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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 NO. 333-3288
CS WIRELESS SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 23-2751747
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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1101 SUMMIT AVENUE
PLANO, TEXAS 75074
(Address of principal executive offices, including zip code)
(972) 398-5300
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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TITLE OF EACH
CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
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Securities Registered Pursuant To Section 12(g) of The Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of April 15, 1999, 6,864,471 shares of the Registrant's Common Stock were
outstanding, 443,305 shares of which were held by nonaffiliates. The Company's
Common Stock has not been registered with the Securities and Exchange
Commission, and no market exists for its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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CS WIRELESS SYSTEMS, INC.
TABLE OF CONTENTS
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PART I..................................................................................................... 1
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 18
Item 3. Legal Proceedings............................................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 19
PART II.................................................................................................... 19
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters......................... 19
Item 6. Selected Financial Data...................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 20
Item 8. Financial Statements and Supplementary Data.................................................. 35
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......... 35
PART III................................................................................................... 36
Item 10. Directors and Executive Officers of the Registrant........................................... 36
Item 11. Executive Compensation....................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 41
Item 13. Certain Relationships and Related Transactions............................................... 41
PART IV.................................................................................................... 46
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 46
SIGNATURES................................................................................................. 48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1
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CS WIRELESS SYSTEMS, INC.
1998 ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS.
GENERAL
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 Estimated Total Service Area Households
(defined at ITEM 1.--BUSINESS--OPERATIONAL AND PLANNED MARKETS) and subscribers.
CS provides subscription television services to approximately 60,160
subscribers, as of December 31, 1998, in eleven operating markets utilizing the
frequency spectrum commonly referred to as the Multichannel Multipoint
Distribution Services ("MMDS") spectrum. Additionally, the Company provides high
speed Internet access services in its Dallas and Ft. Worth markets utilizing the
MMDS spectrum. Overall, the Company presently owns or holds lease rights to MMDS
spectrum in its 21 primary markets where there are 7.7 million Estimated Total
Service Area Households. Additionally, the Company owns or holds lease rights in
other markets.
ORGANIZATION AND CAPITALIZATION OF THE COMPANY. CS was incorporated in
December 1993 under the name ACS Ohio, Inc. The Company remained dormant until
March 1994 when its then parent company, ACS Enterprises, Inc, acquired
MetroCable, Inc. (a company organized on June 4, 1993 as the successor in
interest to a unit of Cablevision) and Metropolitan Satellite Services, Inc.,
the operators of a wireless subscription television system in Cleveland, Ohio.
CAI Wireless Systems, Inc. ("CAI"), which presently owns approximately 94% of
the Company's outstanding common stock, acquired ACS Enterprises, Inc on
September 29, 1995.
The majority of the assets presently owned or leased by the Company were
contributed to CS by CAI and Heartland Wireless Communications, Inc.
("Heartland") pursuant to the terms of a Participation Agreement consummated 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. 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.
On February 23, 1996, the Company consummated a private placement of 100,000
units (the "Units") consisting of $400 million aggregate principal amount of
11 3/8% Senior Discount Notes due 2006 ("CS Notes") and 110,000 shares of common
stock ("CS Common Stock"). The original issue price for each $1,000 principal
amount of CS Notes was $571.71. Each CS Note accretes at a rate of 11 3/8% per
annum computed on a semi-annual bond equivalent basis during the initial five
years of the 10-year term. Cash interest is payable beginning in September 2001
at a rate of 11 3/8% per annum. The yield to maturity (compounded semi-annually)
is 11.45%. Including amounts attributable to the CS Common Stock, the issuance
of the Units resulted in net proceeds to the Company of approximately $162.9
million after (i) underwriting discounts and other debt issuance costs, (ii)
note payments, and (iii) certain distributions made in connection with the
Participation Agreement.
ACQUISITION OF BTAs. In the auction (the "BTA Auction") conducted by the
Federal Communications Commission ("FCC") conducted in 1996 of available
commercial wireless cable spectrum in 487 basic
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trading areas ("BTAs") and six additional BTA-like geographic areas around the
country, CAI and Heartland successfully bid on a number of BTA market
authorizations on behalf of the Company. In order to be eligible for the BTA
Auction, a potential bidder was required to file an application with, and make
up-front payments to, the FCC prior to the start of the BTA Auction. Each of CAI
and Heartland made such filings and up-front payments, entitling each of them to
participate in the BTA Auction. The consummation of the transactions
contemplated by the Participation Agreement had not occurred by the date such
applications were due, and as a consequence, the Company was not an active
participant in the BTA Auction. CAI and Heartland, however, agreed to convey to
the Company, at their cost, and the Company agreed to purchase, any rights
acquired in the BTA Auction relating to the Company's markets, as well as
certain other BTAs. Rights to BTAs for the Company's Bakersfield and
Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio
markets were acquired by CAI for approximately $5.6 million. In addition, CAI
purchased BTAs relating to Atlanta, Georgia and Louisville, Kentucky for
approximately $7.0 million. All of the aggregate $12.6 million has been paid by
CAI to the FCC in accordance with the rules of the BTA Auction. Heartland
purchased BTAs relating to Little Rock, Arkansas; Oklahoma City, Oklahoma;
Dayton, Ohio; Minneapolis, Minnesota; Dallas and San Antonio, Texas; Sedallia
and St. Josephs, Missouri; Lawrence and Emporia, Kansas; and Benton Harbor,
Battle Creek/Kalamazoo, Grand Rapids and Muskegon, Michigan for approximately
$4.4 million. Of this amount, approximately $1.1 million has been paid by
Heartland to the FCC for these BTAs. The Company will continue to reimburse
Heartland for any and all costs relating to the BTAs which total costs are
estimated to be up to an additional $3.8 million, excluding interest expense
which accrues at 9.5% per annum, in connection with these BTAs in accordance
with the terms of the Participation Agreement. The FCC has approved assignment
of all of CAI's BTAs to the Company. The Company and Heartland entered into a
BTA Lease and the Option Agreement pursuant to which Heartland leases to the
Company 10 BTAs and portions of four additional BTAs. The Company has the option
to purchase the leased BTAs.
SUBSEQUENT ACQUISITIONS. The Company 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.
The Company is incorporated under the laws of the state of Delaware. The
Company's principal executive offices are located at 1101 Summit Avenue, Plano,
Texas 75074, and its telephone number is 972/398-5300.
INDUSTRY OVERVIEW
SUBSCRIPTION TELEVISION INDUSTRY. The subscription television industry
began in the late 1940s to serve the needs of residents in predominantly rural
areas with limited access to local broadcast television stations. The industry
expanded to metropolitan areas due to, among other things, the fact that it
offered better reception and more programming. Currently, such systems offer
various types of programming, which generally include basic service, enhanced
basic, premium service and, in some instances, pay-per-view service.
A subscription television customer generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
basic service fee varies from one area to another and is a function, in part, of
the number of channels and services included in the basic service package and
the cost of such services to the television system operator. In most instances,
a separate monthly fee for each premium service and certain other specific
programming is charged to customers, with discounts generally available to
customers receiving multiple premium services. Monthly service fees for basic,
enhanced basic and premium services constitute the major source of revenue for
subscription television systems. Converter
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rentals, remote control rentals, installation charges and reconnect charges for
customers who were previously disconnected are also included in a subscription
television system's revenues, but generally are not a major component of such
revenues.
WIRELESS CABLE INDUSTRY BACKGROUND. Wireless cable, as an alternative to
traditional, hard-wire cable television, was made possible by a series of rule
changes promulgated by the FCC in the 1980s. However, regulatory and other
obstacles impeded the growth of the wireless cable industry through the
remainder of the 1980s. During the 1990s, several factors have encouraged the
growth of the wireless cable industry, including (i) regulatory reforms by
Congress and the FCC to facilitate competition with hard-wire cable, (ii)
federal legislation that increased the availability of programming for wireless
cable systems on non-discretionary terms, (iii) consumer demand for alternatives
to traditional hard-wire cable service, (iv) enhanced ability of wireless cable
operators to aggregate a sufficient number of channels in each market to create
a competitive product, and (v) increased availability of capital to wireless
cable operators in the public and private markets. According to the Wireless
Cable Association, Inc., there are approximately 250 wireless cable systems
currently operating in the United States which served approximately one million
subscribers in 1997. The FCC noted in its Fifth Annual Report on the Status of
Competition in Markets for the Delivery of Video Programming that wireless cable
represented a 1.3% share of the national multichannel video programming market
in June, 1998.
Similar to traditional hard-wire cable systems, a wireless cable system
receives programming at a Headend. Traditional hard-wire cable systems transmit
signals from a central transmission facility and deliver the signal to a
subscriber's location through an extensive network of fiber optic and/or coaxial
cable, amplifiers and related equipment ("Cable Plant"). Wireless cable
programming, however, is then retransmitted by microwave transmitters operating
in the 2150-2162 MHz and 2500-2686 MHz portions of the radio spectrum
(collectively, the "MMDS Spectrum") from an antenna typically located on a tower
associated with the Headend to a small receiving antenna located on a
subscriber's rooftop. At the subscriber's location, the signals are converted to
frequencies that can pass through conventional coaxial cable into a descrambling
converter located on top of a television set. Wireless cable requires a clear
LOS, because the microwave frequencies used will not pass through dense foliage,
hills, buildings or other obstructions. To ensure the clearest LOS possible in
the Company's markets, the Company has placed, and plans to place, its transmit
antennae on towers or tall buildings in areas located in such markets. There
exists, in each of the Company's operating and targeted markets, a number of
acceptable locations for the placement of its transmit antennae, and the Company
does not believe that the failure to secure any one location for such placement
in any single market will materially affect the Company's operations in such
market. Additionally, some LOS obstructions can be overcome with the use of
signal repeaters (known as "beambenders") which retransmit an otherwise blocked
signal over a limited area. The use of beambenders increases the costs per
subscriber incurred by the company. The Company believes that its coverage could
be enhanced upon the implementation of digital technology. In addition, MMDS
operators such as CS may design cellular networks which utilize a main
transmission facility and additional cell sites that rebroadcast the signal
within a smaller area to improve coverage. Since wireless cable systems do not
require an extensive Cable Plant, wireless cable operators can provide
subscribers with a reliable signal and a high quality picture with few
transmission disruptions at a significantly lower system capital cost per
installed subscriber than traditional hard-wire cable systems.
MMDS SPECTRUM. The utilization of MMDS spectrum is regulated by the FCC
which governs, among other things, the issuance, renewal, assignment, transfer
and modification of licenses necessary for the operation of MMDS systems. "MMDS"
is the vernacular term used to describe the Company's business and includes both
MMDS and Multichannel Distribution Service ("MDS") channels, as well as
Instructional Television Fixed Service ("ITFS") channels. Generally, 33 6 MHz
channels within the MMDS Spectrum are available for the transmission of wireless
cable programming in the 50 largest domestic markets, in addition to local
broadcast television channels which are not retransmitted over the microwave
channels. There are certain limitations described in ITEM
1.--BUSINESS--REGULATION below. Traditional
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hardwire cable companies may offer between 35-60 analog channels in a given
market; certain hardwire cable companies have or are in the process of applying
digital technology to increase the number of channels available to subscribers.
The wireless cable industry has been exploring various applications of digital
technology to microwave transmissions in order to increase the number of
channels offered for subscription in various markets. Additionally, the Company
and other wireless cable companies have explored alternative uses of microwave
frequencies for other applications such as Internet access and telephony
delivery services.
FLEXIBLE USE OF MMDS SPECTRUM. MMDS spectrum has been licensed by the FCC
for one-way video and data transmission on an industry-wide basis and has been
traditionally used by MMDS operators to broadcast subscription television
services. CS has applied for and received certain authorizations from the FCC
for fixed, flexible use of its MMDS spectrum in certain markets with respect to
specified channels. The most powerful potential for MMDS spectrum is, however,
in a fully-flexible two-way environment. Two-way use of the MMDS spectrum is
expected by the Company to provide the greatest attraction to a prospective
strategic partner. SEE ITEM 1.--BUSINESS--BUSINESS STRATEGY.
On September 25, 1998, the FCC issued a Report and Order in MM Docket No.
97-217 (referred to herein as the "Two-Way Order") in which the FCC approved
broad authority for full flexible two-way use of MMDS spectrum, subject to
certain engineering and related parameters, for transmissions of data, telephony
and video. The new rules require the filing with the FCC of applications in
order to receive authorization for two-way use of the MMDS 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 either in the latter part of the second quarter or third
quarter of calendar year 1999. The application process involves the formulation
of a frequency plan and coordination of such frequency plan with license holders
in each market in which two-way approval is sought and, potentially, adjacent
markets. In cooperation with CAI, the Company has commenced the process of
formulating frequency plans for each of their respective principal markets, in
order to coordinate generic frequency plans that could be useful to a
prospective strategic partner and to pool resources. There can be no assurance
that the Company, either alone or with the assistance of CAI, will be able to
achieve coordination of their respective frequency plans with all license
holders in each of their respective markets, that all or any of their respective
applications will be granted or that the FCC will grant to them authorization to
utilize their MMDS spectrum in the manner requested in their applications.
However, the Company is devoting substantial resources to the preparation and
filing of all potentially applicable two-way applications. There can also be no
assurance that the designs of the frequency plans prepared by the Company will
be identical or substantially similar to the frequency plan that would have been
designed by any particular potential strategic partner.
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OPERATIONAL AND PLANNED MARKETS
The table below outlines as of December 31, 1998 the characteristics of the
principal markets in which CS operates or in which CS holds significant spectrum
rights:
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ESTIMATED
TOTAL
SERVICE NUMBER OF APPROXIMATE
AREA ESTIMATED LOS WIRELESS NUMBER OF
MARKET HOUSEHOLDS HOUSEHOLDS CABLE CHANNELS SUBSCRIBERS*
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Bakersfield, CA...................................... 162,000 151,000 32 7,615
Battle Creek/Kalamazoo, MI........................... 231,000 173,000 12 **
Cameron/Maysville, MO................................ 65,000 59,000 33 3,130
Charlotte, NC (c).................................... 580,000 472,000 13 **
Cleveland, OH........................................ 1,178,000 884,000 29 19,110
Dallas, TX........................................... 981,000 872,000 29 1,440
Dayton, OH (d)....................................... 610,000 413,000 33 7,955
Fort Worth, TX....................................... 540,000 443,000 33 1,095
Grand Rapids, MI..................................... 346,000 259,000 16 385
Kalispell, MT (c).................................... 33,000 30,000 21 **
Kansas City, MO (e).................................. 432,000 389,000 25 **
Minneapolis, MN...................................... 959,000 882,000 28 3,210
Napoleon/Bloom Center, IN (d)........................ 141,000 113,000 20 **
Nortonville/Effingham, KS............................ 53,000 48,000 33 1,730
Rochester, MN........................................ 57,000 51,000 23 **
San Antonio, TX...................................... 550,000 440,000 33 10,950
Scottsbluff, NE...................................... 25,000 22,000 20 **
Stockton/Modesto, CA................................. 350,000 300,000 33 **
Story City, IA (f)................................... 77,000 73,000 27 1,730
Sweet Springs, MO.................................... 61,000 55,000 33 1,810
Wellsville, KS....................................... 229,000 206,000 33 **
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Total.............................................. 7,660,000 6,335,000 -- 60,160
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* As of December 31, 1998.
** To be launched by CS or a prospective purchaser.
(a) The Estimated Total Service Area Households for each market represents the
Company's estimate of the number of households within the service area for
the primary transmitter in each market based on census data. The Estimated
LOS Households for each market represents the approximate number of
Estimated Total Service Area Households within the service area of the
primary transmitter that can receive an adequate unobstructed analog or
digital signal, as estimated by the Company, based on topographical and
engineering analyses. The service area for a market varies based on a number
of factors, including the transmitter height, transmitter power and the
proximity of adjacent wireless cable systems.
(b) The Number of Channels Available comprises 6 MHz of bandwidth and are
commonly referred to as wireless cable channels. Wireless cable channels
either are licensed to the Company or are leased to the Company by other
license holders. There are no automatic rights to renew ITFS leases and
certain MDS leases. The Number of Channels also includes certain channels
that are subject to FCC approval of applications for new station
authorizations, power increases, transmitter relocations, as well as third
party interference agreements. The FCC's failure to grant one or more new
station applications could decrease the number of channels. The FCC's
failure to grant one or more power increase or
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transmitter relocation applications, or the failure to obtain certain third
party interference agreements, could delay the initiation of service and/or
reduce the coverage area of the affected system or systems. The Company has
the exclusive right to apply for 13 channels in the Wellsville market, which
channels are included in the above table.
(c) The Company currently holds licenses or leases for five wireless cable
channels and also has the right to develop nine additional channels,
depending on interference considerations, in the Charlotte market as a
result of its ownership of the Charlotte BTA. SEE ITEM 13.--CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--CHARLOTTE, NORTH CAROLINA BASIC
TRADING AREA.
(d) When the FCC issues a station authorization, the licensee is afforded a
certain period of time to complete construction. If the licensee cannot
complete construction within the specified time frame, the licensee must
file a request with the FCC for additional time to complete construction.
The Napoleon/Bloom Center, Indiana market has 20 channels, all of which are
the subject of currently pending requests for additional time to complete
construction.
(e) The Kansas City, Missouri market was acquired by the Company from People's
Choice TV Corp. ("PCTV") in connection with an exchange consummated during
the third quarter of 1997. SEE ITEM 1.--GENERAL INFORMATION--SUBSEQUENT
ACQUISITIONS. The number of wireless channels includes 4 leased channels for
which a consent from the lessor to assign the lease from PCTV to the Company
remains outstanding.
(f) The Company assumed operational control of the Story City, Iowa market
effective December 30, 1997. The Company subsequently agreed to transfer the
market to Heartland. SEE ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--STORY CITY, IOWA OPERATING MARKET and HEARTLAND EXIT
TRANSACTION.
Additionally, the Company owns or leases spectrum rights in other markets
for which it owns the applicable BTA granted by the FCC. Those markets are
Little Rock, Arkansas; Louisville, Kentucky; Muskegon, Michigan; Portsmouth, New
Hampshire; and Oklahoma City, Oklahoma.
At December 31, 1998, the Company operated wireless cable systems in
Bakersfield, California; Cleveland and Dayton, Ohio; Dallas, Fort Worth, and San
Antonio, Texas; Grand Rapids, Michigan; Cameron/Maysville and Sweet Springs,
Missouri; Nortonville/Effingham, Kansas; and Minneapolis, Minnesota and has
acquired channel rights in other markets including Charlotte, North Carolina and
Stockton/ Modesto, California. Effective December 30, 1997, the Company assumed
operational control over the Story City, Iowa market; however, the Company has
agreed to transfer the market to Heartland. SEE ITEM 13.--CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS--STORY CITY, IOWA OPERATING MARKET and HEARTLAND EXIT
TRANSACTION. The Company has markets that do not fit with the Company's strategy
of regional concentration, and therefore, the Company may sell or exchange such
systems. The Company has had preliminary discussions with potential buyers but
has not executed any definitive agreements with respect to the sale, trade, or
other dispositions of such markets. The Company has engaged a broker to assist
the Company with the solicitation of interest in the purchase of certain
markets.
SERVICE OFFERINGS AND MARKETING
VIDEO/ANALOG SERVICES. The Company provides analog wireless television
services to the operational markets described at ITEM 1. BUSINESS--OPERATIONAL
AND PLANNED MARKETS. Typically, the Company offers for subscription 28 to 33
channels with traditional off-air, cable and premium programming options. The
services are generally offered through direct marketing to prospective
subscribers. The Company began in 1997 to minimize marketing and capital
expenditures associated with analog services and equipment in order to commit
resources to digital technology. The Company provided analog video programming
to approximately 58,720 and 67,125 subscribers as of December 31, 1998 and 1997,
respectively.
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DIGITAL VIDEO SERVICES. The utilization of MMDS Spectrum for the delivery
of analog television channels is limited by the capacity of the spectrum; a full
6 MHz of spectrum is required for each analog channel. The Company began in 1996
to develop an infrastructure for the purpose of delivering digital services.
Compression technology allows 8-12 video signals per each 6 MHz. The Company
intended to commence a full commercial launch of digital television services in
its Dallas market in 1997. The Company provided digital video programming to
approximately 1,440 subscribers as of December 31, 1998. Towards that goal, the
Company signed an agreement in 1997 with General Instrument Corporation
("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 Instrument experienced certain system integration and
other problems with respect to the digital Headend equipment and converter
boxes. Due to the delay in delivery of the products required by the Company for
a commercial launch of digital services, 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 and the product deficiencies addressed in the contract
amendments executed in February. General Instrument did not successfully resolve
all problems and the intended full-scale commercial launch has been indefinitely
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
third quarter. The Company evaluated the results of the controlled rollout and
determined that, absent the availability of commercially viable equipment from
General Instrument, a full-scale commercial launch of digital video service is
not presently feasible. In March 1999, the Company entered into an agreement
with General Instrument providing for, among other things, the termination of
the equipment purchase agreement executed in 1997, the return of certain
inventory in satisfaction of an account receivable asserted by General
Instrument, the continuing support by General Instrument of inventory and
equipment retained by the Company and mutual releases of certain claims asserted
by each of General Instrument and the Company.
Additionally, in an effort to maximize the utilization of the MMDS Spectrum,
the Company and CAI formed TelQuest Satellite Services LLC ("TelQuest") in
August 1997. The Company and CAI intended that TelQuest develop and generate
satellite systems providing digital services. The strategy envisioned that the
utilization of a TelQuest solution would require only one digital compression
center that would be constructed to service all of the respective markets of the
Company and CAI. The utilization of the single compression center would result
in significant cost savings by eliminating the need to construct compression
centers in each market. Additionally, the TelQuest solution would provide a
direct to home service to enable delivery of services to locations that did not
fall within a LOS view and, ultimately, provide a means by which valuable MMDS
Spectrum could be utilized for telephone and data delivery services. SEE ITEM
13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--TELQUEST SATELLITE
SERVICES.
The Company has converted its analog system in San Antonio, Texas to a
hybrid digital format. However, the problems with the General Instrument
equipment 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, 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.
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
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offer hybrid digital services in conjunction with existing or planned analog
services. However, in the interim, the Company intends to minimize capital
expenditures relative to the conversion of analog markets to digital.
INTERNET ACCESS. The FCC has granted one way Internet access with respect
to all channels in the MMDS Spectrum. The Company commenced a limited commercial
offering of its Internet access services in the fall of 1997 for the purpose of
evaluating several business strategies. At this time, the Company is exploring
and evaluating the costs and benefits of (i) serving as an ISP to commercial
and/or residential accounts, (ii) providing transport services to existing or
future ISPs and (iii) acting in the capacity of a reseller of Internet access.
The Company presently is capable of broadcasting Internet access services at
speeds significantly faster than today's traditional 28.8 Kbps modems, and
services approximately 200 subscribers in its Dallas and Ft. Worth markets as of
December 31, 1998.
TELEPHONE SERVICES. The Company has entered into interconnection agreements
with Southwestern Bell Corp. and GTE for the purpose of offering consumer and/or
multiple dwelling unit ("MDU") operators a bundled package of video, Internet
access and telephony services. Additionally, the Company entered into an
agreement with WorldCom for the purpose of reselling long distance services.
MARKETING FOR MULTIPLE DWELLING UNITS. The Company entered into a contract
in October 1997 with DIRECTV, Inc. for the purpose of offering enhanced
programming choices to MDUs in certain of the Company's analog markets. The
contract enables the Company to improve its product offering at a relatively
lower capital cost in response to competitive pressures in certain selected
markets. The Company has commercially tested certain of its digital video
services in MDUs in Dallas, Texas and has entered into service contracts with
the owner and/or manager of certain MDUs in the Dallas/Fort Worth metropolitan
area.
REGULATION
GENERAL. The wireless cable industry is subject to regulation by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act empowers the FCC, among other things, to issue,
revoke, modify and renew licenses within the spectrum available to wireless
cable; to approve the assignment and/or transfer of control of such licenses; to
approve the location of wireless cable system headends; to regulate the kind,
configuration and operation of equipment used by wireless cable systems; and to
impose certain equal employment opportunity and other obligations and reporting
requirements on wireless cable channel license holders and operators.
The FCC has determined that wireless cable systems are not "cable systems"
for purposes of the Communications Act. Accordingly, a wireless cable system
does not require a local franchise and is subject to fewer local regulations
than a hard-wire cable system. Moreover, all transmission and reception
equipment for a wireless cable system can be located on private property; hence,
there is no need to make use of utility poles or dedicated easements or other
public rights of way. Although wireless cable operators typically have to lease
from third parties the right to use a certain portion of the channels utilized
in any given system, unlike hard-wire cable operators they do not have to apply
for and be awarded a local franchise or pay local franchise fees. In recent
years, legislation has been introduced in some states, such as Illinois,
Maryland, Pennsylvania and Virginia, to authorize state and local authorities to
impose on all video program distributors (including wireless cable operators) a
tax on the distributors' gross receipts comparable to the franchise fees cable
operators pay. While the proposals vary among states, the bills all would
require, if passed, as much as 5% of gross receipts to be paid by wireless
distributors to local authorities. The industry opposed the state bills as they
were introduced, and, in Pennsylvania, Virginia and Maryland, wireless cable
systems were not subject to a new video gross receipts tax. However, Illinois
adapted a 5% gross receipts tax applicable to wireless cable. It is not possible
to predict whether new state laws will be proposed and enacted in other states
which impose new taxes on wireless cable operators.
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The FCC licenses and regulates the use of channels by license holders and
system operators. In the 50 largest markets, 33 6-MHz channels are available for
wireless cable delivery services (in addition to any local broadcast television
channels that can be offered to subscribers via an off-air antenna). In each
geographic service area of all other markets, 32 6-MHz channels are available
for wireless cable (in addition to any local broadcast television channels that
can be offered to subscribers via an off-air antenna). Except in limited
circumstances, 20 wireless cable channels in each of these geographic service
areas are generally licensed only to qualified non-profit educational
organizations (commonly referred to as ITFS channels). In general, each of these
channels must be used a minimum of 20 hours per week per channel for
instructional programming. The remaining "excess air time" on an ITFS channel
may be leased to wireless cable operators for commercial use, without further
restrictions (other than the right of the ITFS license holder, at its option, to
recapture up to an additional 20 hours of air time per week for educational
programming). Lessees of ITFS' "excess air time," including the Company,
generally have the right to transmit to their customers the educational
programming provided by the lessor at no incremental cost. The FCC's rules
permit ITFS license holders to consolidate their educational programming on one
or more ITFS channels, thereby providing wireless cable operators leasing such
channels, including the Company, greater flexibility in their use of ITFS
channels. The remaining 13 channels available in most of the operating and
targeted markets of the Company are made available by the FCC for full-time
usage without programming restrictions.
