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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number: 333-3288
CS Wireless Systems, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 23-2751747
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1101 Summit Avenue, Plano, Texas 75074
(Address of principal executive offices) (Zip Code)
(972) 398-5300
(Registrant's telephone number, including area code)
Indicate by check-mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date:
Shares Outstanding
Class as of November 20, 1998
----- -----------------------
Common Stock, $.001 par value 10,700,506
1
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INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 45,394 $ 74,564
Restricted cash ................................................. 4,222 5,030
Subscriber receivables, net ..................................... 1,030 1,026
Accounts receivable from affiliates ............................. 265 --
Prepaid expenses and other ...................................... 929 939
--------- ---------
Total current assets ....................................... 51,840 81,559
Plant and equipment, net ........................................... 54,905 50,519
License and leased license investment, net (Note 2) ................ 168,247 170,689
Goodwill, net (Note 2) ............................................. -- 48,243
Investment in and loans to equity affiliates ....................... 6,983 8,503
Debt issuance costs and other assets, net .......................... 8,609 11,190
--------- ---------
$ 290,584 $ 370,703
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ........................... $ 6,042 $ 8,370
Accounts payable to affiliates .................................. -- 282
Current portion of long-term debt ............................... 209 217
Current portion of BTA auction payable .......................... 371 1,122
Other current liabilities ....................................... 914 1,523
--------- ---------
Total current liabilities ................................. 7,536 11,514
Long-term debt, less current portion ............................... 308,010 283,686
BTA auction payable, less current portion .......................... 3,571 3,274
--------- ---------
Total liabilities .......................................... 319,117 298,474
--------- ---------
Stockholders' equity (deficit):
Common stock, $.001 par value; authorized 40,000,000 shares at
December 31, 1997 and 15,000,000 shares at September 30, 1998;
issued and outstanding 10,702,609 shares in 1998 and 1997 ..... 11 11
Treasury stock, at cost; 2,103 shares in 1998 and 1997 .......... (40) (40)
Additional paid-in capital ...................................... 154,557 154,557
Accumulated deficit ............................................. (183,061) (82,299)
--------- ---------
Total stockholders' equity (deficit) ....................... (28,533) 72,229
--------- ---------
$ 290,584 $ 370,703
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue .................................. $ 6,448 $ 6,746 $ 20,076 $ 20,246
Operating expenses:
Systems operations .................... 4,094 3,822 12,019 11,174
Selling, general and administrative ... 4,500 4,528 13,602 12,299
Impairment of goodwill (Note 2) ....... -- -- 46,378 --
Depreciation and amortization ......... 7,062 6,976 22,003 20,266
----------- ----------- ----------- -----------
Total operating expenses ........... 15,656 15,326 94,002 43,739
----------- ----------- ----------- -----------
Operating loss ........................... (9,208) (8,580) (73,926) (23,493)
----------- ----------- ----------- -----------
Other income (expense):
Interest income ....................... 803 1,379 2,746 4,261
Interest expense ...................... (8,765) (7,863) (25,657) (23,952)
Equity in losses of affiliates ........ (292) (385) (2,057) (385)
Other ................................. -- (7) -- 648
----------- ----------- ----------- -----------
Total other expense, net ........... (8,254) (6,876) (24,968) (19,428)
----------- ----------- ----------- -----------
Loss before income taxes and
cumulative effect of change in
accounting principle .................. (17,462) (15,456) (98,894) (42,921)
Income tax benefit ....................... -- 1,358 -- 4,072
----------- ----------- ----------- -----------
Loss before cumulative effect
of change in accounting principle ..... $ (17,462) $ (14,098) $ (98,894) $ (38,849)
Cumulative effect of change in
accounting principle for
organizational costs .................. -- -- (1,868) --
----------- ----------- ----------- -----------
Net loss ................................. $ (17,462) $ (14,098) $ (100,762) $ (38,849)
----------- ----------- ----------- -----------
Basic and diluted loss per common
share before cumulative effect of
change in accounting principle ........ $ (1.63) $ (1.32) $ (9.24) $ (3.66)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic and diluted loss per common
share ................................. $ (1.63) $ (1.32) $ (9.42) $ (3.66)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average basic and
diluted shares outstanding............. 10,700,506 10,700,506 10,700,506 10,618,451
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (100,762) $ (38,849)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................... 22,003 20,266
Deferred income taxes............................................ -- (4,072)
Accretion on discount notes and amortization of debt
issuance costs................................................. 25,055 22,444
Non-cash interest expense on other long-term debt................ 602 1,402
Equity in losses of affiliates................................... 2,057 385
Impairment of goodwill (Note 2).................................. 46,378 --
Cumulative effect of change in accounting principle for
organizational costs .......................................... 1,868 --
Gain on sale..................................................... -- (648)
Other .......................................................... 250 --
Changes in operating assets and liabilities:
Subscriber receivables......................................... (4) 273
Prepaid expenses and other..................................... (505) (144)
Accounts payable, accrued expenses and other liabilities....... (2,323) (1,630)
---------- -----------
Net cash used in operating activities...................... (5,381) (573)
---------- -----------
Cash flows from investing activities:
Purchases of plant and equipment................................... (16,991) (12,796)
Additions to license and leased license investment................. (4,589) (2,727)
Investment and advances to equity affiliates....................... (1,270) (5,899)
Investment in assets held for sale................................. -- (943)
Investment in restricted cash...................................... 808 (5,030)
Proceeds from sale of assets held for sale......................... -- 16,350
Other.............................................................. (160) (540)
---------- -----------
Net cash used in investing activities...................... (22,202) (11,585)
---------- -----------
Cash flows from financing activities:
Payments on notes payable.......................................... (125) (17,377)
Payment on capital leases and other................................ (96) (84)
Payment on BTA auction payable..................................... (1,366) --
---------- -----------
Net cash used in financing activities...................... (1,587) (17,461)
---------- -----------
Net decrease in cash and cash equivalents............................ $ (29,170) $ (29,619)
---------- -----------
Cash and cash equivalents at beginning of period..................... 74,564 113,072
---------- -----------
Cash and cash equivalents at end of period........................... $ 45,394 $ 83,453
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
5
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
(1) GENERAL
(a) DESCRIPTION OF BUSINESS
THE COMPANY. CS Wireless Systems, Inc. (together with its subsidiaries,
"CS" or the "Company") is one of the largest wireless cable television
companies in the United States in terms of line-of-sight ("LOS") households
and subscribers. The Company's 21 markets encompass approximately 7.7
million television households, approximately 6.4 million of which are LOS
households, as estimated by the Company. The Company provided video
programming to an average of 64,640 subscribers during the quarter ended
September 30, 1998. The Company has begun to minimize its efforts to attract
analog-based television subscribers and is currently evaluating the results
of its controlled digital television roll-out in the Dallas, Texas market
which began in the third quarter of 1998. The Company has commenced a
limited commercial offering of Internet access services in its Dallas, Texas
market. Additionally, the Company offers certain telephony services through
agreements with certain local exchange carriers and a long distance carrier.
At November 20, 1998, CAI Wireless Systems, Inc. ("CAI") and
Heartland Wireless Communications, Inc. ("Heartland") owned 60% and 36%,
respectively, of the outstanding Common Stock of the Company. CAI is one of
the largest developers, owners and operators of wireless cable television
systems in the United States. CAI and one of its wholly owned subsidiaries
filed voluntary petitions for relief under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") on July 30, 1998. The Plan of
Reorganization submitted by CAI and its subsidiary was confirmed by the
United States Bankruptcy Court for the District of Delaware on September 30,
1998 and consummated on October 14, 1998. Heartland has announced its
intention to file a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in November 1998. Heartland is a leading developer, owner
and operator of wireless cable systems in small to mid-size markets located
in the central United States.
PRINCIPAL MARKETS OF THE COMPANY. On February 23, 1996, in exchange for
approximately 60% of the Company's Common Stock, CAI, directly or indirectly,
contributed to the Company the wireless cable television assets and all related
liabilities, or the stock of subsidiaries owning wireless cable television
assets associated with the wireless cable television markets of Bakersfield and
Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio
(the "February 23, 1996 Contributions"). Simultaneously, in exchange for
approximately 40% of the Company's Common Stock, cash, a short-term note and a
long-term note (the "Heartland Long-Term Note"), Heartland, directly or
indirectly, contributed or sold to the Company the wireless cable television
assets and all related liabilities associated with the wireless cable television
markets of Grand Rapids, Michigan; Minneapolis, Minnesota; Kansas City
(suburbs), Missouri; Dayton, Ohio; Dallas, Fort Worth and San Antonio, Texas;
and Salt Lake City, Utah. The Company subsequently acquired wireless cable
television rights and related assets in certain Midwest markets including the
Effingham and Wellsville, Kansas; Story City, Iowa; Scottsbluff, Nebraska;
Kalispell, Montana and Rochester, Minnesota markets in connection with the
Company's merger acquisition of USA Wireless Cable, Inc. on October 11, 1996
("USA Wireless Acquisition"). The Company consummated on September 3, 1997 an
exchange of its wireless cable rights and related assets in Salt Lake City, Utah
for wireless cable rights and related assets in Kansas City, Missouri pursuant
to an agreement dated as of November 6, 1996 with People's Choice TV Corp.
(b) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of the Company contain all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of September 30, 1998, and the
results of operations for the three and nine months ended September 30, 1998 and
1997 and cash flows for the nine months ended September 30, 1998 and 1997. These
results are not necessarily indicative of the results to be expected for the
full fiscal year.
