provided
management services to the joint venture since its inception. These services
have been provided through an informal management agreement. Management services
expense of $100,000 has been recorded as general and administrative expense in
the accompanying consolidated financial statements for the years ended December
31, 1993, 1994 and 1995.
(4) INVESTMENT IN WIRELESS SYSTEMS AND EQUIPMENT:
Investment in wireless systems and equipment consists of the following at
December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
IN YEARS 1994 1995
--------------- ------------ ------------
<S> <C> <C> <C>
Frequency rights.......................................... 10 $ 3,231,364 $ 3,231,364
Broadcast equipment and inventory......................... 3-7 2,166,958 2,162,017
Vehicles.................................................. 5 48,689 48,173
Office equipment.......................................... 5-7 101,582 93,054
Leasehold improvements.................................... 7 5,534 8,770
------------ ------------
5,554,127 5,543,378
Less--Accumulated depreciation and amortization (1,790,704) (2,556,812)
------------ ------------
$ 3,763,423 $ 2,986,566
------------ ------------
------------ ------------
</TABLE>
(5) RELATED PARTY TRANSACTIONS:
The Partnership had several transactions with Wireless California including
the original sale of general partnership interests, the transactions
contemplated under the services and acquisition agreement and the informal joint
venture and management agreements. In addition to the Partnership and AWS-Ft.
Worth, AWS-Delaware is the minority owner of a wireless cable system joint
venture with another general partnership in Minneapolis/St. Paul, Minnesota.
AWS-Ft. Worth had contracted subscriber installation services to Wireless
Technologies, Inc. (WTI), a Texas corporation engaged in the business of
providing subscriber installation services and distributing subscriber equipment
with respect to traditional and wireless cable systems. WTI is a wholly-owned
subsidiary of North American Cable Corporation, a Texas corporation engaged in
the engineering, construction and maintenance of cable television systems, local
area networks, fiber optic networks and wireless cable television systems, with
operations in the United States, England and several other countries
F-120
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(5) RELATED PARTY TRANSACTIONS: (CONTINUED)
around the world. A former Chief Executive Officer and Director of AWS-Delaware
beneficially owns 50% of the stock of North American Cable Corporation.
WTI purchased certain of the subscriber equipment that is sold to AWS-Ft.
Worth from Micom Products, Ltd. (Micom), a Delaware limited liability company
engaged in the distribution of subscriber equipment for traditional and wireless
cable systems. Micom is owned by the beneficial owners of approximately 32% of
AWS-Delaware.
In 1993, payments of $542,521 were made to WTI for installation services and
related subscriber equipment. Effective July 1993, AWS-Ft. Worth ceased
utilizing the services of WTI.
(6) COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
AWS-Ft. Worth leases office space under an operating lease. Future
obligations under this lease are as follows for years ending December 31:
<TABLE>
<S> <C>
1996.............................................................. $ 60,500
1997.............................................................. 61,200
1998.............................................................. 15,300
---------
$ 137,000
---------
---------
</TABLE>
Lease expense of $62,347, $55,830 and $57,730 has been recorded for the
years ended December 31, 1993, 1994 and 1995, respectively.
AWS-Ft. Worth holds frequency rights to 14 wireless cable channels in the
Ft. Worth market under several leases. Thirteen local broadcast channels are
also transmitted for a total programming package of 27 channels. The channel
leases have original lease periods from five to ten years with options to renew.
Future minimum lease payments for the FCC licenses are as follows for the years
ending December 31:
<TABLE>
<S> <C>
1996.............................................................. $ 108,300
1997.............................................................. 60,500
1998.............................................................. 1,200
1999.............................................................. 1,200
2000.............................................................. 1,200
Thereafter........................................................ 1,700
---------
$ 174,100
---------
---------
</TABLE>
Lease expense of $93,013, $90,460 and $108,300 has been recorded for the
years ended December 31, 1993, 1994 and 1995, respectively.
F-121
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(6) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
CONTINGENCIES
The original formation of WCTVA and the subsequent formation of the
Partnership involved the sale of general partnership interests without
registration under any federal or state securities laws based on the belief that
the general partnership interests did not constitute securities under federal
and applicable state laws. As of December 31, 1995, securities administrators in
22 states as well as the Securities and Exchange Commission (SEC) have conducted
or are currently conducting investigations of the activities related to the
unregistered sale of the general partnership interests.
To date, the investigations have focused on Wireless California and its
successor, AWS-Delaware, the Partnership's joint venture partner in AWS-Ft.
Worth, however, there is a possibility that future actions could be taken
against the Partnership. Such actions could involve fines, administrative
penalties and the requirement for the Partnership to file information with the
SEC pursuant to the Securities and Exchange Act of 1934, as amended. Management
believes that any such penalties or fines should be the responsibility of
Wireless California and does not believe that any such actions will have a
material impact on its financial condition or its results of operations.
(7) SUBSEQUENT EVENT:
Effective February 23, 1996, the Asset Purchase and Merger Agreements
discussed in Note 1 were consummated.
F-122
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee and Partners of
WIRELESS CABLE T.V. ASSOCIATES #38:
We have audited the accompanying consolidated balance sheets of WIRELESS
CABLE T.V. ASSOCIATES #38 (WCTVA or the Partnership) as of December 31, 1994 and
1995, and the related consolidated statements of operations, partners' equity
and cash flows for the years ended December 31, 1993, 1994 and 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 financial statements referred to above present fairly,
in all material respects, the financial position of WCTVA as of December 31,
1994 and 1995, and the results of their operations and their cash flows for the
years ended December 31, 1993, 1994 and 1995, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Partnership will continue as a going concern. As discussed in
Note 1 to the financial statements, the Partnership has incurred losses since
inception and expects to incur additional losses until it is able to generate
sufficient income to cover operating expenses. The Partnership currently does
not have sufficient cash reserves to cover such anticipated losses. These
factors raise substantial doubt about the Partnership's ability to continue as a
going concern. The Partnership's current plans are also discussed in Note 1. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Arthur Andersen LLP
Phoenix, Arizona
February 23, 1996
F-123
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1)................................................ $ 620,058 $ 301,887
Accounts receivable............................................................... 111,848 31,677
Prepaid expenses and other current assets......................................... 13,840 125,935
------------- -------------
Total current assets........................................................ 745,746 459,499
INVESTMENT IN WIRELESS SYSTEMS AND EQUIPMENT, at cost, net (Notes 1 and 5).......... 6,679,478 5,931,061
------------- -------------
$ 7,425,224 $ 6,390,560
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.......................................... $ 162,033 $ 270,998
Advances from affiliates.......................................................... 49,112 100,538
Notes payable and obligations under capital lease (Notes 1 and 4)................. 2,016,692 3,081,432
------------- -------------
Total current liabilities................................................... 2,227,837 3,452,968
------------- -------------
MINORITY INTEREST (Note 1).......................................................... 380,365 249,451
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' EQUITY (Note 2):
General partners' equity.......................................................... 9,433,022 7,304,141
Less--syndication costs........................................................... (4,616,000) (4,616,000)
------------- -------------
Total partners' equity...................................................... 4,817,022 2,688,141
------------- -------------
$ 7,425,224 $ 6,390,560
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-124
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996
------------------------------------- TO FEBRUARY 23,
1993 1994 1995 1996
----------- ----------- ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Subscriber.......................................................... $ 220,537 $ 459,215 $ 863,266 $ 135,957
Installation........................................................ 31,584 11,360 15,635 12,361
Other............................................................... 20,031 64,471 102,827 --
----------- ----------- ----------- -----------------
Total revenues................................................ 272,152 535,046 981,728 $ 148,318
----------- ----------- ----------- -----------------
----------- ----------- ----------- -----------------
OPERATING EXPENSES:
Operating and installation.......................................... 690,835 1,187,795 1,434,557 480,475
Selling and marketing............................................... 70,881 71,317 15,527 14,583
General and administrative.......................................... 443,772 391,839 719,850 203,463
Depreciation and amortization....................................... 738,860 977,471 1,071,589 172,368
----------- ----------- ----------- -----------------
Total operating expenses...................................... 1,944,348 2,628,422 3,241,523 870,889
----------- ----------- ----------- -----------------
NET LOSS FROM OPERATIONS.............................................. (1,672,196) (2,093,376) (2,259,795) (722,571)
MINORITY INTEREST IN LOSSES........................................... 127,217 138,155 130,914 30,019
----------- ----------- ----------- -----------------
NET LOSS.............................................................. $(1,544,979) $(1,955,221) $(2,128,881) $(692,552)
----------- ----------- ----------- -----------------
----------- ----------- ----------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-125
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 23, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL TOTAL
PARTNERS' SYNDICATION PARTNER'S
EQUITY COSTS EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1992.......................................... $ 12,012,646 $ (4,616,000) $ 7,396,646
Capital contributions............................................. 920,576 -- 920,576
Net loss.......................................................... (1,544,979) -- (1,544,979)
------------- ------------- -------------
BALANCE, December 31, 1993.......................................... 11,388,243 (4,616,000) 6,772,243
Net loss.......................................................... (1,955,221) -- (1,955,221)
------------- ------------- -------------
BALANCE, December 31, 1994.......................................... 9,433,022 (4,616,000) 4,817,022
Net loss.......................................................... (2,128,881) -- (2,128,881)
------------- ------------- -------------
BALANCE, December 31, 1995.......................................... 7,304,141 (4,616,000) 2,688,141
Net loss (unaudited).............................................. (692,552) -- (692,552)
------------- ------------- -------------
BALANCE, February 23,1996 (unaudited)............................... $ 6,611,589 $ (4,616,000) $ 1,995,589
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-126
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996
------------------------------------- TO FEBRUARY 23,
1993 1994 1995 1996
----------- ----------- ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(1,544,979) $(1,955,221) $(2,128,881) $(692,552)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization................. 738,860 977,471 1,071,589 172,368
Minority interest in losses................... (127,217) (138,155) (130,914) (30,019)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.... (14,222) (93,986) 80,171 23,411
(Increase) decrease in prepaid expenses and
other current assets........................ (64,098) 56,159 (112,095) 71,387
(Decrease) increase in accounts payable and
accrued liabilities......................... (103,166) 87,343 108,965 274,554
----------- ----------- ----------- -----------------
Net cash used for operating activities.... (1,114,822) (1,066,389) (1,111,165) (180,851)
----------- ----------- ----------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in wireless systems and equipment...... (1,214,519) (520,967) (323,172) (516,951)
----------- ----------- ----------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributed by partners, net.............. 920,576 -- -- --
Proceeds from issuance of notes payable and
accrued interest................................ -- 2,000,000 1,624,336 273,836
Payments on notes payable......................... -- -- (550,000) --
Net advances from affiliates...................... 178,844 49,112 51,426 174,616
Payments on capital lease......................... (2,445) (9,595) (9,596) (6,628)
----------- ----------- ----------- -----------------
Net cash provided by financing
activities.............................. 1,096,975 2,039,517 1,116,166 441,824
----------- ----------- ----------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS....................................... (1,232,366) 452,161 (318,171) (255,978)
CASH AND CASH EQUIVALENTS, beginning of year........ 1,400,263 167,897 620,058 301,887
----------- ----------- ----------- -----------------
CASH AND CASH EQUIVALENTS, end of year.............. $ 167,897 $ 620,058 $ 301,887 $ 45,909
----------- ----------- ----------- -----------------
----------- ----------- ----------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-127
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION:
BACKGROUND, NATURE OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Wireless Cable T.V. Associates #38 (WCTVA or the Partnership) was formed in
February 1992 to develop and operate a wireless cable television system in
Minneapolis, Minnesota as a joint venture partner with American Wireless
Systems, Inc., a California corporation (Wireless California).
Wireless cable television is an emerging business that provides television
programming to subscribers by transmitting a signal via microwave frequencies
licensed by the Federal Communications Commission (FCC) to antennae located at
the subscriber's premises.
Concurrent with its formation, WCTVA entered into a Services and Acquisition
Agreement (the Services Agreement) with Wireless California. Under the terms of
the Services Agreement, Wireless California provided various services including
assistance with FCC filings, market projections, and engineering services
involving equipment assurances and new market evaluation assistance. In
addition, Wireless California coordinated construction of broadcast facilities
(commonly referred to as head-end equipment) and assigned to WCTVA a 75%
interest in certain FCC licenses previously held by Wireless California.
Subsequent to the construction of the head-end equipment in March 1993, the
development and operations of the system have been conducted through a joint
venture relationship between WCTVA and Wireless California (see Note 3).
American Wireless Systems of Minneapolis L.L.C. (AWS-Minneapolis), a limited
liability company, was established through which the operations of the joint
venture have been conducted. AWS-Minneapolis was initially capitalized through
the contribution by WCTVA and Wireless California of their respective interests
in the FCC licenses and head-end equipment.