LICENSING PROCEDURES. The actual number of wireless cable channels
available for licensing in any market is determined by the FCC's interference
protection and channel allocation rules. The FCC awards ITFS and MMDS licenses
based upon applications demonstrating that the applicant is legally, financially
and technically qualified to hold the license and that the operation of the
proposed station will not cause harmful interference to other stations or
proposed stations entitled to interference protection.
During the year ended March 31, 1996, CAI participated in the FCC's BTA
Auction for awarding available commercial wireless spectrum in 493 markets (the
"Auction Markets") throughout the United States, identified as Basic Trading
Areas in accordance with material copyrighted by Rand McNally & Company. The
winner of an Auction Market has the right to apply for the available MMDS
frequencies throughout the Auction Market, consistent with certain specified
interference criteria that protect existing ITFS and MMDS channels. Existing
ITFS and MMDS channel right holders also must protect the Auction Market
winner's spectrum from power increases, tower relocations, or other changes to
their stations. CAI was the successful bidder for 32 Auction Markets, costing
CAI a total of $48.8 million. Pursuant to an agreement with CS, CAI has
transferred five Auction Markets located in CS's operating regions and for which
CAI was the successful bidder, costing an aggregate of $12.6 million, to CS at
cost, and will transfer two additional Auction Markets located in CS's operating
regions and for which CAI was the successful bidder upon the granting of such
Auction Market awards by the FCC. For each of the Auction Markets in which CAI
was the successful bidder, CAI was required to submit the requisite FCC
applications and make a down-payment (20% of such successful bid offset by
amounts previously paid) within five business days of the announcement by public
notice of the successful bid. When the authorization for an Auction Market is
ready to be issued by the FCC, the FCC will release a public notice to that
effect. Within 5 business days of such public notice, the successful bidder is
required to remit the balance of its bid to the FCC, whereupon the Auction
Market authorization will be issued by the FCC. As of March 31, 1999,
authorizations for all of the Auction Markets for which CAI was the successful
bidder (excluding those markets that are required to be conveyed at cost to CS)
have been issued by the FCC and paid for by CAI.
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In February 1995, the FCC amended its rules and established "windows" for
the filing of new ITFS applications or major modifications to authorized ITFS
facilities. The first filing "window" was October 16-20, 1995. (CAI supported a
number of ITFS new station and major modification applications.) Where two or
more ITFS applicants file applications for the same channels and the proposed
facilities could not be operated without impermissible interference, the FCC
employs a set of comparative criteria to select from among the competing
applicants. More recently, the FCC commenced a rulemaking proceeding that
contemplates conducting auctions where two or more ITFS applicants file
competing applications. That rulemaking proceeding remains pending, and it is
uncertain whether the FCC will conduct auctions or maintain the existing
comparative selection process. Construction of ITFS stations generally must be
completed within 18 months of the date of grant of the authorization. If
construction of MMDS or ITFS stations is not completed within the authorized
construction period, the licensee must file an application with the FCC seeking
additional time to construct the station and demonstrate therein compliance with
certain FCC standards. If the extension application is not filed or is not
granted, the license will be deemed forfeited. ITFS and MMDS licenses generally
have terms of 10 years. Licenses must be renewed thereafter, and may be revoked
for cause in a manner similar to other FCC licenses. FCC rules prohibit the sale
for profit of a conditional MMDS license or a controlling interest in the
conditional licensee prior to construction of the station or, in certain
circumstances, prior to the completion of one year of operation. However, the
FCC does permit the leasing of 100% of an MMDS licensee's spectrum to a wireless
cable operator and the granting of options to purchase a controlling interest in
a license even before such holding period has lapsed.
Wireless cable transmissions are subject to FCC regulations governing
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or
digital). Until recently, FCC regulations required wireless cable systems to
transmit only analog signals and those regulations needed to be modified, either
by rulemaking or by individual application, to permit the use of digital
transmissions. CAI was a party to a petition for declaratory ruling filed in
July 1995 seeking adoption of interim regulations authorizing digital
transmission. This petition was granted on July 9, 1996, and allows wireless
license holders to operate digitally under current FCC interference rules. The
license holder is, however, required to file for digital authorization.
In September 1998, the FCC issued new rules that permit and regulate the
deployment of MMDS spectrum for two-way services. The new rules facilitate the
use of ITFS and MMDS channels for the distribution of voice and data services,
in addition to video services, from multiple cell sites by implementing an
expedited licensing scheme. The new licensing scheme contemplates the issuance
of authorizations to operators and licensees to install, receive, and transmit
antennas at subscriber locations within broad geographic areas around cell
sites; the creation of contiguous spectrum for upstream and downstream
transmissions by swapping and shifting channels; the creation of subchannels
(less than 6 MHz) and superchannels (greater than 6 MHz); and the use of new
modulations schemes (e.g., CDMA, TDMA, QPSK). Furthermore, the FCC changed
certain ITFS leasing rules, including extending the maximum length of lease
terms from ten to fifteen years, broadening the definition of educational usage
to include data and voice distribution, and reducing the minimum amount of
channel capacity an ITFS licensee must reserve for its own educational purposes
to five percent of the total capacity. Several issues have been appealed and
further rule changes are anticipated.
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the co-location of a
commercially viable number of MMDS channels and operations with similar
transmission characteristics (such as power and polarity). In order to commence
the operations of certain of markets of the Plan Proponents, applications have
been or will be filed with the FCC to relocate and modify existing transmission
facilities. Under current FCC regulations, a wireless cable operator generally
may serve subscribers anywhere within the line of sight of its transmission
facility, provided that the signal complies with FCC interference standards.
Under rules adopted by the FCC on
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June 15, 1995 and effective as of September 15, 1995, an MMDS channel license
holder generally has a protected service area of 35 miles around its transmitter
site. In launching or upgrading a system, a wireless cable company may wish to
relocate its transmission facility or increase its height or power. If such
changes cause the signal to violate interference standards with respect to the
protected service area of other wireless license holders, the company desiring
to relocate would be required to obtain the consent of such other license
holders; however, there can be no assurance that such consents would be
received.
CHANGE IN CONTROL ISSUES. Under federal law, the FCC must grant prior
approval to any assignment or transfer of control involving an entity that holds
a FCC license. The governing statute and the FCC's rules distinguish between
minor and major changes of control, and the FCC thus has two different processes
tailored to fit the extent to which the licensed entity undergoes changes:(a) a
"short form" or pro forma change of control process that takes approximately two
weeks from filing to grant, for use when, among other things, a licensed entity
files a petition for relief under Chapter 11 of the United States Bankruptcy
Code and (b) a "long form" change of control process that generally takes a
minimum of two to three months, for use when, among other things, a licensed
entity proposes to undergo a permanent change in the ownership of fifty percent
(50%) or more of its voting securities.
There are relatively few bases upon which an interested party can
successfully challenge an application of this nature. Generally, other than
determining that the prospective owners of the licensed entity are citizens of
the United States and do not hold significant interests in hard-wire cable
companies whose franchises overlap with the licensed entity's areas of
operation, the FCC will not perform an extensive analysis of the identity and
characteristics of the proposed assignees or transferees of the entity's voting
securities. Thus, absent a challenge, a long form application generally will be
granted within approximately two to three months. A challenge would extend the
grant period by another two to three months, although predictions as to when the
FCC will dispose of a challenge are inherently unpredictable.
INTERFERENCE ISSUES. Interference from other wireless cable systems can
limit the ability of a wireless cable system to serve any particular site. In
licensing ITFS and MMDS systems, a primary concern of the FCC is avoiding
situations where proposed stations are predicted to cause interference with the
reception of previously authorized or proposed stations. Pursuant to FCC rules,
a wireless cable system is generally protected from interference within a radius
of 35 miles of the transmission site. In addition, modification and new station
applications submitted after the BTA Auction will be required to protect BTA
Auction winners from interference. The FCC's interference protection standards
may make one or more of these proposed modifications or new grants unavailable.
In such event, it may be necessary to negotiate interference agreements with the
licensees of the systems which would otherwise block such modifications or
grants. There can be no assurance that the Company will be able to negotiate
necessary interference agreements on acceptable terms. In the event the Company
cannot obtain interference agreements required to implement acceptable plans for
a market, it may have to curtail or modify operations in that market, utilize a
less optimal tower location, or reduce the height or power of the transmission
facility, any of which could have a material adverse effect on anticipated
growth in that market. In addition, while leases with ITFS and MMDS licensees
require their cooperation, it is possible that one or more channel lessors may
hinder or delay the efforts of the Company to use the channels in accordance
with its plans for the particular market.
THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable
Act, which compels the FCC to, among other things, (i) adopt comprehensive
federal standards for the local regulation of certain rates charged by hard-wire
cable operators, (ii) impose customer service standards on hard-wire cable
operators, (iii) govern carriage of certain broadcast signals by all
multi-channel video providers, and (iv) compel non-discriminatory access to
programming owned or controlled by vertically-integrated cable operators.
The rate regulations adopted by the FCC do not regulate cable rates once
other multi-channel video providers serve, in the aggregate, at least 15% of the
households within the cable franchise area. The
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customer service rules adopted by the FCC establish certain minimum standards to
be maintained by traditional hard-wire cable operators. These standards include
prompt responses to customer telephone inquiries, reliable and timely
installations and repairs, and readily understandable billing practices. These
rules do not apply to wireless cable operators, although the Company believes
that it provides and will continue to provide customer service superior to its
hard-wire cable competitors.
Under the retransmission consent provisions of the 1992 Cable Act and the
FCC's implementing regulations, all multi-channel video providers (including
both hard-wire and wireless cable) seeking to retransmit certain commercial
broadcast signals must first obtain the permission of the broadcast station.
Hard-wire cable systems, but not wireless cable systems, are required under the
1992 Cable Act and the FCC's "must carry" rules to retransmit a specified number
of local commercial television or qualified low power television signals.
The 1992 Cable Act and the FCC's implementing regulations established cable
rate regulations and imposed limits on exclusive programming contracts and
prohibited programmers in which a cable operator has an attributable interest
from discriminating against cable competitors with respect to the price, terms
and conditions of programming. Under the Telecommunications Act of 1996 (the
"1996 Act"), Congress has directed the FCC to eliminate cable rate regulations
for "small systems," as defined in the 1996 Act, and for large systems under
certain prescribed circumstances, and for all cable systems effective March 31,
1999.
While current FCC regulations are intended to promote the development of a
competitive subscription television industry, the rules and regulations
affecting the wireless cable industry may change, and any future changes in FCC
rules, regulations, policies and procedures could have a material adverse effect
on the Company. The extent to which wireless cable operators may continue to
maintain a price advantage over traditional hard-wire cable operators could be
diminished if statutory or regulatory provisions are adopted that strengthen or
reimpose cable rate regulations. Strict rate regulation of cable rates would
also tend to impede the ability of hard-wire cable operators to upgrade their
cable plant and gain a competitive advantage over wireless cable.
THE TELECOMMUNICATIONS ACT OF 1996. The Telecommunications Act of 1996 (the
"1996 Act"), enacted in February 1996, could have a material impact on the MMDS
industry and the competitive environment in which the Company operates. The 1996
Act has and will continue to result in comprehensive changes to the regulatory
environment for the telecommunications industry as a whole. The legislation,
among other things, substantially reduced regulatory authority over cable rates.
Another provision of the 1996 Act afforded hard-wire cable operators greater
flexibility to offer lower rates to certain of its subscribers, and would permit
cable operators to offer discounts on hard-wire cable service to the subscribers
or prospective subscribers of the Company. The legislation also permits
telephone companies to enter the video distribution business, subject to certain
conditions. The entry of telephone companies into the video distribution
business, with greater access to capital and other resources, could provide
significant competition to the companies in the MMDS industry. In addition, the
legislation afforded relief to direct broadcast satellite ("DBS") providers by
exempting such providers from local restrictions on reception antennas and
preempting the authority of local governments to impose certain taxes. The
Company cannot predict the substance of future rules and policies to be adopted
by the FCC in implementing the provisions of the legislation.
COPYRIGHT. Under the federal copyright laws, permission from the copyright
holder generally must be secured before a video program may be retransmitted.
Under Section 111 of the Copyright Act, certain "cable systems" are entitled to
engage in the secondary transmission of programming without the prior permission
of the holders of copyrights in the programming. In order to do so, a cable
system must secure a compulsory copyright license. Such a license may be
obtained upon the filing of certain reports with and the payment of certain fees
to the U.S. Copyright Office. In 1994, Congress enacted the Satellite Home
Viewers Act of 1994 that enables operators of wireless cable television systems
to rely on the cable
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compulsory license under Section 111 of the Copyright Act. For the year ended
December 31, 1998, CS paid approximately $148,000 in fees. Direct-to-Home
satellite distributors rely on a compulsory license under a different provision,
Section 119 of the Copyright Act, to retransmit distant broadcast signals to
subscribers' homes in areas where local broadcast signals are difficult to
receive. The satellite compulsory license expires in 1999 unless reauthorized by
Congress. Legislation has been introduced which would renew the satellite
compulsory license and increase the ability of Direct-to-Home services to
transmitter broadcast signals into local loop areas. Renewal of the satellite
compulsory license and enactment of provisions to retransmit local signals into
local areas will enhance the ability of Direct-to-Home satellite services to
compete with wireless cable systems.
RETRANSMISSION CONSENT. Under the retransmission consent provisions of the
1992 Cable Act, wireless and hard-wire cable operators seeking to retransmit
certain commercial television broadcast signals must first obtain the permission
of the broadcast station in order to retransmit their signal. However, wireless
cable systems, unlike hard-wire cable systems, are not required under the FCC's
"must carry" rules to retransmit a specified number of local commercial
television or qualified low power television signals. Although there can be no
assurances that the Company will be able to obtain requisite broadcaster
consents, management believes in most cases that the Company will be able to do
so for little or no additional cost.
REGULATION BY THE FAA. In addition to regulation by the FCC, MMDS operators
are subject to regulations by the Federal Aviation Administration ("FAA") with
respect to construction of transmission towers and to certain local zoning
regulations affecting construction of towers and other facilities. There also
may be restrictions imposed by local authorities, neighborhood associations and
other similar organizations limiting the use of certain types of reception
equipment used by companies in the wireless cable industry. Future changes in
the foregoing regulations or any other regulations applicable to the Company
could have a material adverse effect on its results of operations and financial
condition.
STATE MANDATORY ACCESS LAWS. Certain states have legislated that each
resident of a multiple dwelling unit ("MDU") should not be denied access to
programming provided by franchised cable systems, notwithstanding the fact that
the MDU entered into an exclusive agreement with a non-franchised video program
distributor. States with such "mandatory access" laws include Connecticut,
Delaware, the District of Columbia, New Jersey, New York, Pennsylvania and Rhode
Island. In several district courts, mandatory access laws have been held
unconstitutional. Such laws could increase the competition for subscribers in
MDUs. There may also be restrictions imposed by local authorities. There can be
no assurance that the Company will not be required to incur additional costs in
complying with such regulations or restrictions.
COMPETITION
The subscription television industry is highly competitive. The principal
subscription television competitors of the Company in each market are
traditional hard-wire cable, DBS and private cable operators. Premium movie
services offered by the cable television systems have encountered significant
competition from the home video cassette recorder industry. In areas where
several local off-air VHF/UHF broadcast channels can be received without the
benefit of subscription television, cable television systems also have faced
competition from the availability of broadcast signals generally and have found
market penetration to be more difficult. Legislative, regulatory and
technological developments may result in additional and significant competition,
including competition from local telephone companies.
HARD-WIRE CABLE. The principal subscription television competitors of the
Company in each market are traditional hard-wire cable operators. Hard-wire
cable companies are generally well established and known to potential customers
and have significantly greater financial and other resources than the Company.
The competing hard-wire cable companies generally offer significantly increased
channel line-ups, compared to between 22 to 42 channels (consisting of between
17 and 33 wireless cable channels and between 5 and 10 local off-air VHF/UHF
broadcast channels) generally offered presently by the Company
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in its markets. According to a report issued by the FCC in December 1998, of the
approximately 98 million total households nationwide with at least one
television, approximately 95.1 million are passed by hard-wire cable systems,
and of those homes that are passed by cable, approximately 65.4 million are
hard-wire cable subscribers.
DIRECT-TO-HOME (DTH). DTH satellite television services originally were
available via satellite receivers which generally were 7-to-12 foot dishes
mounted in the yards of homes to receive television signals from orbiting
satellites. Until the implementation of encryption, these dishes enabled
reception of any and all signals without payment of fees. Having to purchase
decoders and pay for programming has reduced their popularity, although the
Company will to some degree compete with these systems in marketing its
services. Another form of DTH service is DBS, which involves the transmission of
an encoded signal direct from a satellite to the customer's home. Because the
signal is at a higher power level and frequency than most satellite-transmitted
signals, its reception can be accomplished with a relatively small (18-inch)
dish mounted on a rooftop or in the yard. DBS cannot, for technical and legal
reasons, provide local VHF/UHF broadcast channels as part of its service,
although many DBS subscribers receive such channels via standard over-the air
receive antennas. Moreover, DBS may provide subscribers with access to broadcast
network distant signals only when such subscribers reside in areas unserved by
any broadcast station. The cost to a DBS subscriber for equipment and service is
generally substantially higher than the cost to wireless cable subscribers.
According to a report issued by the FCC in December 1998, there are
approximately 7.2 million subscribers using DBS services.
PRIVATE CABLE. Private cable, also known as satellite master antenna
television, is a multi-channel subscription television service where the
programming is received by satellite receiver and then transmitted via coaxial
cable throughout private property, often MDUs, without crossing public rights of
way. Private cable operates under an agreement with a private landowner to
service a specific MDU, commercial establishment or hotel. The FCC amended its
rules to provide point-to-point delivery of video programming by private cable
operators and other video delivery systems in the 18 GHz band. Private cable
operators compete with the Company for exclusive rights of entry into larger
MDUs.
TELEPHONE COMPANIES. The 1996 Act removed many of the restrictions on the
ability of local exchange carriers ("LECs"), including RBOCs, to provide video
programming directly to subscribers in their respective telephone service areas.
Thus, while there remains a prohibition against an LEC acquiring a hard-wire
cable operator within its telephone service area, LECs can build their own
hard-wire cable systems. In addition to having the opportunity to install
traditional hard-wire cable, LECs also have the option of installing high
capacity fiber optic facilities. The Company believes that they will continue to
maintain a cost advantage over installing hard-wire, fiber optic or open video
distribution platforms due to the high capital expenditures associated with such
technologies. Bell South Corporation has acquired wireless cable channel rights
in Atlanta, GA, New Orleans, LA, and Miami, FL and begun to offer services in
New Orleans. Pacific Telesis Group recently launched a 150 channel digital video
system in Los Angeles, CA. The competitive effect of the entry of telephone
companies into the subscription television business, including wireless cable,
is still uncertain.
LOCAL OFF-AIR VHF/UHF BROADCASTS. Local off-air VHF/UHF broadcast
television stations (such as ABC, NBC, CBS and Fox) provide free programming to
the public. Previously, subscription television operators could retransmit these
broadcast signals without permission. However, effective October 6, 1993,
pursuant to the 1992 Cable Act, local broadcasters may require that subscription
television operators obtain their consent before retransmitting local television
broadcasts. The Company has obtained such consents for its operating systems.
The Company will be required to obtain such consents in certain of its markets
to re-broadcast any such channels. Management believes that it will be able to
obtain such consents, but no assurance can be given that the Company will be
able to obtain all such consents. The FCC also has recently permitted broadcast
networks to acquire, subject to certain restriction, ownership interests in
hard-wire cable systems. In some areas, several low power television ("LPTV")
stations
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authorized by the FCC are used to provide multi-channel subscription television
service to the public. LPTV transmits on conventional VHF/UHF broadcast
channels, but is restricted to very low power levels, which limits the area
where a high-quality signal can be received.
LOCAL MULTI-POINT DISTRIBUTION SERVICE (LMDS). In 1993, the FCC initially
proposed to redesignate the 28 GHz band to create a new video programming
delivery service referred to as LMDS. In July 1995, the FCC proposed to award
licenses in each of 493 BTAs pursuant to auctions. Final rules were issued by
the FCC, and the auction for LMDS spectrum was conducted, in February 1998.
Bidders bid on an A-block license, consisting of 1,150 MHz of spectrum, and a
B-block license, consisting of 150 MHz of spectrum, in each BTA. A total of 864
licenses were sold to 104 bidders for bids totaling $578.6 million. 122 licenses
were not sold, including 109 A-block licenses. The FCC intends to re-auction the
unsold licenses at an undetermined date in the future.
The LMDS licensees share the 28 GHz frequency band with the Mobile Satellite
Service and the 31 GHz band with state and local governments. The FCC allows the
LMDS licensees to use the spectrum for a variety of services, including
telephony, interactive video, video distribution, data transmission,
teleconferencing, and other applications. Depending on the type and number of
services offered, the cost of the customer-premises equipment could range from
$300 (for a video receive antenna) to $1,000 (for telephony, video, and data
capabilities).
In addition, within each market, the Company initially must compete with
others to acquire, from the limited number of MMDS channels issued or issuable,
rights to a minimum number of MMDS channels needed to establish a commercially
viable system. Digital capability is essential for MMDS to compete with
hard-wire cable, which in its current analog state offers between 36 to 90
channel offerings depending on a given market. With the deployment of digital,
hard-wire cable is expected to offer over 150 channels. The Company has lost
television subscribers to hard-wire cable competitors in certain of its markets
due to the channel capacity limitations inherent in an analog-based MMDS
operation. In addition, within each market, the Company initially must compete
with others to acquire, from the limited number of MMDS channels issued or
issuable, rights to a minimum number of MMDS channels needed to establish a
commercially viable system. Aggressive price competition or the passing of a
substantial number of presently unpassed households by any existing or new
subscription television service could have a material adverse effect on the
results of operations and financial condition of the Company.
New and advanced technologies for the subscription television industry, such
as digital compression, fiber optic networks, DBS transmission, video dialtone,
and LMDS are in various stages of development of commercial deployment. These
technologies are being developed and supported by entities, such as hard-wire
cable companies and RBOCs, that have significantly greater financial and other
resources than the Company. These new technologies could have a material adverse
effect on the demand for MMDS subscription television services. There can be no
assurance that the Company will be able to compete successfully with existing
competitors or new entrants in the market for subscription television services.
The Company also will face intense competition from other providers of data
and telephony transmission services if such services are implemented on a
commercial basis. Such competition is increased due to the fact that MMDS
spectrum has not traditionally been utilized to deliver such alternative
services, and consumer acceptance of such services delivered via MMDS technology
is unknown at this time. Many of the existing providers of data transmission and
telephony services, such as long distance and regional telephone companies, have
significantly greater financial and other resources than the Company. In
addition, there can be no assurance that there will be consumer demand for
alternative uses of the MMDS spectrum such as data transmission, including
Internet access services, and telephony delivery services, that the Company will
be able to compete successfully against other providers of such services, or
that the Company will be able to achieve profitability from such services in
future years.
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EMPLOYEES
As of December 31, 1998, the Company has approximately 230 employees. The
Company has experienced no work stoppages and believes that it has good
relations with its employees.
BUSINESS STRATEGY
OVERVIEW. The Company intends to expand the use of MMDS Spectrum beyond
analog video services to a full complement of telecommunications services
including two-way data transmission and telephony services. The Company believes
that MMDS Spectrum, in general, can be utilized in a two-way environment to
provide data, telephony and video transmission services. The Company believes
that the combination of digital compression, fiber loop and cellular
technologies can be integrated into the MMDS network architecture, resulting in
a single wireless platform capable of delivering a wide range of services,
including telephony delivery services.
The Two Way Order is consistent with the Company' business strategy. The
Company believes that the rules will streamline the process by which an MMDS
operator could apply for two-way authority for its MMDS Spectrum and increase
its opportunities to implement this strategy, and in turn help it to meet the
current and perceived future competition. In accordance with certain
authorizations granted specifically by the FCC prior to the release of the
Two-Way Order, the Company's largest stockholder, CAI, has performed certain
demonstrations and conducted limited testing of fixed, two-way data and
telephony transmissions as well as digital video transmission using its MMDS
Spectrum. The use of MMDS Spectrum in a two-way environment on a widespread
basis, however, involves the deployment of new technology and engineering, most
of which will be developed for the first time in response to the expanded
authority recently granted by the FCC, and the coordinated efforts of MMDS
operators in contiguous and adjacent markets. There can be no assurance that new
technology and such engineering will be developed by the Company, or that it
will be able to utilize MMDS Spectrum in a two-way environment in any of its
markets on a competitive, cost-effective basis.
The deployment of MMDS Spectrum in a digital two-way environment requires
significant capital expenditures. Implementation of two-way operations requires
an MMDS operator to build an infrastructure that is significantly more complex
than the infrastructure necessary to operate a one-way analog or digital video
system using MMDS Spectrum. The Company anticipates that it will become a
wholesale provider of fixed, two-way transmission services; this would entail a
reduced focus on potential retail distribution of wireless services. The Company
anticipates the presence of one or more strategic partners purchasing or
otherwise utilizing CS' two-way capacity for consideration, and that it will be
able to share certain capital expenditures necessary for the build-out of
digital two-way MMDS systems with such strategic partners. There can be no
assurance that CS will be able to identify one or more strategic partners, or
that any strategic partners so identified will be willing to enter into a
business relationship with CS on terms and conditions, including terms and
conditions relating to capital expenditures, that are satisfactory to the
Company.
The Two-Way Order outlines rules for the use of MMDS Spectrum for two-way
transmissions of data, telephony and video, and requires the filing of a
frequency plan and related application with the FCC in order to receive
authorization for two-way utilization of MMDS Spectrum on a market-by-market
basis. The Company has commenced, jointly with CAI, the process of formulating
frequency plans in each of their respective 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 its
applications will be granted or that the FCC will grant to the authorization to
utilize the MMDS Spectrum in the manner requested in the applications. However,
the Company is devoting, and intends to continue to devote, substantial
resources to the preparation and filing of all potentially applicable two-way
applications.