6
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1998
(Unaudited)
(d) COMMON SHARES OUTSTANDING AND NET LOSS PER COMMON SHARE
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," in the
fourth quarter of 1997, which required companies to present basic earnings
per share and diluted earnings per share. Earnings per share computations for
all comparative periods have been restated to reflect the adoption of SFAS
128. Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Potentially
dilutive securities have been excluded from the diluted loss per share
computation as their inclusion would be antidilutive.
(e) REDUCTION IN AUTHORIZED SHARES
On August 21, 1998, the Company filed with the Secretary of State of
Delaware a Certificate of Amendment of Amended and Restated Certificate of
Incorporation reducing the number of authorized shares of common stock from 40
million to 15 million and eliminating the authorized preferred shares.
(2) LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," requires that long-lived assets and certain identifiable
intangibles be periodically reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Pursuant to SFAS No. 121,
the Company periodically reviews wireless channel rights and other long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable.
The Company believes that the reorganization of CAI under Chapter 11 of
the Bankruptcy Code, the announcement by Heartland of its intention to file a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code and the
announcements of other wireless cable companies regarding their intentions to
review financial restructuring alternatives are circumstances that make it
appropriate for the Company to evaluate the impairment of long lived assets
and certain identifiable intangibles. Accordingly, the Company recorded a
write-down of $46.4 million of goodwill at June 30, 1998. The Company
engaged a third party during the third quarter to assist in completing a
recoverability and valuation analysis of all of its long-lived assets. The
Company may record further reductions in the carrying value of certain
long-lived assets in subsequent reporting periods upon completion of the
analysis and such reductions could be material to the Company's financial
statements.
(3) CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. A
discussion of certain of these legal proceedings is contained in Part II, Item 1
"Legal Proceedings" of this Form 10-Q. The Company believes that the ultimate
resolution of any legal proceeding to which the Company is a party will not have
a material adverse effect on the Company's consolidated financial position,
operating results or liquidity.
(4) SUBSEQUENT EVENTS
As previously disclosed, the Company purchased in July 1998 the
leasehold rights of TelQuest Satellite Services LLC ("TelQuest") in certain
headend equipment owned by CAI for $1.9 million in furtherance of the
development of a contingency plan designed to ensure uninterruptible delivery
of digital video programming services. The members of TelQuest include CAI,
the Company and TelQuest Communications, Inc. Jared E. Abbruzzese, the
Company's Chairman, holds, through various affiliates, the majority interest
in TelQuest Communications, Inc. In October, the Company commenced the
relocation of certain of the leased headend equipment from the TelQuest
facilities in Atlanta, Georgia to Dallas, Texas. The Company anticipates
that relocation of the equipment will be complete by the end of November.
7
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
CS Wireless Systems, Inc. and its subsidiaries develop, own and operate
a network of wireless cable television systems providing subscription
television services. The Company has begun to minimize its efforts to attract
analog based television subscribers and is currently evaluating the results
of its controlled digital television roll-out in the Dallas, Texas market
which began in the third quarter of 1998. The Company has commenced a
limited commercial offering of high-speed Internet access services in Dallas,
Texas. Additionally, the Company offers certain telephony services through
agreements with certain local exchange carriers and a long distance carrier.
The Company had systems in operation in eleven markets at September 30, 1998
compared to ten systems in the corresponding prior year period.
RESULTS OF OPERATIONS
REVENUE. The Company's video revenue primarily consists of monthly fees
paid by subscribers for basic programming, premium programming, equipment
rental and non-recurring installation fees. Total revenue was $6.4 million
and $20.1 million for the three and the nine months ended September 30, 1998
compared to $6.7 million and $20.2 million for the corresponding prior year
periods. Average video subscribers were approximately 64,640 and 66,380 for
the three and nine months ended September 30, 1998 compared to approximately
65,425 and 65,520 for the prior year periods. The decrease in average
subscriber levels during the three months ended September 30, 1998 is
primarily attributed to the Company's strategy of not pursuing growth in the
analog-subscriber base, partially off-set by a modest increase in digital
video subscribers in Dallas, Texas. The increase in average subscriber
levels during the nine months ended September 30, 1998 is due to the Company
assuming control of the Story City, Iowa market on December 30, 1998, a
modest increase in digital video subscribers, both off-set by the decrease in
the analog subscriber base
SYSTEMS OPERATIONS. Systems operations expenses primarily include
programming costs, channel lease payments, transmitter site and tower
rentals, and other costs of providing service. Programming costs (with the
exception of minimum payments) and channel lease payments (with the exception
of certain fixed payments) are variable expenses which generally increase as
the number of subscribers increases. Systems operations expenses were $4.1
million and $12.0 million for the three and the nine months ended September
30, 1998, compared to $3.8 million and $11.2 million for the corresponding
prior year periods, an increase of 7.1% and 7.6%, respectively. The increase
in systems operations expenses is primarily due to (i) increasing programming
rates, (ii) incremental costs associated with the Company assuming
operational control of the Story City, Iowa system on December 30, 1997 and
(iii) additional costs associated with the controlled roll-out of digital
video and high speed Internet access service in Dallas, Texas.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") were $4.5 million and $13.6 million for the
three and nine months ended September 30, 1998, compared to $4.5 million and
$12.3 million, an increase of 0.0% and 10.6%, respectively. The increase in
SG&A during the nine months ended September 30, 1998, compared to the
corresponding prior year period is principally due to (i) incremental costs
associated with the Company assuming operational control of the Story City
system on December 30, 1997 and (ii) additional costs associated with the
controlled roll-out of digital video and high speed Internet access service
in Dallas, Texas ($1.8 million for the nine months ended September 30, 1998
compared to $1.0 million for the corresponding prior year period).
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of licenses and
leased license investment and goodwill. Depreciation and amortization
expenses were $7.1 million and $22.0 million for the three and nine months
ended September 30, 1998, compared to $7.0 million and $20.3 million for the
prior year periods. The increase in depreciation and amortization expense is
attributed to a corresponding average increase in the underlying capital
assets. The write-down of goodwill during the second quarter of 1998
effectively reduced amortization of goodwill during the three and nine months
ended September 30, 1998.
OPERATING LOSS. The Company incurred operating losses of $9.2 million
and $73.9 million for the three and nine months ended September 30, 1998,
compared to $8.6 million and $23.5 million for the corresponding prior year
periods. Consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") were a negative $2.1 million and $5.5 million for the
three and nine months ended September 30, 1998, compared to a negative $1.6
million and $3.2 million for the prior year periods. EBITDA is a financial
measure commonly used in the industry but is not intended to represent cash
flows, as determined in accordance with Generally Accepted Accounting
Principles ("GAAP"), or to be an indicator of operating performance. EBITDA
is exclusive of the impairment of goodwill recorded in the quarter ended June
30, 1998. EBITDA should not be considered a substitute for measures of
performance prepared in accordance with GAAP. The increase in the Company's
operating loss is due principally to the impairment of goodwill and, to a
lesser extent, increasing system operations, SG&A, and depreciation and
amortization expense as described above. The decrease in EBITDA is
primarily due to costs associated with controlled roll-out of digital video
and high speed Internet access service in Dallas, Texas.
INTEREST INCOME. Interest income was $0.8 million and $2.7 million for
the three and nine months ended September 30, 1998, compared to $1.4 million
and $4.3 million for the corresponding prior year periods. The decrease in
interest income is primarily due to a decrease in the average invested cash
and cash equivalents. The average invested balance is comprised mainly of
the proceeds remaining from the private placement of $400.0 million of 11
3/8% Senior Discount Notes (the "Senior Discount Notes") on February 23,
1996, which resulted in net proceeds to the Company of $162.9 million (net of
debt issuance, payments on notes and certain distributions to Heartland and
CAI).
INTEREST EXPENSE. The Company incurred interest expense of $8.8 million
and $25.7 million for the three and nine months ended September 30, 1998,
compared to $7.9 million and $24.0 million for the corresponding prior year
periods. Interest expense during the three and nine months ended September
30, 1998 included (i) non-cash interest and accretion of deferred debt
issuance costs of $8.5 million and $25.1 million related to the Senior
Discount Notes, (ii) interest expense of $0.1 million and $0.2 million
related to a note payable to Heartland in the amount of $15 million (the
"Heartland Long Term Note") and (iii) interest relating to other payables
totaling approximately $0.2 million and $0.4 million, respectively. Interest
expense during the three and nine months ended September 30, 1997 included
(i) non-cash interest and accretion of deferred debt issuance costs of $7.6
million and $22.4 million related to the Senior Discount Notes, (ii) interest
expense of approximately $0.1 million and $1.0 million related to the
Heartland Long-Term Note and (iii) interest relating to other payables of
approximately $0.2 million and $0.6 million, respectively.
NET LOSS. The Company has recorded net losses since inception. The
Company incurred net losses of $17.5 million and $100.8 million for the three
and nine months ended September 30, 1998 compared to $14.1 million and $38.8
million during the corresponding prior year periods. The Company's net
losses have increased due to (i) impairment of goodwill totaling $46.4
million (See Note 2), (ii) increased SG&A, system operations, depreciation
and amortization, and interest expense as detailed above and (iii) the
cumulative effect of the change in accounting principal for organizational
costs totaling $1.9 million.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television business is a capital-intensive business.