In December 1992, the Partnership's joint venture partner, Wireless
California, sold substantially all of its assets, including its remaining 25%
interest in AWS-Minneapolis, to a publicly traded company which also
subsequently assumed the name of American Wireless Systems, Inc. (AWS-Delaware).
The former shareholders of Wireless California beneficially own approximately
32% of AWS-Delaware.
OPERATIONS
The system, which was launched in March 1993, had approximately 2,200 and
2,900 subscribers at December 31, 1994 and 1995, respectively, which is not
sufficient to provide positive cash flow. Additionally, neither the joint
venture nor the Partnership has sufficient funds to support the installation of
additional subscribers to enable the joint venture to reach positive cash flow.
As a result of these factors, in April 1994, the Partnership borrowed $2,000,000
from AWS-Delaware to fund additional development of the system. AWS-Minneapolis
received additional funding in May 1995, of $550,000 from Tsunami Capital Corp.
(Tsunami). The loan was made by Tsunami in anticipation of a reverse merger
between AWS-Minneapolis and Tsunami.
On September 11, 1995, AWS-Delaware and Heartland Wireless Communications,
Inc. (Heartland) executed an Agreement and Plan of Merger (the Merger Agreement)
pursuant to which a wholly-owned subsidiary of Heartland would be merged into
AWS-Delaware and AWS-Delaware would become a wholly-owned subsidiary of
Heartland (Note 8). On October 4, 1995, the Partnership and Heartland executed
an Asset Purchase Agreement pursuant to which the Partnership agreed to sell to
Heartland its
F-128
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION: (CONTINUED)
membership interest in AWS-Minneapolis (the Asset Purchase Agreement or the
Minneapolis Agreement). In addition, pursuant to the Minneapolis Agreement,
Heartland has agreed to assume the obligation to repay the $2,000,000 note owed
by the Partnership to AWS-Delaware. The consideration to be paid to the
Partnership under the Minneapolis Agreement is $18 million (plus the assumption
of liabilities) plus $500 per subscriber added from October 4, 1995, to the
closing date, payable in Heartland common stock, based upon an exchange value
equal to either (a) the lesser of $23 per share and the average closing price of
Heartland common stock as reported on the NASDAQ Stock Market's National Market
over the ten-trading-day period ending on the fifth business day preceding the
date of the closing of the Minneapolis Agreement or (b) if such closing average
is equal to or in excess of $30 per share, then (i) the product of the closing
average multiplied by $23, divided by (ii) $30. Subject to the approval of two-
thirds of the partners, the Partnership has agreed to effectuate the Agreement
and Plan of Liquidation and, in connection therewith, liquidate shares of
Heartland common stock having an aggregate exchange value in an amount necessary
to satisfy certain contingent liabilities of the Partnership (Note 8).
In connection with the Heartland transaction, AWS-Minneapolis received a
$1,575,000 loan from Heartland of which $575,000 was utilized to pay the Tsunami
note plus interest and the remaining $1,000,000 can be utilized to fund
subscriber growth. The remaining $1,000,000 loan can be drawn down in increments
of not less than $25,000 and not more than $250,000, and carries an interest
rate of prime plus 2%, as defined, and is due on the earlier of (i) the closing
of the Heartland transaction, (ii) the termination of the Heartland transaction,
as defined, or (iii) February 28, 1997.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Partnership and AWS-Minneapolis. All significant intercompany accounts have
been eliminated in consolidation.
CASH EQUIVALENTS
The Partnership considers all highly liquid instruments and time deposits
with an initial maturity of three months or less to be cash equivalents. At
December 31, 1994, cash equivalents include a $105,000 restricted deposit
collateralizing the AWS-Minneapolis office lease.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
FREQUENCY RIGHTS
Included in investment in wireless systems and equipment are $6,204,332 and
$6,214,331 of frequency rights as of December 31, 1994 and 1995, respectively,
which are being amortized over a ten-year period.
REVENUE RECOGNITION
Subscription revenues are recognized in the period of service. Installation
fees are recognized as revenue upon subscriber hook-up.
F-129
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION: (CONTINUED)
INCOME TAXES
No income tax liability or benefit is presented in the accompanying
consolidated financial statements as it will accrue to the partners.
UNAUDITED INFORMATION
The unaudited financial information as of February 23, 1996 and for the
period from January 1, 1996 to February 23, 1996 have been prepared without
audit. The information furnished herein reflects, in the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
fairly state the financial position and results of operations for such period.
(2) PARTNERS' EQUITY:
In 1992, WCTVA sold approximately 1,744 general partnership units at $6,250
each, which provided capital of $10,900,000. Additional funds of $1,175,082 (188
units) and $920,576 (147 units) were contributed by existing partners during
1992 and 1993, respectively. The initial offer and sale of WCTVA units were made
by Wireless California. WCTVA reimbursed Wireless California approximately
$4,616,000 for costs incurred in connection with the offering. Such costs are
reflected as an offset to equity in the accompanying consolidated financial
statements.
(3) JOINT VENTURE:
As indicated in Note 1, the Minneapolis wireless cable system has been
operated through a joint venture agreement (the Agreement). A summary of the
provisions of this agreement are as follows.
INITIAL CAPITAL CONTRIBUTIONS
Each member contributed their respective interests in the wireless cable
system assets to AWS-Minneapolis in exchange for their initial ownership
interests of 75% (the Partnership) and 25% (AWS-Delaware). The accompanying
consolidated financial statements reflect such contributed assets at their
respective owners' historical cost which does not directly correlate to the
ownership interests.
ADDITIONAL CAPITAL CONTRIBUTIONS
The Partnership is to make additional cash contributions to develop and
operate the system as it deems necessary. AWS-Delaware is only permitted to make
additional contributions with the consent of the Partnership.
ALLOCATIONS OF PROFIT AND LOSSES
Profits and losses are to be allocated in accordance with the respective
ownership percentages (the initial ownership percentages as adjusted for
additional cash contributions).
F-130
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(3) JOINT VENTURE: (CONTINUED)
CASH DISTRIBUTIONS
Distributions of available operating cash flows are to be made in accordance
with the member's existing capital contribution percentages.
MANAGEMENT
AWS-Delaware has provided management services to the joint venture since its
inception under the terms of a management agreement which provides for an annual
fee to AWS-Delaware equal to the greater of 5% of collected gross revenues or
$100,000 annually. The Partnership has the right to terminate the management
agreement upon 30 days' prior notice. Management services expense of $0, $83,333
and $100,000 has been recorded as general and administrative expense in the
accompanying consolidated financial statements for the years ended December 31,
1993, 1994 and 1995, respectively.
(4) NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASE:
Notes payable, including accrued interest, and obligations under capital
lease consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Note payable to AWS-Delaware, interest at 8%, due February 28, 1996, or the
abandonment of the Minneapolis Agreement; secured by a 10% interest in the joint
venture, as defined................................................................. $ 2,000,000 $ 2,000,000
Notes payable to Heartland, interest at prime rate plus 2%, due upon the earlier of
the consummation or termination of the Minneapolis Agreement, or February 28,
1997................................................................................ -- 1,074,336
Obligations under capital lease, aggregate monthly payments of $810 through September
1996................................................................................ 16,692 7,096
------------ ------------
$ 2,016,692 $ 3,081,432
------------ ------------
------------ ------------
</TABLE>
F-131
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(5) INVESTMENT IN WIRELESS SYSTEMS AND EQUIPMENT:
Investment in wireless systems and equipment consists of the following at
December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
IN YEARS 1994 1995
--------------- ------------ ------------
<S> <C> <C> <C>
Frequency rights......................................................... 10 $ 6,204,332 $ 6,214,331
Broadcast equipment and inventory........................................ 3-7 2,010,842 2,317,376
Vehicles................................................................. 5 77,271 77,271
Office equipment......................................................... 5-7 106,834 112,246
Leasehold improvements................................................... 7 1,450 1,450
------------ ------------
8,400,729 8,722,674
Less--Accumulated depreciation and amortization.......................... (1,721,251) (2,791,613)
------------ ------------
$ 6,679,478 $ 5,931,061
------------ ------------
------------ ------------
</TABLE>
(6) RELATED PARTY TRANSACTIONS:
The Partnership had several transactions with Wireless California including
the original sale of general partnership interests and the transactions
contemplated under the services and acquisition agreement. In addition to the
Partnership and AWS-Minneapolis, AWS-Delaware is the minority owner of a
wireless cable system joint venture with another general partnership in Fort
Worth, Texas.
In its capacity as manager of AWS-Minneapolis, AWS-Delaware contracted
subscriber installation services to Wireless Technologies, Inc. (WTI), a Texas
corporation engaged in the business of providing subscriber installation
services and distributing subscriber equipment with respect to traditional and
wireless cable systems. WTI is a wholly-owned subsidiary of North American Cable
Corporation, a Texas corporation engaged in the engineering, construction and
maintenance of cable television systems, local area networks, fiber optic
networks and wireless cable television systems, with operations in the United
States, England and several other countries around the world. A former Chief
Executive Officer and Director of AWS-Delaware beneficially owns 50% of the
stock of North American Cable Corporation.
WTI purchased certain of the subscriber equipment that is sold to
AWS-Minneapolis from Micom Products, Ltd. (Micom), a Delaware limited liability
company engaged in the distribution of subscriber equipment for traditional and
wireless cable systems. Micom is owned by the beneficial owners of approximately
32% of AWS-Delaware.
In 1993, payments of $381,534 were made to WTI for installation services and
related subscriber equipment. In 1993 and 1994, payments of $114,644 and $2,766,
respectively, were made by WTI to Micom. Effective August 1993, AWS-Minneapolis
ceased utilizing the services of WTI.
F-132
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
(7) COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
Beginning January 1, 1993, AWS-Minneapolis began leasing office space under
an operating lease. Future obligations under this lease are as follows for years
ending December 31:
<TABLE>
<S> <C>
1996.............................................................. $ 98,280
1997.............................................................. 98,280
1998.............................................................. 98,280
---------
$ 294,840
---------
---------
</TABLE>
Lease expense of $57,269, $43,541 and $89,480 has been recorded for the
years ended December 31, 1993, 1994 and 1995, respectively.
AWS-Minneapolis holds frequency rights to 21 wireless cable channels in the
Minneapolis market under several leases. Eight local broadcast channels are also
transmitted for a total programming package of 29 channels. The channel leases
have original lease periods from five to ten years with options to renew. Future
minimum lease payments for the FCC licenses are as follows for the years ending
December 31:
<TABLE>
<S> <C>
1996............................................................ $ 371,488
1997............................................................ 324,988
1998............................................................ 303,988
1999............................................................ 303,988
2000............................................................ 303,988
Thereafter...................................................... 163,924
---------
$1,772,364
---------
---------
</TABLE>
Lease expense of $248,350, $317,180 and $351,380 has been recorded for the
years ended December 31, 1993, 1994 and 1995, respectively.
CONTINGENCIES
The original formation of WCTVA involved the sale of general partnership
interests without registration under any federal or state securities laws based
on the belief that the general partnership interests did not constitute
securities under federal and applicable state laws. Securities administrators in
22 states as well as the Securities and Exchange Commission (SEC) have conducted
or are currently conducting investigations of the activities related to the
unregistered sale of the general partnership interests.
To date, the investigations have focused on Wireless California and its
successor, AWS-Delaware, the Partnership's joint venture partner in
AWS-Minneapolis, however, there is a possibility that future actions could be
taken against the Partnership. Such actions could involve fines, administrative
penalties and the requirement for the Partnership to file required 1934 Act
information with the SEC. Management believes that any such penalties or fines
should be the responsibility of Wireless California and does not believe that
any such actions will have a material impact on its financial condition or its
results of operations.
(8) SUBSEQUENT EVENT:
Effective February 23, 1996, the Asset Purchase and Merger Agreements
described in Note 1 were consummated.
F-133
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CABLEMAXX, INC.
We have audited the accompanying statements of net assets of CableMaxx,
Inc.--San Antonio Division (the "Division") as of June 30, 1994 and 1995 and
December 31, 1995, and the related statements of revenues and expenses, changes
in net assets, and cash flows for the period December 18, 1992 to June 30, 1993,
for the years ended June 30, 1994 and 1995, and for the six month period ended
December 31, 1995 presented on the basis set forth in Note 2. These financial
statements are the responsibility of CableMaxx, Inc.'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 audits 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.
The accompanying financial statements are prepared on the basis described in
Note 2, and are not intended to be a complete presentation of the Division's
financial position, results of operations and cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets of CableMaxx, Inc.--San Antonio
Division as of June 30, 1994 and 1995 and December 31, 1995, and its revenues
and expenses, changes in net assets, and its cash flows for the period from
December 18, 1992 to June 30, 1993, for the years ended June 30, 1994 and 1995
and for the six month period ended December 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
CableMaxx, Inc. (the "Company") and therefore, the Division will continue as a
going concern. As discussed in Note 9, the Company has entered into a merger
agreement which is pending approval. However, the Company's inability to
generate through operations or borrow under its revolving credit facility
sufficient cash flows to fund operations, the Company's expectation that it will
not meet certain financial covenant requirements under its revolving credit
facility and the Company's inability to meet the debt service requirements as
currently exist under its revolving credit facility raise substantial doubt
about the Company's and therefore, the Division's ability to continue as a going
concern. The accompanying financial statements do not include any adjustment
relating to the recoverability of asset carrying amounts or the amount of
liabilities that might result should the Division be unable to continue as a
going concern.