In addition to the completion of the two-way applications, CS has begun the
process of negotiating spectrum leases with its spectrum lessors that
contemplate two-way use of the spectrum. The Company
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owns approximately 7 of the available commercial channels in each of its
markets. The balance of the commercial channels, as well as the ITFS channels
owned by educational institutions, available to the Company in its various
markets are provided through long-term leases. The majority of the spectrum
leases to which the Company is a party do not contemplate two-way usage. CS is
in the process of negotiating these MMDS Spectrum leases to obtain the right to
use the leased spectrum by the respective spectrum lessee for two-way services.
The Company believes that it will be able to negotiate revised leases with
spectrum lessors on terms and conditions that are fair and reasonable to the
Company.
Although the Company believes that it will be able to successfully (i)
negotiate a sufficient number of spectrum leases to incorporate various two-way
provisions, or (ii) engineer certain system modifications in markets where it
may not be able to reach agreement regarding two-way usage with license holders,
there can be no assurance that the Company will be able to reach agreement with
each license holder in each market with respect to use of leased spectrum in a
two-way manner, or that either will be able to engineer such modifications.
Furthermore, there can be no assurance that, if an agreement is reached with a
particular license holder regarding two-way usage of the spectrum, such
agreement will be on terms and conditions satisfactory to the Company.
BUSINESS PLAN. The Company has developed a business plan that contemplates
the development and construction of a wireless broadband network ("WBN") capable
of providing various combinations of video, voice and data transmission
services. The development and construction of the WBN in the Company's markets
would be subject to receipt of regulatory approval for fixed, flexible use of
its MMDS Spectrum and successful testing, the successful deployment of digital
video, one- and two-way data transmission and telephony delivery services
utilizing the MMDS platform and sufficient capital resources. The Company
believes that this network would be able to provide quick and relatively
inexpensive household coverage on a broad scale. The concept of a WBN will
enhance the ability to attract one or more strategic partners by giving such
partners the ability to provide competitive access products over MMDS Spectrum.
The Company also believes that the network design will be capable of providing a
combination of analog and/or digital video services for residential, as well as
for corporate and institutional/instructional subscribers, bundled with high
speed Internet and intranet access services, and telephony delivery services.
The Company has not implemented a WBN system in any of its markets. The
Company believe that the various regulatory approvals CAI has received and the
joint development projects with which the Company and CAI are involved will
enable the assessment of the viability of broadband, large-scale systems in any
of its markets. Neither CS nor CAI has, however, tested a broadband system in
any of its markets. There are a number of risk factors, including, without
limitation, receipt of all requisite regulatory approvals, successful
negotiation of leases and interference agreements with spectrum holders and
adjacent market operations, technology development and the availability of
additional financing, that will affect the implementation of a broadband system
in any market, some of which will be outside the control of the Company. There
can be no assurance that the Company will be able to develop a broadband system
in any of its markets, or that if a WBN system is developed, that a variety of
services may be deployed in a commercially reasonable manner, if at all.
The Company believes it is positioned to execute a strategic transaction
with one or more large telecommunication companies and execute a business plan
utilizing the WBN. The business plan going forward assumes an investment and a
contract for significant usage of the WBN in all of its markets by a strategic
partner. The role of CS in the business case is to provide the transmission
infrastructure and bandwidth enabling a high-quality commercial launch of
simultaneous video, voice and data services.
RECENT DEVELOPMENTS
RECENT CHANGES IN MANAGEMENT STRUCTURE. The Company announced on February
19, 1999, that Mr. Webb, the Company's Chief Executive Officer, resigned from
the Company to join a privately held
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company engaged in the acquisition and development of wireless and hardwire
cable properties in various regions in the United States and Latin America. The
Company also announced the resignation of Thomas Dixon from his position of
Executive Vice President in order to pursue cable opportunities. The CS Board of
Directors appointed Jared Abbruzzese, Chairman and Chief Executive Officer of
CAI, to serve as Acting Chief Executive Officer and Derwood Edge, Senior Vice
President and Chief Systems Officer to serve as Acting Chief Operating Officer
in order to streamline the management structures of CS and CAI. The Company also
executed a comprehensive management, engineering and spectrum services agreement
with CAI. SEE ITEM. 13--CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--ENGINEERING AND SPECTRUM MANAGEMENT SERVICES AGREEMENT. The
Company believes the streamlined management structure will facilitate the
efforts of CS relative to the preparation and filing of two-way applications.
Messrs. Webb and Dixon have agreed to provide consulting services for 14 months
and 12 months, respectively, to assist the Company with, among other things, the
preparation and filing of applications pursuant to the Two-Way Order. Mr. Webb
will receive $20,000 per month (plus $1,000 for office expenses) and Mr. Dixon
will receive $13,000 per month (plus $750 for office expenses) for consulting
services rendered. Additionally, the Company has agreed to pay to each of
Messrs. Webb and Dixon success fees in connection with the filing by the Company
of applications for the two-way use of MMDS Spectrum in certain specified
markets and execution of the various agreements required with respect to such
filings. Messrs. Webb and Dixon are entitled to receive up to $140,000 and
$85,000, respectively, conditioned upon the completion of the filings and
associated agreements in certain specific markets. Finally, the Company has
agreed to pay Mr. Webb commissions of five percent (5%) of the aggregate
consideration received by the Company in connection with the disposition of
certain assets.
ENGINEERING AND SPECTRUM MANAGEMENT SERVICES. In conjunction with the
management changes, the Company entered into an agreement with CAI for the
purpose of coordinating the efforts of both companies with respect to two-way
applications and the various agreements required in order to submit such filings
with the FCC. CS has agreed to retain the engineering staff of CAI and has
conferred upon CAI, subject certain Board approvals, the authority necessary for
CAI to analyze, design and implement all aspects of the frequency coordination
necessary for the two-way applications. The agreement calls for CS to pay to CAI
the costs of the personnel provided, including benefits, and the facility and
equipment utilized by the CAI personnel in delivering the services. SEE ITEM
13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--ENGINEERING AND SPECTRUM
MANAGEMENT SERVICES.
CIBC. The Company previously announced that it had 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, and the processes necessary to implement such options, including
court supervised proceedings. CIBC has assisted the Company with respect to
discussions and negotiations with certain holders of the CS Notes concerning the
appropriate capitalization of the Company. To date, CS has not executed any
definitive agreements relative to any restructuring of the capitalization of the
Company. CS intends to continue to evaluate all available options.
ITEM 2. PROPERTIES.
The Company leases office sites in Plano, Texas, including office space
subleased from Heartland. SEE ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--HEARTLAND LEASE. The Company also leases or owns office space,
transmitting facilities, including tower space, tower sites and Headend
facilities, in all of its markets. The Company believes adequate leasehold space
is available in all locations in which the Company currently leases office or
transmission sites.
The Company owns substantially all of the equipment which is necessary to
conduct its operations, except certain vehicles and certain test equipment. A
significant portion of the Company's investment in plant and equipment consists
of subscriber equipment, which includes antennae, block-down converters,
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remotes and related installation equipment, principally located at the
subscribers' premises, and the reception and transmitter equipment located at
leased transmitter sites.
ITEM 3. LEGAL PROCEEDINGS.
The Company 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has not been registered with the Securities and
Exchange Commission, and no market exists for its Common Stock.
The Company did not pay dividends on its Common Stock during the year ended
December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data for the
Company and the Company's Cleveland, Ohio market (the "Predecessor") as of
February 28, 1994, and December 31, 1994, 1995, 1996, 1997 and 1998 and for the
year ended February 28, 1994, the period from March 1, 1994 to March 8, 1994,
the period from March 9, 1994 to December 31, 1994, the period from January 1,
1995 to September 29, 1995, the period from September 30, 1995 to December 31,
1995, and each of the three years ended December 31, 1998 which have been
derived from the financial statements of Metropolitan Cablevision, Inc.
("Cablevision"), MetroCable, Inc. ("MetroCable"), Metropolitan Satellite Corp.
("Metro Satellite"), ACS Ohio, Inc. and Subsidiaries ("ACS Ohio"), CS Wireless
Systems, Inc. and Subsidiaries (formerly ACS Ohio, Inc.) and certain assets of
Atlantic Microsystems, Inc. and the Company, which have been audited.
Period-to-period comparisons of financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance due to the
acquisition of the Predecessor on March 9, 1994 by ACS Enterprises, Inc. ("ACS
Enterprises"), the subsequent acquisition of the Predecessor on September 29,
1995 by CAI and the contribution of certain wireless cable television assets
comprising various domestic markets by CAI and Heartland at the Contribution
Closing. Additionally, on October 11, 1996 the Company acquired certain assets
in certain Midwest markets in connection with the USA Wireless Acquisition. As a
result of the acquisitions, financial information for periods through March 8,
1994, periods from March 9, 1994 through September 29, 1995 and periods
subsequent to September 29, 1995 is presented on different cost bases and,
therefore, such information is not comparable.
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The information contained herein should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the Financial Statement and Notes thereto of the Company as
included on the pages immediately following the index to Consolidated Financial
Statements appearing on page F-1.
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 1, MARCH 9, JANUARY 1,
YEAR ENDED 1994 TO 1994 TO 1995 TO
FEBRUARY 28, MARCH 8, DECEMBER 31, SEPTEMBER 29,
1994(1) 1994(1) 1994(2) 1995(2)
------------ --------- ------------ -------------
(IN THOUSANDS)
Statement of operations data:
Revenues................................ $ 5,267 $ 16 $ 4,332 $ 6,170
Costs and expenses, excluding
depreciation and amortization......... 4,256 76 3,454 5,441
Depreciation and amortization........... 836 10 1,571 3,020
Operating income (loss)(4).............. 175 30 (693) (2,291)
Interest expense........................ 2,846 39 62 233
Net loss(4)............................. (2,162) (9) (576) (1,875)
Balance Sheet data (at period end):
Total assets............................ 3,797 -- 19,741 --
Total debt (excluding accrued
interest)............................. 10,117 -- 2,471 --
Total equity (deficit).................. (10,846) -- 15,375 --
Other data:
EBITDA(5)............................... 1,011 40 878 729
<CAPTION>
COMPANY
----------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, YEAR YEAR YEAR
1995 TO ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995(3) 1996(3) 1997(3) 1998(3)
------------- ------------ ------------ ------------
(IN THOUSANDS)
Statement of operations data:
Revenues................................ $ 2,301 $ 22,738 $ 26,920 $ 26,259
Costs and expenses, excluding
depreciation and amortization......... 2,103 27,192 30,825 35,393
Depreciation and amortization........... 1,796 20,345 26,858 29,222
Operating income (loss)(4).............. (1,598) (24,799) (30,763) (102,263)
Interest expense........................ 2 24,959 31,995 34,679
Net loss(4)............................. (1,207) (28,527) (52,565) (139,384)
Balance Sheet data (at period end):
Total assets............................ 75,688 414,237 370,703 258,817
Total debt (excluding accrued
interest)............................. 112 276,276 288,299 320,778
Total equity (deficit).................. 60,316 124,834 72,229 (68,688)
Other data:
EBITDA(5)............................... 198 (4,454) (3,905) (9,134)
</TABLE>
- ------------------------------
(1) Through March 8, 1994, the wireless cable television system serving the
Predecessor was comprised of MetroCable (and its predecessor, Cablevision)
and Metro Satellite. The selected historical financial information has been
derived from the financial statements of (i) Cablevision for the period from
March 1, 1992 to June 3, 1993 and MetroCable for the period from June 4,
1993 to March 8, 1994 and (ii) Metro Satellite for the period March 1, 1993
to March 8, 1994.
(2) From March 9, 1994 through September 29, 1995, ACS Ohio provided wireless
cable television service to the Predecessor. The selected historical
financial information has been derived from the financial statements of ACS
Ohio for the period from March 9, 1994 to September 29, 1995.
(3) Subsequent to September 29, 1995, the Company provided wireless cable
television service as the Predecessor. The selected historical financial
information has been derived from the financial statements of CAI Wireless
Systems, Inc. and Subsidiaries and certain assets of Atlantic Microsystems,
Inc. for the period from September 30, 1995 to December 31, 1995, and the
financial statements of the Company for the year ended December 31, 1996.
(4) Operating loss and net loss for the year ended December 31, 1998 includes
the write-off of certain long-lived assets totaling $63.9 million.
(5) EBITDA means earnings before interest expense, income taxes, depreciation,
amortization and other non-cash charges. EBITDA is a financial measure
commonly used in the Company's industry and it is a widely accepted
financial indicator of a company's ability to service and/or incur debt.
However, EBITDA should not be considered as an alternative to cash flow from
operating activities (as determined in accordance with generally accepted
accounting principles) as an indicator of operating performance or as a
measure of liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The statements contained in this Annual Report on Form 10-K, including the
exhibits hereto, relating to the Company's future operations may constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results of the Company may differ
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materially from those in the forward-looking statements and may be affected by a
number of factors including the Company's ability to attract one or more new
strategic partners, their willingness to enter into arrangements with the
Company on a timely basis and the terms of such arrangements, the receipt of
regulatory approvals for alternative uses of its MMDS Spectrum contemplated by
the Company's business plan, the success of the Company's trials in various of
its markets, the commercial viability of any alternative use of MMDS Spectrum,
consumer acceptance of any new products offered or to be offered by CS,
subscriber equipment availability, practical success of CS engineered
technology, tower space availability, absence of interference and the ability of
the Company to redeploy or sell excess equipment, the assumptions, risks and
uncertainties set forth below in this MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and elsewhere herein, as well as
other factors contained herein and in the Company's other securities filings.
RECENT DEVELOPMENTS: ANTICIPATED RESTRUCTURING
The Company projects that operating and capital expenditure cash
requirements will be approximately $17.2 million for the year ended December 31,
1999. The Company has adequate cash to fund its operations at least through
1999. However, CS has substantial indebtedness which, beginning in September
2001, will include significant debt service requirements. As of December 31,
1998 CS had outstanding consolidated debt of approximately $320.8 million, and
trade payables and accrued liabilities of approximately $5.5 million. The high
level of indebtedness and the additional resources required to execute the
Company's long term business plan has resulted in the retention of the
investment banking firm of CIBC to serve as its financial advisor. SEE ITEM
1.--BUSINESS--RECENT DEVELOPMENTS.
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 Company has
been from the net proceeds from the sale of the CS Notes. The Company has
approximately $41.8 million in cash and cash equivalents at December 31, 1998.
The Company has used the proceeds from the CS 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, which emphasizes cash preservation, the
Company believes that its available cash will provide sufficient funds to meet
its needs for at least the next 12 months.
During late 1998, the Company emphasized the conservation of capital while
it evaluated 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 scale 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 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 Instrument 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
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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. In March
1999, the Company entered into an agreement with General Instrument providing
for, among other things, the termination of the equipment purchase agreement
executed in 1997, the return of certain inventory in satisfaction of the account
receivable asserted by General Instrument, the continuing support by General
Instrument of inventory and equipment retained by the Company and mutual
releases of certain claims asserted by each of General Instrument and the
Company.
Beginning in 1999, the Company's strategy has been to operate its analog
video systems within the confines of a cash conservation strategy, while
pursuing a strategic alliance with one or more strategic partners interested in
using the Company's spectrum for fixed, one- and two-way transmission services.
The Company's cash conservation strategy includes the recovery of out-of-pocket
expenses associated with adding a new analog video subscriber by charging such
subscriber an up-front installation fee. The cash conservation strategy also
includes the continued implementation of cost-cutting measures and the periodic
sales of non-core assets in an effort to maximize the value of assets that are
no longer used or useful to the Company's long-term operating strategy, which is
to be a wholesale provider of two-way transmission services to one or more
strategic partners. Accordingly, the Company is considering selling certain
assets relating to the provision of video services to multiple dwelling units
("MDUs"), such as apartment and condominium complexes, in certain of its
markets. Assets typically involved in providing analog subscription video
services to residents of MDUs include the tangible assets necessary to transmit
and receive the video programming signal, customer premises equipment and a
right of entry agreement with the property owner or manager, pursuant to which
the Company's operating subsidiary is granted the right to provide subscription
video services to residents of the MDU. It is uncertain whether a definitive
agreement will be executed for any of the service contracts. Additionally, the
Company is considering selling certain analog equipment held in inventory and
other operating and non-operating systems which are not considered part of the
Company's long-term business plan.
For 1999, the Company has initially budgeted approximately $17.2 million to
fund operations, capital expenditures and debt service. The significant
components of the budget include approximately $7.2 million for operations
(including $1.7 million to be paid to CAI pursuant to the Engineering and
Spectrum Management Services Agreement--SEE ITEM 13.--CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--ENGINEERING AND SPECTRUM MANAGEMENT SERVICES AGREEMENT),
$2.0 million for digital subscriber installations primarily relating to MDU
construction, $0.8 million for analog subscriber installations, $0.5 million to
test and develop the two-way technology, $0.5 million relating to Year 2000
compliance, $1.25 million consent fee payable to bondholders of record as of
December 3, 1998 (SEE ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--HEARTLAND EXIT TRANSACTION.), $3.5 million for strategic
investments in items such as channel capacity and $1.0 million for BTA
obligations. The initial 1999 budget is exclusive of costs relating to obtaining
a strategic partner, costs relating to the anticipated restructuring, and
estimated proceeds from asset sales, if any.
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. 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.
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<PAGE>
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.
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 could be
materially adversely affected.
Cash used in operating activities in 1998 was $8.1 million. Cash provided by
operations was $3.1 million in 1997 and $2.4 million in 1996. The increase in
cash used in operations during 1998 was primarily due to (i) timing of payments
to vendors, (ii) increased SG&A and system operating expense, (iii) increasing
costs associated with the controlled roll-out of digital video and high speed
Internet access services in Dallas, Texas and (iv) to a lesser extent, financial
advisory fees relating to the planned reorganization totaling $535,000. The
increase in cash provided by operating activities during 1997 was primarily due
to a $4.7 million increase in EBITDA in the analog markets from $1.3 million in
1996 to $6.0 million in 1997, partially offset by increasing corporate SG&A
costs and certain costs associated with the activities preparing for the launch
of digital video and high speed Internet access services in Dallas, Texas.
Net cash used in investing activities was $21.3 million in 1998, $24.2
million in 1997 and $27.3 million in 1996. 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
decrease in net cash used in investing activities during 1998 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. The decrease
in cash used in investing activities during 1997 is primarily due to the
proceeds from the assets held for sale partially off-set by the investment in
equity affiliates and restricted cash with no comparable amounts in the
corresponding prior year period.
Net cash used in financing activities was $3.3 million in 1998 and $17.5
million in 1997. Net cash provided from financing activities was $137.7 million
in 1996. Cash used in financing activities during 1998 is attributed to the
repayment of the payable relating to the BTA's acquired in the BTA Auction
totaling approximately $1.5 million, the repayment of other notes payable
totaling approximately $264,000 and the repurchase of 3,836,035 shares of the
Company's common stock for approximately $1.5 million--SEE NOTE 3TO CONSOLIDATED
FINANCIAL STATEMENTS. Cash used in financing activities in 1997 is primarily
attributed to the repayment of $2.1 million of indebtedness related to the USA
Wireless Acquisition and the repayment of approximately $15.3 million of the
Heartland Long-Term Note. Cash provided by financing activities during 1996
primarily represents the net proceeds from the sale of the CS Notes reduced by
cash distributed in connection with the February 23, 1996 Contributions and debt
issuance costs, the repayment of a $25.0 million note to Heartland, payments on
the BTA auction payable and the payment of certain notes associated with the USA
Wireless Acquisition.
23
<PAGE>
RESULTS OF OPERATIONS
Long-lived assets and certain identifiable intangibles are 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 future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. The 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. When such circumstances occur, the Company evaluates the
possible effects on the carrying amount of such assets. The Company's estimates
of future gross revenues and operating cash flows, the remaining estimated lives
of long-lived assets, or both could be reduced in the future due to changes in,
among other things, technology, the Company's ability to obtain permission for
flexible use of the wireless channel rights, government regulation, available
financing or competition. The Company's estimate of future gross revenues and
operating cash flows assumes that the Company will successfully develop and
provide digital wireless cable systems as well as video, voice and data
transmission such as Internet access and telephony. Since these alternative uses
of the MMDS spectrum are in the early stages of development, there is no
assurance that the Company can commercially deploy such alternatives or that it
will be able to achieve positive cash flow from any operating activities. As a
result of valuations completed for the year ended December 31, 1998, the Company
reduced the carrying value of net goodwill by $46.4 million, net property and
equipment by $9.4 million, and net license and leased license investment by $4.4
million (SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS). Additionally, the
Company recorded a write-down of approximately $3.7 million of leased license
investments relating to the Heartland Exit Transaction (SEE ITEM 13.--CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS).
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
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 $26.3 million in 1998
compared to $26.9 million in 1997, a decrease of 2.2%. Average video subscribers
were approximately 65,186 for 1998 compared to approximately 65,390 in the prior
year period. The decrease in average subscriber levels during the period is
primarily attributed to the Company's strategy of not pursuing growth 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 $16.4 million in 1998
compared to $15.0 million in 1997, an increase of 9.3%. 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 $19.0 million in 1998, compared to $15.8 million in 1997,
an increase of 20.2%. The increase in SG&A during the period is principally due
to (i) costs associated with the controlled roll-out of digital video and high
speed Internet access service in Dallas, Texas and (ii) incremental costs
associated with the Company assuming operational control of the Story City
system on December 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of licenses and
leased license investment and goodwill. Depreciation
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and amortization expenses were $29.2 million in 1998 compared to $26.9 million
for the prior year period. The increase in depreciation and amortization expense
is attributed to a corresponding average increase in the underlying capital
assets. The write-down of long-lived assets during 1998 effectively reduced
amortization of goodwill.
OPERATING LOSS. The Company incurred operating losses of $102.3 million in
1998, compared to $30.8 million for the prior year period. Consolidated earnings
before interest, taxes, depreciation and amortization and impairment of
long-lived assets. ("EBITDA") were a negative $9.1 million for 1998, compared to
a negative $3.9 million for the prior year period. 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 long-lived assets. 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 long-lived
assets 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 $3.4 million in 1998, compared to $5.5
million for the prior year period. 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 the CS 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. Interest expense was $34.7 million 1998, compared to
$32.0 million for the prior year period. Interest expense during 1998 included
(i) non-cash interest and accretion of deferred debt issuance costs of $33.9
million related to the CS Notes, (ii) interest expense of $0.3 million related
to a note payable to Heartland in the amount of $15.0 million (the "Heartland
Long Term Note") and (iii) interest expense relating to the BTA Auction payable
of approximately $0.5 million. Interest expense during 1997 included (i)
non-cash interest and accretion of deferred debt issuance costs of $30.4 million
related to the CS Notes, (ii) interest expense of approximately $1.1 million
related to the Heartland Long-Term Note and (iii) interest relating to the BTA
Auction payable of approximately $0.5 million.
EQUITY IN LOSSES OF AFFILIATES. Equity in operating losses of affiliates
was $2.6 million in 1998, compared to $1.3 million in 1997. Equity in losses of
affiliates represent losses from TelQuest Satellite Services LLC in which the
Company has a 30% interest, Television Interactiva del Norte S.A. de C.V. in
which the Company has an approximate 39% interest and Television Inalambrica,
S.A. de C.V. in which the Company has an approximate 49% interest. The Company
acquired its interest in TelQuest Satellite Services on August 4, 1997. The
Company acquired its interest in the other two companies in September 1997. SEE
ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--TELQUEST SATELLITE
SERVICES and ACQUISITIONS OF FOREIGN INTERESTS FROM HEARTLAND.
OTHER INCOME (EXPENSE). Other expense of $1.4 million in 1998 is primarily
related to discounting a long-term reserve for the notes receivable from
Television Interactiva del Norte SA de C.V.--SEE NOTE 4 TO THE CONSOLIDATED
FINANCIAL STATEMENTS. Other Income in 1997 is primarily comprised of a gain on
sale of assets. On May 27, 1997 the Company sold to BellSouth Corporation,
pursuant to the July 25, 1996 purchase agreement, certain assets for
approximately $16.4 million, resulting in a gain of approximately $0.7 million.
SEE ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--ATLANTA SUBURBS
MARKET.
NET LOSS. The Company has recorded net losses since inception. The Company
incurred net losses of $139.4 million in 1998 compared to $52.6 million during
1997. The Company's net losses have increased due to (i) impairment of long
lived assets totaling $63.9 million (ii) increased SG&A, system operations,
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depreciation and amortization, and interest expense as detailed above and (iii)
the cumulative effect of the change in accounting principal for organizational
costs totaling $63.9 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue primarily consists of monthly fees paid by subscribers for
basic programming, premium programming and equipment rental. Revenues were $26.9
million in 1997 compared to $22.7 million in 1996, an increase of 18.5%. The
increase in revenue for the periods presented is primarily due to average
subscribers increasing to approximately 65,390 for 1997 (excluding 2,070
subscribers relating to the Story City, Iowa market of which CS assumed
operational control as of December 30, 1997) compared to approximately 54,375
for the prior year period, an increase of 20.3%. The increase in subscriber
levels is attributed to the February 23, 1996 Contributions and the USA Wireless
Acquisition. The increase in revenue attributed to subscriber growth was
partially offset by a decrease in average recurring revenue per subscriber to
approximately $34.31 from approximately $34.85 for the comparable prior year
period.
SYSTEMS OPERATIONS. Systems operations 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 was $15.0 million for 1997 compared to $13.3
million in 1996, an increase of 12.7%. The increase in systems operations for
1997 compared to the prior year period is primarily due to the increase in the
subscriber base brought about by the February 23, 1996 Contributions and the USA
Wireless Acquisition, and, to a lesser extent, costs associated with the
preparations to launch digital video and high speed Internet access services in
Dallas, with no comparable amount in 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses ("SG&A") was $15.8 million in 1997 compared to $13.9 million in 1996,
an increase of 13.7%. The increase in SG&A for 1997 compared to the prior year
period is principally due to (i) increased costs associated with the
preparations for the anticipated launch of digital video and high speed Internet
access services in Dallas, Texas totaling $1.7 million in 1997, with no
comparable amount in 1996 (ii) non-recurring severance payments to former
executives totaling approximately $1 million in 1997 with no comparable amounts
in 1996 (SEE ITEM 11.--EXECUTIVE COMPENSATION), and (iii) certain costs
associated with the subscriber base brought about by the February 23, 1996
Contributions and the USA Wireless Acquisition. The aforementioned increase in
SG&A was partially off-set by a decrease in SG&A at the operating system level
of approximately $2.0 million. The decrease in SG&A at the operating system
level is principally due to the Company implementing a no-growth strategy in its
analog markets pending deployment of digital technology.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of licenses and
leased license investment, goodwill and other intangible assets. Depreciation
and amortization expenses were $26.9 million in 1997 compared to $20.3 million
in 1996, an increase of 32.5%. The increase in depreciation and amortization
expense in 1997 is attributed to current year acquisitions of property,
equipment and intangible assets totaling approximately $27.5 million.