Funds are required for the lease or acquisition of channel rights, the
acquisition of wireless cable systems, the construction of system headend and
transmission equipment, the conversion of analog systems to digital
technology, and start-up costs related to the commencement of operations and
subscriber installation costs. To date, the primary source of capital of the
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Company has been from the net proceeds from the sale of the Senior Discount
Notes. The Company has approximately $45.4 million in cash and cash
equivalents at September 30, 1998. The Company has used the proceeds from
the Senior Discount Notes received in February 1996 primarily to fund (i)
continued operating losses, (ii) capital expenditures to launch digital video
and high speed Internet access services in the Dallas, Texas market, hybrid
digital service in the San Antonio, Texas market and limited build-out in the
Company's analog markets, (iii) strategic investments in items such as
channel capacity and (iv) general debt service. Based upon the Company's
current operating plans, the Company believes that its available cash will
provide sufficient funds to meet its needs for at least the next 12 months.
The Company is emphasizing the conservation of capital while it
evaluates its controlled launch of digital video programming and limited
commercial offering of Internet access in its Dallas market. The Company
intended to commence a full commercial launch of digital television services
in its Dallas market in 1997. Towards that goal, the Company signed an
agreement in 1997 with General Instrument Corp. ("General Instrument") for
the purchase of equipment necessary to deliver digital signals to
subscribers; the timely delivery of commercially viable equipment was an
integral component of the Company's plans to offer digital video service.
General Instruments experienced certain system integration problems with
respect to the digital headend equipment and converter boxes. Due to the
delay in delivery of the required product, the Company and General Instrument
agreed in February 1998 to amend certain contractual obligations relating to
delivery dates, performance requirements, penalties and responsibilities in
consideration for certain pricing concessions. In connection with the
amendment, the Company released General Instrument from any claims it may
have had with respect to the failure of General Instrument to perform certain
obligations prior to the deadlines prescribed in the original agreement. The
Company had anticipated that General Instrument would commence shipment of
equipment required for the launch of digital services in Dallas during the
second quarter of 1998, provided General Instrument successfully resolved
certain outstanding integration problems. General Instrument did not
successfully resolve all problems and the intended full-scale commercial
launch was further delayed. The Company commenced a controlled roll-out of
its digital video product to selected areas in its Dallas market subsequent
to the end of the second quarter. The Company is evaluating the results of
the controlled rollout.
For 1998, the Company had initially budgeted approximately $45.2 million
in capital expenditures, including $13.1 million for digital subscriber
installations, $9.3 million for analog subscriber installations, $2.6 million
for headend and transmission equipment, $0.9 million relating to the
build-out of markets to accommodate a new line of business, Internet access,
$3.7 million to convert the Company's San Antonio analog markets to a hybrid
digital format, and $15.6 million for strategic investments in items such as
channel capacity. Through September 30, 1998, the Company has incurred $21.4
million in capital expenditures, significantly less than previously
estimated. The difference is primarily attributed to the delay of the full
roll-out of digital video and Internet services in Dallas. The Company's
principal capital expenditures for the remainder of the year are expected to
be significantly less than previously estimated and are expected to relate
principally to the trials of two-way broad-band data and telephony services,
the purchase of new channels and limited installation of subscriber premise
equipment. The level of capital expenditures incurred for customer
installations is primarily variable and dependent on the customer
installation activities of the Company. Therefore, actual customer
installation expenditures may be more or less than the Company's estimates.
If the Company believes appropriate market conditions exist and all equipment
problems are satisfactorily resolved, the Company may incur significant
capital expenditures for customer installations and commit additional
resources to marketing its Internet access business in 1999 and subsequent
years.
The Company has converted much of its analog system in San Antonio,
Texas to a hybrid digital format. However, the problems with the equipment
manufactured by General Instrument and the resulting impact on the intended
commercial launch in the Company's Dallas market have caused management to
delay completion of the conversion. Further, an essential equipment
manufacturer has filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code. See "--LIQUIDITY AND CAPITAL RESOURCES--OTHER."
Accordingly, additional expenditures may be required with respect to customer
installation and/or conversion activities in San Antonio. The Company is
evaluating its other markets to determine where and when to convert existing
analog markets to digital or offer hybrid digital services in conjunction
with existing or planned analog services. However, in the interim, the
Company intends to minimize capital expenditures in its analog markets.
The Company intends to finance its future capital requirements from
existing cash, 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, the assumption
of debt and other liabilities in connection with acquisitions and alliances
with strategic partners. There can be no assurances that the Company will be
able to obtain any third party financing.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. Until sufficient cash flow is generated
from operations, the Company will utilize its current capital resources and
may seek external sources of funding to satisfy its capital needs. Cash
interest payments required under the terms of the Senior Discount Notes are
scheduled to commence on September 1, 2001. There can be no assurance that
the Company will be able to secure its capital requirements on terms and
conditions satisfactory to the Company. Accordingly, in the event the Company
is unable to secure funding for capital requirements on satisfactory terms
and conditions, the ability of the Company to sustain and expand operations
and fulfill its debt obligations would be materially adversely affected.
Net cash used in operating activities during the nine months ended
September 30, 1998 was $5.4 million compared to $0.6 million during the
comparable prior year period. The increase in cash used in operations was
primarily due to (i) timing of payments to vendors, (ii) increased SG&A and
system operating expense and (iii) to a lesser extent, increasing costs
associated with the controlled roll-out of digital video and high speed
Internet access services in Dallas, Texas.
Net cash used in investing activities was $22.2 million during the nine
months ended September 30, 1998 compared to $11.6 million during the
corresponding prior year period. Cash used in investing activities primarily
relates to the acquisition and installation of subscriber receive-site
equipment, the acquisition of certain wireless cable channel rights, the
investments in assets held for sale and the investment in equity affiliates.
The increase in net cash used in investing activities is primarily attributed
to the proceeds from the assets held for sale totaling $16.4 million in 1997
with no corresponding amounts in the current year period.
Net cash used in financing activities was $1.6 million during the nine
months ended September 30, 1998 compared to $17.5 million during the
corresponding prior year period. Cash used in financing activities during
the nine months ended September 30, 1998 is attributed to the repayment of
the payable relating to the Basic Trading Areas acquired in the Federal
Communications Commission Auction totaling approximately $1.4 million and the
repayment of other notes payable totaling approximately $0.2 million. Cash
used in financing activities during the nine months ended September 30, 1997
is attributed to the repayment of $2.1 million of indebtedness related to the
USA Wireless Acquisition and the repayment of $15.3 million of the Heartland
Long-Term Note.
EXECUTIVE AND KEY EMPLOYEE RETENTION PROGRAM
On November 12, 1998, the Compensation Committee of the Board of
Directors authorized an Executive and Key Employee Retention Bonus program.
Six executive officers (David E. Webb, Chief Executive Officer; Thomas W.
Dixon, Executive Vice President; John Lund, Senior Vice President - Finance;
Albert G. McGrath, Jr., General Counsel; Scott Mindemann, Vice President -
Internet; and Steven Moncreiff, Vice President - Operations) were awarded
retention bonuses of fifty percent (50%) of their respective annual base
salaries. The bonus awards are payable, in cash increments, upon
satisfaction of certain identified performance benchmarks. Fifteen percent
(15%) is payable upon the solicitation by the Company of the holders of at
least 66 2/3% of the outstanding Senior Discount Notes in support of a plan
of reorganization of the Company; thirty-five percent (35%) is payable upon
consummation of a plan of reorganization restructuring the outstanding debt
of the Company; thirty-five percent (35%) is payable upon the filing of
applications with the Federal Communications Commission seeking two way
authorization in certain specified markets; and fifteen percent (15%) payable
upon execution of leases with MMDS and ITFS licenseholders in certain
specified markets authorizing two way transmission by the Company in such
markets.
Additionally, the Compensation Committee authorized and directed management
of the Company to set aside up to a maximum aggregate sum of $200,000 to be
distributed to key employees designated by management within certain
parameters established by the Compensation Committee.
EMPLOYMENT AGREEMENTS
During the third quarter, the Compensation Committee of the Board of
Directors authorized the execution of an Employment Agreement with Mr. Lund.
The Agreement has a three year term and requires the payment of an annual
salary of $140,000. The Committee also authorized the execution of a
Separation Agreement with Frank H. Hosea, the Company's Chief Operating
Officer, providing for, among other things, the continued payment of Mr.
Hosea's base salary through April 1, 2000.
On November 12, 1998 the Compensation Committee authorized the execution
of a one year Employment Agreement with Mr. McGrath, the Company's General
Counsel, and an amendment to Mr. Dixon's Employment Agreement. Mr. McGrath's
Employment Agreement requires the payment of an annual base salary of
$145,000. Mr. Dixon's amendment provides for certain benefits in the event
of a relocation.
YEAR 2000 COMPLIANCE
An undetermined number of computer software programs have been written
using two digits rather than four to determine the applicable year. As a
result, date-sensitive computer software may recognize a date using "00" as
the year 1900 rather than year 2000. This could result in major system
failures or miscalculations, and is generally referred to as the "Year 2000"
problem. An preliminary review of the Company's information systems has
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
been completed and a comprehensive program is currently in process to modify
or replace those systems that are not Year 2000 compliant. Management
believes that all Company systems are compliant, or will be compliant by
September 1999. Additional validation of the Company's systems will be
conducted through testing throughout 1999.
In addition to the assessment of in-house systems, the Company is
currently assessing the readiness of its vendors for the Year 2000 problem.
To determine the status of third parties, letters inquiring as to their
readiness have been sent or are being sent to substantially all of the
Company's vendors. The Company will assess the vendors' responses and
prioritizing them in order of significance to the business of the Company.