COOPERS & LYBRAND L.L.P.
Austin, Texas
February 16, 1996
F-134
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash................................................................ $ 10,000 $ 10,400 $ 10,400
Subscriber receivables, net of allowance for doubtful accounts of
approximately $88,000, $16,000, and $16,000, as of June 30, 1994
and 1995, and December 31, 1995, respectively..................... 237,989 143,700 170,668
Prepaids and other.................................................. 77,170 97,513 68,372
Systems and equipment, net.......................................... 10,094,566 9,801,119 9,007,255
Intangible assets, net.............................................. 5,647,385 5,228,339 5,018,763
------------- ------------- -------------
Total assets.................................................. 16,067,110 15,281,071 14,275,458
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Accounts payable and accrued liabilities............................ 1,871,474 641,371 802,245
Subscriber deposits................................................. 26,413 21,175 19,450
Deferred revenue.................................................... 134,792 136,818 142,632
------------- ------------- -------------
Total liabilities............................................. 2,032,679 799,364 964,327
------------- ------------- -------------
Commitments
Net Assets.................................................... $ 14,034,431 $ 14,481,707 $ 13,311,131
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-135
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
STATEMENTS OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
PERIOD FROM PERIOD
DECEMBER SIX MONTH SIX MONTH FROM
18, PERIOD PERIOD JANUARY 1,
1992 TO YEAR ENDED JUNE 30, ENDED ENDED 1996 TO
JUNE 30, ---------------------- DECEMBER DECEMBER FEBRUARY
1993 1994 1995 31, 1994 31, 1995 23, 1996
----------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 187,099 $2,922,977 $5,090,374 $2,439,281 $2,663,638 $ 814,481
----------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Systems operations........... 120,110 1,374,032 2,285,882 1,066,320 1,214,247 377,033
Selling, general and
administrative............. 317,217 2,590,593 2,128,528 1,182,922 947,457 1,032,174
Depreciation and
amortization............... 364,235 1,542,434 3,047,954 1,470,665 1,611,064 494,793
----------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses................. 801,562 5,507,059 7,462,364 3,719,907 3,772,768 1,904,000
----------- ---------- ---------- ---------- ---------- ----------
Operating expenses in excess of
revenues..................... (614,463) (2,584,082) (2,371,990) (1,280,626) (1,109,130) (1,089,519)
Interest expense............... (139,000) (239,000) (157,000) (90,090) (98,196) (28,675)
----------- ---------- ---------- ---------- ---------- ----------
Expenses in excess of
revenues............... $(753,463) $(2,823,082) $(2,528,990) $(1,370,716) $(1,207,326) $(1,118,194)
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-136
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
ADVANCE
FROM ACCUMULATED
COMPANY DEFICIT TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 18, 1992.......................................... -- -- --
Expenses in excess of revenues for the period..................... $ (753,463) $ (753,463)
Net advance from Company.......................................... $ 8,433,395 8,433,395
------------- ------------- -------------
Balance, June 30, 1993.............................................. 8,433,395 (753,463) 7,679,932
Expenses in excess of revenues for the year....................... (2,823,082) (2,823,082)
Net advance from Company.......................................... 9,177,581 9,177,581
------------- ------------- -------------
Balance, June 30, 1994.............................................. 17,610,976 (3,576,545) 14,034,431
Expenses in excess of revenues for the year....................... (2,528,990) (2,528,990)
Net advance from Company.......................................... 2,976,266 2,976,266
------------- ------------- -------------
Balance, June 30, 1995.............................................. 20,587,242 (6,105,535) 14,481,707
Expenses in excess of revenues for the period..................... (1,207,326) (1,207,326)
Net advance from Company.......................................... 36,750 36,750
------------- ------------- -------------
Balance, December 31, 1995.......................................... 20,623,992 (7,312,861) 13,311,131
Expenses in excess of revenues for the period (unaudited)......... (1,118,194) (1,118,194)
Net advance from Company (unaudited).............................. 285,396 285,396
------------- ------------- -------------
Balance, February 23, 1996 (unaudited).............................. $ 20,909,388 $ (8,431,055) $ 12,478,333
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-137
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM SIX MONTH SIX MONTH JANUARY 1,
DECEMBER 18, YEAR ENDED JUNE 30, PERIOD ENDED PERIOD ENDED 1996 TO
1992 TO ---------------------- DECEMBER 31, DECEMBER 31, FEBRUARY 23,
JUNE 30, 1993 1994 1995 1994 1995 1996
------------- ---------- ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Expenses in excess of revenues....... $ (753,463) $(2,823,082) $(2,528,990) $(1,370,716) $(1,207,326) $(1,118,194)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization.... 364,235 1,542,434 3,047,954 1,470,665 1,611,064 494,793
Changes in assets and
liabilities:
Subscriber receivables......... 3,872 (241,861) 94,289 31,089 (26,968) (77,879)
Prepaids and other............. (24,877) (52,293) (20,343) (155,562) 29,141 (35,535)
Accounts payable and accrued
liabilities.................. 884,525 (87,051) (1,363,103) (314,188) 156,608 605,483
Subscriber deposits............ 28,500 (2,087) (5,238) (2,774) (1,725) 350
Deferred revenue............... 19,159 115,633 2,026 10,144 5,814 83,415
------------- ---------- ---------- ------------ ------------ ------------
Net cash provided by (used
in) operating activities... 521,951 (1,548,307) (773,405) (331,342) 566,608 (47,567)
------------- ---------- ---------- ------------ ------------ ------------
Cash flows from investing activities:
Purchases of systems and equipment... (2,668,971) (7,621,722) (2,202,461) (2,689,796) (603,358) (237,829)
Purchases of intangible assets....... (6,283,927)
------------- ---------- ---------- ------------ ------------ ------------
Net cash used in investing
activities................. (8,952,898) (7,621,722) (2,202,461) (2,689,796) (603,358) (237,829)
------------- ---------- ---------- ------------ ------------ ------------
Cash flows from financing activities:
Advances from company................ 8,433,395 9,177,581 2,976,266 3,021,538 36,750 285,396
------------- ---------- ---------- ------------ ------------ ------------
Net cash provided by
financing activities....... 8,433,395 9,177,581 2,976,266 3,021,538 36,750 285,396
------------- ---------- ---------- ------------ ------------ ------------
Net increase in cash................. 2,448 7,552 400 400 0 0
Cash, beginning of period............ 0 2,448 10,000 10,000 10,400 10,400
------------- ---------- ---------- ------------ ------------ ------------
Cash, end of period.................. $ 2,448 $ 10,000 $ 10,400 $ 10,400 $ 10,400 $ 10,400
------------- ---------- ---------- ------------ ------------ ------------
------------- ---------- ---------- ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-138
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
CableMaxx, Inc. develops, owns and operates wireless cable television
systems providing wireless cable television service to subscribers in Austin,
San Antonio (the "Division"), Temple/Killeen and Waco, Texas.
On December 18, 1992, Charter Cable Corporation and Charter Cable (San
Antonio), Inc. acquired the Austin and San Antonio wireless cable systems from
certain sellers (collectively, the "Predecessor"). These corporations were
wholly-owned by Charter Wireless Cable Holdings, L.L.C. ("Charter Holdings").
Charter Holdings is owned by an affiliate of Charterhouse Group International,
Inc. ("Charterhouse"), Galaxy Cablevision, L.P. ("Galaxy") and Galaxy
Management, Inc. CableMaxx, Inc. was capitalized with $12,500,000 cash,
$2,000,000 previously deposited with the Predecessor by Galaxy, and an ownership
interest in Charter Holdings valued at $750,000 which was conveyed to the
Predecessor in connection with the acquisition.
In November 1993, CableMaxx, Inc. sold in an initial public offering
("IPO"), 3,500,000 shares of its common stock, par value $.01 per share ("Common
Stock"), at an initial price of $12.00 per share, resulting in net proceeds to
the Company of $38,110,159 after underwriting discounts and costs in connection
with the IPO.
In December, 1994, in order to create a holding company structure to
facilitate CableMaxx, Inc.'s access to sources of financing, CM Newco, Inc., a
wholly-owned subsidiary of CableMaxx Holdings, Inc. ("Holdings"), was merged
with and into CableMaxx, Inc. As a result of such merger, (i) Holdings changed
its name to CableMaxx, Inc. (the "Company"), is now owned by the stockholders of
the former CableMaxx, Inc., immediately prior to such merger, and (ii)
CableMaxx, Inc., which changed its name to CableMaxx (Texas), Inc., is now a
wholly-owned subsidiary of the Company.
2. ACQUISITION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the assets, liabilities,
revenues and expenses that are directly related to the Division presented at the
Company's historical cost. The financial statements do not include general
unallocated corporate assets, liabilities, equity, revenues and expenses of the
Company which are not directly related to the Division or debt financing and
associated interest expense to the extent it is not directly related to the
Division and, therefore, may not necessarily reflect what the financial
position, results of operations and cash flows of the Division would have been
had it been a separate, stand-alone entity during the periods covered by the
financial statements. Company intangible assets are allocated to the Division on
a relative line of sight households basis. Centralized Company selling, general
and administrative expenses attributable to its systems operations are allocated
to the Division on a relative average subscriber basis.
The accompanying unaudited statements of revenue and expenses, changes in
net assets and cash flows have been prepared in accordance with generally
accepted accounting principles for interim financial information. They do not
include all information and notes required by generally accepted accounting
principles for complete financial statements and do not include a statement of
net assets. However, except as disclosed herein, there has been no material
change in the information disclosed in the Notes to Financial Statements of the
Division for the six months ended December 31, 1995 included elsewhere
F-139
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
herein. In the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the full year. All
information with respect to periods after December 31, 1995 is unaudited.
ACQUISITION
On December 18, 1992, the Company acquired assets and assumed liabilities
related to the Austin and San Antonio, the Division's wireless cable operations
of the Predecessor. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the total acquisition cost has been
allocated to the net assets acquired based on the fair values of the assets and
liabilities at the date of acquisition. The results of operations of the
Division is included in the financial statements since the date of acquisition.
The acquisition included the following assets and liabilities (amounts rounded):
<TABLE>
<CAPTION>
DIVISION
ASSETS
ACQUIRED
------------
<S> <C>
Systems and equipment........................................................... $ 200,000
Intangible assets............................................................... 6,283,927
------------
Assets acquired............................................................. $ 6,483,927
------------
------------
</TABLE>
CASH MANAGEMENT
With the exception of a local manager depository account which balances
generally do not exceed FDIC coverage, the Division utilizes the central cash
management systems of the Company to finance its operations. Cash requirements
are satisfied by transactions between the Division and the Company. Such
transactions are included in the changes in assets as net advances from Company
and to the extent such transactions are cash transactions of the Company, they
are included in the Division's statements of cash flows.
SYSTEMS AND EQUIPMENT
Systems and equipment is carried at cost and includes the cost of
transmission equipment as well as subscriber installations. Reception equipment
on subscriber premises and outside contractor costs associated with subscriber
installations including successful and unsuccessful transmission reception
testing are capitalized. The Division has elected to depreciate the full
capitalized installation cost subsequent to disconnect. Capitalized installation
costs are accounted for under the composite method. Cost of maintenance and
repairs is charged to expense as incurred. Upon sale or retirement, the related
cost and accumulated depreciation are removed from their respective accounts,
and any resulting gain or loss is credited or charged to income.
F-140
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Systems and equipment is depreciated as follows:
<TABLE>
<CAPTION>
METHOD TERM
-------------- ----------------
<S> <C> <C>
Wireless cable systems:
Subscriber installations:
Material............................................... Straight-line 5.5 to 7 years
Outside contract labor................................. Straight-line 3 years
Head-end, tower and transmission equipment............... Straight-line 7 to 10 years
Vehicles, furniture and equipment.......................... Straight-line 3 to 10 years
Leasehold improvements..................................... Straight-line 10 years
</TABLE>
During the fiscal years ended June 30, 1994 and 1995 the Division
transferred ownership of installation materials to independent contractors. As a
result, ownership of materials removed from disconnected homes remains with the
independent contractors. Accordingly, the lives for this equipment are shorter
than estimated in prior years. The Division has changed the useful lives for
installation materials to 5.5 years, effective July 1, 1994. The effect of this
change in estimate increased depreciation expense and increased net loss in the
year ended June 30, 1995 and in the six month period ended December 31, 1994 by
approximately $230,000 and 115,000 (unaudited), respectively. The effect of this
change was not significant in the year ended June 30, 1994.