OPERATING LOSS. The Company generated operating losses of $30.8 million in
1997 compared to $24.8 million in 1996, a 24.2% increase. Consolidated earnings
before interest, taxes, depreciation and amortization ("EBITDA") was a negative
$3.9 million in 1997 compared to a negative $4.4 million in 1996, a 11.4%
favorable increase. The increase in the Company's operating loss is primarily
due to incremental net operating costs associated with the February 23, 1996
Contributions and the USA Wireless Acquisition and increased systems operations,
SG&A, depreciation and amortization. The favorable increase in negative EBITDA
during 1997 is attributed to EBITDA at the analog system level improving to $6.0
million in 1997 from $1.3 million in 1996, partially offset by an increase in
non-recurring SG&A at the
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corporate level and start-up costs associated with the preparations to launch
digital video and high speed Internet access services in Dallas, Texas, with no
comparable amounts in 1996.
INTEREST INCOME. Interest income was $5.5 million in 1997 compared to $6.6
million in 1996. The Company consummated a private placement of $400.0 million
of the CS Notes on February 23, 1996, resulting in net proceeds of $219.7
million (net of debt issuance costs of $9.8 million, but prior to certain
distributions made in connection with the Participation Agreement--SEE NOTE 3 TO
CONSOLIDATED FINANCIAL STATEMENTS). See ITEM 1.--BUSINESS--GENERAL. The decrease
in interest income is primarily due a decrease in the average invested balance,
partially offset by cash equivalents being invested for a shorter period in 1996
compared to 1997.
INTEREST EXPENSE. Interest expense was $32.0 million in 1997 compared to
$25.0 million in 1996. Interest expense during 1997 included (i) non-cash
interest and accretion of deferred debt issuance costs of $30.4 million related
to the New Discount Notes and (ii) non-cash interest of $1.1 million relating to
the Heartland Long-Term Note issued by the Company in connection with the
February 23, 1996 Contributions and $0.4 million relating to the BTA auction
payable. Interest expense during the year ended December 31, 1996 included
non-cash interest and accretion of deferred debt issuance costs of $23.5
million, related to the New Discount Notes and $1.5 million, primarily relating
to the Heartland Long-Term Note.
EQUITY IN LOSSES OF AFFILIATES. The Company's equity in net operating
losses of affiliates was $1.3 million in 1997. Equity in losses of affiliates
during 1997 represent losses from TelQuest Satellite Services LLC, Television
Interactiva del Norte, S.A de C.V. in which the Company has an approximate 39%
interest and Television Inalambrica, S.A. de C.V. in which the Company has an
approximate 49% interest. The Company initially acquired its interest in
TelQuest Satellite Services LLC on August 4, 1997. The Company acquired its
interest in the other two companies in September 1997. SEE ITEM 13.--CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--TELQUEST SATELLITE SERVICES and
ACQUISITIONS OF FOREIGN INTERESTS FROM HEARTLAND.
OTHER INCOME. Other Income is primarily comprised of a gain on sale of
assets. On May 27, 1997 the Company sold to BellSouth Corporation, pursuant to
the July 25, 1996 purchase agreement, certain assets for approximately $16.4
million, resulting in a gain of approximately $0.7 million. See ITEM
13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--ATLANTA SUBURBS MARKET.
INCOME TAX BENEFIT. As discussed more fully in Note 9 to the Consolidated
Financial Statements, the Company recognized income tax benefits related to the
Company's losses before income taxes of $5.4 million in 1997, compared to $14.6
million for the comparable prior year periods. The Company recognized income tax
benefits to the extent of future expected reversals of existing taxable
temporary differences.
NET LOSS. The Company has recorded net losses since inception. The Company
incurred net losses of $52.6 million during 1997 compared to $28.5 million
during the prior year period. As previously discussed, although the Company's
total revenue increased 18.5% from 1996 to 1997, the Company's net losses have
increased due to increased SG&A, system operations, depreciation and
amortization and interest expense.
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.
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INCOME TAX MATTERS
The Company and its subsidiaries have net operating loss carryforwards
("NOL's") at December 31, 1998, totaling approximately $52.7 million which begin
to expire in 2010. Approximately $7.5 million of these NOL's are subject to
annual limitation and the separate return limitation year rules. SEE NOTE 10 TO
CONSOLIDATED FINANCIAL STATEMENTS.
INFLATION
Management does not believe that inflation has a material impact on the
Company's results of operations. Management believes it will be able to increase
customer rates to keep pace with inflationary increases in costs without a
significant decline in the number of customers.
THE YEAR 2000 ISSUE
OVERVIEW. 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. A
preliminary review of the Company's information systems has been completed and a
comprehensive program is currently in process to modify or replace those systems
that are not Year 2000 compliant
STATE OF READINESS. The Company's Year 2000 compliance program focuses on
the Company's analog video operations, limited Internet operations, and internal
business processes, such as accounting. As of March 31, 1999, the inventory,
assessment and compliance planning phases for these areas have been materially
completed, and remediation, replacement or retirement and testing activities are
beginning. The inventory items that are not assessed as Year 2000 compliant and
that require action to avoid service impact are expected to be fixed, replaced,
or retired. CS' goal for its accounting services is to have its accounting
software and any other mission critical systems relating directly to the
accounting function Year 2000 compliant by April 1, 1999, the beginning of its
fiscal year. For all other areas, CS' goal is to have all mission critical
systems Year 2000 compliant by September 30, 1999.
VENDOR AND SERVICE PROVIDER ISSUES. The Company has requested that its
vendors and service providers provide CS with information as to the compliance
status of products and/or services used by CS and its operating subsidiaries
which information is subject to Company testing and verification. Although the
Company has received information from some of its vendors and service providers,
it has not yet received information from each of the vendors and service
providers it has identified. The Company will continue to pursue its vendors and
service providers in order to obtain the necessary information regarding Year
2000 compliance of such vendors and service providers.
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.
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COST. 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
1999. 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.
RISKS. The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of the Company's normal business functions or
operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition. Due to the uncertainty inherent in
other Year 2000 issues that are ultimately beyond CS's control, including, for
example, the final Year 2000 readiness of its mission critical vendors and
service providers, the Company is unable to determine at this time the
likelihood of a material impact on its results of operations, liquidity or
financial condition, due to such Year 2000 issues. The costs of the Company's
Year 2000 program and the timetable for completing its Year 2000 preparations
are based on current estimates, which reflect numerous assumptions about future
events, including the continued availability of certain resources, the timing
and effectiveness of third-party remediation plans and other factors. The
Company can give no assurance that these estimates will be achieved, and actual
results could differ materially from those currently anticipated. In addition,
there can be no assurance that the Company's Year 2000 program will be effective
or that its contingency plans will be sufficient. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct relevant computer software codes and embedded technology, the
results of internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
The Company believes that the worst case scenario would be the failure of
the Company's subscriber management system addressing the headend equipment,
which sends the signal to the addressable controller units, as well as the
addressable controller units themselves. The controller units communicate to the
customer's set-top box. The loss of the ability to transmit such data could
result in the loss of customers and related revenues, among other things.
CONTINGENCY PLAN. At December 31, 1998, the Company is not aware of any
mission critical aspect of its operations or internal business processes that
can not be made Year 2000 compliant, however, its inventory and assessment of
Year 2000 compliance is not yet completed. Due to the uncertainties presented by
third party Year 2000 problems, and the possibility that, despite its efforts,
the Company is unsuccessful in preparing its internal systems and equipment for
the Year 2000, the Company expects to develop contingency plans for dealing with
the most reasonably likely worst case scenario. The Company's assessment of its
most reasonably likely worst case scenario and the exact nature and scope of its
contingency plans will be affected by the Company's continued Year 2000
assessment and testing. The Company expects to complete such assessment by
September 30, 1999 and to have all contingency systems in place and fully tested
by the fourth quarter of 1999.
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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. 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 Activities," 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 did not have a material impact
on the Company's financial statements and related disclosures.
FORWARD 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 Commission, regarding estimated future operating results,
planned capital expenditures (including the amount and nature thereof) and the
Company's financing plans, if any, related thereto, increases in subscribers and
the Company's financial position and other plans and objectives for future
operations. There can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected effects on its business or operations. Among
the factors that could cause actual results to differ materially from the
Company's expectations are general economic conditions, competition, government
regulations and other factors set forth among the risk factors noted below or in
the description of the Company's business in Item 1 of this Report, as well as
factors contained in the Company's other securities filings.
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.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT. As of December 31, 1998,
the Company had outstanding indebtedness of approximately $320.8 million. For
the years ended December 31, 1997 and December 31, 1998, earnings were
insufficient to cover fixed charges by $58.0 million and $125.6 million,
respectively. The ability of the Company to meet its debt service requirements
will depend upon achieving significant and sustained growth in the Company's
cash flow. The Company currently anticipates that working capital and revenues
generated from the operation of its wireless cable systems should be sufficient
to make principal and interest payments on the Company's indebtedness as they
become due.
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However, there can be no assurance that the Company's operations will generate
sufficient cash flow to pay such obligations. The Company's ability to generate
such cash flow is subject to a number of risks and contingencies. Accordingly,
there can be no assurance as to whether or when the Company's operations will
become profitable or whether the Company will have sufficient resources to meet
its debt service obligations as they become due.
The degree to which the Company is leveraged could have important
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain additional equity or debt financing in the future for working
capital, capital expenditures, product development, acquisitions, general
corporate purposes or other purposes may be materially limited or impaired; (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness; and
(iii) the Company's high degree of leverage may make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions.
LACK OF PROFITABLE OPERATIONS; LIMITED BUSINESS HISTORY. The wireless cable
systems and assets that the Company has acquired have experienced operating
losses. The Company expects to realize additional operating and net losses on a
consolidated basis while it develops and expands its wireless cable systems.
There can be no assurance that the Company will be able to develop or expand its
wireless cable systems or that it or its individual subsidiaries will achieve
profitability in future years.
The Company has a limited operating history. Given the Company's limited
operating history, there is no assurance that the Company will be able to
achieve positive cash flow from operating activities and to compete successfully
in the subscription television industry.
NEED FOR ADDITIONAL FINANCING FOR CAPITAL EXPENDITURES AND OPERATIONS. The
Company's business requires substantial investment to finance capital
expenditures and operating expenses for subscriber growth and systems
development. The Company believes that working capital and revenues generated
from operations will provide sufficient funds to meet its needs for at least the
next twelve months. Capital expenditures in excess of such resources may be
financed, in whole or in part, by the Company through debt or equity financing,
subscriber equipment lease financing, joint ventures or other arrangements.
There is no assurance that any additional financing necessary to expand the
build-out of the Company's wireless cable systems or to acquire new systems will
be available on satisfactory terms and conditions, if at all. Further, there is
no assurance the Company could obtain additional capital within the limitations
of the Indenture governing the terms of the CS Notes. Additional debt could
result in a substantial portion of the Company's cash flow from operations being
dedicated to the payment of principal and interest on such indebtedness, may
render the Company more vulnerable to competitive pressures and economic
downturns and could impose restrictions on the Company's operations. To the
extent that future financing requirements are satisfied through the issuance of
equity securities, the Company's stockholders could experience dilution. Failure
to obtain additional financing could adversely affect the growth of the Company
and its ability to compete successfully in the subscription television industry.
HIGHLY COMPETITIVE INDUSTRY. The subscription television, high speed data,
and local telephone services businesses are highly competitive. The competitors
for the services in each market are traditional hard-wire cable, direct
broadcast satellite (DBS), private cable operators, regional telephone
companies, CLEC's and Internet service providers. Many of these competitors are
well established and known to potential customers and have significantly greater
financial and other resources than the Company.
New and advanced technologies for the delivery of telecommunications
services, such as fiber optic networks, ADSL, 28 GHz microwave transmission
(LMDS), and 22 GHz microwave transmission, are in various stages of development.
Certain of these technologies are being developed and supported by entities,
such as hard-wire cable companies and regional telephone companies, that have
significantly greater financial and other resources than the Company. These new
technologies could have a material
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adverse effect on the demand for services of the Company. There can be no
assurance that the Company will be able to compete successfully with existing or
new entrants in the market for subscription television and telecommunications
services.
NEW APPLICATIONS OF THE MMDS SPECTRUM. The Company is pursuing alternative
uses of its MMDS spectrum, many of which uses rely on technology that is
currently being developed by the Company and other MMDS operators and vendors.
There can be no assurance that such technology development will continue, or
that it will result in technologically-viable MMDS systems. Additionally,
alternative uses of MMDS spectrum have not been commercially deployed in any
meaningful manner to date by any MMDS operator. There can be no assurance that
such alternative uses can be deployed in a commercially reasonable manner, that
such uses will gain consumer acceptance, or that alternative uses of the MMDS
spectrum can be developed into a profitable business by the Company.
COMPETITIVE PRESSURES OF RAPID CHANGES IN TECHNOLOGY. The wireless cable
industry and the subscription television industry in general are subject to
rapid and significant changes in technology which may increase competitive
pressures on the Company or require capital investments to remain competitive
that are beyond the Company's resources at the time. Because of the rapid and
high level of technological change in the industry in which the Company
competes, the effect of technological changes on the businesses of the Company
cannot be predicted.
DIGITAL TECHNOLOGY NOT COMMERCIALLY AVAILABLE. Currently, wireless cable
companies can offer up to 33 6 MHz channels of educational and commercial
programming. The ability to offer substantially more programming utilizing
existing wireless channel capacity is dependent on effectively applying digital
technology. FCC approval is required before the Company's wireless cable systems
can be converted to digital technology. The FCC has issued a Declaratory Ruling
and Order which effectively established interim rules to govern the transition
from analog to digital technology. The FCC has yet to commence a rulemaking
proceeding to adopt permanent rules. There can be no assurance as to what
permanent rules and policies the FCC will adopt to govern the use of digital
technology, which such rules and policies will be adopted, or the Company's
ability to comply with those rules and policies. It is expected that the cost of
digital equipment will exceed the cost of analog equipment. There can be no
assurance, however, that digital converter boxes and other equipment necessary
to implement digital technology, including satellite delivery of digital
signals, will be available on this timetable. Conversion from current analog
technology to digital technology will not take place in all markets
simultaneously.
LAUNCH OF DIGITAL SYSTEMS. The ability of the Company to successfully
launch digital services is dependent upon several factors, including, without
limitation, the availability of adequate facilities and equipment to support a
digital MMDS system, as well as the receipt of requisite regulatory approvals.
The Company was granted a series of related modification applications requesting
authority to operate a 50 watt digital video system in Dallas; certain
modification applications remain pending. The FCC has granted MMDS licensees the
authority to offer one-way Internet access (using a traditional telephone line
return path) without any further regulatory hurdles. The Company has received
from the FCC developmental authority for two-way flexible use of two channels in
its Dallas market, on a test basis. There can be no assurance that the Company
will be granted authority with respect to any of its remaining applications or
that the commercial deployment of any new products for which authority has been
or will be granted will be successful. Further, there can be no assurance that,
even if such tests of two-way flexible use of the MMDS spectrum are successful
and permanent authority is granted by the FCC to the Company, that two-way
flexible use could be successfully deployed in a commercial manner, and if so
deployed, would be profitable.
In order for the Company to launch a digital subscription television service
in any market in which it now has or may in the future have a digital MMDS
transport system, the Company must have access to pre-digitized, compressed
programming. The Company has entered into an agreement with TelQuest Satellite
Services LLC which the Company believes will be able to provide it with the
pre-digitized,
32
<PAGE>
compressed programming necessary to launch digital subscription television in
markets selected by the Company. SEE ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--TELQUEST SATELLITE SERVICES. If, however, that company is unable
to assure delivery to CS with sufficient digital programming to launch a digital
subscription television service, the Company would have to construct its own
digital compression center in each market in which it intends to offer digital
subscription programming. The Company estimates the cost of constructing a
digital compression center to be approximately $6.0 million, based on
information available to the Company as of the date hereof. Access to
pre-digitized, compressed programming, either through a third party provider or
construction of a digital compression center, must be secured for each market in
which CS desires to launch a digital subscription television service.
RESTRICTIONS IMPOSED BY GOVERNMENT AND COMMUNITY REGULATION. The wireless
cable industry is regulated by the FCC. The FCC governs, among other things, the
issuance, renewal, assignment, transfer and modification of licenses necessary
for wireless cable systems to operate and the time afforded to licensees to
construct their facilities. The FCC requires fees for certain applications and
licenses, and mandates that certain amounts of educational, instructional or
cultural programming be transmitted over certain of the channels used by the
Company's existing and proposed wireless cable systems. In the 50 largest
markets, the FCC has authorized up to 33 channels (constituting a spectrum
bandwidth of 198 MHz) primarily for wireless cable transmission of video
programming. In smaller markets, the FCC has authorized up to 33 channels
(constituting a spectrum bandwidth of 196 MHz). Up to 13 MMDS channels can be
licensed by the FCC to commercial operators for full-time usage without
programming restrictions. The remaining ITFS channels typically are authorized
for educational purposes, although excess capacity can be leased to wireless
cable operators, subject to certain programming restrictions. Licenses for both
MMDS and ITFS channels are granted based upon applications filed with the FCC.
FCC approval also is required for assignment of existing licenses or transfer of
control of license holders. The FCC imposes restrictions and conditions upon the
use, control and operation of channels. FCC licenses are limited in duration and
subject to renewal procedures. While current FCC rules are intended to promote
development of a competitive subscription television industry, the statutes,
rules and regulations affecting the subscription television industry could
change, and any future changes in FCC rules, regulations, policies or procedures
could have a negative impact on the industry as a whole, and on the Company in
particular.
In addition, wireless cable operators are subject to regulation by the FAA
with respect to construction of transmission towers and to certain local zoning
regulations affecting construction of towers and other facilities. There also
may be restrictions imposed by local authorities, neighborhood associations and
other similar organizations limiting the use of certain types of reception
equipment used by the Company. Future
changes in the foregoing regulations or any other regulations applicable to the
Company could have a material adverse effect on the Company's results of
operations and financial condition.
DEPENDENCE ON CHANNEL LEASES AND LICENSES: NEED FOR LICENSE EXTENSIONS. The
Company is dependent upon leases of transmission capacity from various
third-party license holders for much of their respective channel rights. MMDS
and ITFS licenses generally are granted for a term of ten years and are subject
to renewal by the FCC. FCC licenses also specify construction deadlines which,
if not met, could result in the loss of the license. Requests for additional
time to construct a channel may be filed and are subject to review pursuant to
FCC rules. Certain MMDS and ITFS channel rights are subject to pending extension
requests and it is anticipated that additional extensions will be required.
There can be no assurance that the FCC will grant any particular extension
request or license renewal request.
Under the rules of the FCC, the term of leases for ITFS channels, which
constitute between 20 and, in rare instances, 28 of the 33 available wireless
channels within any major wireless cable market, may not exceed 15 years. The
ITFS channel leases under which CAI and CS operate generally provide that
following the expiration of the initial term of the lease, the ITFS license
holders may negotiate for the lease of channel capacity for one or more
additional or renewal terms with only the contracting party or its sublessor.
(The MMDS channel leases generally grant the right to renew the channel lease.)
If a renewal agreement is not reached within a specified time frame during which
only the contracting party or its
33
<PAGE>
sublessor has the use of the channel capacity, the Company would thereafter
typically have a right of first refusal to match any competing offers from one
or more third parties. For these and other reasons, including control of the
tower lease and the equipment, the Company anticipates that it will be able to
negotiate additional renewals with either the incumbent license holder, or with
successor license holders, although there is no assurance that it will be
successful.
All ITFS and MMDS channel leases are dependent upon the continued validity
of the corresponding FCC license. The Company anticipates that upon the
expiration of the current license terms, all such FCC licenses will be renewed
following completion of the FCC review process, although there is no assurance
that the FCC will grant these renewal applications. The termination of or
failure to renew a channel license or lease (due to a breach by the contracting
party or its lessor, cancellation of the license held by a third party lessor
for failure to timely construct and/or perfect the wireless cable facility, or
otherwise) or the failure to grant an application for an extension of the time
to construct an authorized station, could result in the inability to deliver
services on such channel(s) unless it were able to lease excess capacity from a
successor license holder. Such a termination or failure in a market which the
Company then actively serves could have a material adverse effect on the Company
and its operations.
UNCERTAINTIES OF A NEW INDUSTRY. While wireless cable television is not a
new technology, it is a new industry with a limited operating history. Many
difficulties and uncertainties are normally associated with new industries, such
as lack of consumer acceptance, difficulty in obtaining financing, increasing
competition, advances in technology and changes in laws and regulations. There
can be no assurance that the wireless cable industry will develop or continue as
a viable or profitable industry.
CABLE SUBSCRIBER CONVERSION. In each of the principal markets serviced by
the Company there is or will be significant competition for households that are
presently subscribers of hard-wire cable services. There can be no assurance
that the Company will be able to attract to its services existing cable
customers, who for a variety of reasons may be reluctant to shift from their
present cable service.
NO ASSURANCE THAT THE COMPANY WILL MANAGE GROWTH EFFECTIVELY. If the
Company grows rapidly it may experience a significant strain on its management,
operating and financial resources. The Company's ability to manage growth
effectively will require it to continue to implement and improve its operating
and financial systems and to expand, train and manage its employee base. These
demands are expected to require the addition of new management personnel and the
development of additional expertise by existing management personnel. Managing
growth is especially challenging for a company with limited financial resources,
and the failure to effectively manage growth could have a material adverse
effect on the Company's operations. Further, the Company has been created by
combining various wireless cable systems from several different companies, and
may in the future acquire additional wireless cable systems, and there can be no
assurance that such systems can be integrated efficiently into the existing
business.
IMPACT OF 1996 ACT. The Act could have a material impact on the wireless
cable industry and the competitive environment in which the Company operates.
The 1996 Act is intended to result in comprehensive changes to the regulatory
environment for the telecommunications industry as a whole. The legislation
intends to, among other things, substantially reduce regulatory authority over
cable rates. Another provision of the 1996 Act will afford hard-wire cable
operators greater flexibility to offer lower rates to certain of their
subscribers, and would thereby permit cable operators to offer discounts on
hard-wire cable service to the Company's subscribers or prospective subscribers.
The legislation will permit telephone companies to enter the video distribution
business, subject to certain conditions. The entry of telephone companies into
the video distribution business, with greater access to capital and other
resources, could provide significant competition to the wireless cable industry,
including the Company. In addition, the legislation will afford relief to DBS by
exempting DBS providers from local restrictions on reception antennas and
preempting the authority of local governments to impose certain taxes.
34
<PAGE>
CONTROL BY CAI. In connection with the Heartland Exit Transaction
(described in ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--HEARTLAND EXIT TRANSACTION) CAI increased its ownership percentage
of the outstanding common stock of the Company to approximately 94%.
Additionally, the Company has recently executed an agreement with CAI and a
wholly owned subsidiary pursuant to which CAI will render engineering and
spectrum management services (described in ITEM 13.--CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--ENGINEERING AND SPECTRUM MANAGEMENT SERVICES AGREEMENT).
On July 30, 1998, CAI and one of its wholly-owned subsidiaries, Philadelphia
Choice Television, Inc., a Delaware corporation, filed voluntary petitions for
relief under the Bankruptcy Code with the Bankruptcy Court. The CAI plan of
reorganization and related disclosure statement were filed with the Bankruptcy
Court on its petition date and filed by CAI with the SEC on a Current Report on
Form 8-K on July 1, 1998. A confirmation hearing was held in the Bankruptcy
Court on September 9, 1998. The CAI plan of reorganization was confirmed on
September 30, 1998 and consummated on October 14, 1998. Following the CAI
Bankruptcy, CAI has outstanding $212.9 million aggregate principal amount at
maturity ($100.0 million aggregate principal amount at issuance) of 13% senior
notes due 2004 (the "CAI Senior Notes"), 17,241,379 shares of CAI Common Stock,
and $80 million principal of Secured Notes. In connection with consummating the
CAI Bankruptcy, CAI obtained an $80 million credit facility (the "CAI Secured
Facility") from Merrill Lynch Global Asset Management. The CAI Secured Facility
is governed by the terms of a Note Purchase Agreement dated October 14, 1998, a
copy of which was filed by CAI with the SEC as an exhibit to CAI's Current
Report on 8-K dated October 15, 1998. The CAI Secured Facility consists of two
tranches: Tranche A and Tranche B. Tranche A is a $30 million senior secured
loan bearing interest at 10.5% compounded semi-annually and evidenced by a
Senior Secured A Note. CAI has granted a first priority lien on and security
interest in and to all of its assets to secure performance of CAI's obligations
with respect to Tranche A. Tranche B is a $50 million senior secured loan
bearing interest at 13% per annum and evidenced by a Senior Secured B Note. CAI
has granted a second priority lien on and security interest in and to all of its
assets to secure performance of its obligations with respect to Tranche B.
Included among the assets pledged by CAI pursuant to the CAI Secured Facility
are the shares of common stock of the Company owned by CAI.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements required by this item are
included on the pages immediately following the Index to Consolidated Financial
Statements appearing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information as of the date of this
report with respect to the those persons who are currently serving as directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Jared E. Abbruzzese(1)(2)................. 44 Chairman of the Board and Acting Chief Executive Officer
Derwood Edge.............................. 50 Acting Chief Operating Officer
John Lund................................. 33 Senior Vice President Finance and Chief Financial Officer
Albert G. McGrath, Jr..................... 41 Vice President and General Counsel
James P. Ashman(2)(3)..................... 44 Director
Robert D. Happ(1)(2)(3)................... 58 Director
David M. Tallcott(1)(2)(3)................ 53 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee. The Compensation Committee determines
the compensation to be paid by the Company to its officers and determines
the stock options to be granted by the Company to employees.