Contingency plans will be developed in the event that business-critical
vendors do not provide the Company with satisfactory evidence of their
readiness to handle Year 2000 issues. The Company intends to make every
reasonable effort to assess the Year 2000 readiness of these critical
business partners and to create action plans to address the identified risks.
The Company anticipates that it will have substantially completed an
assessment of the Year 2000 compliance status of all information technology
and non-information technology during the first quarter of 1999, and will
then address the Year 2000 compliance of such equipment.
All maintenance and modification costs will be expensed as incurred,
while the cost of new software, if material, will be capitalized and
depreciated over its expected useful life. Testing and remediation costs of
all of the Company's systems and applications are currently estimated at
approximately $300,000 to $500,000 from inception in fiscal 1998 through
completion in fiscal 2000. These costs are estimated to be incurred during
1999. All estimated costs are expected to be funded from existing cash.
The Company does not believe the costs related to the Year 2000
compliance project will be material to its financial position or results of
operation. However, the cost of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans, and other factors. Unanticipated failures by critical
vendors as well as the failure by the Company to execute its own remediation
efforts could have a material adverse effect on the cost of the project and
its completion date. As a result, there can be no assurance that these
forward-looking estimates will be achieved and the actual cost and vendor
compliance could differ materially from those plans, resulting in material
financial risk.
CIBC
The Company has retained the investment banking firm of CIBC Oppenheimer
Corp. ("CIBC") to serve as its financial advisor. CS and CIBC have begun to
evaluate available options with respect to the capitalization of the Company,
including financial restructuring alternatives. CIBC will assist the
Company with respect to discussions and negotiations with the holders of the
Senior Discount Notes concerning the appropriate capitalization of the
Company.
OTHER
Pacific Monolithics, Inc. ("Pac Mono"), a supplier of wireless cable
subscriber and transmission equipment, filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. Pac Mono has advised the Company
that it intends to phase out and discontinue certain product lines, including
products utilized by the Company in its San Antonio market. The Company is
currently exploring alternatives to Pac Mono equipment and services. The
Company expects to incur certain costs relating to equipment purchases and
personnel necessary to effect either a change in equipment or service of
previously purchased equipment.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," in the
first quarter of 1998, which required companies to disclose comprehensive
income separately from net income. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-ownership sources. It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The adoption of this statement had no effect on the Company for the three and
nine months ended September 30, 1998 or 1997 because the Company has no
elements of other comprehensive income.
The Company adopted the provisions of Statement of Position 98-5 ("SOP
98-5"), "Reporting On The Costs of Start-up Activity," in the second quarter
of 1998, effective as of January 1, 1998. This pronouncement requires that
costs of start-up activities, including organizational costs, should be
expensed as incurred. As a result of adopting SOP 98-5, the Company recorded
a charge of approximately $1.9 million as the cumulative effect of the change
in accounting principle as of January 1, 1998.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of Enterprise and Related Information" was issued.
This statement establishes standards for reporting information about
operating segments in annual and interim financial statements, although this
statement need not be applied to interim financial statements in the initial
year of its application. This statement is effective for fiscal years
beginning after December 15, 1997. The adoption of this statement is not
expected to have a material impact on the Company's financial statements and
related disclosures.
FUTURE LOOKING INFORMATION AND RISK FACTORS
The Company or its representatives may make forward looking statements,
oral or written, including statements in this Report's Management's
Discussion and Analysis of Financial Condition and Results of Operations,
press releases and filings with the Securities and Exchange Commission
("Commission"), regarding estimated future operating results, planned capital
expenditures (including the amount and nature thereof) and the Company's
financing plans, if any, related thereto, increases in subscribers and the
Company's financial position and other plans and objectives for future
operations. There can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially
realized, that they will have the expected effects on its business or
operations. Among the factors that could cause actual results to differ
materially from the Company's expectations are general economic conditions,
competition, government regulations and other factors set forth among the
risk factors noted in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Generally, forward looking statements include words or phrases such as
"management believes," the "Company anticipates," the "Company expects" and
words and phrases of similar import. Forward looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995.
All subsequent oral and written forward looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in
their entirety by these factors. The Company assumes no obligation to update
any of these statements.
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 costs and
level of consumer acceptance associated with the launch of systems in new
markets, (iii) the availability and performance of digital compression
equipment, (iv) the Company's existing indebtedness and the need for
additional financing to fund subscriber growth and system development, (v)
government regulation, including FCC regulations, and receipt of regulatory
approvals for alternative uses of spectrum, (vi) the Company's dependence on
channel leases, (vii) the announcements by other wireless cable companies
regarding their respective intentions to restructure outstanding indebtedness
and (viii) numerous competitive factors, including alternative methods of
distributing and receiving video transmissions.
Because the foregoing uncertainties could affect 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
trends to anticipate results or trends in future periods. In addition, the
Company's participation in a highly dynamic industry often results in
significant volatility in the price of the Company's Senior Discount Notes.
The Company's largest stockholder, CAI, and one of its wholly owned
subsidiaries filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code on July 30, 1998. The Plan of Reorganization submitted by
CAI and its subsidiary was confirmed by the United States Bankruptcy Court
for the District of Delaware on September 30, 1998 and consummated on October
14, 1998. Additionally, Heartland has announced its intention to file a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code. There
can be no assurance that any of the foregoing will not affect the Company.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a material
adverse effect on the Company's consolidated financial position, operating
results or liquidity.
ITEM 5. OTHER INFORMATION
RECENT FEDERAL COMMUNICATIONS COMMISSION RULES. On September 25, 1998,
the Federal Communications Commission ("FCC") released rules for the use of
MMDS spectrum for two way transmissions of data, telephony and video. The
rules require the filing of applications with the FCC in order to receive
authorization for two way utilization of frequency spectrum in each market.
The FCC has not yet announced a definitive date for the filing of
applications; however, the Company anticipates that the first "filing window"
will open at the FCC in the latter part of the first quarter or early in the
second quarter of calendar year 1999. The application process involves the
formulation of a frequency plan and coordination of such frequency plan with
licenseholders in each market in which two way approval is sought and,
possibly, adjacent markets. Following the close of the first "filing
window", completed applications are reviewed in the order in which they are
filed. The Company has commenced the process to formulate its frequency plan
in each of its markets. There can be no assurance that the Company will be
able to achieve coordination of its frequency plans with all licenseholders
in all of its markets, that all or any of the Company's applications will be
granted or that the FCC will grant to the Company authorization to utilize
the frequency spectrum in the manner requested by the Company in its
applications.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits
*3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of CS Wireless Systems, Inc.
*10.1 Amendment to Employment Agreement dated as of November 12, 1998
between Thomas W. Dixon and the Company.
*10.2 Employment Agreement dated as of September 23, 1998 between
John M. Lund and the Company
*10.3 Employment Agreement dated as of November 12, 1998 between
Albert G. McGrath, Jr. and the Company.
*10.4 Separation Agreement dated as of October 19, 1998 between
Frank H. Hosea and the Company.
*27 Financial Data Schedule
(b) Reports on Form 8-K
1. Report on Form 8-K filed July 2, 1998 to report the appointment
of John Burgoyne to the Board of Directors of the Company and
Joseph W. Autem as Senior Vice President and Chief Financial
Officer.
2. Report on Form 8-K filed August 19, 1998 to report the
resignation of Joseph W. Autem as the Company's Senior Vice
President and Chief Financial Officer and appointment of
John M. Lund to the position of Senior Vice President -
Finance.
</TABLE>
*Filed herewith.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CS WIRELESS SYSTEMS, INC.
By: /s/ John M. Lund
-------------------------------
Senior Vice President - Finance and
Chief Accounting Officer
(Principal Financial Officer)
By: /s/ David E. Webb
-------------------------------
Chief Executive Officer
(Principal Executive Officer)
Dated: November 23, 1998
<PAGE>
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF CS WIRELESS SYSTEMS, INC.
CS Wireless Systems, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the Sate of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of CS Wireless
Systems, Inc. resolutions were duly adopted setting forth a proposed
amendment to the Certificate of Incorporation of CS Wireless Systems, Inc.,
declaring said amendments to be advisable and calling a meeting of
stockholders or alternatively requesting a solicitation of stockholders for
consideration thereof. The resolution setting forth the proposed amendment
is as follows:
RESOLVED, that the Amended and Restated Certificate of Incorporation of CS
Wireless Systems, Inc. be amended by deleting ARTICLE FOURTH in its
entirety and substituting in lieu thereof the following:
FOURTH: The total number of shares of capital stock which the Corporation
has the authority to issue is Fifteen Million (15,000,000) shares of common
stock with a par value of $.001 per share. The common stock of the
Corporation shall be entitled to one (1) vote per share in all proceedings
in which actions shall be taken by the stockholders of the Corporation. In
the event of a vacancy from any cause on the Board of Directors, including,
but not limited to, the death, disability, removal, disqualification,
resignation or refusal to act of any of the directors, the holders of the
common stock shall nominate and elect one or more directors to fill the
vacancy so created. Any director may be removed at any time, with or
without cause, by the affirmative vote of stockholders owning more than
fifty percent (50%) of the common stock.
SECOND: That pursuant to the direction of the Board of Directors, written
consent of a majority of stockholders of the Corporation pursuant to
Section 228
1
<PAGE>
of the General Corporation Law of the State of Delaware was solicited
and obtained.