INTANGIBLE ASSETS
Intangible assets are amortized as follows:
<TABLE>
<CAPTION>
METHOD TERM
-------------- ---------
<S> <C> <C>
Channel rights and goodwill....................................... Straight-line 15 years
Covenant not to compete........................................... Straight-line 15 years
</TABLE>
Channel rights and goodwill include the allocation of the excess of purchase
price over the fair value of tangible assets and liabilities acquired. The
Division reviews channel rights and goodwill for impairment from time to time,
measuring impairment based upon expected future undiscounted cash flows from
operations.
REVENUE RECOGNITION
Revenues from subscribers are recognized in the month that the service is
provided. Installation fees are recognized as revenue upon origination of
service to subscribers to the extent of any costs incurred to obtain the
subscriber, which are expensed as incurred.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between tax basis 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 income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
While the Company has a net operating loss carryforward for income tax
F-141
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
purposes of approximately $19,211,000 as of June 30, 1995, which expires
beginning in 2007, such losses are not available for the Division's benefit.
The results of operations of the Division have been included in the federal
income tax returns of the Company. Accordingly, net operating losses generated
by the Division are subject to potential utilization only by the Company and
therefore are not reported as Division deferred income taxes. If such net
operating losses totalling approximately $7.3 million and $8.4 million
(unaudited) as of December 31, 1995 and February 23, 1996, respectively, were
allocable to the Division, they would be subject to a full valuation allowance.
Other current and deferred income taxes have been allocated to the Division as
if such taxes were calculated on a separate return basis using the accounting
principles in Statement of Financial Accounting Standards No. 109 and are not
considered significant in the aggregate.
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.
3. SYSTEMS AND EQUIPMENT
Systems and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
Wireless cable systems.......................... $ 10,435,408 $ 12,711,337 $ 13,289,548
Vehicles, furniture and equipment............... 571,647 607,773 622,881
Building and leasehold
improvements.................................. 357,638 381,044 395,349
------------- ------------- -------------
11,364,693 13,700,154 14,307,778
Accumulated depreciation and amortization....... (1,270,127) (3,899,035) (5,300,523)
------------- ------------- -------------
$ 10,094,566 $ 9,801,119 $ 9,007,255
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-142
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Channel rights and goodwill........................ $ 5,486,826 $ 5,486,826 $5,486,826
Covenant not to compete............................ 797,101 797,101 797,101
------------ ------------ ------------
6,283,927 6,283,927 6,283,927
Accumulated amortization........................... (636,542) (1,055,588) (1,265,164)
------------ ------------ ------------
$ 5,647,385 $ 5,228,339 $5,018,763
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Division leases from third parties channel rights licensed by the
Federal Communications Commission ("FCC"). Under FCC rules, the base term of
each lease cannot exceed the term of the underlying FCC license. FCC licenses
for wireless cable frequencies range from five to ten years, and there is no
automatic renewal of such licenses. The use of such frequencies by the third
party lessors is subject to regulation by the FCC, and therefore the Division's
ability to enjoy the benefit of these leases is dependent upon the third party
lessors' continuing compliance with applicable regulations. The remaining terms
of the Division's leases range from approximately one year to seven years. Most
of the Division's leases provide for renewal of their terms upon FCC renewal of
the underlying license or require the parties to negotiate renewal in good
faith. Although the Division has no reason to believe that its leases will not
be renewed or that the underlying FCC licenses will be canceled or not renewed,
such event would prevent the Division from delivering programming over the
affected frequencies, which could have a material adverse effect on the
Division. Channel rights lease agreements generally require payments based on
the greater of specified minimums or amounts based upon various factors
including subscriber levels, subscriber revenues, the cost of transmission
equipment and facilities, and facility operating costs as specified in the
agreements.
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 (8) 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
F-143
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
damages related to the Company's unwillingness to vacate the channels. Based on
the recent course of events and dealings between the Company and SAW, the
estimated range of loss, net of the Company's accrual, is $0 to $1.25 million.
Payments under the leases 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. Channel rights lease expenses were
approximately $23,000, $208,000, $344,000, 168,000 (unaudited), $177,000, and
$61,000 (unaudited) for the period from December 18, 1992 to June 30, 1993, for
the years ended June 30, 1994 and 1995, for the six month periods ended December
31, 1994 and 1995, and for the period from January 1, 1996 to February 23, 1996,
respectively.
Future minimum lease payments due under channel rights leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
- ------------------------------------------------------------------------------ ----------
<S> <C>
1996........................................................................ $ 185,000
1997........................................................................ 186,000
1998........................................................................ 186,000
1999........................................................................ 144,000
2000........................................................................ 66,000
</TABLE>
The Division also has operating leases for office space and equipment, land
for head-ends, and transmission facilities. Rental expenses incurred in
connection with these leases approximated $30,000, $76,000, $103,000, $61,000
(unaudited), 53,000, and $17,000 (unaudited) for the period from December 18,
1992 to June 30, 1993, for the years ended June 30, 1994 and 1995, for the six
month periods ended December 31, 1994 and 1995, and for the period from January
1, 1996 to February 23, 1996 respectively.
Future minimum lease payments under such leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
- ------------------------------------------------------------------------------ ----------
<S> <C>
1996........................................................................ $ 99,000
1997........................................................................ 96,000
1998........................................................................ 95,000
1999........................................................................ 106,000
2000........................................................................ 141,000
</TABLE>
Wireless cable system equipment, excluding television-top converters which
are provided by the Division, site reception testing and installation are
provided through a third party contractor under three year agreement commencing
in fiscal year 1994, which establish rate structures for such equipment and
services by service area subject to periodic adjustment, specifying minimum
charges aggregating $14,500 per month.
6. RELATED PARTY TRANSACTIONS
Prior to the Company's IPO, the Company and therefore the Division incurred
management fees and expenses pursuant to the terms of a management agreement
with Galaxy Management, Inc., an affiliate of
F-144
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
Galaxy, under which it managed a significant portion of the Company's business
including the Division. In addition to reimbursing expenses, the Company and
Division paid a management fee based on 3.5% of operating revenues as defined in
the management agreement. Subsequent to the IPO, Galaxy Management, Inc. ceased
to manage the Company's business, but continued to provide certain
administrative services for the Company for which it receives reimbursement for
certain of its salaries and expenses. Management fees incurred and reimbursable
expenses allocated in association with these agreements approximated $14,000 for
the period from December 18, 1992 to June 30, 1993,. $62,000 and $43,000 for the
years ended June 30, 1994 and 1995, respectively, $23,000 (unaudited) and
$20,000 for the six month periods ended December 31, 1994 and 1995,
respectively, and $2,000 (unaudited) for the period from January 1, 1996 to
February 23, 1996. Subsequent to the IPO, the Company's president and CEO who is
also the principal stockholder and president of Galaxy Management, Inc. receives
an annual salary under provisions of a two-year employment agreement of
$200,000, of which approximately $25,000, $43,000, $22,000 (unaudited), $20,000,
and $6,000 (unaudited) was allocable to the Division for the years ended June
30, 1994 and 1995, the six month periods ended December 31, 1994 and 1995 and
for the period from January 1, 1996 to February 23, 1996. Centralized Company
selling, general and administrative expenses attributable to its systems
operations allocated to the Division totalled $137,000, $296,000, $133,000
(unaudited), $124,000 and $41,000 (unaudited) for the years ended June 30, 1994
and 1995, the six month period ended December 31, 1994 and 1995 and for the
period from January 1, 1996 to February 23, 1996.
7. SUPPLEMENTAL CASH FLOWS DISCLOSURES
The Division had obligations amounting to approximately $1,074,000,
$133,000, $165,000 (unaudited), $4,000 and $8,000 (unaudited) related to systems
and equipment additions which are included in accounts payable at June 30, 1994
and 1995, December 31, 1994 and 1995, and February 23, 1996, respectively.
8. LIQUIDITY
The growth of the Division's business requires substantial investment on a
continuing basis to finance capital expenditures and related expenses for
subscriber growth and system development. The amount and timing of Division's
future capital requirements will depend upon a number of factors, many of which
are not within Division's control, including programming costs, equipment costs,
marketing expenses, staffing levels, subscriber growth and competitive
conditions. Failure to obtain any required additional financing or advances from
the Company could have a material adverse effect on the growth of Division and
the development of its market. While these activities may be financed in part by
Division cash flows, the Division continues to be dependent upon such advances
to fund these activities. The Company has been unable to secure additional
capitalization or expand its current availability under its existing revolving
credit and term loan, and has violated certain restrictive loan covenants in
fiscal 1995 and during the six month period ended December 31, 1995, for which
waivers have been obtained and expects to continue to violate such covenants in
fiscal 1996 resulting in expected events of default.
The Company's current financing agreement does not provide for any more
advances to the Company. Current cash reserves may not be sufficient to meet
future operating needs and liabilities. In connection with the proposed merger
discussed in Note 9, the Company has sold its channel rights in Sherman,
Lubbock, Amarillo and Athens for approximately $2.4 million to, and has entered
into a loan agreement with Heartland Wireless Communications, Inc.
("Heartland"). The Company expects that these
F-145
<PAGE>
CABLEMAXX, INC.
SAN ANTONIO DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LIQUIDITY (CONTINUED)
funds will enable the Company and therefore, the Division to continue operations
through the proposed closing date of the merger. If the merger is not completed,
the Company and therefore, the Division will have to find additional funding for
operations. Company management will continue to negotiate and seek to amend the
current revolving credit facility and also pursue other areas of financing.
9. PROPOSED MERGER
In September 1995, the Company entered into an agreement (the "Merger
Agreement") to merge with a subsidiary of Heartland. The Merger Agreement
provides for the conversion of the common stock of the Company at a value of
$8.50 per share, subject to adjustment, into Heartland common stock, with the
exchange ratio determined by the average price of Heartland stock preceding the
transaction date. The transaction is subject to approval by the shareholders' of
each company and is subject, among other things, to consent by the Heartland
bondholders. Should the Merger Agreement be terminated as a result of a third
party acquisition proposal that is approved by the Board of Directors of the
Company or recommended to the stockholders of the Company by the Board of
Directors, a $2 million fee is payable to Heartland.
In October 1995, the Company sold certain channel rights to Heartland for
approximately $2.4 million subject to adjustment to the appraised value of such
channel rights should the Merger Agreement be terminated for any reason other
than the Company's breach thereof or the Company's acceptance of a third party's
acquisition proposal.
In connection with the Merger Agreement, on December 26, 1995, the Company
entered into a loan agreement ("CMAX Loan") with Heartland for up to $1,000,000
bearing interest at published prime rate plus 2% of which (a) $500,000 was
advanced on or about December 29, 1995 to be used for working capital purposes,
and (b) $500,000 to be used for subscriber growth is funded at a rate of $500
per additional subscriber. The CMAX Loan will not increase the amount of CMAX
Excess Liabilities as set forth in the Merger Agreement. Upon consummation of
the Merger Agreement, it is anticipated that the CMAX Loan will remain as an
inter-company obligation from the Company to Heartland. In the event that the
Merger Agreement is not consummated, the CMAX Loan is payable August 29, 1996;
provided, that if the Merger Agreement is terminated as a result of a competing
acquisition proposal, then the CMAX Loan will be immediately due and payable.
10. SUBSEQUENT EVENTS (UNAUDITED)
The proposed merger as specified in Note 9 was consummated on February 23,
1996.
F-146
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CABLEMAXX, INC.
We have audited the accompanying statements of net assets of CableMaxx,
Inc.--Utah Division (the "Division") as of June 30, 1995 and December 31, 1995,
and the related statements of revenues and expenses, changes in net assets and
cash flows for the period from February 28, 1995 (acquisition) to June 30, 1995,
and for the six month period ended December 31, 1995, presented on the basis set
forth in Note 2. These financial statements are the responsibility of CableMaxx,
Inc.'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 audits 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.
The accompanying financial statements are prepared on the basis described in
Note 2, and are not intended to be a complete presentation of the Division's
financial position, results of operations and cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets of CableMaxx, Inc.--Utah Division as of
June 30, 1995 and December 31, 1995, and its revenues and expenses, changes in
net assets, and its cash flows for the period from February 28, 1995
(acquisition) to June 30, 1995 and for the six month period ended December 31,
1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
CableMaxx, Inc. (the "Company") and therefore, the Division will continue as a
going concern. As discussed in Note 6, the Company has entered into a merger
agreement which is pending approval. However, the Company's inability to
generate through operations or borrow under its revolving credit facility
sufficient cash flows to fund operations, the Company's expectation that it will
not meet certain financial covenant requirements under its revolving credit
facility and the Company's inability to meet the debt service requirements as
currently exist under its revolving credit facility raise substantial doubt
about the Company's and therefore, the Division's ability to continue as a going
concern. The accompanying financial statements do not include any adjustment
relating to the recoverability of asset carrying amounts or the amount of
liabilities that might result should the Division be unable to continue as a
going concern.