(2) Member of the Restructuring Committee. The Restructuring Committee has been
authorized to evaluate and, if deemed to be in the best interests of the
Company, propose an appropriate plan of reorganization for the Company and
to authorize the officers of the Company to take such actions as may be
necessary or appropriate in furtherance thereof.
(3) Member of the Audit Committee. The Audit Committee assists the Board of
Directors in fulfilling its responsibilities with respect to the Company's
accounting and financial reporting activities.
Jared E. Abbruzzese has been Chairman of the Board of Directors since the
Company's formation in February 1996. Mr. Abbruzzese was appointed Acting Chief
Executive Officer of the Company effective February 18, 1999. Mr. Abbruzzese has
been the Chairman, Chief Executive Officer and a director of CAI since its
formation in 1991. From August 1992 until September 1993, Mr. Abbruzzese served
in various capacities for the prior operator of a wireless cable system in
Albany, New York.
Derwood Edge was appointed Acting Chief Operating Officer of the Company
effective February 10, 1999. Mr. Edge serves as Senior Vice President and Chief
Systems Officer of CAI, positions he has held since January 1997. From April
1994 to December 1996, Mr. Edge served as Vice President and General Manager of
Hampton Road Wireless Television, Inc., an MMDS operator in Virginia Beach,
Virginia, that was acquired by CAI in 1994. Prior to that, Mr. Edge served in
various management capacities for Storer Cable.
John Lund was appointed as the Company's Chief Financial Officer on February
10, 1999. He has served as the Company's Senior Vice President--Finance since
August 1998 and the Chief Accounting Officer since August 1997. Mr. Lund joined
the Company in February 1997 as the Company's Controller. Prior to joining the
Company, Mr. Lund was employed by KPMG LLP for 6 years, most recently as Audit
Manager. Mr. Lund is a Certified Public Accountant.
Albert G. McGrath, Jr. has served as the Company's Vice President and
General Counsel since June 1997. Prior to joining the Company, Mr. McGrath
served as Senior Legal Counsel of ENSCO International, Inc. from January 1996
until June 1997. Mr. McGrath was Senior Vice President, General Counsel and
Secretary of Emerson Radio Corporation ("Emerson") from August 1992 until
December 1995.
36
<PAGE>
Emerson reorganized under Chapter 11 of the United States Bankruptcy Code
pursuant to a Plan of Reorganization confirmed by the United States Bankruptcy
Court of the District of New Jersey in March 1994. Prior to joining Emerson, Mr.
McGrath was engaged in private practice in Dallas, Texas.
James P. Ashman has been a director of the Company since the Company's
formation in February 1996. Mr. Ashman has been Executive Vice President and
Chief Financial Officer of CAI since December 1995. Prior to his appointment as
Executive Vice President and Chief Financial Officer, Mr. Ashman was Senior Vice
President and Treasurer of CAI, positions he held since September 1994. From
November 1992 to September 1994, he was a senior advisor of, and independent
consultant affiliated with, Carolina Barnes Capital, Inc. ("CBC"), a registered
broker dealer. CBC served as financial advisor to CAI from January 1993 until
September 1994.
Robert D. Happ has been a director of the Company since the Company's
formation in February 1996 and a director of CAI since September 1995. Mr. Happ
had been the Managing Partner of the Boston, Massachusetts office of KPMG LLP
from 1985 until his retirement in 1994. Mr. Happ is also a director of Galileo
Corporation and Cambridgeport Bank.
David M. Tallcott has been a director of the Company since December 1998.
Since 1990, Mr. Tallcott has been president of Lortech Corporation, a full
service, large main frame commercial data center serving the insurance industry,
labor unions and direct mailers. Mr. Tallcott was previously a director of CAI.
Messrs. Abbruzzese and Ashman serve as executive officers and Mr. Happ
serves as a director of CAI which reorganized under Chapter 11 of the United
States Bankruptcy Code pursuant to a Plan of Reorganization confirmed by the
United States Bankruptcy Court for the District of Delaware on September 30,
1998. SEE ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION--FORWARD LOOKING INFORMATION AND RISK FACTORS--CONTROL
BY CAI.
37
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation paid or awarded for the year ended December 31, 1998 to the
Company's Chief Executive Officer, each of the Company's other most highly
compensated executive officers and one individual for whom disclosure would have
been provided had he served at the end of the year (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)/(1) ($)/(2)
- ----------------------------------- ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
David E. Webb...................... 1998 235,601 110,250 N/A -0-
President and 1997 161,538 42,188 N/A -0-
Chief Executive Officer(3) 1996 N/A N/A N/A N/A
Thomas W. Dixon.................... 1998 145,192 68,600 N/A 2,178
Senior Vice President 1997 140,000 42,000 N/A 969
of Corporate Strategy and 1996 105,961 48,767 N/A -0-
Business Development(4)
Frank Hosea........................ 1998 148,818 0 N/A 1,696
Senior Vice President and 1997 141,623 42,000 N/A 2,042
Chief Operating Officer(5) 1996 68,462 40,833 N/A -0-
John M. Lund....................... 1998 115,385 53,430 22,090 1,374
Senior Vice President-- 1997 58,028 22,500 N/A 232
Finance and Chief Financial 1996 N/A N/A N/A N/A
Officer
Albert G. McGrath, Jr.............. 1998 127,307 61,250 N/A 1,910
Vice President and 1997 64,423 9,375 N/A -0-
General Counsel 1996 N/A N/A N/A N/A
</TABLE>
- ------------------------------
(1) Other annual compensation, including Company-provided vehicle or allowances,
life insurance, or membership dues, less than the lesser of 10% of total
annual salary and bonus or $50,000 is not presented other than for Mr. Lund
who received a $15,000 bonus in connection with a promotion and $7,690 for
automobile allowances.
(2) All other compensation consists of the Company's matching contributions on
behalf of the employee to the Company's 401(k) plan. Matching contributions
vest ratably over four years commencing on the date of hire.
(3) Mr. Webb resigned as President and Chief Executive Officer of the Company
effective February 16, 1999.
(4) Mr. Dixon resigned as Senior Vice President of the Company effective
February 1, 1999.
(5) Mr. Hosea resigned as Chief Operating Officer of the Company effective
October 19, 1998.
COMPENSATION OF DIRECTORS
Directors who are not officers of the Company are paid an annual fee of
$5,000 and a fee of $625 per meeting attended (including committee meetings),
plus reimbursement of out-of-pocket expenses. Officers of the Company who also
serve as directors do not receive fees for serving as directors.
OPTION GRANTS IN LAST FISCAL YEAR
No executive officer named in the Summary Compensation Table received
options to purchase Common Stock of the Company during the fiscal year ended
December 31, 1998.
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<PAGE>
AGGREGATE OPTION/SAR EXERCISES IN 1998 AND FISCAL YEAR-END OPTION/SAR VALUES
No executive officer named in the Summary Compensation Table exercised
options to purchase Common Stock in 1998. The following table sets forth certain
information with regard to the outstanding options to purchase Common Stock as
of December 31, 1998 for the persons named in the Summary Compensation Table
above.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END (#) AT 12/31/98 ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------------- -------------------------- -------------------------------
<S> <C> <C>
David E. Webb......................... 50,000/150,000 (1)
Thomas W. Dixon....................... 61,673/24,000 (1)
Frank Hosea........................... 19,000/64,000 (1)
John M. Lund.......................... 2,000/6,000 (1)
Albert G. McGrath, Jr................. 5,000/15,000 (1)
Harry E. Nichols...................... 8,000/8,000 (1)
</TABLE>
- ------------------------
(1) The Company's Common Stock is not publicly traded, and no market exists for
its Common Stock. Accordingly, no estimate is made regarding the value of
unexercised in-the-money options.
EMPLOYMENT AGREEMENTS
Messrs. Lund and Scott Mindemann, the Company's Vice President of Internet
Operations, have entered into employment agreements with the Company providing
for, among other things (i) the payment of an annual base salary, (ii) three
year employment terms, (iii) automobile allowances and (iv) certain insurance
benefits. Each contract provides that in the event the employee is terminated
for any reason other than Cause (as defined in the Contract) the employee shall
receive severance in an amount equal to the greater of (i) their then base
salary payable in twelve equal monthly installments and (ii) the then base
salary which would have been payable for the balance of the term payable in
equal monthly installments. Additionally, the Company has entered into a
one-year employment agreement with Mr. McGrath providing for the payment of an
annual base salary, automobile allowance and certain insurance benefits.
The Company's former Chief Executive Officer, David E. Webb, and former
Executive Vice President, Thomas Dixon, entered into employment agreements upon
substantially the same terms and conditions as the agreements entered into by
Messrs. Lund and Mindemann. The annual base salary payable under the terms of
the respective agreements was $275,000 to Mr. Webb and $180,000 to Mr. Dixon. In
connection with their respective departures from the Company in February, 1999,
the employment contracts were terminated and each of Messrs. Webb and Dixon
entered into Separation Agreements providing for the immediate cash payment of
$308,493 and $215,133, respectively, in satisfaction of their claims under the
terms of their respective employment agreements.
RETENTION BONUS PROGRAM
Six members of the Company's senior management (Messrs. Webb, Dixon, Lund,
Mindemann, McGrath and Steven Moncreiff, Vice President of 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 CS 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 FCC 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. Messrs. Webb
39
<PAGE>
and Dixon have released their rights under the program in connection with their
respective departures from the Company.
Additionally, the Compensation Committee has authorized and directed
management of the Company to set aside up to a maximum aggregate sum of $250,000
to be distributed to key employees designated by management within certain
parameters established by the Compensation Committee.
MANAGEMENT STOCK OPTIONS
In 1996, the Company established the CS Wireless Systems, Inc. Incentive
Stock Plan ("Stock Plan") which provides for the issuance of stock options to
officers and other key employees of the Company and its subsidiaries. The Stock
Plan makes available for issuance 1,500,000 shares of common stock. Options
issued under the Stock Plan have varying vesting periods as provided in separate
stock option agreements and generally carry an expiration date of ten years
subsequent to the date of issuance. Options issued are required to have an
exercise price of not less than fair market value of the Company's common stock
on the date of grant. All outstanding options have been awarded at exercise
prices of $9.40 and $6.50. Certain employees of the Company surrendered their
respective options to purchase the Company's Common Stock in March 1999 in
consideration for the issuance by CAI of options to purchase an aggregate of
205,000 shares of CAI Common Stock at their then current exercise price. The
terms and conditions of the options are governed by the 1998 Stock Option Plan
adopted by CAI in connection with its reorganization under Chapter 11 of the
United States Bankruptcy Code. CAI's 1998 Stock Option Plan is described in the
Quarterly Report filed by CAI with the Securities and Exchange Commission on
Form 10-Q for the quarterly period ended December 31, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, Messrs. Abbruzzese and Happ comprised the Compensation
Committee. Mr. Abbruzzese is Chairman, Chief Executive Officer and a director of
CAI. Mr. Happ serves as a director of CAI. The Company and CAI engaged in
certain transactions more particularly described in ITEM 13-- CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of April 15, 1999
regarding the beneficial ownership of the Common Stock of the Company by (a)
each person that is the beneficial owner of more than five percent of the Common
Stock of the Company, (b) the directors of the Company, (c) the Chief Executive
Officer and the Named Executive Officers of the Company, and (d) all directors
and executive officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER COMMON SHARES OUTSTANDING SHARES
- --------------------------------------------------------- --------------- -----------------------
<S> <C> <C>
CAI Wireless Systems, Inc. .............................. 6,421,166 94%
18 Corporate Woods Blvd.
Third Floor
Albany, NY 12211
Jared E. Abbruzzese ..................................... 0 0
18 Corporate Woods Blvd.
Third Floor
Albany, NY 12211
John M. Lund ............................................ 0 0
1101 Summit Avenue
Plano, TX 75074
Albert G. McGrath, Jr. .................................. 0 0
1101 Summit Avenue
Plano, TX 75074
James P. Ashman ......................................... 0 0
18 Corporate Woods Blvd.
Third Floor
Albany, NY 12211
Robert D. Happ .......................................... 0 0
18 Corporate Woods Blvd.
Third Floor
Albany, NY 12211
David M. Tallcott ....................................... 0 0
18 Corporate Woods Blvd.
Third Floor
Albany, NY 12211
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain officers and directors of the Company and its affiliates are
involved in other relationships and transactions with the Company, including
interests in certain affiliated companies and in companies which provide CS with
certain services. Recent transactions with affiliates are summarized below.
TELQUEST SATELLITE SERVICES. TelQuest is a joint venture between CAI, the
Company, and TelQuest Communications, Inc., a company controlled by Mr.
Abbruzzese, the Chairman of the Boards of CAI and the Company. TelQuest was
formed on August 4, 1997 for the purpose of developing and operating satellite
systems providing digital services.
The Company acquired a 25% ownership interest in TelQuest for consideration
of an initial contribution of $2.5 million in cash (paid in quarterly
installments beginning August 1997) and, through a five-year renewable lease at
a nominal amount, of approximately $2.5 million in equipment. In connection with
41
<PAGE>
CAI's acquisition of its 25% interest, CAI made four cash payments totaling $2.5
million and contributed to TelQuest a combination of equipment (made available
to TelQuest pursuant to a five-year renewable lease at a nominal rental amount)
and cash (in lieu of equipment) totaling $2.5 million. The Company and CAI
increased their respective ownership interests to 30% in December 1997.
In conjunction with their respective investments in TelQuest, the Company
and CAI each entered into an affiliation agreement with TelQuest facilitating
the purchase from TelQuest of pre-digitized video programming from TelQuest for
those markets, if any, in which the Company or CAI launches a commercial digital
subscription video product. The Company designated its Dallas and Ft. Worth
markets and CAI designated its Boston market as the first of its markets to
receive TelQuest digital video programming.
The Company purchased in July 1998 the leasehold rights of 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. 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 completed the
relocation of the equipment in December 1998.
EQUIPMENT SALES AND PURCHASES; CERTAIN OTHER PAYMENTS. During the years
ended December 31, 1998 and 1997, CS purchased approximately $3.4 million and
$300,000 of equipment from CAI upon payment terms of 20% down and the balance
due 30 days after delivery. The equipment consisted primarily of equipment
purchased by CAI for its Boston, MA project. The Company believes the purchase
terms obtained from CAI were more favorable than terms available from third
party vendors. Additionally, during April 1997, CAI placed purchase orders
approximating $1.6 million with CS for equipment needed for the Boston project,
taking advantage of CS favorable pricing arrangements with its vendors. The
Company reimbursed CAI for payments made by CAI to the FCC in connection with
the BTA Auction with respect to the Company's markets; the reimbursements were
approximately $12.0 million in 1996, $1.9 million in 1997, and $643,200 in 1998.
The Company reimbursed Heartland in the amounts of approximately $1.1 million in
1996, $252,560 in 1997, and $435,427 in 1998, including interest, for payments
made by Heartland in connection with the BTA Auction. Additionally, the Company
paid CAI approximately $471,000 and $139,000 for services rendered, rent,
licensing, and other fees during 1997 and 1998, respectively.
ENGINEERING AND SPECTRUM MANAGEMENT SERVICES. CAI has arrangements with CS
pursuant to which CAI personnel provide engineering and spectrum management
services, including engineering consulting services required in connection with
the digital build-out by CS of its Dallas and Ft. Worth markets. CAI receives
$10,000 per month plus reimbursement for all reasonable expenses incurred in the
performance of such consulting services. The Company has recently negotiated the
terms of such arrangement and entered into an Engineering and Spectrum
Management Agreement (the "Management Agreement") with CAI and CAI/AMI Spectrum
Management, Inc., a wholly-owned subsidiary of CAI ("AMI"). Effective March 1,
1999, AMI assumed supervision and delivery of all engineering and spectrum
management services, in a coordinated effort with CAI, as the Company prepares
to take advantage of the expanded use of its MMDS spectrum contemplated by the
Two-Way Order.
Under the Management Agreement, AMI has commenced, directly or through third
parties, supervising or providing all engineering and technical advice, services
and consulting related to the MMDS spectrum controlled by the Company. AMI will
also manage all of such spectrum for the Company, subject to the Company's
business plan and an approved budget. Pursuant to the Management Agreement, the
Company has delegated to AMI full authority over engineering and over the
deployment of the Company's MMDS spectrum for the five-year term of the
Management Agreement, in a manner consistent with the business plan approved by
the Company's board of directors.
AMI, which provides the same services to CAI, has agreed to provide the
services contemplated by the Management Agreement in exchange for a fee equal to
40% of AMI's fully allocated costs plus an
42
<PAGE>
administrative fee of 20% of such amount. The fee is payable quarterly in
advance. Additionally, the Company has agreed to reimburse AMI for out-of-pocket
expenses associated with the services, subject to certain approvals if the
expenses exceed the amounts contemplated by an approved budget.
Pursuant to the Management Agreement, AMI is also providing the Company with
an acting chief executive officer and an acting chief operating officer. Jared
E. Abbruzzese, Chairman of the Company and Chairman and Chief Executive Officer
of CAI, has been named Acting Chief Executive Officer, and Derwood Edge, a
Senior Vice President and Chief Systems Officer of CAI, has been named Acting
Chief Operating Officer. The Company agreed to pay a fee equal to 30% of CAI's
compensation costs for Mr. Abbruzzese's services rendered as acting chief
executive officer and a fee equal to 75% of CAI's compensation costs for Mr.
Edge's services rendered as acting chief operating officer. Each fee is payable
by the Company monthly in advance. Pursuant to the Management Agreement, the
parties agree to negotiate these fees at the conclusion of the initial 6 months
of the agreement. The Company may terminate the acting chief executive officer
or chief operating officer services at any time upon ten days' prior written
notice and payment in full of all fees owing as of the intended date of
termination
Also, up to 20% of the professional time of Mr. Gerald Stevens-Kittner,
CAI's Senior Vice President--Spectrum Management, is devoted to CS spectrum
management matters, including regulatory issues before the FCC. CS compensates
Mr. Stevens-Kittner directly for such services. CAI charges CS a PRO RATA
portion of the monthly rent payment for its Arlington office space, based on the
office space used by one CS Wireless employee resident in the Arlington office.
ALAN SONNENBERG. On September 4, 1997, the Board of Directors of the
Company approved an agreement (the "Separation Agreement") with Alan Sonnenberg,
the former Vice Chairman of the Company's Board of Directors, to terminate Mr.
Sonnenberg's Employment Agreement dated as of February 23, 1996. Pursuant to the
Separation Agreement, Mr. Sonnenberg received a lump sum payment of $500,000 and
acknowledgment by the Company of the vesting of Mr. Sonnenberg's options (the
"Options") to purchase 172,044 shares of CS Common Stock under the 1996 CS
Wireless Systems, Inc. Incentive Stock Plan (the "Plan") at an exercise price of
$6.50 per share. On the first anniversary of the date of the Separation
Agreement, Mr. Sonnenberg had the option, provided the CS Common Stock was not
then publicly traded and the price per share quoted on any applicable exchange
or over-the-counter was greater than $9.50, to (i) hold the Options, in which
event the Options would have been exercisable until the five-year anniversary of
the Separation Agreement in accordance with the Plan, or (ii) deliver written
notice ("Election Notice") to the Company of his election to cancel all, but not
part of, the Options in consideration for payment by the Company of $500,000
(less applicable taxes); upon delivery of such payment, the Options would lapse
without further action. Mr. Sonnenberg exercised his option to receive the cash
payment and the Company paid $500,000 to Mr. Sonnenberg in the third quarter of
1998 in consideration for the lapse of the Option. Mr. Sonnenberg resigned from
the Company's Board of Directors on December 3, 1998.
ACQUISITION OF FOREIGN INTERESTS FROM HEARTLAND. On September 29, 1997, the
Company acquired 39% of the voting common stock of Television Interactiva del
Norte, S.A. de C.V. ("Telinor") from Heartland for cash proceeds of $915,000 and
assumption of a cash call obligation in the amount of $145,000. The Company also
purchased from Heartland two unsecured promissory notes payable by Telinor for
$2.56 million, including accrued interest. The two notes were immediately
restructured into one unsecured note accruing interest at 12% and maturing on
September 21, 2002. Additionally, the Company consummated another transaction
with the principal stockholders of Telinor whereby the Company purchased 49% of
the voting stock of Television Inalambrica, S.A. de C.V. ("Television") for cash
in the amount of $1.0 million and committed to (i) loan Television up to the sum
of $5.0 million in cash or (ii) finance an equivalent amount in sales of the
Company's equipment to Television. The funds committed were deposited into
escrow pending disbursement or reduction of the required escrow amount through
equipment sales to Television. As of December 31, 1998 approximately $950,000
had been advanced to Television in connection with the loan. The remaining
escrowed funds have been released to the Company; however, the
43
<PAGE>
Company has advanced an additional $953,405 to Television during 1999. As of
December 31, 1998, the Company's recorded investment in Telinor and Television
was $7.5 million, including the notes purchased. Telinor and Television were
formed to develop wireless cable television systems providing subscription
television services in Mexico.
HEARTLAND NOTE OBLIGATION. The Heartland Long-Term Note:(i) was payable in
the principal amount of $15 million and had a final maturity date that is 10
years and one day after the Contribution Closing; (ii) accrued interest at an
annual rate of 10% until the first anniversary of the Contribution Closing and
15% thereafter; and (iii) required that all of the net proceeds received by the
Company from the sale of assets be applied to the repayment of the Heartland
Long-Term Note. Substantially all of the proceeds from the sale of the Atlanta
Suburbs Market (see below) were applied to the Heartland Long-Term Note. The
Heartland Long-Term Note shall be completely discharged upon consummation of the
Heartland Exit Transaction described below.
ATLANTA SUBURBS MARKET. On July 17, 1996, CS acquired from Heartland all of
the outstanding stock of Heartland Wireless Georgia Properties, Inc., a Georgia
corporation ("Heartland Georgia") that was a wholly-owned subsidiary of
Heartland. Heartland Georgia owns (i) certain leases and licenses for wireless
cable frequency rights for wireless cable channels transmitting in Adairsville,
Powers Crossroads and Rutledge, Georgia (the "Atlanta Suburbs Markets") and (ii)
leases for four tower sites. The purchase price was $7.2 million. On May 22,
1997, the Company consummated the sale to Bell South Corporation of the leases
for the Atlanta Suburbs Markets and four tower sites, as well as the BTA license
relating to Atlanta, Georgia, and other assets and reimbursable expenses for
approximately $16.4 million, resulting in a gain of approximately $0.7 million.
The Company subsequently paid to Heartland approximately $15.0 million from the
sales proceeds.
HEARTLAND EXIT TRANSACTION. On December 2, 1998, CS, Heartland and CAI
executed a Master Agreement providing for, among other things, the termination
of Heartland's rights in, and claims against, the Company. The Master Agreement
shall be performed in two steps. Stage I, which has been consummated, required
the lease by the Company to Heartland of certain assets related to the Story
City, Iowa market, the sale to Heartland of certain consumer premises equipment
at agreed upon prices and the payment by the Company to Heartland of $366,000.
In consideration, Heartland leased to CS certain assets related to the
Portsmouth, New Hampshire market, effected a partial satisfaction of the
Heartland Long-Term Note and agreed to various mutual cooperation obligations
relative to developmental applications filed by Heartland or CS for two way
authority in adjacent and overlapping markets, including Dallas-Ft. Worth. At
the Stage II Closing, which is to occur following receipt of certain necessary
governmental approvals, CS and Heartland will transfer to one another their
respective ownership interests in the Story City, Iowa and Portsmouth, New
Hampshire markets, the Heartland Long-Term Note shall be canceled and CS shall
pay Heartland $100,000; additionally, the Company agreed to transfer certain
inventory to Heartland. In connection with the Master Agreement, the three
Heartland designees to the CS Board resigned and the Stockholders Agreement was
terminated. At the Stage I Closing, CAI purchased from Heartland all of its CS
Common Stock in consideration for $1,534,000. Subsequent to the Stage I Closing,
CS redeemed the shares of CS Common Stock that CAI acquired from Heartland in
consideration for payment of approximately $1.5 million in cash. The Company
solicited and obtained written consents and waivers from the holders of a
majority of the outstanding CS Notes relative to the transactions consummated in
connection with the Heartland Exit Transactions. The Company agreed to pay to
the holders of the CS Notes, as of December 3, 1999, the aggregate sum of $1.25
million in connection with the consents and waivers that were deemed by the
Company to be necessary under the terms of the Indenture governing the CS Notes.
The payment shall be made upon the latter to occur of (i) three business days
following the Stage III Closing and (ii) the date on which the Company may be
legally permitted to make such payment.
CHARLOTTE, NORTH CAROLINA BASIC TRADING AREA. CAI was the high bidder for
the Charlotte BTA in the BTA Auction. CAI is obligated to convey to the Company,
at cost, its rights to the Charlotte BTA. The
44
<PAGE>
Company reimbursed CAI for the Charlotte BTA in 1996. The Company will also have
the right to develop an additional seven channels, depending on interference
considerations in the Charlotte market as a result of its ownership of the
Charlotte BTA.
STORY CITY, IOWA OPERATING MARKET. The Company entered in a letter of
intent in 1996 pursuant to which Heartland agreed to acquire the wireless cable
operating system in Story City (also known as Radcliffe), Iowa, and wireless
cable assets in Scottsbluff, Nebraska and Kalispell, Montana currently held by
the Company for an aggregate of approximately $3.9 million. The Company received
the Story City system and Scottsbluff and Kalispell assets in connection with
the USA Wireless Acquisition. Heartland terminated the letter of intent and,
effective December 30, 1997, the Company assumed operational control of the
markets. The Company reimbursed Heartland in 1998 for approximately $300,000 in
capital expenditures. The Company subsequently agreed to transfer the Story City
operating market to Heartland in connection with the Heartland Exit Transaction
described above.
INSTALLATION CONTRACTING. In September 1997, the Company entered into an
Installation Contractor Agreement with ACS Telecommunications Systems, Inc.
("ACS") whereby ACS agreed to provide installation contractor services in the
Dallas, Texas vicinity and such other markets as mutually agreed upon. The
Agreement has a term of two years. In addition to Dallas, ACS has provided
services for the Company in the majority of the Company's operating markets. The
Company paid $988,000 and $4.4 million, respectively, for the years ended
December 31, 1997 and 1998. In order to reduce the Company's expenditures for
installation services and service calls, the Company terminated the Installation
Contractor Agreement and negotiated the terms of a new service agreement with
reduced minimum and other payments for installation and service call services.