THIRD: That said amendment was duly adopted in accordance with Section 242
of the General Corporation Law of the State of Delaware.
FOURTH: That the capital of the Corporation shall not be reduced under or
by reason of the amendment.
IN WITNESS WHEREOF, CS Wireless Systems, Inc. has caused this Certificate
to be signed by Thomas Dixon, Senior Vice President, and Albert G. McGrath, Jr.,
Acting Secretary, on this 20th day of August, 1998.
CS WIRELESS SYSTEMS, INC.
BY:
------------------------
THOMAS DIXON,
SENIOR VICE PRESIDENT
ATTEST:
-----------------------------
ALBERT G. MCGRATH, JR.
ACTING SECRETARY
2
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment (the "Amendment") to Employment Agreement is entered into
as of the 12th of November, 1998, by and between the undersigned employee
(hereinafter referred to as "Employee") residing at the address indicated
following the Employee's signature below and CS Wireless Systems, Inc., a
Delaware corporation having its principal place of business at 1101 Summit
Avenue, Plano, Texas 75074 (the "Company").
WHEREAS, Employee executed an Employment Agreement ("Agreement") dated
as of April 2, 1997; and
WHEREAS, the Company has determined that it is in the best interests of
the Company to amend certain terms and conditions of the Agreement.
NOW, THEREFORE, for and in consideration of the premises and mutual
promises set forth below, the Company and the Employee hereby agree as
follows:
RELOCATION. The Agreement is hereby amended to add the following:
17. RELOCATION. In the event that Employee consents to relocate his
residence in conjunction with a relocation of the Employer's principal
office, the Company shall pay for all of Employee's expenses in connection
with such relocation including, without limitation, temporary residence
pending relocation, moving expenses, and real estate costs, commissions,
fees and appraisals.
Executed to be effective the date set forth above.
CS WIRELESS SYSTEMS, INC.
BY:
-------------------------
NAME:
-----------------------
TITLE:
---------------------
----------------------------
THOMAS W. DIXON
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made as of the 23rd day of
September, 1998 by and between the undersigned employee (hereinafter referred
to as "Employee") residing at the address indicated following Employee's
signature below and CS WIRELESS SYSTEMS, INC., a Delaware corporation having
its principal place of business at 1101 Summit Avenue, Plano, Texas 75074
(hereinafter referred to as the "Company").
1. EMPLOYMENT. The Company hereby employs Employee and Employee agrees to
work for the Company in the capacity set forth on SCHEDULE A hereto
during the Term (as defined below) of and upon the terms and conditions
set forth in this Agreement.
2. COMPENSATION/BENEFITS.
(a) BASE SALARY. During the Term of this Agreement (as defined below)
the Company agrees to pay Employee the base annual salary set forth
on SCHEDULE A ("Base Salary"). Such Base Salary shall be reviewed no
less frequently than annually during the Term and may be increased
but not decreased by the Board of Directors. Such Base Salary shall
be payable in accordance with the Company's normal business
practices or in such other amounts and at such other times as the
parties may mutually agree.
(b) INCENTIVE COMPENSATION. During the Term of this Agreement, Employee
shall be entitled to such incentive program, pursuant to the terms
of a separate plan of the Company, as may be in effect from time to
time. Such incentive program shall be based on the following three
(3) components: (i) the achievement of Company performance targets;
(ii) the achievement of Employee performance targets; and (iii)
discretionary bonuses. These performance targets will be revised
annually by the Board of Directors.
(c) STOCK OPTIONS. Employee shall be, subject to approval of the
Company's Compensation Committee, granted stock options (the "Stock
Options") to purchase shares of Company common stock, $.001 par
value per share, as set forth on SCHEDULE A, pursuant to the
Company's 1996 Incentive Stock Plan, as amended, and subject to the
terms and conditions thereof and the stock option agreement in the
form attached as EXHIBIT A hereto.
(d) BENEFITS/VACATION. During the Term, the Company shall provide
Employee with such other benefits, including executive incentive and
bonus plans and medical and disability plans, as are made generally
available to executive employees of the Company from time to time.
Employee shall be entitled to that amount of paid vacation during
each year of the Term as set forth on SCHEDULE A. In addition,
Employee shall be entitled to those benefits set forth on SCHEDULE A.
3. SERVICES. Employee agrees to devote substantially all his working time,
attention and
<PAGE>
-2-
energies to the business of the Company and its Affiliates (as defined
below) under the general direction of the Management Group of the Company
and Chief Executive Officer and hereby agrees to abide by and implement
Company Policies, Strategy Principles and Governance Parameters as may be
adopted from time to time by the Management Group of the Company in its
sole discretion. Employee shall not directly or indirectly, during the
Term of this Agreement, render services, for compensation or otherwise,
to or for any other person or firm in direct competition with the
business of the Company in any market served by the Company or its
Affiliates without the written consent of the Board of Directors. In
performing his duties hereunder, Employee shall be available for
reasonable travel as the needs of the Company's business require.
Employee shall work in the Company's Plano, Texas office, unless
otherwise indicated on SCHEDULE A.
4. TERM. The term of this Agreement (the "Term" or the "Term of this
Agreement") shall be for the period set forth on SCHEDULE A.
5. EARLY TERMINATION.
(a) GENERAL. The Employee's employment hereunder is at will and shall be
terminated and the Company's obligations hereunder shall cease,
including the obligation to pay compensation for any period after
the date of termination, (i) immediately upon notice, in the sole
discretion of the Company, (ii) without the necessity of notice,
upon the death of the Employee, or (iii) upon written notice of a
finding by at least 60% of the members of the Board of Directors
that the Employee has (a) acted with gross negligence or willful
misconduct in connection with the performance of his duties
hereunder, (b) engaged in a material act of insubordination or of
common law fraud against the Company or its employees, or (c) acted
against the best interests of the Company in a manner that has or
could have an adverse affect on the financial condition of the
Company (death of an Employee or any such findings is referred to
herein as "Cause"). Upon the Company's termination of Employee for
any reason other than Cause, the Company shall pay Employee: (i)
severance in an amount (the "Severance Amount") equal to the greater
of (x) his then Base Salary under PARAGRAPH 2, payable in twelve
equal monthly installments and (y) the Base Salary that would have
been payable for the balance of the Term, payable in equal monthly
installments; and (ii) any accrued and unpaid bonuses due Employee
in accordance with the Company's incentive program then in effect.
(b) DISABILITY If Employee shall become unable efficiently to perform
the essential functions of his job, even with reasonable
accommodation, as a result of a disability or illness, as such terms
are defined by the Americans with Disabilities Act, he shall be
entitled to his regular compensation until the total period of
disability or illness (whether or not continuous and whether or not
the same disability or illness) shall exceed sixty (60) days during
any calendar year in the
<PAGE>
-3-
Term. This Agreement may thereafter be terminated by the Company and
the Company's obligations hereunder shall cease, including the
obligation to pay compensation for any period after the date of
termination. Any amounts payable as compensation during the period
of disability or illness shall be reduced by any amounts paid during
such period under any disability plan or similar insurance of the
Company.
(c) EMPLOYEE'S RIGHT TO TERMINATE. Employee may, at any time during the
Term, resign and shall be entitled to all accrued rights with
respect to compensation and benefits in accordance with the
Company's Policies then in effect.
(d) ARBITRATION IN THE EVENT OF A DISPUTE REGARDING THE NATURE OF
TERMINATION. In the event that the Company terminates Employees'
employment for Cause (as defined above), and Employee contends that
Cause did not exist, the Company's only obligation shall be to
submit such claim to arbitration before the American Arbitration
Association ("AAA"). In such a proceeding, the only issue before the
arbitrator will be whether Employee was in fact terminated for
Cause. If the arbitrator determines that Employee was not terminated
for Cause, the only remedy that the arbitrator may award is an
amount equal to the severance payment specified in PARAGRAPH 5(a),
the costs of arbitration, and Employee's attorneys' fees. If the
arbitrator finds that the Employee was terminated for Cause, the
arbitrator will be without authority to award Employee anything, and
the parties will each be responsible for their own attorneys' fees,
and they will divide the costs of arbitration equally.
6. EMPLOYER'S AUTHORITY. Employee agrees to observe and comply with the
rules and regulations of the Company as adopted by the Management Group
of the Company or by the Board of Directors respecting the performance of
his duties and to carry out and perform orders, directions and policies
communicated to him from time to time.
7. EXPENSES. During the Term, the Company shall reimburse Employee for all
reasonable business expenses which are approved in advance and incurred
by Employee in the course of performing his duties for the Company
hereunder in accordance with the procedures then in place for such
reimbursement.
8. NON-DISCLOSURE AGREEMENT/NON-COMPETITION.
(a) Employee will execute the Nondisclosure Agreement of the Company
attached as EXHIBIT B hereto and made a part hereof. Said agreement
shall survive termination of Employee's employment hereunder.