COOPERS & LYBRAND L.L.P.
Austin, Texas
February 16, 1996
F-147
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
------------- -------------
<S> <C> <C>
ASSETS
Prepaids and other................................................................. $ 2,000 $ 6,150
Systems and equipment, net of accumulated depreciation of $5,311 and $14,786 as of
June 30, 1995 and December 31, 1995, respectively................................ 127,366 117,891
Intangible assets, net of accumulated amortization of $239,881 and $603,749 as of
June 30, 1995 and December 31, 1995, respectively................................ 10,625,726 10,384,270
------------- -------------
Total assets................................................................. 10,755,092 10,508,311
------------- -------------
LIABILITIES
Accounts payable and accrued liabilities........................................... 26,110 77,054
------------- -------------
Total liabilities............................................................ 26,110 77,054
------------- -------------
Commitments
Net Assets................................................................... $ 10,728,982 $ 10,431,257
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-148
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
STATEMENTS OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
THE PERIOD
THE PERIOD FROM
FROM FEBRUARY JANUARY 1,
28, 1995 SIX MONTH 1996
(ACQUISITION) PERIOD ENDED TO
TO JUNE 30, DECEMBER 31, FEBRUARY 23,
1995 1995 1996
------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues...................................... $ -- $ -- $ --
------------- -------------- -------------
Operating expenses:
Systems operations.......................... -- -- --
Selling, general and administrative......... 37,557 55,448 16,555
Depreciation and amortization............... 245,192 373,343 112,444
------------- -------------- -------------
Total operating expenses................ 282,749 428,791 128,999
------------- -------------- -------------
Operating Expenses in excess of revenues...... (282,749) (428,791) (128,999)
Interest expense.............................. (210,000) (304,642) (82,747)
------------- -------------- -------------
Expenses in excess of revenues.......... $ (492,749) $ (733,433) $(211,746)
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-149
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
ADVANCE FROM ACCUMULATED
COMPANY DEFICIT TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Balance, February 28, 1995 (acquisition)............................ -- -- --
Expenses in excess of revenues for period......................... $ (492,749) $ (492,749)
Net advance from Company.......................................... $ 11,221,731 11,221,731
------------- ------------- -------------
Balance, June 30, 1995.............................................. 11,221,731 (492,749) 10,728,982
Expenses in excess of revenues for period......................... (733,433) (733,433)
Net advance from Company.......................................... 435,708 435,708
------------- ------------- -------------
Balance, December 31, 1995.......................................... 11,657,439 (1,226,182) 10,431,257
Expenses in excess of revenues for period (unaudited)............. (211,746) (211,746)
Net advance from Company (unaudited).............................. 173,420 173,420
------------- ------------- -------------
Balance, February 23, 1996 (unaudited).............................. $ 11,830,859 $ (1,437,928) $ 10,392,931
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-150
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE PERIOD THE PERIOD
FROM FROM
FEBRUARY 28, JANUARY 1,
1995 SIX MONTH 1996
(ACQUISITION) PERIOD ENDED TO
TO DECEMBER 31, FEBRUARY 23,
JUNE 30, 1995 1995 1996
------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Expenses in excess of revenues.............. $ (492,749) $ (733,433) $(211,746)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 245,192 373,343 112,444
Changes in assets and liabilities:
Prepaids and other.................... (2,000) (4,150) 448
Accounts payable and accrued
liabilities......................... 26,110 (26,110) 4,481
------------- -------------- -------------
Net cash used in operating
activities.......................... (223,447) (390,350) (94,373)
------------- -------------- -------------
Cash flows from investing activities:
Acquisition of wireless cable systems....... (6,459,966) (45,358) (79,047)
Purchases of equipment...................... (132,677)
------------- -------------- -------------
Net cash used in investing
activities.......................... (6,592,643) (45,358) (79,047)
------------- -------------- -------------
Cash flows from financing activities:
Advances from Company....................... 6,816,090 435,708 173,420
------------- -------------- -------------
Net cash provided by financing
activities.......................... 6,816,090 435,708 173,420
------------- -------------- -------------
Net increase in cash.......................... 0 0 0
Cash, beginning of period..................... 0 0 0
------------- -------------- -------------
Cash, end of period........................... $ 0 $ 0 $ 0
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-151
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
CableMaxx, Inc. (the "Company") develops, owns and operates wireless cable
television systems providing wireless cable television service to subscribers in
Austin, San Antonio, Temple/Killeen and Waco, Texas.
On June 30, 1994, the Company entered into an agreement to acquire wireless
cable channel rights in Salt Lake City, Utah (the "Division") for approximately
$10.87 million, making an initial deposit of approximately $1.1 million. On
February 28, 1995 ("Acquisition"), the Company completed the acquisition
consisting of cash in the amount of $6.5 million and the issuance of 907,311
shares of the Company's common stock. These rights do not constitute an existing
operating wireless cable system. Under the Acquisition Agreement, the Company is
obliged to maintain the related licenses and perform all other obligations
imposed under each channel lease. The Division does not constitute an operating
wireless cable system as it has no subscribers nor is it transmitting wireless
cable programming.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the assets, liabilities,
revenues and expenses that are directly related to the Division presented at the
Company's historical cost. The financial statements do not include general
unallocated corporate assets, liabilities, equity, revenues and expenses of the
Company which are not directly related to the Division nor debt financing and
associated interest expense to the extent it is not directly related to the
Division and, therefore, may not necessarily reflect what the financial
position, results of operations and cash flows of the Division would have been
had it been a separate, stand-alone entity during the periods covered by the
financial statements.
The accompanying unaudited statements of revenue and expenses, changes in
net assets and cash flows have been prepared in accordance with generally
accepted accounting principles for interim financial information. They do not
include all information and notes required by generally accepted accounting
principles for complete financial statements and do not include a statement of
net assets. However, except as disclosed herein, there has been no material
change in the information disclosed in the Notes to Financial Statements of the
Division for the six months ended December 31, 1995 included elsewhere herein.
In the opinion of Management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the periods presented are not necessarily indicative of
the results that may be expected for the full year. All information with respect
to periods after December 31, 1995 is unaudited.
CASH MANAGEMENT
The Division utilizes the central cash management systems of the Company to
finance its operations. Cash requirements are satisfied by transactions between
the Division and the Company. Such transactions are included in changes in net
assets as net advances from Company and to the extent such transactions are cash
transactions of the Company, they are included in the Division's statements of
cash flows.
SYSTEMS AND EQUIPMENT
Systems and equipment is carried at cost and includes the cost of
transmission equipment. Cost of maintenance and repairs is charged to expense as
incurred. Upon sale or retirement, if any, the related cost
F-152
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and accumulated depreciation are removed from their respective accounts, and any
resulting gain or loss would be credited or charged to income.
Systems and equipment consist of head-end, tower and transmission equipment
which is depreciated straight-line over 7 years.
INTANGIBLE ASSETS
Intangible assets consist of acquired channel rights and goodwill which is
amortized straight-line over 15 years. The Division reviews channel rights and
goodwill for impairment from time to time, measuring impairment based upon
expected future undiscounted cash flows from operations.
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 liability at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between tax basis 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 income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
While the Company has a net operating loss carryforward for income tax purposes
of approximately $19,211,000 as of June 30, 1995, which expires beginning in
2007, such losses are not available for the Division's benefit.
The results of operations of the Division have been included in the federal
income tax returns of the Company. Accordingly, net operating losses generated
by the Division are subject to potential utilization only by the Company and
therefore are not reported as Division deferred income taxes. If such net
operating losses totaling approximately $1,226,000 and $1,438,000 (unaudited) as
of December 31, 1995 and February 23, 1996, respectively, were allocable to the
Division, they would be subject to a full valuation allowance. Other current and
deferred income taxes have been allocated to the Division as if such taxes were
calculated on a separate return basis using the accounting principles in
Statement of Financial Accounting Standards No. 109 and are not considered
significant in the aggregate.
3. COMMITMENTS AND CONTINGENCIES
The Division leases from third parties channel rights licensed by the
Federal Communications Commission ("FCC"). Under FCC rules, the base term of
each lease cannot exceed the term of the underlying FCC license. FCC licenses
for wireless cable frequencies range from five to ten years, and there is no
automatic renewal of such licenses. The use of such frequencies by the third
party lessors is subject to regulation by the FCC, and therefore the Division's
ability to enjoy the benefit of these leases is dependent upon the third party
lessors' continuing compliance with applicable regulations. The remaining terms
of
F-153
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the Division's leases range from approximately one year to seven years. Most of
the Division's leases provide for renewal of their terms upon FCC renewal of the
underlying license or require the parties to negotiate renewal in good faith.
Although the Division has no reason to believe that its leases will not be
renewed or that the underlying FCC licenses will be canceled or not renewed,
such event would prevent the Division from delivering programming over the
affected frequencies, which could have a material adverse effect on the
Division. Channel rights lease agreements generally require payments based on
the greater of specified minimums or amounts based upon various factors
including subscriber levels, subscriber revenues, the cost of transmission
equipment and facilities, and facility operating costs as specified in the
agreements.
Payments under the leases 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. Channel rights lease expenses were
approximately $19,000, $36,000 and $10,350 (unaudited) for the period from
Acquisition to June 30, 1995, for the six month period ended December 31, 1995,
and for the period from January 1, 1996 to February 23, 1996, respectively.
Future minimum lease payments due under channel rights leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
------------ ---------
<S> <C>
1996............................................................................... $ 66,000
1997............................................................................... 66,000
1998............................................................................... 66,000
1999............................................................................... 66,000
2000............................................................................... 66,000
</TABLE>
The Division also has operating leases for office space and equipment, land
for head-ends, and transmission facilities. Rental expenses incurred in
connection with these leases approximated $25,000, $19,000 and $5,700
(unaudited) for the period from Acquisition to June 30, 1995, for the six month
period ended December 31, 1995, and for the period from January 1, 1996 to
February 23, 1996 respectively.
Future minimum lease payments under such leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
------------ ---------
<S> <C>
1996............................................................................... $ 39,000
1997............................................................................... 41,000
1998............................................................................... 43,000
1999............................................................................... 46,000
2000............................................................................... 48,000
</TABLE>
4. SUPPLEMENTAL CASH FLOWS DISCLOSURES
The Division had obligations amounting to approximately $77,000 and $39,500
(unaudited) related to intangible asset additions which are included in accounts
payable at December 31, 1995 and February 23, 1996.
F-154
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LIQUIDITY
The growth of the Division's business requires substantial investment on a
continuing basis to finance capital expenditures and related expenses for
subscriber growth and system development. The amount and timing of Division's
future capital requirements will depend upon a number of factors, many of which
are not within Division's control, including programming costs, equipment costs,
marketing expenses, staffing levels, subscriber growth and competitive
conditions. Failure to obtain any required additional financing of advances from
the Company could have a material adverse affect on the growth of Division and
the development of its market. While these activities may be financed in part by
Division cash flows, the Division continues to be dependent upon such advances
to fund these activities. The Company has been unable to secure additional
capitalization or expand its current availability under its existing revolving
credit and term loan, and has violated certain restrictive loan covenants in
fiscal 1995 and during the six month period ended December 31, 1995 for which
waivers have been obtained and expects to continue to violate such covenants in
fiscal 1996 resulting in expected events of default.
The Company's current financing agreement does not provide for any more
advances to the Company. Current cash reserves may not be sufficient to meet
future operating needs and liabilities. In connection with the proposed merger
discussed in Note 6, the Company has sold its channel rights in Sherman,
Lubbock, Amarillo and Athens for approximately $2.4 million to, and has entered
into a loan agreement with Heartland Wireless Communications Inc. ("Heartland").
The Company expects that these funds will enable the Company and therefore, the
Division to continue operations through the proposed closing date of the merger.
If the merger is not completed, the Company and therefore, the Division will
have to find additional funding for operations. Company management will continue
to negotiate and seek to amend the current revolving credit facility and also
pursue other areas of financing.
6. PROPOSED MERGER
In September 1995, the Company entered into an agreement (the "Merger
Agreement") to merge with a subsidiary of Heartland. The Merger Agreement
provides for the conversion of the common stock of the Company at a value of
$8.50 per share, subject to adjustment, into Heartland common stock, with the
exchange ratio determined by the average price of Heartland stock preceding the
transaction date. The transaction is subject to approval by the shareholders' of
each company and is subject, among other things, to consent by the Heartland
bondholders. Should the Merger Agreement be terminated as a result of a third
party acquisition proposal that is approved by the Board of Directors of the
Company or recommended to the stockholders of the Company by the Board of
Directors, a $2 million fee is payable to Heartland.
In October 1995, the Company sold certain channel rights to Heartland for
approximately $2.4 million subject to adjustment to the appraised value of such
channel rights should the Merger Agreement be terminated for any reason other
than the Company's breach thereof or the Company's acceptance of a third party's
acquisition proposal.