In connection with the termination of the original agreement, CS as agreed to
pay ACS the sum of $510,000, payable in installments of $210,000, $100,000,
$100,000, and $100,000, pursuant to the early termination provisions of the
agreement. Mr. Sonnenberg, a former director of the Company, is the principal
stockholder of ACS.
CONSULTING SERVICES. Effective January 13, 1998, the Company entered into a
six month services contract with Wireless Digital Net, Inc. ("Digital Net")
pursuant to which Digital Net performs sales and marketing functions on behalf
of the Company with respect to hospitals, schools and libraries. Digital Net was
paid approximately $245,000 for the performance of its services and
reimbursement of expenses, including the retention of third party advisors. Anne
Dixon, spouse of Thomas W. Dixon, owns 23% of Digital Net and served as
President until her resignation effective in June 1998.
TELEDIST SYSTEMS LLC. TeleDist Systems LLC ("TeleDist") has assisted the
Company and Heartland in connection with certain marketing activities conducted
at Wal-Mart stores. The Company has paid approximately $100,000 in beta
development charges to TeleDist in lieu of affiliation fees for rights to the
Company's 21 principal markets. Additionally, the Company paid approximately
$17,000 and $105,000 to TeleDist during 1997 and 1998, respectively, for Kiosk
rental and marketing fees of selected Wal-Mart stores. Mr. Sitton, a former
director of the Company, is a director of and equity owner in TeleDist. The
Company terminated the relationship with TeleDist effective March, 1999.
HEARTLAND LEASE. The Company subleases approximately 10,000 square feet of
office space in Plano, Texas from Heartland. Pursuant to the sublease, which
expires in April 2003, the Company was obligated to pay Heartland approximately
$121,404 per annum plus certain operating costs. In March, 1999 the Company and
Heartland agreed to reduce the payment to approximately $39,060 per annum.
PROGRAMMING COOPERATIVE. In 1997, CS, Heartland, CAI and another wireless
cable provider formed Wireless Enterprises, LLC ("Wireless Enterprises"), a
cooperative that negotiates programming and marketing services with suppliers of
programming. For the eight months ended December 31, 1997 and the year ended
December 31, 1998, the Company paid approximately $5.6 million and $8.3 million
to Wireless Enterprises for programming and administrative services.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on Form
10-K.
1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements at Item 8.
2. Consolidated Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for the Year Ended
December 31, 1998.
All other Financial Statement Schedules have been omitted because (i) the
required information is not present in amounts sufficient to require submission
of the schedule, (ii) the information required is included in the Consolidated
Financial Statements or the Notes thereto, or (iii) the information required in
the Schedules is not applicable to the Company.
3. Exhibits:
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company.(1)
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the
Company.(2)
3.3 Bylaws of the Company.(1)
4.1 Indenture dated as of February 15, 1996 between the Company and Fleet National Bank
of Connecticut (including the form of 11 3/8% Senior Discount Notes and 11 3/8%
Series B Senior Discount Notes due 2006 as Exhibit A and Exhibit B, respectively,
thereto).(1)
10.1 Participation Agreement dated as of December 12, 1995 among the Company, CAI and
Heartland.(3)
10.2 Amendment No. 1 to Participation Agreement dated as of February 22, 1996 among the
Company, CAI and Heartland.(4)
10.3 Amended and Restated 1996 CS Wireless Systems, Inc. Incentive Stock Plan.(5)
10.4 Common Share Registration Rights Agreement dated as of February 15, 1996 between the
Company and the Initial Purchasers.(1)
10.5 Stockholders' Agreement dated as of February 23, 1996 among the Company, CAI and
Heartland.(1)
10.6 Market Protection Agreement dated as of February 23, 1996 between the Company and
Heartland.(1)
10.7 Promissory Note of the Company in the principal amount of $15,000,000 payable to the
order of Heartland.(1)
10.8 Administrative Service Agreement dated as of February 23, 1996 between the Company
and Heartland.(1)
10.9 MMDS Affiliation Agreement dated August 4, 1997 between the Company and TelQuest
Satellite Services LLC.(6)
10.10 Separation Agreement dated August 16, 1997 between the Company and Alan
Sonnenberg.(7)
10.11 Form of Director and Officer Indemnity Agreement.(8)
10.12 Installation Contractor Agreement between the Company and ACS Telecommunications
Systems, Inc.(9)
10.13 Employment Agreement between the Company and John Lund dated September 23, 1999.(10)
10.14 Separation Agreement between the Company and Frank Hosea dated October 19, 1999.(11)
</TABLE>
46
<PAGE>
<TABLE>
<C> <S>
10.15 Employment Agreement between the Company and Albert G. McGrath, Jr. dated November
12, 1999.(12)
10.16 Master Agreement among Heartland Wireless Communications, Inc., CS Wireless Systems,
Inc. and CAI Wireless Systems, Inc. dated as of December 2, 1999.+
10.17 Separation Agreement between the Company and Thomas Dixon dated February 1, 1999.+
10.18 Consulting Agreement between the Company and Thomas Dixon dated February 1, 1999.+
10.19 Separation Agreement between the Company and David E. Webb dated February 16, 1999.+
10.20 Consulting Agreement between the Company and David E. Webb dated February 16, 1999.+
10.21 Engineering and Spectrum Management Services Agreement between the Company and CAI
Wireless Systems, Inc. dated as of March 1, 1999.+
21 Subsidiaries of the Company.+
27.1 Financial Data Schedule--Year Ended December 31, 1998.+
</TABLE>
- ------------------------
+ Filed herewith.
(1) Incorporated by reference to Item 16 of the Company's Registration
Statement on Form S-1, File No. 333-3288.
(2) Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q filed November 23, 1998.
(3) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
dated December 12, 1995 (File No. 0-22888) of CAI Wireless Systems, Inc.
("CAI").
(4) Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
dated March 8, 1996 (File No. 0-22888) of CAI.
(5) Incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed August 11, 1997.
(6) Incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed August 29, 1997
(7) Incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed September 11, 1997.
(8) Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q filed for the quarter ended September 30, 1997.
(9) Incorporated by reference to Exhibit 10.19 to the Company's Annual Report
on Form 10-K filed on March 30, 1998 for the year ended December 31, 1997.
(10) Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q filed on November 23, 1998 for the quarter ended September 30,
1998.
(11) Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q filed on November 23, 1998 for the quarter ended September 30,
1998.
(12) Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q filed on November 23, 1998 for the quarter ended September 30,
1998.
(b) Reports on Form 8-K.
During the three-month period ended December 31, 1998, the Company filed the
following Current Reports on Form 8-K:
None
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized, as of April 15, 1999.
<TABLE>
<S> <C> <C>
CS WIRELESS SYSTEMS, INC.
Registrant
By: /s/ JARED E. ABBRUZZESE
-----------------------------------------
Jared E. Abbruzzese
ACTING CHIEF EXECUTIVE OFFICER AND
DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of April 15, 1998 by the following persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<S> <C>
/s/ JOHN M. LUND /s/ ROBERT D. HAPP
- ----------------------------------- -----------------------------------
John M. Lund Robert D. Happ
SENIOR VICE PRESIDENT FINANCE AND DIRECTOR
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
/s/ JAMES P. ASHMAN /s/ DAVID TALLCOTT
- ----------------------------------- -----------------------------------
James P. Ashman David Tallcott
DIRECTOR DIRECTOR
</TABLE>
48
<PAGE>
CS WIRELESS SYSTEMS, INC.
ITEMS 8 AND 14(A)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CS Wireless Systems, Inc. and Subsidiaries:
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheet as of December 31, 1998 and 1997.............................................. F-3
Consolidated Statement of Operations for the years ended December 31, 1998, 1997
and 1996............................................................................................... F-5
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996...... F-6
Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997
and 1996............................................................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CS Wireless Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CS Wireless
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CS Wireless
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
As discussed in note 1(f) to the consolidated financial statements, the
Company changed its method of accounting for the costs of start-up activities in
1998 to adopt the provisions of Statement of Accounting Position 98-5,
"Reporting on the Costs of Start-up Activities."
KPMG LLP
Dallas, Texas
April 12, 1999
F-2
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 41,839 74,564
Restricted cash (note 4)................................................................. -- 5,030
Subscriber receivables, less allowance for doubtful accounts of $339 and $257 in 1998 and
1997, respectively..................................................................... 1,542 1,026
Prepaid expenses and other............................................................... 638 939
---------- ---------
Total current assets................................................................... 44,019 81,559
Property and equipment, net (note 5)....................................................... 43,645 50,519
License and leased license investment, net of accumulated amortization of $25,481 and
$16,159 in 1998 and 1997, respectively (notes 2 and 3)................................... 157,269 170,689
Goodwill, net of accumulated amortization of $7,707 in 1997 (notes 2 and 3)................ -- 48,243
Assets held for sale (note 3).............................................................. 2,102 --
Investments in and loans to equity affiliates (note 4)..................................... 3,884 8,503
Debt issuance costs, net of accumulated amortization of $2,101 and $1,286 in 1998 and 1997,
respectively............................................................................. 7,444 8,260
Other assets, net.......................................................................... 454 2,930
---------- ---------
$ 258,817 370,703
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses, including payable to affiliates of $282 in 1997
(note 6).............................................................................. $ 5,490 8,652
Current portion of long-term debt (note 7).............................................. 199 217
Current portion of BTA auction payable to affiliates including accrued interest payable
(note 7).............................................................................. 354 1,122
Deferred revenue........................................................................ 1,237 628
Other current liabilities............................................................... -- 895
----------- ---------
Total current liabilities............................................................. 7,280 11,514
----------- ---------
Long-term debt, excluding current portion (note 7)........................................ 316,720 283,686
BTA auction payable to affiliates, excluding current portion (note 7)..................... 3,505 3,274
----------- ---------
Total liabilities..................................................................... 327,505 298,474
----------- ---------
Stockholders' equity (deficit) (notes 3 and 9):
Preferred stock, $.01 par value; authorized 5,000,000 shares in 1997; none in 1998...... -- --
Common stock, $.001 par value; authorized 40,000,000 shares in 1997, 15,000,000 in 1998;
issued and outstanding 10,702,609 shares in 1998 and
1997.................................................................................. 11 11
Treasury stock, at cost; 3,838,138 and 2,103 shares in 1998 and 1997,
respectively.......................................................................... (1,574) (40)
Additional paid-in capital.............................................................. 154,557 154,557
Accumulated deficit..................................................................... (221,682) (82,299)
Total stockholders' equity (deficit).................................................. (68,688) 72,229
Commitments and contingencies (notes 8 and 13)
----------- ---------
$ 258,817 370,703
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ----------
<S> <C> <C> <C>
Revenues................................................................ $ 26,259 26,920 22,738
Operating expenses:
Systems operations.................................................... 16,409 14,976 13,258
Selling, general and administrative................................... 18,984 15,849 13,934
Depreciation and amortization......................................... 29,222 26,858 20,345
Impairment of long-lived assets (note 2).............................. 63,907 -- --
------------- ------------ ----------
Total operating expenses............................................ 128,522 57,683 47,537
------------- ------------ ----------
Operating loss...................................................... (102,263) (30,763) (24,799)
------------- ------------ ----------
Other income (expense):
Interest expense...................................................... (34,679) (31,995) (24,959)
Interest income....................................................... 3,399 5,469 6,600
Equity in net losses of affiliates (note 4)........................... (2,553) (1,349) --
Other................................................................. (1,419) 644 --
------------- ------------ ----------
Other income (expense), net......................................... (35,252) (27,231) (18,359)
------------- ------------ ----------
Loss before income taxes and cumulative effect of change in
accounting principle.............................................. (137,515) (57,994) (43,158)
Income tax benefit (note 10)............................................ -- 5,429 14,631
------------- ------------ ----------
Loss before cumulative effect of change in accounting principle..... (137,515) (52,565) (28,527)
Cumulative effect of change in accounting principle..................... (1,868) -- --
------------- ------------ ----------
Net loss............................................................ $ (139,383) (52,565) (28,527)
------------- ------------ ----------
------------- ------------ ----------
Basic and diluted loss per common share before cumulative effect of
change in accounting principle........................................ $ (13.23) (4.94) (3.06)
------------- ------------ ----------
------------- ------------ ----------
Basic and diluted loss per common share................................. $ (13.41) (4.94) (3.06)
------------- ------------ ----------
------------- ------------ ----------
Weighted average basic and dilutive shares outstanding.................. $ 10,395,558 10,639,190 9,170,169
------------- ------------ ----------
------------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- PAID-IN DIVISION TREASURY ACCUMULATED
SHARES AMOUNT CAPITAL EQUITY STOCK DEFICIT TOTAL
------------ ----------- ---------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995................. 1,000 $ 1 $ 15,950 $ 45,572 $ -- $ (1,207) $ 60,316
Contribution to Company--true-up adjustment
(note 3)................................. 9,999,000 9 131,503 (45,572) -- -- 85,940
Issuance of common stock pursuant to Unit
Offering................................. 110,000 -- 800 -- -- -- 800
Issuance of common stock in acquisition.... 335,408 -- 6,305 -- -- -- 6,305
Net loss................................... -- -- -- -- -- (28,527) (28,527)
------------ --- ---------- --------- --------- ------------ -----------
Balance, December 31, 1996................. 10,445,408 10 154,558 -- -- (29,734) 124,834
Contribution to Company--true-up adjustment
(note 3)................................. 257,201 1 (1) -- -- -- --
Treasury stock purchases (note 3).......... -- -- -- -- (40) -- (40)
Net loss................................... -- -- -- -- -- (52,565) (52,565)
------------ --- ---------- --------- --------- ------------ -----------
Balance, December 31, 1997................. 10,702,609 11 154,557 -- (40) (82,299) 72,229
Treasury stock purchases (note 3).......... -- -- -- -- (1,534) -- (1,534)
Net loss................................... -- -- -- -- -- (139,383) (139,383)
------------ --- ---------- --------- --------- ------------ -----------
Balance, December 31, 1998................. 10,702,609 $ 11 $ 154,557 $ -- $ (1,574) $ (221,682) $ (68,688)
------------ --- ---------- --------- --------- ------------ -----------
------------ --- ---------- --------- --------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (139,383) (52,565) (28,527)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes....................................................... -- (5,429) (14,631)
Depreciation and amortization............................................... 29,222 26,858 20,345
Accretion on discount notes and amortization of debt issuance costs......... 33,934 30,395 23,483
Non-cash interest expense on other long term debt........................... 770 1,524 1,275
Impairment of long-lived assets (note 2).................................... 63,907 -- --
Discount and provision for long-term notes receivable (note 4).............. 1,770 -- --
Write-off of start-up and organizational costs (note 1 (f))................. 1,868 -- --
Gain on sale of assets, net................................................. -- (644) --
Equity in losses of affiliates.............................................. 2,553 1,349 --
Changes in assets and liabilities, net of effects of contributions,
acquisitions and assets held for sale:
Subscriber receivables, net............................................... (516) 63 (115)
Prepaid expenses and other................................................ 301 41 (345)
Accounts payable, accrued expenses and other liabilities.................. (2,485) 1,545 928
---------- --------- ---------
Net cash provided by (used in) operating activities..................... (8,059) 3,137 2,413
Cash flows from investing activities:
Purchases of property and equipment........................................... (18,930) (22,685) (13,243)
Additions to intangible assets................................................ (4,853) (4,329) (3,816)
Subscriber acquisition, net of property and equipment......................... -- (448) --
Investment in assets held for sale............................................ (423) (943) (8,766)
Proceeds from sale of assets.................................................. -- 16,350 --
Issuance of notes receivable.................................................. -- -- (1,510)
Utilization of (investment in) in restricted cash............................. 5,030 (5,030) --
Investment in equity affiliates............................................... (1,257) (6,555) --
Other......................................................................... (895) (540) 81
---------- --------- ---------
Net cash used in investing activities................................... (21,328) (24,180) (27,254)
Cash flows from financing activities:
Proceeds from long-term debt.................................................. -- 500 --
Payments of capital lease obligations......................................... (139) (95) (198)
Payments on BTA auction payable and other..................................... (1,665) (493) (20,125)
Payment in settlement of USA acquisition...................................... -- (2,103) --
Payments on Heartland Short-Term Note......................................... -- -- (25,000)
Payments on Heartland Long-Term Note.......................................... -- (15,274) --
Purchase of shares into treasury (note 3(c)).................................. (1,534) -- --
Proceeds from Unit Offering................................................... -- -- 229,484
Debt issuance costs........................................................... -- -- (9,793)
Cash distributed pursuant to Contributions (note 3)........................... -- -- (36,639)
---------- --------- ---------
Net cash provided by (used in) financing activities..................... (3,338) (17,465) 137,729
---------- --------- ---------
Increase (decrease) in cash and cash equivalents................................ (32,725) (38,508) 112,888
Cash and cash equivalents at beginning of year.................................. 74,564 113,072 184
---------- --------- ---------
Cash and cash equivalents at end of year........................................ $ 41,839 74,564 113,072
---------- --------- ---------
---------- --------- ---------
Cash paid for interest.......................................................... $ 446 263 114
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
CS Wireless Systems, Inc. and subsidiaries (the "Company" or "CS Wireless")
develop, own and operate a network of wireless cable television systems
providing subscription television and high-speed Internet access services. The
Company has a portfolio of wireless cable channel rights in various markets in
the United States. The Company currently has systems in operation in eleven
markets, and it owns or holds lease rights in several other markets.
Wireless cable television is a relatively new industry within the highly
competitive subscription television industry. The Company's principal
subscription television competitors in each of its markets are traditional
hard-wire cable companies, direct broadcast satellite, private cable companies
and other alternate methods of distributing and receiving television
transmissions. Hard-wire cable companies generally are well-established and
known to potential customers and have significantly greater financial and other
resources than the Company. As the telecommunications industry continues to
evolve, the Company may face additional competition from new providers of
entertainment and data services. In addition, until the Company can increase its
channels offered through the deployment of digital compression technology, the
Company's existing competitors generally have more channels to offer
subscribers. There can be no assurance that the Company will be able to compete
successfully with existing or potential competitors in the subscription
television industry.
In addition to wireless cable television services, the Company intends to
expand the use of wireless channel rights spectrum to include telecommunications
services. These new services are expected to include two-way data transmission
services and telephony services, possibly through the participation of a
strategic partner.
The Company has incurred significant operating losses since inception and
has negative stockholders' equity at December 31, 1998. Losses are expected for
at least the next year as the Company continues to develop its wireless
communications business. The Company has approximately $41,800,000 in cash and
cash equivalents at December 31, 1998, and, based on its current operating plan,
believes that it has sufficient cash to fund its anticipated capital
expenditures and operating losses through at least the first quarter of 2000.
However, the growth of the Company's wireless communications business may
require substantial continuing investment to finance capital expenditures
related to the acquisition of channel rights and infrastructure development of
digital video programming, two-way frequency utilization and telephony systems.
Additionally, significant debt service begins in September 2001. Without
additional funding through debt or equity offerings, joint ventures, the sale or
exchange of its wireless cable channel rights or the participation of a
strategic partner, or the restructuring of its debt agreements, the Company may
not be able to meet its future debt and interest payments. There can be no
assurance that the Company will achieve positive cash flow from operations, or
consummate the sale of any wireless cable channel rights or that sufficient debt
or equity financing will be available to the Company. In addition, subject to
restrictions under its outstanding debt, the Company may pursue other
opportunities to acquire additional wireless cable channel rights and businesses
that may utilize the capital currently expected to be available for its current
markets.
F-8
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The amount and timing of the Company's future capital requirements will
depend upon a number of factors, including programming, equipment costs and
marketing costs, staffing levels, subscriber growth, competitive conditions, and
the presence of a strategic partner, many of which are beyond the control of the
Company. Failure to obtain any required additional financing could materially
affect the growth, cash flow or operating results of the Company.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
The accompanying consolidated financial information for the period from
January 1, 1996 through February 23, 1996 reflects the combined financial
position and results of operations for the Company's wireless cable system
serving the Cleveland, Ohio market, which is comprised of the accounts of the
Company and certain assets of Atlantic Microsystems, Inc. For the period
subsequent to February 23, 1996, the Company's consolidated financial statements
include the results of operations of the entities and assets contributed to the
Company on February 23, 1996 (see note 3).
On September 29, 1995, ACS Enterprises, Inc. (including ACS Ohio, Inc., the
predecessor of the Company and a wholly-owned subsidiary of ACS Enterprises,
Inc.) was acquired by CAI Wireless Systems, Inc. ("CAI") in a business
combination accounted for as a purchase.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including all direct labor costs
of new customer installations. Depreciation and amortization of property and
equipment are computed using the straight-line method over the estimated useful
lives of the assets. Repairs and maintenance costs are charged to expense when
incurred; renewals and betterments are capitalized.
(D) LICENSE AND LEASED LICENSE INVESTMENT
License and leased license investment includes costs incurred to acquire
and/or develop wireless cable channel rights. Costs incurred to acquire channel
rights issued by the Federal Communications Commission ("FCC") are deferred and
amortized ratably over estimated useful lives of 15 years beginning with
inception of service in each respective market. As of December 31, 1998 and
1997, $17,900,000 and $54,800,000, respectively, of the license and leased
license investment was not yet subject to amortization.
(E) GOODWILL
Goodwill represents excess purchase price of acquisitions over identifiable
net tangible and intangible assets. Goodwill is amortized ratably over an
estimated useful life of 15 years beginning with the acquisition of the market.
The Company assesses the recoverability of goodwill by determining whether
the amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of impairment, if any, is measured based on projected discounted future
F-9
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved (note 2).
(F) OTHER ASSETS
Other assets includes a non-compete agreement with a former officer and
certain other intangible assets, including organizational costs at December 31,
1997, totaling approximately $469,000 and $2,085,000 at December 31, 1998 and
1997, respectively, net of accumulated amortization of approximately $240,000
and $486,000, respectively. These assets are being amortized over the respective
lives of the underlying agreements.
The Company adopted the provisions of Statement of Position 98-5 ("SOP
98-5"), REPORTING ON THE COSTS OF START-UP ACTIVITIES, effective 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 $1,868,000 as a cumulative effect of
the change in accounting principle as of January 1, 1998.
(G) LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell or otherwise dispose of (note 2).
(H) INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the total of tax payable for the period and the
change in deferred tax assets and liabilities during the period.
(I) REVENUE RECOGNITION
Revenues from subscribers are recognized in the period of service. Amounts
paid in advance are recorded as deferred revenue.
(J) SYSTEMS OPERATIONS
Systems operations expenses consist principally of programming fees, channel
lease costs, tower rental and other costs for providing service.
F-10
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company is party to several contract arrangements with related parties
to provide programming, installation and other services (see note 11).
(K) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers
temporary cash investments purchased with original maturities of three months or
less and which are available for use in operations to be cash equivalents. The
Company had cash equivalents of $41,520,000 and $75,352,000 at December 31, 1998
and 1997, respectively.
(L) INVESTMENTS IN AFFILIATES
Investments in affiliates are accounted for under the equity method as the
Company's investment in each of three companies represents greater than 20%
interest and the Company has the ability to exercise significant influence over
each of the entities. Under this method, the investment originally recorded at
cost is adjusted to recognize the Company's share of net earnings or losses of
the affiliate as they occur. The Company's share of net earnings or losses of
affiliates includes the amortization of purchase adjustments.
(M) NET LOSS PER COMMON SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"), in
1997. Accordingly, the Company has presented basic loss per share, computed on
the basis of the weighted average number of common shares outstanding during the
year, and diluted loss per share, computed on the basis of the weighted average
number of common shares and all dilutive potential common shares outstanding
during the year.
The potentially dilutive effect of the Company's stock options has not been
considered in the computation of diluted net loss per common share since their
effect would be antidilutive.
(N) ACCOUNTING FOR STOCK OPTIONS
On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS No. 123"), which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS
No. 123. Under APB Opinion No. 25, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price.
F-11
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(O) COMPREHENSIVE INCOME
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. The
adoption of this statement had no effect on the Company at December 31, 1998,
because the Company has no elements of other comprehensive income. Accordingly,
comprehensive income and net income are the same amount for each period
presented.
(P) SEGMENT REPORTING
In January 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS No. 131"). SFAS No. 131
requires that public companies report operating segments based upon how
management allocates resources and assesses performance. Based on the criteria
outlined in SFAS No. 131, the Company is comprised of a single reportable
segment--distribution of wireless cable television subscription services. No
additional disclosure is required by the Company to conform to the requirements
of SFAS No. 131.
(Q) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(R) RECLASSIFICATIONS
Certain reclassifications have been made to prior year consolidated
financial statements to conform to the current year presentation.
(2) IMPAIRMENT OF LONG-LIVED ASSETS
During the second and third quarters of 1998, CAI and a wholly-owned
subsidiary announced their intention to file a voluntary petition for relief
under Chapter 11 of Title 11 of the United States Code and Heartland Wireless
Communications, Inc. ("Heartland") announced its intent not to pay interest on
certain of its bonds. As a result of these negative industry events, combined
with continuing net losses, the Company reassessed its business strategy and
evaluated its long-lived assets for impairment based on these bankruptcy
petitions and determined that cash flows from operations would not be adequate
to fund the capital outlay required to build out non-operating markets while
continuing the build out of the digital market in Dallas, Texas. Thus, in
accordance with SFAS No. 121, the Company began the process of estimating the
fair values of the long-lived assets. Although this process was not complete
prior to filing the June 30, 1998 Quarterly Report on Form 10-Q, the Company
recorded a non-cash impairment charge of
F-12
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
$46,378,000 to write off the carrying value of the Company's goodwill based on
preliminary estimates of fair value.