(b) Because Employee's services to the Company are special and because
Employee has access to the company's confidential information,
Employee covenants and
<PAGE>
-4-
agrees that if (i)(x) Employee's employment is terminated, or not
renewed, by the Company for Cause or (y) Employee voluntarily
terminates his employment relationship hereunder with the Company or
Employee elects not to renew his employment with the Company
following the expiration of this Agreement, for a period of twelve
(12) months following the termination of this Agreement, or (ii)
Employee's employment is terminated and Employee is receiving the
Severance Amount, for the period during which Employee is receiving
such Severance Amount under PARAGRAPH 5 hereof, whichever is
applicable, he will not, directly or indirectly, either on his own
behalf or on behalf of any person, partnership, corporation or
otherwise, (A) engage in any business or undertaking directly
competitive with the wireless cable television, cable television,
subscription television, direct broadcast satellite, direct-to-home,
wired video programming, non-wired video programming, wireless
Internet access, wireless fixed telephony or other fixed wireless
information businesses (the "Related Business") being carried on by
the Company or any Affiliate in any market serviced by the Company
or any Affiliate, at the time of Employee's termination, (B) be
employed by or provide consulting services to or be an investor,
limited partner or shareholder in, any entity or other person in any
Related Business within 25 miles of any city in which the Company or
any Affiliate does business at time of execution of this Agreement
or has rights to broadcast or transmit television programming or in
which the Company has a transmission license at the time of
Employee's termination, without the prior written consent of the
Board of Directors. The parties agree that the time period and
geographical area of non-competition specified above are reasonable
and necessary in light of the transactions entered into in this
Agreement. If, however, it shall be determined at any time by a
court of competent jurisdiction that either the time period
restriction or the geographical area restriction, or both, are
invalid or unenforceable, the parties agree that any such invalid
restriction shall be amended and reformed to the extent necessary to
make same valid and enforceable in the determination of said court,
and such restriction, as so amended, shall be enforceable between
the parties to the same extent as if such amendment had been made as
of the date of this Agreement. This SUBPARAGRAPH 8(b) shall survive
the termination of this Agreement and shall not apply to investments
constituting not more than 5% of the common equity of a publicly
traded company.
9. INDEMNIFICATION. As a material inducement for Employee to enter into this
Agreement, the Company hereby covenants and agrees to indemnify Employee
to the fullest extent permitted under applicable law with respect to any
and all damages, expenses (including reasonable attorney's fees), and
other liability suffered as a result of any and all claims, causes of
action, proceedings or other actions which may be asserted against
Employee in connection with Employee's service as an employee of the
Company or any of its Affiliates.
<PAGE>
-5-
10. NOTICES. Any notice permitted or required hereunder shall be deemed
sufficient when hand-delivered or mailed by certified mail, postage
prepaid, and addressed if to the Company at the address indicated above
and if to Employee at the address indicated below (or such other address
as may be provided by notice).
11. MISCELLANEOUS. This Agreement, together with all schedules, exhibits and
collateral documents referenced herein, (i) constitutes the entire
agreement between the parties concerning the subjects hereof and
supersedes any and all prior agreements or understandings, (ii) may not
be assigned by Employee without the prior written consent of the Company
and (iii) may be assigned by the Company and shall be binding upon, and
inure to the benefit of, the Company's successors and assigns. Headings
herein are for convenience of reference only and shall not define, limit
or interpret the contents hereof.
12. AMENDMENT. This Agreement may be amended, modified or supplemented by the
mutual consent of the parties in writing, but no oral amendment,
modification or supplement shall be effective.
13. SPECIFIC PERFORMANCE. The parties acknowledge that the Company would be
irreparably damaged and there would be no adequate remedy at law for
Employee's breach of PARAGRAPH 8 of this Agreement, and accordingly, the
terms thereof shall be specifically enforced. Employee hereby consents to
the entry of any temporary restraining order or preliminary or ex parte
injunction, in addition to any other remedies available at law or in
equity, to enforce the provisions hereof.
14. AFFILIATES. As used herein, the term "Affiliate" shall mean any
individual or entity controlling, controlled by or under common control
with the Company, now or in the future, including without limitation,
partnerships in which the Company or any Affiliate may invest as a
limited or general partner and limited liability companies in which the
Company or any Affiliate may become a member.
15. SEVERABILITY. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision.
16. GOVERNING LAW. This Agreement shall be constructed and regulated in all
respects under the laws of the State of Texas. Venue for any action under
this Agreement shall lie with a court of competent jurisdiction in the
State of Texas.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-6-
IN WITNESS WHEREOF, this Agreement is entered into as of the date and year
first above written.
CS WIRELESS SYSTEMS, INC.
By
-------------------------------
Name: David Webb
Title: President
EMPLOYEE:
By
-------------------------------
Name: John Lund
Address: 2604 Creswick Drive
Plano, Texas 75093
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made as of November 12, 1998
(the "Effective Date") by and between the undersigned employee, residing at
the address indicated below (hereinafter referred to as "Employee") and CS
Wireless Systems, Inc., a Delaware corporation having its principal place of
business at 1101 Summit Avenue, Plano, Texas 75074 (hereinafter referred to
as the "Company").
1. EMPLOYMENT. The Company hereby employs Employee and Employee agrees
to work for the Company with the title specified on Schedule A below during
the Term (as defined below) of and upon the terms and conditions set forth in
this Agreement.
2. COMPENSATION/BENEFITS. (a) BASE SALARY. During the Term of this
Agreement, the Company agrees to pay Employee the base annual salary
specified on Schedule A below ("Base Salary"). Such Base Salary shall be
reviewed no less frequently than annually during the term of this Agreement
and may be increased but not decreased by the Company's board of directors.
Such Base Salary shall be payable in accordance with the Company's normal
business practices or in such other amounts and at such other times as the
parties may mutually agree.
(b) BONUSES. During the Term of this Agreement, the Company shall
pay to the Employee an annual bonus of up to 25% of Base Salary, based upon
the Company's achievement of performance targets established by the Company's
board of directors. These targets will be revised annually within ninety
days of the beginning of each fiscal year in consultation with the Employee.
The bonus may be structured as a part of a deferred compensation arrangement.
(c) INCENTIVE COMPENSATION. During the Term of this Agreement,
Employee shall be entitled to participate in any pooled incentive programs
established by the Company for executive employees.
(d) BENEFITS/VACATION. During the Term of this Agreement, the
Company also shall provide Employee with such other benefits, including
medical, disability, pension and severance plans, as are made generally
available to executive employees of the Company from time to time. Employee
shall be entitled to twenty-six bank days as the vacation, personal and sick
benefit during each year of the Term in accordance with the policy set forth
in the Employee Manual of the Company. Accrued vacation may be carried over
or "sold back" to the Company to the extent permitted by, and in accordance
with, the policy set forth in the Employee Manual of the Company.
<PAGE>
2
(e) LIFE INSURANCE. Subject to Employee's submitting to any required
physical examinations, the Company shall purchase and maintain in effect a
term insurance policy with a face amount of one times Employee's Base Salary
or other greater amount as may be specified in the Company's executive
benefit policies or plans on the life of Employee and shall permit Employee
to designate the beneficiary thereof.
3. SERVICES. Employee agrees to devote substantially all of his
working time, attention and energies to the business of the Company and its
Affiliates under the general direction of the board of directors acting
through its Chairman and delegated officers. Nothing herein shall be
interpreted to preclude Employee from participating as an officer or director
of, or advisor to, any charitable or other tax exempt or civic organization.
4. TERM. The term of this Agreement (the "Term" or the "Term of this
Agreement") shall be for a period beginning on the Effective Date and
continuing until the first anniversary of the Effective Date, and shall be
automatically renewed annually thereafter for successive one year periods on
terms no less favorable than are contained herein unless either party gives
notice to the other of its intention not to renew this Agreement within sixty
days of the expiration of the Term of this Agreement.
5. EARLY TERMINATION. (a) IN GENERAL. The Employee's employment
hereunder shall be terminated and, other than the obligations listed in
Paragraph 5(b), the Company's obligations hereunder shall cease, including
the obligation to pay compensation for any period after the date of
termination, (i) without the necessity of notice, upon the death of the
Employee, or (ii) upon written notice of a finding by the Company's board of
directors that the Employee has (a) acted with gross negligence or willful
misconduct in connection with the performance of his duties hereunder,
(b) engaged in a material act of insubordination or of common law fraud
against the Company or its employees, or (c) acted against the best interests
of the Company in a manner that has or could have a material adverse affect
on the financial condition of the Company (any such finding is referred to
herein as "Cause"). Upon any termination of Employee's employment, the Term
of this Agreement shall expire. In the event of Employee's death or
Employee's termination of employment by the Company other than for Cause,
Employee shall be entitled to severance in an amount equal to his then Base
Salary under Paragraph 2 (the "Severance Amount"), payable in twelve equal
monthly installments. If, within eighteen months following the Effective
Date, (a) Employee terminates his or her employment for Good Reason, or (b)
the Company terminates Employee's employment other than for Cause, the
Company shall pay the Severance Amount in a lump sum not later than ten (10)
days after the date the Company selects as Employee's last day of active
employment (the "Effective Date"), provided, however, that at Employee's
option, the Severance Amount shall be payable to Employee in the form of
equal periodic payments ("Deferred Payment") according to the Company's
regular payroll schedule or at any other intervals elected by Employee for a
period commencing on the first regular payroll pay date beginning after the
Effective Date (the
<PAGE>
3
"Deferred Payment Period"). In order to receive Deferred Payment during a
Deferred Payment Period, Employee must elect such Deferred Payment in writing
and specify the Deferred Payment Period, which may not exceed the number of
months of Base Monthly Salary payable to Employee as the Severance Amount.
In the event of Employee's death during the Deferred Payment Period, any
unpaid Deferred Payment shall be paid in a lump sum to such beneficiary or
beneficiaries designated by Employee in writing or, failing such designation,
to Employee's spouse if Employee is married or to Employee's estate if
Employee is unmarried.