In connection with the Merger Agreement, on December 26, 1995, the Company
entered into a loan agreement ("CMAX Loan") with Heartland for up to $1,000,000
bearing interest at published prime rate plus 2% of which (a) $500,000 was
advanced on or about December 29, 1995 to be used for working capital purposes,
and (b) $500,000 to be used for subscriber growth is funded at a rate of $500
per additional subscriber. The CMAX Loan will not increase the amount of CMAX
Excess Liabilities as set forth in the Merger Agreement. Upon consummation of
the Merger Agreement, it is anticipated that the CMAX Loan
F-155
<PAGE>
CABLEMAXX, INC.
UTAH DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. PROPOSED MERGER (CONTINUED)
will remain as an inter-company obligation from the Company to Heartland. In the
event that the Merger Agreement is not consummated, the CMAX Loan is payable
August 29, 1996; provided, that if the Merger Agreement is terminated as a
result of a competing acquisition proposal, then the CMAX Loan will be
immediately due and payable.
7. SUBSEQUENT EVENTS (UNAUDITED)
The proposed merger as specified in Note 6 was consummated on February 23,
1996.
F-156
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TECHNIVISION, INC.:
We have audited the accompanying balance sheet of Dayton System, a division
of Technivision, Inc., as of May 31, 1994 and 1995, and the related statements
of operations and system equity and cash flows for the years 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Dayton System, a division of
Technivision, Inc., as of May 31, 1994 and 1995, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Dayton System will continue as a going concern. As discussed in note 2 to the
financial statements, Dayton System, which is dependent upon contributions from
Technivision, Inc. to fund operating activities, and Technivision, Inc. have
incurred cumulative losses since inception of $2,858,200 and $14,871,000,
respectively, through May 31, 1995, and as of that date current liabilities
exceeded current assets by $372,464 and $15,086,000, respectively. Additional
capital or financing is needed to enable Technivision, Inc. to meet its debt
service requirements in fiscal year 1996. These factors, as more fully discussed
in note 2, raise substantial doubt about Dayton System's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Dallas, Texas
January 15, 1996
F-157
<PAGE>
DAYTON SYSTEM
(A DIVISION OF TECHNIVISION, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, MAY 31, NOVEMBER 30,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash................................................................. $ -- $ 22,558 $ 21,827
Subscriber receivables, net of allowance for doubtful accounts of
$5,322 in 1994 and $21,408 in 1995................................. 104,756 153,849 96,931
Prepaid expenses and other........................................... 19,780 21,425 98,499
------------ ------------ ------------
Total current assets............................................... 124,536 197,832 217,257
Systems and equipment, net (note 3).................................... 2,779,114 2,898,143 2,849,833
Leased license investment, net of accumulated amortization of $16,238
in 1994 and $68,003 in 1995.......................................... 912,503 889,690 863,617
Other assets, net...................................................... 34,956 -- --
------------ ------------ ------------
$ 3,851,109 $ 3,985,665 $3,930,707
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SYSTEM EQUITY
Current liabilities:
Accounts payable..................................................... $ 200,696 $ 510,862 $ 610,772
Accrued expenses and other liabilities............................... 292,210 557,954 140,304
Current portion of long-term debt (note 4)........................... 51,187 52,500 94,924
------------ ------------ ------------
Total current liabilities.......................................... 544,093 1,121,316 846,000
Long-term debt, less current portion (note 4).......................... 176,031 128,680 189,848
System equity.......................................................... 3,130,985 2,735,669 2,894,859
Commitments (note 6)...................................................
------------ ------------ ------------
$ 3,851,109 $ 3,985,665 $3,930,707
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-158
<PAGE>
DAYTON SYSTEM
(A DIVISION OF TECHNIVISION, INC.)
STATEMENTS OF OPERATIONS AND SYSTEM EQUITY
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JUNE 1, 1995
YEARS ENDED MAY 31 ENDED TO FEBRUARY
---------------------------- NOVEMBER 30, 23,
1994 1995 1994 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Subscription...................................... $ 268,836 $ 1,027,389 $ 449,734 $ 913,339
Installation...................................... 54,504 57,093 37,186 34,004
------------- ------------- ------------- --------------
Total revenues................................ 323,340 1,084,482 486,920 947,343
------------- ------------- ------------- --------------
Operating expenses:
System operations................................. 587,741 1,059,838 624,546 717,253
Selling, general and administrative............... 799,439 726,288 372,058 535,831
Depreciation and amortization..................... 269,182 507,195 152,242 429,771
------------- ------------- ------------- --------------
Total operating expenses...................... 1,656,362 2,293,321 1,148,846 1,682,855
------------- ------------- ------------- --------------
Operating loss................................ (1,333,022) (1,208,839) (661,926) (735,512)
------------- ------------- ------------- --------------
Other income (expense):
Interest expense.................................. (10,225) (18,378) (7,093) (29,429)
Other expense, including $105,000 to affiliates in
1994............................................ (105,000) (1,285) -- --
------------- ------------- ------------- --------------
Total other income (expense).................. (115,225) (19,663) (7,093) (29,429)
------------- ------------- ------------- --------------
Net loss...................................... (1,448,247) (1,228,502) (669,019) (764,941)
System equity, beginning of period.................. 329,668 3,130,985 3,130,985 2,735,669
Net investment by parent............................ 4,249,564 833,186 428,140 1,009,644
------------- ------------- ------------- --------------
System equity, end of period........................ $ 3,130,985 $ 2,735,669 $ 2,890,106 $ 2,980,372
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-159
<PAGE>
DAYTON SYSTEM
(A DIVISION OF TECHNIVISION, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JUNE 1,
YEARS ENDED MAY 31 ENDED 1995
---------------------- NOVEMBER TO FEBRUARY
1994 1995 30, 1994 23, 1996
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(1,448,247) $(1,228,502) $(669,019) $(764,941)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization......... 269,182 507,195 152,242 429,771
Changes in assets and liabilities:
Subscriber receivables.............. (104,756) (49,093) (59,195) (10,275)
Prepaid expenses and other.......... (54,736) 33,311 (73,925) 9,357
Accounts payable, accrued expenses
and other liabilities............. 492,906 575,910 375,022 (208,352)
---------- ---------- ----------- -----------
Net cash used in operating
activities...................... (845,651) (161,179) (274,875) (544,440)
---------- ---------- ----------- -----------
Cash flows from investing activities:
Purchases of systems and equipment...... (2,490,011) (574,459) (112,096) (446,389)
Expenditures for leased licenses........ (887,979) (28,952) -- (8,485)
---------- ---------- ----------- -----------
Net cash used in investing
activities...................... (3,377,990) (603,411) (112,096) (454,874)
---------- ---------- ----------- -----------
Cash flows from financing activities:
Net investment by parent................ 4,249,564 833,186 428,140 1,009,644
Payments on notes payable............... (25,923) (46,038) (18,310) (27,844)
---------- ---------- ----------- -----------
Net cash provided by financing
activities...................... 4,223,641 787,148 409,830 981,800
---------- ---------- ----------- -----------
Net increase (decrease) in cash........... -- 22,558 22,859 (17,514)
Cash at beginning of period............... -- -- -- 22,558
---------- ---------- ----------- -----------
Cash at end of period..................... $ -- $ 22,558 $ 22,859 $ 5,044
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-160
<PAGE>
DAYTON SYSTEM
(A DIVISION OF TECHNIVISION, INC.)
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
The accompanying financial statements include the accounts of Dayton System
("Dayton System"), a division of Technivision, Inc. ("Technivision"). Dayton
System has the rights to, and operates a wireless cable television system in,
Dayton, Ohio.
(b) SYSTEMS AND EQUIPMENT
Systems and equipment are stated at cost and include the cost of
transmission equipment as well as subscriber installations. Reception equipment
on subscriber premises and costs associated with initial subscriber
installations are capitalized. Upon subscriber disconnect, Dayton System
continues to depreciate the full capitalized installation cost subsequent to the
disconnection. Depreciation and amortization are recorded on a straight-line
basis for financial reporting purposes over useful lives ranging from 3 to 10
years. Repair 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.
(c) INTANGIBLE ASSETS
Leased license investment includes costs incurred to acquire wireless cable
channel rights. Costs incurred to acquire channel rights issued by the Federal
Communications Commission ("FCC") are deferred and amortized ratably over an
estimated useful life of 20 years. Dayton System continually reevaluates the
propriety of the carrying amounts of the leased license investment based on
undiscounted future cash flows as well as the amortization period to determine
whether current events or circumstances warrant adjustments to the carrying
amount or a revised estimate of the useful life.
(d) REVENUE RECOGNITION
Revenues from subscribers are recognized in the period that the service is
provided. Installation fees are recognized upon origination of service to a
subscriber to the extent of costs incurred to obtain subscribers. Installation
revenues in excess of such costs will be deferred and amortized over six years.
(e) SYSTEM OPERATIONS
System operations expenses consist principally of programming fees, channel
lease costs, tower rental and other costs of providing services.
(f) INCOME TAXES
Dayton System is included in the consolidated federal income tax return of
Technivision's parent company, Three Sixty Corp. Total current and deferred tax
expense is allocated to the Company as if such
F-161
<PAGE>
DAYTON SYSTEM
(A DIVISION OF TECHNIVISION, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
taxes were calculated on a separate return basis under the asset and liability
method prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." For the years ended May 31, 1994 and 1995, no tax
benefit or expense was recorded as a result of losses incurred by Dayton System.
(g) STATEMENTS OF CASH FLOWS
Dayton System considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
(h) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed financial
information of Dayton System contains all adjustments, consisting only of those
of a recurring nature, necessary to present fairly Dayton System's financial
position as of November 30, 1995, and the results of its operations and its cash
flows for the six-month period ended November 30, 1994 and for the period June
1, 1995 to February 23, 1996. These results are not necessarily indicative of
the results to be expected for the full fiscal year.
(2) REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
Dayton System as a going concern. As shown on the accompanying balance sheet,
Dayton System's current liabilities exceeded its current assets by $372,464 at
May 31, 1995. In addition, Dayton System has sustained losses through May 31,
1995 of $2,858,200. Further, Dayton System is dependent upon contributions from
Technivision until such time as its operating activities provide cash flows
sufficient to fund operating activities. Technivision's current liabilities
exceeded its current assets by $15,086,000 at May 31, 1995 and Technivision has
sustained losses through May 31, 1995 of $14,781,000. In order for Technivision
to meet its debt service requirements in fiscal year 1996, Technivision must
obtain additional capital or debt financing. Given these facts, the ability of
Dayton System to continue as a going concern and the recoverability of a major
portion of its recorded asset amounts is dependent upon Technivision's ability
to meet its financing requirements on a continuing basis.
Technivision and its stockholders have been exploring financing and
capitalization alternatives, including the possibility of a sale of Technivision
or its assets. As a result, in October 1995, Technivision entered into a
definitive agreement with Heartland Wireless Communications, Inc. ("Heartland")
whereby Heartland will acquire substantially all of the assets of Technivision
in exchange for Heartland common stock, less an amount of assumed obligations,
and will simultaneously contribute a portion of the assets (including Dayton
System) to a newly-formed joint venture. This transaction is subject to certain
conditions and there can be no assurance that Technivision will be able to
consummate such transaction. Dayton System's financial statements do not include
any adjustments relating to the recoverability of recorded asset amounts or
amounts of liabilities that might be necessary depending upon the outcome of
these uncertainties.
F-162
<PAGE>
DAYTON SYSTEM
(A DIVISION OF TECHNIVISION, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) SYSTEMS AND EQUIPMENT
Systems and equipment consists of the following at May 31:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Equipment awaiting installation................................... $ 118,334 $ 30,836
Subscriber premises equipment and installation costs.............. 584,096 909,223
Transmission equipment and system construction costs.............. 1,570,145 1,870,341
Office furniture and equipment.................................... 449,158 485,792
Buildings and leasehold improvements.............................. 281,802 281,802
------------ ------------
3,003,535 3,577,994
Accumulated depreciation and amortization......................... (224,421) (679,851)
------------ ------------
$ 2,779,114 $ 2,898,143
------------ ------------
------------ ------------
</TABLE>
Equipment awaiting installation is not yet subject to depreciation.
(4) LONG-TERM DEBT
Long-term debt at May 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
IBM................................................................... $ 94,827 $ 80,116
GMAC.................................................................. 94,589 80,401
Other................................................................. 37,802 20,663
---------- ----------
277,218 181,180
Less current portion.................................................. 51,187 52,500
---------- ----------
$ 176,031 $ 128,680
---------- ----------
---------- ----------
</TABLE>
Long-term debt includes equipment notes payable. The notes, which require
monthly installments of principal and interest, are collateralized by the
equipment and have interest rates ranging from 7.5% to 9.5%. The notes mature at
various dates through November 1999.
Aggregate maturities for long-term debt are as follows: 1996, $52,500; 1997,
$54,000; 1998, $55,500; and 1999, $19,180.