During the third quarter, the Company engaged a third party to assist in
completing the recoverability analysis in conjunction with a Company-wide
valuation analysis. This process was completed during the fourth quarter of
1998. In assessing the fair value of its long-lived assets, the Company and the
third party considered relevant cash flows, estimated future operating results,
trends, management's strategic plans, competition and other available
information including the fair value of wireless channel rights owned and
leased. Based on the results of this internal analysis and the third-party
valuation, the Company recorded additional impairment charges to certain
operating and non-operating markets' long-lived assets in the fourth quarter of
1998. This impairment charge, combined with the second quarter charge, totaled
$63,907,000, as follows:
<TABLE>
<CAPTION>
DESCRIPTION OF WRITE-DOWNS
- -----------------------------------------------------------------------------------
<S> <C>
Property and equipment............................................................. $ 9,400
License and leased license investment.............................................. 8,129
Goodwill........................................................................... 46,378
---------
$ 63,907
</TABLE>
The Company's estimates of future gross revenues and operating cash flows,
the remaining estimated lives of long-lived assets, or both, could be reduced in
the future due to changes in, among other things, technology, government
regulation, available financing, interference issues or competition. As result,
the carrying amounts of long-lived assets could be reduced by additional amounts
which would be material to the Company's financial position and results of
operations.
(3) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS
(A) CONTRIBUTIONS TO COMPANY
On February 23, 1996, CAI and Heartland contributed to the Company (the
"Contributions") certain wireless cable television assets comprising various
markets in the United States. In connection with the Contributions, CAI and
Heartland received approximately 5.4 million and 3.6 million shares,
respectively, of the Company's newly-issued common stock. In addition, CAI
received approximately $750,000 in cash and Heartland received approximately
$30.9 million in cash, a nine-month note for $25 million (the "Heartland
Short-Term Note") and a 10-year note for $15 million (the "Heartland Long-Term
Note"). The Heartland Short-Term Note was repaid on March 1, 1996 with a portion
of the net proceeds from the Unit Offering (see note 7).
Additionally, in connection with the Contributions, MMDS Holdings II, Inc.,
an affiliate of Bell Atlantic, and NYNEX MMDS Holding Company, an affiliate of
NYNEX, each received 500,000 shares of common stock of the Company for certain
non-cash consideration.
The consummation of the Contributions has been accounted for at CAI's and
Heartland's historical cost basis, reduced by the amount of cash and notes
distributed to CAI and Heartland in connection with
F-13
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS (CONTINUED)
the Contributions. A substantial portion of the net assets contributed by
Heartland were purchased by Heartland on February 23, 1996. Accordingly,
Heartland's cost basis with respect to such net assets was determined based on
Heartland's allocation of the purchase price to the net assets acquired and
liabilities assumed. On November 8, 1996, the Company distributed an additional
$5 million in cash to Heartland as part of the equity true-up per the provisions
of the agreement governing the contributions. Effective March 31, 1997, an
additional 257,201 shares of common stock of the Company were issued to
Heartland in satisfaction of certain post-closing adjustments. The net assets
contributed to the Company consist primarily of plant and equipment and various
wireless cable channel rights. The following is a summary of the net assets
contributed to the Company on February 23, 1996 (in thousands):
<TABLE>
<S> <C>
Working capital deficit........................................... $ (141)
Plant and equipment, net.......................................... 25,755
License and leased license investment and goodwill................ 144,340
Deferred income taxes............................................. (6,982)
Other liabilities................................................. (393)
---------
162,579
Cash and notes distributed to CAI and Heartland................... 76,639
---------
Net assets contributed............................................ $ 85,940
---------
---------
</TABLE>
(B) ACQUISITIONS
On October 11, 1996, the Company acquired all of the issued and outstanding
common stock ("USA Common Stock") of USA Wireless Cable, Inc. ("USA") in a
transaction (the "USA Wireless Acquisition") accounted for under the purchase
method. USA provided wireless cable service in certain Midwest markets,
including but not limited to the Effingham and Wellsville, Kansas; Radcliffe,
Iowa; Scottsbluff, Nebraska; Kalispell, Montana; and Rochester, Minnesota
markets (the "USA Markets"). At the effective time of the USA Wireless
Acquisition, the outstanding shares of USA Common Stock were converted into
rights to receive an aggregate $17,635,000 of which approximately $6,305,000 was
paid in the form of CS Wireless common stock and approximately $11,330,000 of
indebtedness and payables assumed by the Company. In connection with this
acquisition, the Company extended two notes receivable to affiliates of USA. A
note receivable for $1,260,000 with an interest rate of 12% was settled in
February 1997, and a note receivable for $250,000 with an interest rate of 12%
was July 1, 1998. However, the affiliates of USA defaulted on this note and the
Company wrote-off the balance as uncollectible during the year ended December
31, 1998.
On July 17, 1996, the Company acquired from Heartland (i) leases and
licenses for wireless cable channel rights in Adairsville, Powers Crossroads and
Rutledge, Georgia (the "Atlanta (suburbs) markets") and (ii) leases for four
tower sites. The purchase price was $7.2 million in cash.
F-14
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The acquisitions discussed above were accounted for as purchases.
Accordingly, the accompanying consolidated financial statements include the
results of operations of the acquired entities from the dates of acquisition. A
summary of the net assets acquired follows:
<TABLE>
<S> <C>
Working capital deficit........................................... $ (1,155)
Property and equipment............................................ 1,354
Assets held for sale.............................................. 11,800
Intangible assets................................................. 13,959
Deferred tax liability............................................ (2,333)
Notes payable assumed............................................. (10,120)
---------
Total purchase price.......................................... $ 13,505
---------
---------
</TABLE>
(C) DISPOSITION AND EXCHANGE
On December 2, 1998, the Company, CAI and Heartland entered into a Master
Agreement providing for, among other things, the termination of Heartland's
rights in, and claims against, the Company. As part of the Master Agreement, in
December 1998, CAI purchased from Heartland Heartland's ownership in the
Company, or 3,836,035 shares of CS Wireless common stock, for $1,534,000. The
Company subsequently purchased those shares from for the same price. At December
31, 1998, these shares are recorded as treasury stock. Additionally, the Company
agreed to lease certain channel rights and sell the net operating assets of its
Radcliffe, Iowa market to Heartland primarily in exchange for the forgiveness by
Heartland of the outstanding balance owed by the Company of $2,335,000 under the
Heartland Long-Term Note (see note 7) and additional cash payments by the
Company to Heartland of $466,000. In December 1998, under the terms of the
Master Agreement, the Company made a deposit of $366,000 to Heartland in
anticipation of the exchange. This deposit, along with the carrying value of the
net assets of the Radcliffe, Iowa market, are classified as assets held for sale
at December 31, 1998 in the accompanying consolidated balance sheet.
On September 3, 1997, pursuant to an agreement dated as of November 6, 1996,
the Company consummated an exchange with Peoples Choice TV Corp. of wireless
cable channel rights and related assets in Salt Lake City, Utah for wireless
cable channel rights and related assets in Kansas City, Missouri. This
transaction was accounted for as a non-monetary exchange and, accordingly, the
recorded amounts of the assets relinquished were allocated to the assets
acquired. In connection with this transaction, the Company exchanged the rights
to the BTA license in Salt Lake City with related indebtedness of approximately
$330,000 for the rights to a BTA license in Kansas City with related
indebtedness of approximately $216,000.
On May 22, 1997 the Company sold to BellSouth Corporation, pursuant to the
July 25, 1996 purchase agreement, (i) certain leases and licenses for wireless
cable channel rights in Adairsville, Power Crossroads and Rutledge, Georgia
(Atlanta Suburbs markets) and leases for four tower sites; (ii) the BTA license
relating to Atlanta, Georgia and (iii) certain other assets and reimbursable
expenses for approximately $16.4 million, resulting in a gain of approximately
$0.7 million.
F-15
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) INVESTMENTS IN AND LOANS TO AFFILIATES
TELQUEST SATELLITE SERVICES LLC
On August 4, 1997 the Company acquired a 25% ownership interest in TelQuest
Satellite Services LLC ("TelQuest"), for an initial contribution of $2.5 million
in cash (payable in quarterly installments beginning August 1997) and, $2.5
million of equipment leased to TelQuest under a bargain lease. The Company made
quarterly payments of approximately $1,394,000 during 1997. As part of the
contributions, the Company converted a note receivable from TelQuest entered
into during March 1997 in the amount of $200,000 principal into an investment in
TelQuest of $211,000. During 1998, the Company made payments of $895,000 which
fulfilled the cash contribution requirement of $2,500,000. TelQuest was formed
to provide digital video programming signals through its headend in the sky
satellite service. The Company entered into a ten-year Affiliation Agreement
with TelQuest through which the Company received TelQuest's headend in the sky
service as well as other services offered by TelQuest. TelQuest Satellite
Services LLC's other members are TelQuest Communications, Inc. and CAI. Both CAI
and TelQuest Communications, Inc. are affiliated entities. CAI acquired a 25%
ownership in TelQuest for the same consideration given by CS Wireless.
In July 1998, the Company purchased the leasehold rights of TelQuest in
certain headend equipment owned by CAI for $1,900,000 as part of a contingency
plan to ensure uninterrupted programming service. In October 1998, the Company
commenced the relocation of certain of the leased headend equipment from the
TelQuest facilities as TelQuest ceased its headend in the sky service.
Accordingly, the Company has classified the carrying value of the previously
leased equipment of $2,125,000 and the equipment acquired through the $1,900,000
lease payment as property and equipment at December 31, 1998. Such amounts will
be depreciated over the estimated remaining useful lives of the related
equipment.
During the years ended December 31, 1998 and 1997, the Company recorded
equity in losses of $1,719,000 and $1,159,000, respectively, related to its
investment in TelQuest. In 1998 and 1997, these losses were comprised of: (i)
the Company's equity in losses of TelQuest of $146,000 and $1,107,000; (ii)
amortization of the cost in excess of the Company's basis in the underlying
assets of TelQuest of $1,198,000 and $52,000, respectively; and (iii)
amortization of $375,000 and $0, respectively, related to the Company's
$2,500,000 investment in the leasehold rights in certain headend equipment. The
carrying value of the Company's investment in and advances to TelQuest was $0
and $3,842,000 at December 31, 1998 and 1997, respectively.
MEXICO INVESTMENTS
On September 29, 1997, the Company acquired 39% of the voting common stock
of Television Interactiva del Norte, S.A. de C.V. ("Telinor") from Heartland for
cash proceeds of $915,000 and assumption of a cash call obligation in the amount
of $145,000. The Company also purchased from Heartland two unsecured promissory
notes payable by Telinor for $2.56 million, including accrued interest. The two
notes were immediately restructured into one unsecured note accruing interest at
12% and maturing on September 21, 2002. Additionally, the Company consummated
another transaction with the principal stockholders of Telinor whereby the
Company purchased 49% of the voting stock of Television Inalambrica, S.A. de
C.V. ("Television") for cash in the amount of $1.0 million and committed to (i)
loan Television up to the sum of $5.0 million in cash or (ii) finance an
equivalent amount in sales of the
F-16
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) INVESTMENTS IN AND LOANS TO AFFILIATES (CONTINUED)
Company's equipment to Television. The funds committed were deposited into
escrow pending disbursement or reduction of the required escrow amount through
equipment sales to Television. As of December 31, 1997, approximately $5.0
million was held in escrow pursuant to this agreement. During 1998, the escrowed
funds were released to the Company.
Telinor and Television were formed to develop wireless cable television
systems providing subscription television services in Mexico. During the years
ended December 31, 1998 and 1997, the Company incurred reimbursable overhead
allocation costs of approximately $161,000 and $405,000 on behalf of Telinor and
Television. Further, the Company funded $145,000 under a cash call obligation
and advanced additional funds under the note receivable in the amount of
$950,000.
During the years ended December 31, 1998 and 1997, the Company recorded
equity in losses of $833,000 and $190,000, respectively, related to its
investments in Telinor and Television (collectively, "Telinor Investments"). In
1998 and 1997, these losses were comprised of $256,000 and $173,000,
respectively, of the Company's share in losses of Telinor Investments, and
$577,000 and $17,000, respectively, in amortization of the cost in excess of the
Company's basis in the underlying assets of Telinor Investments. Additionally,
the Company recorded an allowance of $1,200,000 related to the note receivable
from Telinor due to uncertainties regarding its ultimate collectibility.
The carrying value of the Company's investments in and advances to Telinor
Investments was $3,884,000 and $4,661,000 at December 31, 1998 and 1997,
respectively, including the Company's note receivable at December 31, 1998 and
1997 of $2,311,000 and $2,560,000, respectively.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
ESTIMATED
1998 1997 USEFUL LIFE
--------- --------- ------------
<S> <C> <C> <C>
Subscriber premises equipment and
installation costs....................... $ 39,003 52,656 1 - 7 years
Transmission equipment and system
construction costs....................... 21,928 16,035 5 - 10 years
Office furniture and equipment............. 7,434 4,106 5 years
Leasehold improvements..................... 1,156 1,016 5 years
--------- ---------
69,521 73,813
Less accumulated depreciation and
amortization............................. (25,876) (23,294)
--------- ---------
$ 43,645 50,519
--------- ---------
--------- ---------
</TABLE>
F-17
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accounts payable............................................................ $ 684 4,680
Accrued programming and licenses............................................ 1,158 1,319
Accrued personnel costs..................................................... 806 1,247
Accrued taxes............................................................... 943 528
Other....................................................................... 1,899 878
--------- ---------
$ 5,490 8,652
--------- ---------
--------- ---------
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Senior Notes............................................. $ 314,385 281,266
Heartland Long-Term Note................................. 2,335 2,069
BTA auction payable to affiliates........................ 3,859 4,396
Capital leases and other................................. 199 568
--------- ---------
Total long-term debt................................. 320,778 288,299
Less current portion of BTA auction payable.............. 354 1,122
Less current portion of long term debt................... 199 217
--------- ---------
$ 320,225 286,960
--------- ---------
--------- ---------
</TABLE>
SENIOR NOTES
On February 23, 1996, the Company consummated a private placement of 100,000
units (the "Unit Offering" or "Units") consisting of $400 million aggregate
principal amount of 11 3/8% Senior Discount Notes due 2006 ("Senior Notes") and
110,000 shares of common stock of the Company. The Senior Notes will mature on
March 1, 2006. The issue price of the Senior Notes represents a yield to
maturity of 11 3/8% per annum computed on a semi-annual bond equivalent basis.
Cash interest on the Senior Notes will not be payable prior to March 1, 2001.
Commencing September 1, 2001, cash interest on the Senior Notes will be payable
on March 1 and September 1 of each year at a rate of 11 3/8% per annum.
Including amounts attributable to the common stock, the issuance of the Units
resulted in net proceeds to the Company of approximately $219.7 million after
underwriting discounts and other debt issuance costs aggregating approximately
$9.8 million. For financial reporting purposes, the shares of common stock were
valued at $800,000.
The Senior Notes were issued pursuant to an Indenture which contains certain
restrictive covenants and limitations. Among other things, the Indenture limits
the incurrence of additional indebtedness, limits the making of restricted
payments (as defined) including the declaration and/or payment of dividends,
F-18
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) LONG-TERM DEBT (CONTINUED)
places limitations on dividends and other payments by the Company's
subsidiaries, prohibits the Company and its subsidiaries from engaging in any
business other than the transmission of video, voice and data and related
businesses and services, and places limitations on liens, certain asset
dispositions and merger/sale of assets activity.
HEARTLAND LONG-TERM NOTE
In connection with the Contributions on February 23, 1996, Heartland
received the Heartland Long-Term Note. The Heartland Long-Term Note has a final
maturity date that is 10 years and one day after the closing of the
Contributions. The interest rate on the Heartland Long-Term Note increases from
10% to 15% if the Heartland Long-Term Note is not repaid within one year of
issuance, with interest accruing and added to the balance annually. No cash
interest will be paid on the Heartland Long-Term Note until after the Senior
Notes (see above) have been paid in full. During 1997, the Company made a
principal payment of approximately $15.3 million with a portion of the proceeds
from the disposition of assets and wireless channel rights in Atlanta (see note
3 (c)).
As part of the Master Agreement (note 3(c)), Heartland agreed to forgive,
during 1999, the outstanding balance of the Heartland Long-Term Note in exchange
for primarily cash and the wireless cable assets of the Story City, Iowa market.
The transactions are expected to be consummated in late May 1999. As agreed,
interest on the Heartland Long-Term Note does not accrue subsequent to November
30, 1998.
BTA AUCTION PAYABLE TO AFFILIATES
The FCC concluded auctions in 1997 for the award of initial commercial
wireless cable licenses for "Basic Trading Areas" or "BTAs" (the "BTA Auction").
Pursuant to an agreement among CAI, Heartland and the Company, CAI and Heartland
are obligated to convey to the Company, at their cost, and the Company has
agreed to purchase, any rights acquired in the BTA Auction relating to the
Company's markets, as well as certain other BTAs. CAI and Heartland were the
winning bidders in the amount of approximately $17.9 million with respect to
BTAs that will be conveyed to the Company. As of December 31, 1998, the
accompanying consolidated balance sheet reflects a BTA auction payable to
Heartland of approximately $3,859,000 representing the remaining unpaid balances
with respect to BTAs to be conveyed to the Company. At December 31, 1997, the
accompanying consolidated balance sheet reflects a BTA auction payable to CAI,
Heartland, and other affiliated entities of approximately $643,000, $3,543,000,
and $210,000, respectively. The BTA auction payable to Heartland bears interest
at 9.5% and is being paid over a 10-year period commencing in the fourth quarter
of 1996. The Company is required to make quarterly interest-only payments for
the first two years and quarterly payments of principal and interest over the
remaining eight years.
During 1997, the Company exchanged and returned to Heartland certain of its
rights to BTA licenses resulting in a decrease of $614,000 in license costs and
the corresponding BTA payable.
F-19
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999.............................................................. $ 553
2000.............................................................. 386
2001.............................................................. 424
2002.............................................................. 465
2003.............................................................. 511
Thereafter........................................................ 318,439
</TABLE>
(8) LEASES AND FCC LICENSES
The Company is dependent on leases with third parties for most of its
wireless cable channel rights. Under FCC rules, the base term of each lease
cannot exceed the term of the underlying FCC license. FCC licenses for wireless
cable channels generally must be renewed every ten years, and there is no
automatic renewal of such licenses. The use of such channels by the lessors is
subject to regulation by the FCC and, therefore, the Company's ability to
continue to enjoy the benefits of these leases is dependent upon the lessors'
continuing compliance with applicable regulations. The remaining initial terms
of most of the Company's channel leases range from 5 to 10 years, although
certain of the Company's channel leases have initial terms expiring in the next
several years. Most of the Company's leases provide that the lessor may
negotiate lease renewals with only the Company and, if a renewal agreement is
not reached within a specified time, grant the Company a right of first refusal
to match any competing offers. Although the Company does not believe that the
termination of or failure to renew a single channel lease would adversely affect
the Company, several of such terminations or failures in one or more markets
that the Company actively serves could have a material adverse effect on the
Company. Channel rights lease agreements generally require payments based on the
greater of specified minimums or amounts based upon various subscriber levels.
Additionally, FCC licenses also specify construction deadlines, which, if not
met, could result in the loss of the license. Requests for additional time to
construct may be filed and are subject to review pursuant to FCC rules.
Payments under the channel rights lease agreements generally begin upon the
completion of construction of the transmission equipment and facilities and
approval for operation pursuant to the rules and regulations of the FCC.
However, for certain leases, the Company is obligated to begin payments upon
grant of the channel rights. Channel rights lease expense was approximately
$1,911,000, $1,883,000 and $1,810,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
The Company also has certain operating leases for office space, equipment
and transmission tower space. Rent expense incurred in connection with other
operating leases was approximately $1,817,000, $1,656,000 and $1,405,000 for the
years ended December 31, 1998, 1997, and 1996 respectively.
F-20
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) LEASES AND FCC LICENSES (CONTINUED)
Future minimum lease payments due under channel rights leases and other
noncancellable operating leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CHANNEL OTHER
RIGHTS OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999..................................................................... $ 1,998 1,567
2000..................................................................... 2,289 1,436
2001..................................................................... 2,321 1,309
2002..................................................................... 2,321 1,252
2003..................................................................... 2,321 1,262
</TABLE>
(9) STOCKHOLDERS' EQUITY
(A) PREFERRED AND COMMON STOCK
At December 31, 1997, the Company had authorized 5,000,000 shares of
preferred stock which can be issued in series with varying preferences and
conversion features as determined by the Board of Directors of the Company, with
no shares issued. 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.
(B) TREASURY STOCK
As part of the Master Agreement (note 3(c)), the Company purchased 3,836,035
shares of its common stock from CAI for $1,534,000 on December 3, 1998.
(C) STOCK OPTIONS
In 1996, the Company established the CS Wireless Systems, Inc. Incentive
Stock Plan ("Stock Plan") which provides for the issuance of stock options to
officers and other key employees of the Company and its subsidiaries. The Stock
Plan makes available for issuance 1,500,000 shares of common stock. Options
issued under the Stock Plan have varying vesting periods as provided in separate
stock option agreements and generally carry an expiration date of ten years
subsequent to the date of issuance. Options issued are required to have an
exercise price of not less than fair market value of the Company's common stock
on the date of grant.
The Company applies APB Opinion No. 25 in accounting for its Stock Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company
F-21
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Net loss:
As reported............................................... $ (139,383) (52,565) (28,527)
Pro forma................................................. (139,217) (54,616) (29,404)
Basic and diluted loss per common share:
As reported............................................... $ (13.41) (4.94) (3.06)
Pro forma................................................. (13.39) (5.11) (3.21)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997 and 1996: dividend yield of 0%; risk-free
interest rate of 6.0% and an expected life of 5 years.
Following is a summary of activity in the employee option plan discussed
above for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........... 898,861 $ 6.88 655,161 $ 9.40 -- $ --
Granted.................................... -- -- 833,335 6.50 655,161 9.40
Exercised.................................. -- -- -- -- -- --
Canceled................................... (265,044) 6.55 (589,635) (9.14) -- --
----------- ----- ----------- ----------- ---------- -----
Options outstanding at end of year......... 633,817 $ 7.01 898,861 $ 6.88 655,161 $ 9.40
----------- ----- ----------- ----------- ---------- -----
----------- ----- ----------- ----------- ---------- -----
Options exercisable at year end............ 444,150 536,818 367,049
----------- ----------- ----------
----------- ----------- ----------
Weighted average fair value of options
granted during year...................... $ -- $ 6.50 $ 9.40
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------- -------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICE 1998 LIFE PRICE 1998 PRICE
- ----------- ------------ ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
6$.50...... 521,291 7.8 years $ 6.50 331,624 $ 6.50
----- ------------ ---------- ----- ------------ -----
----- ------------ ---------- ----- ------------ -----
9$.40...... 112,526 7.2 years $ 9.40 112,526 $ 9.40
----- ------------ ---------- ----- ------------ -----
----- ------------ ---------- ----- ------------ -----
</TABLE>
F-22
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(10) INCOME TAXES
As the Company has fully offset its deferred tax assets by a valuation
allowance at December 31, 1998, no income tax benefit has been recorded for the
year ended December 31, 1998. For the years ended December 31, 1997 and 1996,
income tax benefit of $5,429,000 and $14,631,000, respectively, were comprised
of deferred tax benefits.
Total income tax benefit for the years ended December 31, 1998 and 1997
differed from the amount computed by applying the U.S. federal statutory income
tax rate of 35% to loss before income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax benefit.............................. $ (48,784) (19,827) (15,105)
Amortization of goodwill and impairment charge............... 18,959 1,394 1,260
State income taxes........................................... (2,788) (1,133) (863)
Adjustment to prior year deferred taxes...................... 10,382 (2,019) --
Increase in valuation allowance.............................. 22,220 16,082 --
Other, net................................................... 11 74 77
---------- --------- ---------
$ -- (5,429) (14,631)
---------- --------- ---------
---------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 18,702 14,596
Noncash interest....................................................... 32,573 19,736
Investments in affiliates.............................................. 0 499
Property and equipment................................................. 3,988 1,443
Other.................................................................. 806 --
---------- ---------
Total gross deferred tax assets........................................ 56,069 36,274
Less valuation allowance............................................... (38,302) (16,082)
---------- ---------
17,767 20,192
---------- ---------
Deferred tax liabilities:
License and leased license investment.................................. 17,767 20,143
Other.................................................................. 0 49
---------- ---------
Total deferred tax liabilities......................................... 17,767 20,192
---------- ---------
Net deferred tax liability............................................. $ -- --
---------- ---------
---------- ---------
</TABLE>
F-23
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(10) INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are computed by applying the U.S.
federal income tax rate in effect to the gross amounts of temporary differences
and other tax attributes, such as net operating loss carryforwards. Deferred tax
assets and liabilities relating to state income taxes are not material.
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon these
considerations, the Company has recognized deferred tax assets to the extent
such assets can be realized through future reversals of existing taxable
temporary differences.
At December 31, 1998, the Company has net operating loss carryforwards
available of approximately $52,695,000 which begin to expire in 2010.
Approximately $7,520,000 of the net operating loss carryover is subject to an
annual limitation and the separate return limitation year rules.
(11) OTHER RELATED PARTY TRANSACTIONS
In 1997, the Company, CAI and Heartland (see note 3), and a third party
wireless cable provider formed Wireless Enterprises, LLC ("Wireless
Enterprises"). Wireless Enterprises is a programming cooperative that negotiates
programming and marketing services with suppliers of programming. During the
years ended December 31, 1998 and 1997, the Company paid $8,293,000 and
$5,578,000, respectively, to Wireless Enterprises for programming and other
administrative services.
During 1998 and 1997, the Company purchased equipment from CAI for $300,000
and $3,400,000.
During 1998, the Company had an arrangement with CAI whereby CAI personnel
provide engineering and other technical consulting services in connection with
the digital build-out of the Dallas, Texas market. Under this arrangement, CAI
receives $10,000 per month plus reimbursement for all reasonable expenses
incurred in the performance of such services. The Company has renegotiated the
terms of this arrangement and entered into an Engineering and Spectrum
Management Agreement with CAI and a wholly-owned subsidiary whereby effective
March 1, 1999, CAI assumed supervision and delivery of all engineering and
technical management services. The Company will pay CAI a fee equal to 40% of
the wholly-owned subsidiary's fully allocated costs plus an administrative fee
of 20% of such amount. Additionally, the Company paid CAI approximately $139,000
and $472,000 for services rendered, rent, licensing and other fees during 1998
and 1997, respectively.