(b) PAYMENTS UPON TERMINATION. Upon termination of this Agreement for
any reason, Employee shall be entitled to all compensation and benefits
earned but not yet paid up to and including the termination date, including
Base Salary, bonus and any other incentive compensation. Unless otherwise
specified in this Agreement, unused vacation shall be treated in accordance
with the policy set forth in the Employee Manual of the Company.
(c) GOOD REASON. For purposes of this Agreement, Good Reason shall
mean, with respect to Employee, (i) the assignment to Employee of any
material duties materially inconsistent with Employee's position, authority,
duties or responsibilities immediately before the Effective Date, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken
in bad faith and that is remedied by the Company promptly after receipt of
notice thereof given by Employee; (ii) any material reduction in Employees
Base Salary, opportunity to earn annual bonuses or other compensation or
employee benefits, other than as a result of an isolated and inadvertent
action not taken in bad faith and that is remedied by the Company promptly
after receipt of notice thereof given by Employee; (iii) the Company's
requiring Employee to relocate his or her principal place of business to a
place that is more than thirty-five miles from his or her previous principal
place of business, or (iv) any purported termination of this Agreement
otherwise than as expressly permitted by this Agreement.
(d) DISABILITY. If Employee shall become unable efficiently to
perform the essential functions of his job, even with reasonable
accommodation, as a result of a disability or illness, as such terms are
defined by the Americans with Disabilities Act, he shall be entitled to his
regular compensation until the total period of disability or illness (whether
or not continuous and whether or not the same disability or illness) shall
exceed 60 days during any calendar year in the Term hereunder. This
Agreement may thereafter be terminated by the Company and, if such
termination is not within two years of the Effective Date, the Company's
obligations hereunder shall cease, including the obligation to pay
compensation for any period after the date of termination. Any amounts
payable as compensation during the period of disability or illness shall be
reduced by any amounts paid during such period under any disability plan or
similar insurance of the Company.
<PAGE>
4
6. EMPLOYER'S AUTHORITY. Employee agrees to observe and comply with the
rules and regulations of the Company as adopted by the Company's President or
Chief Executive Officer or by the Company's board of directors respecting the
performance of his duties and to carry out and perform orders, directions and
policies communicated to him from time to time.
7. EXPENSES. During the Term of this Agreement, the Company shall
reimburse Employee for the reasonable business expenses incurred by Employee
in the course of performing his duties for the Company hereunder in
accordance with the procedures then in place for such reimbursement.
8. AUTOMOBILE ALLOWANCE. During the Term of this Agreement, Employee
shall be entitled to an automobile allowance as specified on Schedule A
below, payable monthly in arrears.
9. NON-DISCLOSURE/NON-COMPETITION. (a) Employee has executed a
Nondisclosure Agreement of the Company. Said agreement shall survive
termination of employment hereunder.
(b) Because Employee's services to the Company are special and
because Employee has access to the Company's confidential information,
Employee covenants and agrees that if (i)(x) Employee's employment is
terminated by the Company for Cause or (y) Employee voluntarily terminates
his employment relationship hereunder with the Company other than for Good
Reason, for a period of six (6) months following the termination of this
Agreement, or (ii) Employee's employment is terminated and Employee is
receiving the Severance Amount, for the period during which Employee is
receiving such Severance Amount under Paragraph 5 hereof, whichever is
applicable, he will not, directly or indirectly, either on his own behalf or
on behalf of any person, partnership, corporation or otherwise, (a) engage in
any business or undertaking in a capacity that is directly competitive with
any business (each a "Related Business") being carried on by the Company or
any Affiliate thereof at the time of Employee's termination of employment, or
(b) be employed by or provide consulting services to or be an investor,
partner, member or shareholder in, any entity or other person in a Related
Business within 25 miles of any city in which the Company or any Affiliate
thereof, does business at time of execution or any other city or community in
which the Company or any Affiliate thereof, has a transmission license at the
time of termination, without the prior written consent of the Company's board
of directors. The parties agree that the time period and geographical area
of non-competition specified above are reasonable and necessary in light of
the transactions entered into in this Agreement. If, however, it shall be
determined at any time by a court of competent jurisdiction that either the
time period restriction or the geographical area restriction, or both, are
invalid or unenforceable, the parties agree that any such restriction
determined to be invalid or unenforceable shall be deemed so amended as to
make such restriction valid and enforceable in the
<PAGE>
5
determination of said court, and such restriction, as so amended, shall be
enforceable between the parties to the same extent as if such amendment had
been made as of the date of this Agreement. This subparagraph 9(b) shall
survive the termination of this Agreement.
10. EXECUTION, DELIVERY AND PERFORMANCE. To the best of Employee's
knowledge, the execution, delivery and performance by Employee of this
Agreement or any other agreement, instrument or document contemplated herein
or hereby will not result in a breach of or conflict with any terms of any
other agreement, instrument or document to which Employee is a party or by
which Employee or his property is bound. No consent or approval of any
person or entity, other than those that have been obtained by Employee, is
required for Employee to execute, deliver and perform its obligations under
this Agreement or any agreement, instrument or document contemplated herein
or hereby.
11. NOTICES. Any notice permitted or required hereunder shall be deemed
sufficient when hand-delivered or mailed by certified mail, postage prepaid,
and addressed if to the Company at the address indicated above and if to the
Employee at the address indicated below (or to such other address as may be
provided by written notice received at least five (5) business days prior to
the hand delivery or mailing of any such notice).
12. MISCELLANEOUS. (a) This Agreement (i) constitutes the entire
agreement between the parties concerning the subjects hereof and supersedes
any and all prior agreements or understandings, (ii) may not be assigned by
Employee without the prior written consent of the Company, and (iii) may be
assigned by the Company to any Affiliate of the Company or to the successors
or assigns of the Company, provided such successors or assigns carry on
substantially the Company's telecommunications business as conducted at the
time of assignment and shall be binding upon, and inure to the benefit of,
any such Affiliate, successor or assign.
(b) Headings herein are for convenience of reference only and shall
not define, limit or interpret the contents hereof.
(c) As used herein, the term "Affiliate" shall mean any entity
controlled by or under common control with the Company.
13. AMENDMENT. This Agreement may be amended, modified or supplemented
by the mutual consent of the parties in writing, but no oral amendment,
modification or supplement shall be effective.
14. SPECIFIC ENFORCEMENT. The parties acknowledge that the Company
would be irreparably damaged and there would be no adequate remedy at law for
the Employee's
<PAGE>
6
breach of Paragraph 9 of this Agreement, and accordingly, the terms thereof
shall be specifically enforced. Employee hereby consents to the entry of any
temporary restraining order or preliminary injunction, in addition to any
other remedies available at law or in equity, to enforce the provisions
hereof, provided sufficient facts are shown to warrant such relief.
15. SEVERABILITY. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision.
16. GOVERNING LAW. This Agreement shall be construed and regulated in
all respects under the laws of the State of Texas.
IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.
CS WIRELESS SYSTEMS, INC. EMPLOYEE:
By: By:
--------------------------------- ---------------------------------
Name: David E. Webb Name: Albert G. McGrath, Jr.
Title: Chief Executive Officer
<PAGE>
SEPARATION AGREEMENT
SEPARATION AGREEMENT (this "Agreement") made as of the 19th day of
October, 1998 (the "Effective Date") by and between FRANK H. HOSEA, residing at
the address indicated following his signature below (hereinafter referred to as
"Employee") and CS WIRELESS SYSTEMS, INC., a Delaware corporation having its
principal place of business at 1101 Summitt Avenue, Plano, 75074 (hereinafter
referred to as the "Company").
WHEREAS, Employee and the Company are parties to that certain
Employment Agreement dated as of April 2, 1997 (the "Employment Agreement") and
the Non-Qualified Stock Option Agreements dated as of June 3, 1996, January 1,
1997 and April 2, 1997 (the "Stock Option Agreements"); and
NOW THEREFORE, in consideration of their mutual promises, and for other
good and valuable consideration, the parties, intending to be legally bound,
agree as follows:
1. TERMINATION OF EMPLOYMENT. The Employment Agreement is hereby terminated as
of the Effective Date, and shall be of no further force and effect, except as
provided in PARAGRAPH 2 and PARAGRAPH 5 below.
2. NON-DISCLOSURE. The non-disclosure covenants contained in PARAGRAPH 9(A) of
the Employment Agreement shall survive the termination of the Employment
Agreement in accordance with their terms, and the Non-Disclosure Agreement dated
as of April 2, 1997 (the "Non-Disclosure Agreement") between the parties shall
remain in full force and effect.
3. SEVERANCE. From the date hereof and continuing until April 1, 2000 (the
"Term") the Company shall pay Employee severance in an amount (the "Severance
Amount") equal to the Base Salary (defined herein) that would have been payable
pursuant to the Employment Agreement for the balance of the Term, payable in
equal monthly installments. All payments will be made according to Company's
normal payroll schedule and shall be made subject to applicable payroll
withholding. For the purposes of this Agreement, the term "Base Salary" shall be
defined as and deemed to be the sum of $140,000 payable annually during a
calendar year. The Parties acknowledge that such sum represents Employee's
annual base salary as of the Effective Date.
4. STOCK OPTIONS. The parties acknowledge that options (the "Original Options")
to purchase 66,000 shares of the Company's common stock, par value $.001
("Common Stock"), were granted to Employee under the 1996 CS Wireless Systems,
Inc. Incentive Stock Plan, as amended from time to time (the "Plan"). The
parties further acknowledge that of the Original Options, options to purchase
14,000 shares of Common Stock at an exercise price of $6.50 per share, and
options to purchase 5,000 shares of Common Stock at an exercise price of $9.40
per share, are fully vested (the "Remaining Options") and
1
<PAGE>
the balance of the Original Options, which represent options to purchase
47,000 shares of Common Stock, are hereby surrendered by Employee to the
Company. The Remaining Options shall continue to be governed by the Plan.