(5) LEASES
Dayton System, through its parent company, leases from third parties channel
rights licensed by the FCC. Under FCC policy, the base term of most of these
leases cannot exceed ten years from the time the lessee begins using the leased
channel rights. FCC licenses for wireless cable channels range from five to ten
years, and there is no automatic renewal of such licenses. The use of such
channels by third parties is subject to regulation by the FCC and, therefore,
Dayton System's ability to continue to enjoy the benefits of these leases is
dependent upon the third party lessor's continuing compliance with applicable
regulations. The initial terms of Dayton System's channel leases are generally
10 years, although certain of Dayton System's channel leases have initial terms
expiring in the next several years. Most of Dayton System's leases provide for
automatic renewal of their terms upon FCC renewal of the underlying license
F-163
<PAGE>
DAYTON SYSTEM
(A DIVISION OF TECHNIVISION, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) LEASES (CONTINUED)
and/or require the parties to negotiate renewal in good faith. Although Dayton
System does not believe that the termination of or failure to renew a single
channel lease could adversely affect Dayton System, several of such terminations
or failures could have a material adverse effect on Dayton System. Channel
rights lease agreements generally require payments based on the greater of
specified minimums or amounts based upon various factors, such as subscriber
levels or subscriber revenues.
Payments under the channel rights lease agreements 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. Channel rights lease
expense was $89,425 and $95,134 for the years ended May 31, 1994 and 1995.
Dayton System also has certain operating leases for office space and
transmission tower space. Rent expense incurred in connection with other
operating leases was $27,500 and $30,000 for the years ended May 31, 1994 and
1995, respectively.
Future minimum lease payments due under channel rights leases and other
noncancellable operating leases in effect at May 31, 1995 are as follows:
<TABLE>
<CAPTION>
CHANNEL OTHER
YEAR ENDING RIGHTS OPERATING
MAY 31, LEASES LEASES
------------- ---------- -----------
<S> <C> <C>
1996............................................................. $ 105,974 $ 42,000
1997............................................................. 105,974 66,000
1998............................................................. 105,974 66,000
1999............................................................. 105,974 38,500
2000............................................................. 105,974 36,000
</TABLE>
(6) RELATED PARTY TRANSACTIONS
Dayton System paid $105,000 in 1995 to various affiliates for services
performed in connection with the development of wireless cable television
systems and certain administrative services.
(7) COMMITMENTS
Dayton System has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire through 1997.
The agreements generally require monthly payments based upon the number of
subscribers, subject to certain minimums.
F-164
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT ON
THE FINANCIAL STATEMENTS
To the Board of Directors
USA Wireless Cable, Inc.
Scottsbluff, Nebraska
We have audited the accompanying balance sheet of USA Wireless Cable, Inc.
as of December 31, 1995, and the related statements of operations, stockholder's
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 USA Wireless Cable, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has suffered recurring losses from operations
and there is considerable debt due in 1996. This raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
/s/ McGladrey & Pullen, LLP
Cheyenne, Wyoming
March 15, 1996
F-165
<PAGE>
USA WIRELESS CABLE, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS (NOTE 3)
Current Assets:
Cash and cash equivalents...................................................... $ 23,678 $ 32,136
Trade receivables.............................................................. 30,961 43,729
Income tax refund receivable................................................... 187,805 1,662
Prepaid expense and other current assets....................................... 9,268 12,126
Assets held for sale........................................................... -- 1,440,850
------------- -------------
Total current assets............................................................... 251,712 1,530,503
------------- -------------
Property and Equipment
Buildings...................................................................... 59,742 55,669
Transmission equipment and system construction cost............................ 2,461,956 1,633,719
Subscriber premises equipment and deferred installation costs.................. 2,198,740 1,609,777
Office furniture and equipment................................................. 50,705 39,350
Subscriber equipment inventory................................................. 131,096 78,031
Transportation equipment....................................................... 106,401 61,649
------------- -------------
5,008,640 3,478,195
Less accumulated depreciation...................................................... 668,680 816,676
------------- -------------
4,339,960 2,661,519
------------- -------------
Other Assets
Deferred license and leased license acquisition costs, less accumulated
amortization of $49,669 for December 31, 1995 and $148,751 for September 30,
1996......................................................................... 6,550,851 6,628,758
Deferred financing costs, less accumulated amortization of $22,422 for December
31, 1995 and $28,733 for September 30, 1996.................................. 58,641 33,523
Deposits....................................................................... 87,873 2,275
------------- -------------
6,697,365 6,664,556
------------- -------------
$ 11,289,037 10,856,578
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Note payable, stockholder...................................................... -- 765,091
Note payable (Note 3).......................................................... $ 3,000,000 $ 3,000,000
Current maturities of long-term debt (Note 3).................................. 5,701,185 7,817,790
Checks in excess of bank balance............................................... -- 47,620
Accounts payable............................................................... 269,804 788,929
Accrued expenses............................................................... 349,773 330,235
Due to affiliate companies/stockholders........................................ 180,622 28,019
------------- -------------
Total current liabilities.......................................................... 9,501,334 12,777,684
------------- -------------
Long-Term Debt, less current maturities (Note 3)................................... 2,258,878 47,581
------------- -------------
Commitments and Contingencies (Notes 6, 9 and 10)
Stockholder's Equity (Deficit)
Common stock, par value $10 per share, authorized 1,000 shares, issued and
outstanding 100 shares....................................................... 1,000 1,000
Retain earnings (deficit)...................................................... (472,225) (1,969,687)
------------- -------------
(471,225) (1,968,687)
------------- -------------
$ 11,289,037 $ 10,856,578
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
F-166
<PAGE>
USA WIRELESS CABLE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
-------------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Subscriptions and fees:
Service and other.................................................. $ 719,819 $ 454,872 $ 1,379,140
Installation....................................................... 141,772 77,482 84,927
-------------- ------------ -------------
861,591 532,354 1,464,067
-------------- ------------ -------------
Costs and expenses:
Operating:
Programming fees................................................. 198,330 115,404 380,197
Technical and installation....................................... 442,580 281,928 302,811
Selling, general and administrative................................ 719,976 386,276 595,543
Depreciation and amortization...................................... 676,152 420,995 980,620
-------------- ------------ -------------
2,037,038 1,204,603 2,259,171
-------------- ------------ -------------
Operating (loss)................................................. (1,175,447) (672,249) (795,104)
-------------- ------------ -------------
Other income (expense):
Rental income...................................................... 20,060 14,960 10,754
Interest income.................................................... 16,563 16,437 --
Interest (expense)................................................. (520,748) (292,008) (792,302)
Other income (expense)............................................. (9,649) (4,918) 79,190
-------------- ------------ -------------
(493,774) (265,529) (702,358)
-------------- ------------ -------------
Loss before income taxes......................................... (1,669,221) (937,778) (1,497,462)
Federal and state income taxes (benefits) (Note 5)................... (449,305) (245,565) --
-------------- ------------ -------------
Net (loss)....................................................... $ (1,219,916) $ (692,213) $ (1,497,462)
-------------- ------------ -------------
-------------- ------------ -------------
Net (loss) per share............................................. $ (12,199) $ (6,922) $ (14,974)
-------------- ------------ -------------
-------------- ------------ -------------
</TABLE>
See Notes to Financial Statements.
F-167
<PAGE>
USA WIRELESS CABLE, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
YEAR ENDED DECEMBER 31, 1995 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS
----------- -------------
<S> <C> <C>
Balance, December 31, 1994.............................................................. $ 1,000 $ 747,691
Net (loss)............................................................................ -- (1,219,916)
----------- -------------
Balance, December 31, 1995.............................................................. 1,000 (472,225)
----------- -------------
Net (loss)............................................................................ -- (1,497,462)
----------- -------------
Balance, September 30, 1996 (unaudited)................................................. $ 1,000 $ (1,969,687)
----------- -------------
----------- -------------
</TABLE>
See Notes to Financial Statements.
F-168
<PAGE>
USA WIRELESS CABLE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
1995 1995 1996
------------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Cash Flows from Operating Activities
Net (loss)........................................................... $(1,219,916) $ (692,213) $(1,497,462)
Adjustments to reconcile net (loss) to net cash (used in) operating
activities:
Depreciation and amortization...................................... 676,152 420,995 980,620
Deferred taxes..................................................... (261,500) (245,565) --
Gain on sale of assets............................................. -- -- (70,983)
Change in assets and liabilities:
(Increase) decrease in:
Trade receivables.............................................. (23,564) (41,481) (12,768)
Prepaid expenses and other current assets...................... 8,079 (155,714) (6,218)
Income tax refund receivable................................... (187,805) -- 186,143
Increase (decrease) in:
Accounts payable............................................... (83,850) 30,948 519,125
Accrued expenses and deferred revenue.......................... 330,753 158,933 (19,538)
Income taxes payable........................................... (223,000) (223,000) --
Due to affiliates.............................................. 30,950 (44,916) (152,603)
------------- ----------- -----------
Net cash (used in) operating activities...................... (953,701) (792,013) (73,684)
------------- ----------- -----------
Cash Flows from Investing Activities
Purchase of property and equipment................................... (3,388,946) (2,578,793) (676,872)
Purchase of deferred licenses and leased license acquisition costs... (3,216,093) (3,059,043) (253,477)
Proceeds from sale of assets......................................... -- -- 268,974
Proceeds from note receivable........................................ 858,547 853,618 --
(Increase) decrease in deposits...................................... 15,077 -- 25,598
------------- ----------- -----------
Net cash (used in) investing activities...................... (5,731,415) (4,784,218) (635,777)
------------- ----------- -----------
Cash Flows from Financing Activities
Payments on deferred financing costs................................. (75,994) -- --
Net borrowings (payments) on short-term note payable, stockholder.... (189,746) 74,971 365,091
Proceeds from short-term note payable................................ 3,000,000 -- --
Proceeds from long-term borrowings................................... 4,040,317 5,552,541 620,200
Principal payments on long-term borrowings........................... (98,677) (13,114) (314,892)
Increase in checks written in excess of bank balance................. -- -- 47,620
------------- ----------- -----------
Net cash provided by financing activities.................... 6,675,900 5,614,398 718,019
------------- ----------- -----------
Increase (decrease) in cash and cash equivalents............. (9,216) 38,167 8,558
Cash and cash equivalents:
Beginning............................................................ 32,894 32,894 23,678
------------- ----------- -----------
Ending............................................................... $ 23,678 $ 71,061 $ 32,236
------------- ----------- -----------
------------- ----------- -----------
Supplementary Schedule of Cash Flow Information........................
Cash payments for interest........................................... $ 312,834 $ 118,013 $ 741,821
Cash payment (receipts) for income taxes............................. 180,000 180,000 (186,143)
Supplementary Schedule of Noncash Investing and Financing Activities
Licensing rights obtained in exchange for notes payable.............. 3,300,000 3,300,000 --
</TABLE>
See Notes to Financial Statements.
F-169
<PAGE>
USA WIRELESS CABLE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND FORMATION
The Company was formed on November 1, 1990 with an effective date of June 1,
1994. Delivery of cable services to subscribers commenced September 15, 1994.
The Company provides wireless cable television services to various rural
areas in and around Kearney, Nebraska, Radcliffe, Iowa and Kansas City, Kansas.
The Company grants credit to customers within those areas in connection with
those monthly services.
A summary of the Company's significant accounting policies is as follows:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.................................................................... 10
Transmission equipment and system construction cost.......................... 5
Office furniture and equipment............................................... 5
Transportation equipment..................................................... 4
</TABLE>
Subscriber equipment inventory is stated at the lower of cost or market
determined principally by the first-in, first-out method. Such inventory
consists primarily of wireless cable television distribution equipment not yet
placed in service.
Repair and maintenance costs are charged to expense when incurred. Renewals
and betterments are capitalized.
DEFERRED LICENSE AND LEASED LICENSE ACQUISITION COSTS
Costs include costs incurred to develop or acquire wireless cable licenses.
Costs incurred to acquire or lease licenses issued by the Federal Communications
Commission ("FCC") are deferred and are amortized ratably over useful lives of
10 years beginning with inception of service in each respective market, or
charged to expense if development is not pursued.
DEFERRED FINANCING COSTS
Bank fees and other direct costs incurred to acquire debt financing are
deferred and are amortized ratably over the term of the agreements.
REVENUE RECOGNITION
The cost of initial subscriber installations, which includes reception
equipment on subscriber premises, capitalized labor and related costs, and
outside contract labor, is included in property and equipment and
F-170
<PAGE>
USA WIRELESS CABLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized over five years. All other initial subscriber costs, including
marketing, feasibility studies and selling costs are expensed as incurred.
Installation fees are recognized as revenue upon subscriber hook-up to the
extent of costs to obtain subscribers.
EMPLOYEE HEALTH BENEFIT SELF-INSURANCE
The Company self insures employee health benefits. Claims expense is
recognized when the claims are incurred.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2. UNAUDITED INTERIM INFORMATION
In the opinion of management, the accompanying unaudited condensed financial
information of the Company contains all adjustments, consisting only of those of
a recurring nature, necessary to present fairly the Company's financial position
as of September 30, 1996, and the results of its operations and its cash flows
for the nine months ended September 30, 1995 and 1996. These results are not
necessarily indicative of the results to be expected for the full fiscal year.
NOTE 3. PLEDGED ASSETS AND LONG-TERM DEBT
Short-term debt:
<TABLE>
<S> <C>
Note payable to bank, due June 30, 1996 with interest payments due monthly at 1%
over bank base rate (8.5% at December 31, 1995)............................... $3,000,000
---------
---------
</TABLE>
F-171
<PAGE>
USA WIRELESS CABLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PLEDGED ASSETS AND LONG-TERM DEBT (CONTINUED)
The Company's long-term debt and collateral pledged thereon, consisted of
the following at December 31, 1995:
<TABLE>
<S> <C>
Term note with bank(1).......................................................... $3,571,640
Term note with bank(2).......................................................... 608,160
Note payable, scheduled repayments due in quarterly installments of $300,000,
including interest at 12%, through June, 1998, secured by a second position on
tangible and intangible assets related to Effingham and Wellsville, Kansas
wireless cable markets subordinated to the term note (2) and the short-term
note payable with the bank as shown above requiring that bank notes be repaid
before the subordinated debt holder can demand payment........................ 3,300,000
Note payable to stockholder, unsecured, due in full June, 2000, including
accrued interest at 8%........................................................ 400,000
9.25% to 12.1% vehicle loans due in varying monthly installments totaling $2,389
through October, 2000, collateralized by vehicles with a depreciated cost of
$85,050 at December 31, 1995.................................................. 80,263
---------
7,960,063
Less current maturities......................................................... 5,701,185
---------
Long-term portion....................................................... $2,258,878
---------
---------
</TABLE>
The term loan agreements are with the same bank and provide for monthly
interest payments at 1% over bank base rate (8.5% at December 31, 1995) on the
outstanding principal balances. The loans are guaranteed by the stockholder and
a related party. The term notes are collateralized by substantially all assets
of the Company and by an investment in marketable equity securities held by a
company owned by the stockholder. The following is a description of the term
loan agreements:
TERM NOTE (1)
The agreement provides for a maximum amount of $3,600,000 to be advanced
through April 30, 1996. The outstanding balance as of April 30, 1996 converts
into a long-term note with principal payments varying from $600,000 to
$1,000,000 per year commencing on April 30, 1997 until April 30, 2000. Interest
payments are due quarterly beginning June 30, 1996.
TERM NOTE (2)
The agreement provides for a maximum amount of $1,200,000 to be advanced
through June 30, 1996. The outstanding balance as of June 30, 1996 converts into
a long-term note with principal payments varying from $200,000 to $400,000 per
year, commencing on June 30, 1997 through June 30, 2000. Interest payments are
due quarterly.
The term loan agreements contain an operating cash flow ratio requirement
and restrictions on payment of subordinated debt, acquisition of fixed assets
and certain reporting requirements. Due to violations of certain of these
covenants, the term notes are callable by the bank and are thus reported in
current maturities.
F-172
<PAGE>
USA WIRELESS CABLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PLEDGED ASSETS AND LONG-TERM DEBT (CONTINUED)
Aggregate maturities required on the long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------------------------------------------------------------------
<S> <C>
1996................................................................................ $ 5,701,185
1997................................................................................ 1,223,720
1998................................................................................ 622,164
1999................................................................................ 11,229
2000................................................................................ 401,765
------------
$ 7,960,063
------------
------------
</TABLE>
NOTE 4. RELATED PARTY TRANSACTIONS
Selling, general and administrative expenses include $52,274 in expense
reimbursements paid to affiliated companies for the year ended December 31,
1995, and $48,723 for the nine months ended September 30, 1996 (unaudited).
NOTE 5. INCOME TAX MATTERS
Deferred taxes consist of the following components as of December 31, 1995:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................... $ 322,000
Property and equipment......................................... --
---------
322,000
Less valuation allowance....................................... 180,000
---------
142,000
---------
Deferred tax liabilities:
Installment sale............................................... --
Property and equipment......................................... 142,000
---------
142,000
---------
$ --
---------
---------
</TABLE>
Income taxes charged to income for the year ended December 31, 1995 consist
of the following:
<TABLE>
<S> <C>
Current tax expense (credit)..................................... $(187,805)
Deferred tax expense (credit).................................... (261,500)
---------
$(449,305)
---------
---------
</TABLE>
During the year ended December 31, 1995, the Company recorded a valuation
allowance of $180,000 on the deferred tax assets to reduce the total to an
amount that management belives will ultimately be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income. There was no other activity in the
valuation allowance account during 1995.
F-173
<PAGE>
USA WIRELESS CABLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INCOME TAX MATTERS (CONTINUED)
The Company has a net operating loss carryforward of approximately $825,000,
which can be used to reduce the Company's income tax liabilities through 2010.
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income (loss) from
continuing operations for the year ended December 31, 1995 due to the following:
<TABLE>
<S> <C>
Computed "expected" tax expense.................................. $(584,227)
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit................. (20,000)
Valuation allowance............................................ 180,000
Other.......................................................... (25,078)
---------
$(449,305)
---------
---------
</TABLE>
NOTE 6. CHANNEL LEASE COMMITMENTS
The Company has entered into various agreements to lease FCC channel
authorizations to provide wireless cable services. Annual payments are $10,000
per year due on or before the last day of each year of the lease agreements
and/or the date FCC approval was received. The leases typically provide for five
or ten year minimum terms and renewals thereafter at the option of the Company.
The Company's obligations under certain leases are subject to receipt by the
lessor of all necessary FCC approvals to begin providing service. Channel lease
expense during 1995 was approximately $61,600 and $38,100 for the nine months
ended September 30, 1996 (unaudited). As of December 31, 1995, aggregate minimum
annual payments pursuant to FCC approved channel leases are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- --------------------------------------------------------------------------------------
<S> <C>
1996.................................................................................. $ 150,000
1997.................................................................................. 150,000
1998.................................................................................. 150,000
1999.................................................................................. 150,000
2000.................................................................................. 116,667
Thereafter............................................................................ 245,002
----------
$ 961,669
----------
----------
</TABLE>
NOTE 7. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity on
those instruments.
NOTES PAYABLE AND LONG-TERM DEBT
Based on the terms of debt negotiated during 1995, the fair value of notes
payable and long-term debt is estimated to approximate the carrying value.
F-174
<PAGE>
USA WIRELESS CABLE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Compnay's financial instruments are as
follows:
<TABLE>
<CAPTION>
CARRYING
VALUE FAIR VALUE
------------- -------------
<S> <C> <C>
Cash and cash equivalents...................................... $ 23,678 $ 23,678
Long-term debt and notes payable............................... 10,960,063 10,960,063
</TABLE>
NOTE 8. EMPLOYEE BENEFIT PLAN
During 1995, the Company implemented a cash or deferred (401(k))
profit-sharing plan for employees who have completed one year of continuous
service. The eligible employees may elect to contribute up to the maximum
allowable not to exceed the limits of applicable Code Sections. The Company may,
at the discretion of the Board of Directors, match the employees contribution.
This amount is determined annually by the Board. There were no contributions
made by the Company for the year ended December 31, 1995 or for the nine months
ended September 30, 1996 (unaudited).
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement to purchase the rights to FCC
granted licenses for $200,000. The Company has made deposits totaling $80,000
toward the purchase of these rights and the remaining amount to be paid of
$120,000 is contingent upon the seller's ability to obtain certain modifications
to the licensing for use by the Company.
NOTE 10. RISKS, OTHER IMPORTANT FACTORS AND MANAGEMENT'S PLANS
The Company's activities have been concentrated on the construction of
wireless cable systems. As a result, the Company has experienced operating
losses since inception. These losses are expected to continued as additional
systems are being developed. There can be no assurance that the Company's
operations will become profitable. In connection with the continued construction
of the wireless cable systems, the Company will have to incur additional debt or
obtain additional capital in the future to complete the systems for all areas.
In addition, as described in Note 3, the Company has a significant amount of
debt due or callable in 1996. Management plans on selling part of the systems to
an interested party and paying off the outstanding debt. If the sale of the
systems does not occur, the Company will seek to refinance its bank debt.
NOTE 11. SUBSEQUENT EVENTS (UNAUDITED)
The Company has sold two of its systems to other cable companies. The
Mankato system was sold to American Telecasting, Inc. and American Telecasting
of Minnesota, Inc. on July 1, 1996. The sales price was $118,500 and the Company
recognized a gain of $58,550. The Company also has entered into an Agreement and
Plan of Merger with CS Wireless Systems dated July 23, 1996. CS Wireless will
acquire all of the issued and outstanding common stock of USA Wireless in a
merger transaction.
The Company entered in an agreement to sell the Kearney system to Antilles
Wireless, L.L.C. The agreement was entered into on May 15, 1996. The sale price
was $1,500,000 ($1,800,000 less $300,000 of cash infusion) which includes the
assumption of certain accounts payable and debt. There was a gain of $80,000.
The Company has three notes with the First National Bank of Omaha with a
total balance of approximately $7,800,000 that came due on June 30, 1996. USA
Wireless has received an extension on two of the notes until October 31, 1996
and the third note was extended to March 31, 1997. All other debt was paid off
in October, 1996.
F-175
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
-------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. 3
Prospectus Summary.................... 5
Summary Historical and Pro Forma
Financial Data...................... 12
Risk Factors.......................... 13
Use of Proceeds....................... 21
The Contributions..................... 21
The Unit Offering..................... 23
Capitalization........................ 24
Selected Historical Financial Data.... 25
The Exchange Offer.................... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 33
Business.............................. 39
Industry Overview..................... 48
Management............................ 56
Stock Ownership....................... 61
Certain Relationships and Related
Transactions........................ 62
Description of the Notes.............. 64
Description of Capital Stock.......... 96
Registration Rights................... 97
Certain Federal Income Tax
Considerations...................... 99
Plan of Distribution.................. 102
Book-entry; Delivery and Form......... 103
Legal Matters......................... 104
Selection of Accountants.............. 105
Experts............................... 105
Index to Pro Forma Financial
Information and Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
OFFER FOR ALL OUTSTANDING
11 3/8% SENIOR DISCOUNT NOTES DUE 2006
IN EXCHANGE FOR
11 3/8% SERIES B SENIOR DISCOUNT NOTES DUE 2006
EACH ISSUED BY
CS WIRELESS SYSTEMS, INC.
-------------
PROSPECTUS
-------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The holders of the outstanding Old Notes have agreed to pay all expenses
associated with the registration of the New Notes offered hereby. The table
below sets forth the expenses expected to be incurred and borne solely by the
Company in connection with the registration of the New Notes offered hereby. All
amounts shown are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 0
Accounting Fees and Expenses.................................... 0
Legal Fees and Expenses......................................... 0
Blue Sky Fees and Expenses...................................... 0
Printing Expenses............................................... 0
Fees of Exchange Agent.......................................... 0
Miscellaneous Expenses.......................................... 1,000
---------
Total................................................... $ 1,000
---------
---------
</TABLE>
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement (Registration
No. 333-20295) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Albany, State of New York, on January 29, 1997.
CS WIRELESS SYSTEMS, INC.
By: /s/ JARED E. ABBRUZZESE
-----------------------------------------
JARED E. ABBRUZZESE
CHAIRMAN
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement (Registration No. 333-20295) has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ------------------------------------ ------------------------------------ ---------------
<C> <S> <C>
* Chairman of the Board of Directors January 29,
- ------------------------------------ 1997
Jared E. Abbruzzese
* President, Chief Executive Officer January 29,
- ------------------------------------ and Director (Principal Executive 1997
David Webb Officer)
* Vice Chairman of the Board of January 29,
- ------------------------------------ Directors 1997
Alan Sonnenberg
* Chief Financial Officer (Principal January 29,
- ------------------------------------ Financial Officer) 1997
Jeffrey A. Kupp
* Senior Vice President of Business January 29,
- ------------------------------------ Development and Licensing 1997
Thomas W. Dixon
- ------------------------------------ Controller January ,
Brad R. Bradford 1997
* Director January 29,
- ------------------------------------ 1997
James P. Ashman
* Director January 29,
- ------------------------------------ 1997
Robert D. Happ
* Director January 29,
- ------------------------------------ 1997
J.R. Holland, Jr.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S> <C>
* Director January 29,
- ------------------------------------ 1997
D. Michael Sitton
- ------------------------------------ Director January ,
William W. Sprague 1997
*By /s/ WAYNE BARR, JR.
----------------------------------
Wayne Barr, Jr.
Attorney-in-Fact
</TABLE>
II-3