5. NON-COMPETITION. (a) Employee and the Company acknowledge and agree that
the Non-Competition provisions and restrictions (the "Non-Compete
Restrictions") set forth in PARAGRAPH 8 of the Employment Agreement are in
full force and effect as of the date hereof. Employee has requested Company
to modify the Non-Compete Restrictions. In consideration of the agreement of
the Company to modify the terms of the Non-Compete Restrictions and perform
the terms of this Separation Agreement. Employee agrees to be bound by the
covenants contained in PARAGRAPH 5.(b) below.
(b) Because Employee's services to the Company have been and are special and
because Employee had access to and been responsible for developing a portion
of the Company's confidential information, Employee covenants and agrees that
from the date hereof through April 1, 2000 that he will not, directly or
indirectly, either on his own behalf or on behalf of any person, partnership,
corporation or otherwise, (i) engage in any business or undertaking directly
competitive with the wireless cable television, cable television,
subscription television, direct broadcast satellite, direct-to-home, wired
video programming, non-wired video programming, wireless Internet access,
wireless fixed telephony or other fixed wireless information businesses (the
"Related Business") being carried on by the Company or its subsidiaries in
any market serviced by the Company or any such subsidiary or (ii) be employed
by or provide consulting services to or be an investor, limited partner or
shareholder in, any entity or other person engaged in the Related Business
within 25 miles from the originally listed and approved FCC broadcast point
for each operating entity from which the Company or any of its subsidiaries
does business at the Effective Date. The parties agree that the time period
and geographical area of non-competition specified above are applicable to
the restrictions set forth in (i) and (ii) of the preceding sentence and are
reasonable and necessary in light of the transactions entered into in this
Agreement. If, however, it shall be determined at any time by a court of
competent jurisdiction that either the time period restriction or the
geographical area restriction, or both, are invalid or unenforceable, the
parties agree that any such invalid restriction shall be amended and reformed
to the extent necessary to make same valid and enforceable in the
determination of said court, and such restriction, as so amended, shall be
enforceable between the parties to the same extent as if such amendment had
been made as of the date of this Agreement. This PARAGRAPH 5 shall not apply
to investments constituting not more than 5% of the common equity of a
publicly traded or privately held company.
6. INSURANCE. To the extent permitted by the Company's insurance carriers and
applicable law, and provided you elect to continue such coverage and make any
required contributions, the Company agrees that you will remain eligible to
participate in the Company's medical and dental plans through the earlier to
occur of (i) the expiration of one year from the Effective Date or (ii) such
time as you accept full time employment.
2
<PAGE>
7. RELEASE. (a) Employee hereby releases, remises, and forever discharges,
and by these presents does, for himself, his heirs, executors,
administrators, legal representatives and assigns, release, remise, and
forever discharge the Company, its subsidiaries and Affiliates, its past,
present and future divisions; its past, present and future subsidiary and
parent corporations; its past, present and future Affiliates and related
companies; its successors and assigns; its past, present and future
directors, officers, stockholders, agents and employees both personally and
as directors, officers, stockholders, agents and employees; and the past,
present and future directors, officers, stockholders, agents and employees of
its parents, subsidiaries, divisions, Affiliates, related companies and
successors and assigns (hereinafter collectively referred to as "the Company
and/or its Affiliates"), from any claim, known or unknown, asserted or
unasserted, suspected or unsuspected, arising in any way from any actions
taken by the Company and/or its Affiliates up to and including the date of
the execution of this Agreement, including any claims, demands and causes of
action under federal or state law, regulation or decision including any
rights to bring any demands, complaints, causes of action, claims and charges
under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.
section 2000e ET SEQ., the Civil Rights Act of 1991, 42 U.S.C. section 1981a
ET SEQ., the Employee Retirement Income Security Act, 29 U.S.C. section 1001
ET SEQ., the Age Discrimination Employment Act of 1967, as amended, 29 U.S.C.
section 601 ET SEQ. the Americans with Disabilities Act of 1990, 42 U.S.C.
section 12101 ET SEQ, and any other federal or state law, regulation or
decision, including but not limited to any claims arising out of his
employment or the termination or resignation of his employment, including
claims for wages owed, constructive discharge, wrongful discharge, infliction
of emotional distress, breach of contract, breach of any implied covenant of
good faith and fair dealing, violation of public policy, violation of company
policy or any other common law claims, and any claims, demands or causes of
action for injunctive or declaratory relief, reinstatement, compensation for
lost wages, workers' compensation, employee or fringe benefits, compensatory
or punitive damages, and any claims for attorneys' fees, interest and
expenses and costs of litigation, and any other or additional relief.
(b) Without in any way limiting the scope and effect of this PARAGRAPH 7,
Employee acknowledges that (i) he would not otherwise be entitled to all of
the consideration described herein, and that the Company is providing such
consideration in return for Employee's agreement to be bound by the terms of
this Agreement; (ii) among the rights he knowingly and voluntarily waives by
executing this Agreement is his right to bring against the Company any
demands, complaints, causes of action, claims and charges under the Age
Discrimination in Employment Act, 29 U.S.C. subsection 621 ET SEQ., or under
any other federal or state law, regulation or decision prohibiting
discrimination on the basis of race, color, religion, sex, age, national
origin, sexual orientation or physical or mental handicap; (iii) he has been
advised to consult with an attorney regarding this Agreement and he has, in
fact, consulted with an attorney regarding this Agreement; and (iv) he has
been given a reasonable period of time within which to consider this
Agreement and if he wanted additional time, such time was available to him,
up to and including October 29, 1998 which is more than twenty-one (21)
calendar days from October 8, 1998 the date on which Employee first was
provided with this Agreement and Employee further acknowledges that he does
not want more time to consider this
3
<PAGE>
Agreement and that he has requested that the Agreement be executed on this
date. Employee understands that he may revoke this Agreement during the first
seven days after he signs it by delivering written notice of his revocation
to the Company. Employee understands that if he does not revoke this
Agreement within the first seven days after he signs it, it will become
effective on the eighth day after he signs it.
8. NOTICES. Any notice permitted or required hereunder shall be deemed
sufficient when hand-delivered or mailed by certified mail, postage prepaid,
and addressed if to the Company at the address indicated above and if to
Employee at the address indicated below (or to such other address as may be
provided by notice).
9. MISCELLANEOUS. This Agreement (i) together with the Non-Disclosure
Agreement, constitutes the entire agreement between the parties concerning
the subjects hereof and supersedes any and all prior agreements or
understandings, (ii) may not be assigned by Employee without the prior
written consent of the Company and (iii) may be assigned by the Company and
shall be binding upon, and inure to the benefit of, the Company's successors
and assigns. Headings herein are for convenience of reference only and shall
not define, limit or interpret the contents hereof.
10. AMENDMENT. This Agreement may be amended, modified or supplemented by the
mutual consent of the parties in writing, but no oral amendment, modification
or supplement shall be effective.
11. SPECIFIC PERFORMANCE. The parties acknowledge that the Company would be
irreparably damaged and there would be no adequate remedy at law for
Employee's breach of PARAGRAPH 5 of this Agreement, and accordingly, the
terms thereof shall be specifically enforced. Employee hereby consents to the
entry of any temporary restraining order or preliminary or ex parte
injunction, in addition to any other remedies available at law or in equity,
to enforce the provisions hereof.
12. AFFILIATES. As used herein, the term "Affiliate" shall mean any
individual or entity controlling, controlled by or under common control with
the Company, now or in the future, including without limitation, partnerships
in which the Company or any Affiliate may invest as a limited or general
partner and limited liability companies in which the Company or any Affiliate
may become a member.
13. SEVERABILITY. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision.
14. GOVERNING LAW. This Agreement shall be construed and regulated in all
respects under the laws of the State of Texas.
IN WITNESS WHEREOF, this Agreement is entered into as of the date
and year first above written.
4
<PAGE>
CS WIRELESS SYSTEMS, INC.
BY:
------------------------------------
NAME: DAVID WEBB
TITLE: PRESIDENT AND
CHIEF EXECUTIVE OFFICER
EMPLOYEE:
------------------------------
NAME: FRANK H. HOSEA
ADDRESS: 1811 FOREST HILLS DRIVE
MCKINNEY, TX 75070
5
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 45,394
<SECURITIES> 0
<RECEIVABLES> 1,030
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,840
<PP&E> 90,804
<DEPRECIATION> 35,899
<TOTAL-ASSETS> 290,584
<CURRENT-LIABILITIES> 7,536
<BONDS> 305,718
0
0
<COMMON> 11
<OTHER-SE> (28,544)
<TOTAL-LIABILITY-AND-EQUITY> 290,584
<SALES> 20,076
<TOTAL-REVENUES> 20,076
<CGS> 0
<TOTAL-COSTS> 94,002<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,657
<INCOME-PRETAX> (98,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> (98,894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,868)<F2>
<NET-INCOME> (100,762)
<EPS-PRIMARY> (9.42)
<EPS-DILUTED> (9.42)
<FN>
<F1>Includes impairment of goodwill of $46.4 million.
<F2>Due to adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities".
</FN>
</TABLE>