In September 1997, the Company entered into an two-year Installation
Contractor Agreement with ACS Telecommunications Systems, Inc. ("ACS") whereby
for a fixed monthly fee per market plus additional variable costs, ACS agreed to
provide installation contractor services in the Dallas, Texas area and other
markets as mutually agreed upon. During the years ended December 31, 1998 and
1997, the Company paid $4,400,000 and $988,000, respectively, to ACS under this
agreement. The Company amended this agreement to shorten the term and decrease
the fixed monthly payment. In connection with this amendment, the Company has
agreed to make payments totaling $510,000 to ACS pursuant to the
F-24
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(11) OTHER RELATED PARTY TRANSACTIONS (CONTINUED)
original agreement. A former director of the Company, who resigned in December
1998, is the principal stockholder of ACS.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Senior Notes at December 31, 1998 and 1997 was
approximately $68.0 million and $96.0 million, respectively (carrying amounts of
$314.4 million and $281.2 million, respectively) based on market quotes obtained
from dealers. The carrying amounts of the Heartland Long-Term Note, the
Acquisition Note and the BTA auction payables approximate fair value as these
notes bear interest at current market rates.
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturity of these
instruments.
(13) COMMITMENTS AND CONTINGENCIES
The Company has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire through 2000.
The agreements generally require monthly payments based upon the number of
subscribers to the Company's systems, subject to certain minimums.
The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a material adverse
effect on the Company's consolidated financial position, operating results or
liquidity.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CS Wireless Systems, Inc.:
Under the date of April 12, 1999, we reported on the consolidated balance
sheets of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1998 and
1997 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998, which are included in the Company's annual report on Form 10-K. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in the index at item 14(a)2. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audit.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
April 12, 1999
F-26
<PAGE>
CS WIRELESS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT
DESCRIPTION PERIOD EXPENSES OTHER WRITEOFFS END OF PERIOD
- ------------------------------------------------------ ------------- --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts..................... $ 138 971 -- (691) $ 418
----- --- --- ----------- -----
----- --- --- ----------- -----
Year ended December 31, 1997:
Allowance for doubtful accounts..................... $ 418 847 -- (1,008) $ 257
----- --- --- ----------- -----
----- --- --- ----------- -----
Year ended December 31, 1998:
Allowance for doubtful accounts..................... $ 257 934 -- (853) $ 338
----- --- --- ----------- -----
----- --- --- ----------- -----
</TABLE>
F-27
<PAGE>
EXHIBIT 10.16
MASTER AGREEMENT
Master Agreement dated as of the 2nd day of December, 1998 (this
"Agreement") by and among Heartland Wireless Communications, Inc., a Delaware
corporation having its principal place of business located at 200 Chisholm
Place, Suite 200, Plano, Texas 75075 ("Heartland"), CAI Wireless Systems,
Inc., a Connecticut corporation having its principal place of business
located at 18 Corporate Woods Boulevard, Third Floor, Albany, New York 12211
("CAI") and CS Wireless Systems, Inc., a Delaware corporation having its
principal place of business located at 1101 Summit Avenue, Plano, Texas 75074
("CS Wireless").
R E C I T A L S
WHEREAS, the parties hereto are parties to that certain Participation
Agreement (as defined herein), pursuant to which each of Heartland and CAI
contributed wireless cable assets or the stock of entities owning wireless
cable assets to CS Wireless in exchange for CS Common Stock (as defined
herein); and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Participation Agreement, Heartland received 3,578,834
shares of CS Wireless Common Stock, which amount was subsequently increased
to 3,836,035 shares of CS Wireless Common Stock as a result of the issuance
by CS Wireless to Heartland of an additional 257,201 shares of CS Wireless
Common Stock in satisfaction of that certain true-up obligation owed to
Heartland under Section 9.6(a) of the Participation Agreement; and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Participation Agreement, CS Wireless issued to Heartland
the Heartland Long-Term Note (as defined herein) in the principal amount of
$15,000,000, which promissory note matures on February 21, 2006; and
WHEREAS, there is $2,335,276.00 outstanding on the Heartland Long-Term
Note as of November 30, 1998; and
WHEREAS, simultaneously with the consummation of the transactions
contemplated by the Participation Agreement, the parties hereto entered into
that certain Stockholders' Agreement (as defined herein), which agreement
requires, among other things, that Heartland and CAI vote their shares of CS
Wireless Common Stock in favor of a board of directors comprised of four
members designated by CAI and three members designated by Heartland, and that
significant decisions affecting CS Wireless requires the approval of at least
70% of the directors of CS Wireless so that neither CAI nor Heartland can
unilaterally make significant decisions affecting CS Wireless; and
WHEREAS, the parties have disagreed about various matters regarding the
operations, valuation, governance and future of CS Wireless; and
<PAGE>
WHEREAS, with due regard to their respective fiduciary duties to various
constituencies including the respective stockholders and creditors of CS
Wireless, CAI and Heartland, the parties wish to terminate Heartland's
ongoing participation in the governance of CS Wireless on a basis that after
prolonged negotiation, investigation and consultation with advisors, the
parties believe to be fair and in the best interests of the parties and their
respective constituents while ensuring that the future operations of
Heartland and CS Wireless and their respective successors can be separated
without unnecessary disruption to either party; and
WHEREAS, CAI desires to purchase from Heartland and Heartland desires to
sell to CAI all of the 3,836,035 shares of CS Wireless Common Stock owned by
Heartland, on and subject to the terms and conditions set forth herein; and
WHEREAS, CS Wireless desires to assign and transfer to Heartland certain
MDS-1 channels, all assets relating to the Radcliffe, Iowa market, WCS
Spectrum in 19 markets and certain other equipment, and Heartland desires to
assign and transfer to CS Wireless any and all ownership and leasehold
interests in MMDS and MDS channels in the Portsmouth, New Hampshire market,
including, but not limited to, the MMDS E Group and MDS H1 - 3 channels,
together with any and all assets used by Heartland in the Portsmouth market;
and
WHEREAS, the parties hereto desire to cooperate with each other with
respect to proposed two-way use of their MMDS, MDS and ITFS spectrum in
contiguous and adjacent markets, including, but not limited to, reaching an
agreement with respect to a comprehensive two-way frequency utilization plan,
cooperation with respect to the implementation of such, timely provision of
requisite interference consent agreements and such other actions as may be
consistent with supporting each other's necessary or desirable filings at the
FCC (as defined herein) in connection with two-way applications; and
WHEREAS, the parties hereto desire to settle certain claims they have
against each other; and
WHEREAS, the parties shall continue to own and lease spectrum rights in
contiguous and adjacent markets, the value of which rights would be
materially adversely affected absent agreement with respect to interference
and related uses arising out of the contemplated two-way applications of such
spectrum.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, each of the parties hereto agree as follows.
Section 1. DEFINED TERMS. As used in this Agreement, the following
terms shall have the respective meanings set forth below:
"Bankruptcy Code" means the United States Bankruptcy Code, as heretofore
and hereafter amended, and as codified as 11 U.S.C. Sections 101 ET SEQ.
2
<PAGE>
"BTA" means Basic Trading Area, as such term is used by the FCC to
denote geographic areas in connection with the public auction of available
spectrum in the Multipoint and/or Multichannel Distribution Service.
"BTA Lease and Option Agreement" means that certain BTA Lease and Option
Agreement dated October 31, 1997 by and between CS Wireless and Heartland.
"CPE" means Customer Premises Equipment listed on SCHEDULE 3(a)(i)
attached hereto.
"Communications Act" means the Communications Act of 1934, as amended,
47 U.S.C. Sections 151 ET SEQ.
"CS Leases" means the spectrum leases listed on SCHEDULE 4(a)(i)
attached hereto.
"CS Senior Notes" means $400,000,000 aggregate principal amount of
Series B 11-3/8% Senior Notes due 2006 of CS Wireless Systems, Inc.
"CS Wireless Common Stock" means the common stock, par value $.001 per
share, of CS Wireless.
"CS Wireless FCC Assets" means the FCC licenses owned by CS Wireless and
listed on SCHEDULE 3(a)(ii) attached hereto.
"Encumbrance" shall have the meaning given to such term in Section
8(a)(i).
"FCC Approvals" shall have the meaning given to such term in Section 3(b).
"Governmental Authority" means (a) the government of (i) the United
States of America or any State or other political subdivision thereof, or
(ii) any jurisdiction in which any party hereto or any of such party's
subsidiaries conducts all or any part of its business, or which has
jurisdiction over any properties of any party hereto, as the case may be, or
(b) any entity exercising executive, legislative, judicial, regulatory or
administrative functions of, or pertaining to, any such government.
"Heartland FCC Assets" means the FCC licenses owned by Heartland and
listed on SCHEDULE 3(b) attached hereto.
"Heartland Leases" means the spectrum leases listed on SCHEDULE 4(b)(i)
attached hereto.
"Heartland Long-Term Note" means that certain Subordinated Promissory
Note dated February 23, 1996 and issued by CS Wireless to Heartland in the
principal amount of $15,000,000.
"Hosea" means Frank H. Hosea.
3
<PAGE>
"Participation Agreement" means the Participation Agreement dated as of
December 12, 1995 by and among CAI, Heartland and CS Wireless, as amended by
Amendment No.1 to the Participation Agreement dated as of February 23, 1996
among the parties thereto.
"Portsmouth Non-FCC Assets" means all assets owned by Heartland and used
in connection with the operation of the channels pursuant to the Heartland FCC
Assets and Heartland Leases, including, without limitation, the assets listed on
SCHEDULE 4(b)(ii) attached hereto.
"Radcliffe Non-FCC Assets" means all assets owned by CS Wireless and used
in connection with the Radcliffe, IA wireless cable system, including, without
limitation, the assets listed on SCHEDULE 4(a)(ii) attached hereto.
"Securities Act" means the Securities Act of 1933, as amended.
"Services Agreement" means that certain Administrative Services Agreement
dated as of February 23, 1996 by and between Heartland and CS Wireless.
"Stage I Closing" shall have the meaning given to such term in Section
5(a).
"Stage I Closing Date" shall have the meaning given to such term in Section
5(a).
"Stage I Transactions" shall have the meaning given to such term in Section
5(a).
"Stage II Closing" shall have the meaning given to such term in Section
5(b).
"Stage II Closing Date" shall have the meaning given to such term in
Section 5(b).
"Stage II Transactions" shall have the meaning given to such term in
Section 5(b).
"Stockholders' Agreement" means that certain Stockholders' Agreement dated
as of February 23, 1996 by and among CS Wireless, CAI and Heartland.
Section 2. CS WIRELESS COMMON STOCK.
(a) At the Stage I Closing (as defined below), Heartland shall sell,
assign, transfer, convey and deliver to CAI, and CAI shall purchase, accept and
assume from Heartland, all of Heartland's right, title and interest in and to
3,836,035 shares of CS Wireless Common Stock owned by Heartland, which shares
represent the entire equity interest in CS Wireless owned by Heartland as of the
date hereof.
(b) The parties hereto agree that upon the consummation of the Stage I
Transactions (as defined below), Heartland shall cease to have any equity
interest in CS Wireless and the Stockholders' Agreement shall, without further
action by the parties, permanently and
4
<PAGE>
irrevocably lapse and terminate with no further force or effect, and each of
the parties thereto shall be relieved of their obligations thereunder, with
the same force and effect and as if the parties had never entered into such
agreement. Upon such Stage I Closing, the resignation of each of the
Heartland Directors and the Heartland Independent Director (as such terms are
defined in the Stockholders' Agreement) from the Board of Directors of CS
Wireless, in the form attached hereto as EXHIBIT A, shall become immediately
effective without further action by the parties; PROVIDED, HOWEVER, that any
indemnification obligations of CS Wireless to each of the Heartland
Directors, the Heartland Independent Directors and Hosea under CS Wireless'
certificate of incorporation, by-laws, contracts, insurance policies (to the
extent applicable) or otherwise existing as of the date hereof shall survive
such resignation, and CS Wireless expressly agrees to assume any such
indemnification obligation in any bankruptcy proceeding filed by or against
CS Wireless.
Section 3. TRANSFERS OF ASSETS AND LEASES OF SPECTRUM RIGHTS AT THE
STAGE I CLOSING.
At the Stage I Closing:
(a) CS Wireless shall, in partial satisfaction of the Heartland Long-Term
Note, which shall cease to accrue interest from and after the Stage I Closing
Date:
(i) sell, assign, transfer, convey and deliver to Heartland, and
Heartland shall purchase, accept and assume from CS Wireless, all of CS
Wireless' right, title and interest in and to the CPE listed on SCHEDULE
3(a)(i);
(ii) lease to Heartland, and Heartland shall lease from CS Wireless
all of CS Wireless' right, title and interest in and to the CS Wireless FCC
Assets. The CS Wireless FCC Assets shall be leased pursuant to the Lease
Agreement set forth as EXHIBIT B attached hereto. Within ten (10) business
days of the signing of this Agreement, CS Wireless and Heartland together
shall file with the FCC the necessary applications for the consent of the
assignment of the CS Wireless FCC Assets; and
(iii) pay Heartland Three Hundred Sixty-six Thousand and 00/100
Dollars ($366,000.00), payable in immediately available funds by wire
transfer in accordance with written wire transfer instructions previously
delivered by Heartland to CS Wireless;
(b) Heartland shall lease to CS Wireless, and CS Wireless shall lease
from Heartland all of Heartland's right, title and interest in and to the
Heartland FCC Assets. The Heartland FCC Assets shall be leased pursuant to the
Lease Agreement set forth as EXHIBIT C attached hereto. Within ten (10)
business days of the signing of this Agreement, CS Wireless and Heartland
together shall file with the FCC the necessary applications for the consent of
the assignment of the Heartland FCC Assets (such consent, together with the
consent of the FCC contemplated by Section 3(a)(ii) above, the "FCC Approvals");
5
<PAGE>
(c) CAI shall pay Heartland One Million Five Hundred Thirty-four
Thousand and 00/100 Dollars ($1,534,000.00), payable in immediately available
funds by wire transfer in accordance with written wire transfer instructions
previously delivered by Heartland to CAI; and
(d) Heartland and CS Wireless shall execute and deliver an amendment
to the BTA Lease and Option Agreement in the form attached hereto as Exhibit
D, which amendment shall correct certain ground elevation parameters of
Heartland's Sherman, Texas market to reflect a previously proposed or
licensed facility and correct certain operating parameter of CS Wireless'
Fort Worth, Texas market.
The parties acknowledge that it is impracticable for Heartland to inspect,
test and select the CPE before the Stage I Closing. Accordingly, CS Wireless
shall make the CPE available for inspection by Heartland representatives
during normal business hours and Heartland shall inspect, test and select the
CPE on or before the Stage II Closing. CS Wireless shall make available for
inspection at CS Wireless' offices or warehouse facilities the CPE listed on
SCHEDULE 3(A)(I) at the following locations:
<TABLE>
<S> <C>
(Model 8607 BN55) Scientific Atlanta San Antonio
converter boxes (with remote)
(Model 5508 W or WP) Tocom converter boxes Dallas
(with remote)
(Cal Amp 2040\011 or PacMono 3191i Dallas
or 3192i) Dipoles, PCS filtered and tested
</TABLE>
In the event that CS Wireless does not make available for delivery to
Heartland on or before the Stage II Closing the CPE listed on SCHEDULE
3(A)(I), CS Wireless shall immediately pay to Heartland cash in an amount
equal to the difference between $354,000 and the value (as established
pursuant to SCHEDULE 3(A)(I)) of the CPE made available for delivery at the
Stage II Closing.
For a period of One Hundred Eighty (180) days following the earlier of the
(i) Stage II Closing or (ii) the date on which Heartland accepts a unit of
CPE made available by CS Wireless, Heartland shall have the right to return
such unit of CPE which is not in good working order for the purpose for which
it was intended. Upon timely receipt of any returned unit, CS Wireless shall
immediately (i) pay to Heartland cash in an amount equal to the value of such
item as established in SCHEDULE 3(A)(I) or (ii) repair or replace such unit.
If CS Wireless elects to repair or replace such unit, Heartland shall have a
period of Forty-five (45) days to determine whether such repaired or
replacement unit is in good working order for the purpose for which it was
intended. Except as provided herein, CS Wireless hereby disclaims all
warranties, express or implied, including without limitation any warranties
under the UCC or otherwise implied by law. CS Wireless shall use all
reasonable commercial efforts to assist Heartland in enforcing the terms of
6
<PAGE>
any manufacturer's warranty applicable to any unit of CPE delivered to
Heartland pursuant to the terms hereof.
Section 4. CANCELLATION OF HEARTLAND LONG-TERM NOTE AND RELATED
TRANSACTIONS AT THE STAGE II CLOSING.
At the Stage II Closing:
(a) CS Wireless shall sell, assign, transfer, convey and deliver to
Heartland, and Heartland shall purchase, accept and assume from CS Wireless, all
of CS Wireless' right, title and interest in and to the CS Wireless FCC Assets,
the lessee's interest under the CS Leases and the Radcliffe Non-FCC Assets;
(b) Heartland shall sell, assign, transfer, convey and deliver to CS
Wireless, and CS Wireless shall purchase, accept and assume from Heartland, all
of Heartland's right, title and interest in and to the Heartland FCC Assets, the
lessee's interest under the Heartland Leases and the Portsmouth Non-FCC Assets;
(c) CS Wireless shall pay Heartland One Hundred Thousand and 00/100
Dollars ($100,000.00), payable by wire transfer in immediately available funds
in accordance with written wire instructions previously delivered by Heartland
to CS Wireless; and
(d) Heartland shall cancel the Heartland Long-Term Note and deliver such
cancelled promissory note to CS Wireless.
CS Wireless acknowledges and agrees that Heartland shall not assume any
liabilities, obligations or commitments of CS Wireless or any affiliates thereof
relating to or arising out of the operation of the CS Wireless FCC Assets, the
CS Leases or Radcliffe Non-FCC Assets prior to the Stage II Closing Date
including, without limitation, any liabilities associated with employees arising
prior to the Stage II Closing Date who are hired by Heartland from and after the
Stage II Closing Date.
Heartland acknowledges and agrees that CS Wireless shall not assume any
liabilities, obligations or commitments of Heartland or any affiliate thereof
relating to or arising out of the operation of the Heartland FCC Assets,
Heartland Leases or Portsmouth Non-FCC Assets prior to the Stage II Closing
Date.
Section 5. STAGE I AND STAGE II CLOSING DATES.
(a) The sale and transfer of the CS Wireless Common Stock by Heartland to
CAI, and the sale and transfer of the CPE, the cash payments by each of CS
Wireless and CAI to Heartland contemplated under Section 3, the lease from CS
Wireless to Heartland of the CS Wireless FCC Assets and the lease from Heartland
to CS Wireless of the Heartland FCC Assets (collectively, the "Stage I
Transactions") shall occur at the offices of Heartland, 200 Chisholm Place,
Suite 200, Plano, Texas 75075, at 11:30 a.m., at a closing (the "Stage I
7
<PAGE>
Closing") on December 2, 1998, or at such other time as the parties hereto may
agree (the "Stage I Closing Date").
(b) The sale and transfer of the CS Wireless FCC Assets, the CS Leases,
the Radcliffe Non-FCC Assets, the Heartland FCC Assets, the Heartland Leases and
the Portsmouth Non-FCC Assets, the cash payment by CS Wireless to Heartland
contemplated under Section 4 and the cancellation and delivery of the Heartland
Long-Term Note (collectively, the "Stage II Transactions") shall occur at the
offices of Heartland, 200 Chisholm Place, Suite 200, Plano, Texas 75075, at
11:30 a.m., at a closing (the "Stage II Closing") on January 30, 1999 or, if
later, 3 business days after receipt of the final FCC Approvals, or at such
other time as the parties hereto may agree (the "Stage II Closing Date").
Section 6. FCC COOPERATION AND RELATED SPECTRUM MATTERS. As a material
inducement to each of the parties to enter into this Agreement and as additional
consideration for the transactions contemplated by Sections 2, 3 and 4 above,
the parties hereto agree as follows:
(a) The parties hereto will cooperate with each other to the maximum
extent possible in agreeing to enter into interference agreements requested by
the other party that are necessary to facilitate the FCC's grant of applications
filed or sponsored by the other party, as more fully described in Article V of
the BTA Lease and Option Agreement, dated October 31, 1997 by and between
Heartland and CS Wireless and their affiliates (hereinafter the "BTA Lease and
Option Agreement"), which agreement is attached hereto as EXHIBIT D and
incorporated herein by this reference. Heartland and CS Wireless hereby
expressly agree to abide by the BTA Lease and Option Agreement, and that the BTA
Lease and Option Agreement, together with this Agreement, supersedes any other
agreements to the contrary; provided, however, that neither Heartland nor CS
Wireless shall be required to breach any pre-existing agreements with third
parties as a result of this Agreement, or pay monetary or other consideration
not otherwise due.
(b)(i) With respect to markets in which Heartland and CS Wireless
have contiguous or adjacent interests, including, without limitation,
Dallas and Fort Worth, Texas, Heartland and CS Wireless agree to give high
priority to resolving issues surrounding CS Wireless' developmental
application for two-way authority in Dallas/Fort Worth, Texas and to
cooperate in an expeditious manner so as to permit the other party to file
two-way transmission applications in such markets during the first FCC
filing window (with priority given to CS Wireless' Dallas/Fort Worth
market) to (A) agree on a comprehensive two-way frequency utilization plan,
(B) implement such plan and (C) provide the other party with requisite
interference consent agreements in support of such party's two-way
applications, as long as such applications meet each party's mutually
agreed upon technical parameters, consistent with FCC rules.
(ii) Notwithstanding anything to the contrary, CS Wireless and
Heartland agree that the preferred use of the MDS-1 and MDS-2 channels, as
well as the WCS Spectrum, shall be for upstream transmissions, and that
both parties will take all
8
<PAGE>
reasonable and appropriate steps to accommodate the other party's
applications for and the use of such spectrum so long as such
applications meet the mutually agreed upon technical parameters,
consistent with FCC rules.
(c) Notwithstanding anything in the FCC's rules to the contrary, for
purposes of this Agreement, the interference protection criteria applicable to
the WCS Spectrum shall be governed by the FCC rules in 47 C.F.R. Part 21, as
such rules are amended from time to time, applicable to MMDS spectrum licensed
pursuant to BTA authorizations. For example, the maximum power flux density
application to the WCS Spectrum shall be equal to or less than -73 dbw/m2 at the
BTA or partitioned service area boundary(ies), or as otherwise provided in any
successor rule or regulation of the FCC for MMDS spectrum licensed pursuant to
BTA authorizations.
(d) Heartland hereby acknowledges its obligation to cooperate with CS
Wireless in resolving a dispute with the licensee of the G group channels in
Grand Rapids, Michigan, Call Sign WLS-950, including, but not limited to,
assigning the lease to CS Wireless on an expeditious basis and permitting CS
Wireless to negotiate and execute an excess capacity lease agreement directly
with the licensee. Notwithstanding anything to the contrary, nothing in this
Section 6(d) shall require Heartland to pay any amount of consideration to the
licensor of such channels or to CS Wireless, or to expend any other amounts
related to such channels, including, without limitation, construction, tower
lease, engineering, legal or other fees.
Section 7. CONDITIONS TO ALL OF THE PARTIES' OBLIGATIONS.
(a) The respective obligations of Heartland, CAI and CS Wireless to
consummate the Stage I Transactions, as appropriate, are subject to the
fulfillment prior to or on the Stage I Closing Date of the following conditions
(each of which may be waived in whole or in part by the party being benefitted
thereby in its sole discretion):
(i) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Heartland, CAI and CS Wireless contained in this Agreement
shall be complete and correct in all material respects when made and at the
Stage I Closing Date.
(ii) COMPLIANCE. Each of Heartland, CAI and CS Wireless shall have
performed and complied in all material respects with all agreements and
conditions contained in this Agreement required to be performed or complied
with by each of them prior to or on the Stage I Closing Date.
(iii) COMPLIANCE CERTIFICATES. Each of Heartland, CAI and CS
Wireless shall have delivered to the other an Officer's Certificate dated
the Stage I Closing Date, certifying (A) that the conditions specified in
subsections (i) and (ii) of this Section 7(a), solely as such conditions
relate to the certifying party, have been fulfilled, (B) as to resolutions
adopted by the Board of Directors of Heartland, CAI and CS Wireless, as the
case may be, which certificate shall have attached thereto a copy of such
9
<PAGE>
resolutions, and (C) as to such other corporate proceedings relating to the
authorization, execution and performance of the transactions contemplated
hereby.
(iv) BOARD AUTHORIZATIONS. The Board of Directors of each of
Heartland, CAI and CS Wireless shall have approved this Agreement and the
transactions contemplated hereby, and shall have authorized, empowered and
directed any or all of their corporate officers to execute and deliver this
Agreement and such agreements, certificates, instruments and other
documents and to take any and all other actions that may be deemed
necessary or desirable by the officer taking such action to give effect to
this Agreement and the transactions contemplated hereby.
(v) TRANSACTIONS PERMITTED UNDER APPLICABLE LAW. On the Stage I
Closing Date, the Stage I Transactions contemplated by this Agreement shall
(A) be permitted by the laws and regulations of each jurisdiction or
Governmental Authority, including, without limitation, the FCC, to which
Heartland, CAI or CS Wireless or any of their respective affiliates, as the
case may be, is subject, and (B) not violate any applicable law or
regulation.
(vi) CERTAIN PROCEEDINGS AND REGULATORY MATTERS. At the Stage I
Closing, none of the parties hereto shall be subject to any judgment, writ,
order, decree or injunction of any court of competent jurisdiction which
restrains, enjoins or otherwise prohibits the consummation of the Stage I
Transactions, nor shall there be pending any suit, action, investigation,
inquiry or other proceeding by any person (including, without limitation,
any Governmental Authority) that (A) seeks injunctive or other relief or
remedies in connection with such transactions or that makes consummation of
the Stage I Transactions subject to significant uncertainty, (B) could
prevent or make illegal the consummation of the Stage I Transactions
contemplated hereby, or (C) imposes or would be reasonably expected to
impose any remedy, condition or restriction on a party hereto which, in
its reasonable judgment, is material and adverse to such party.
(vii) THIRD PARTY AUTHORIZATION, CONSENT, ETC. All required
authorizations, consents, approvals or waivers of any third party,
including, without limitation, consents of Governmental Authorities, if
any, and any lender to any of the parties hereto, in connection with the
transactions contemplated hereby shall have been obtained, including,
without limitation, the consent of the holders of at least a majority of
aggregate principal amount of the CS Senior Notes, which consent shall be
in substantially the form of EXHIBIT F attached hereto.
(viii) BANKRUPTCY PROCEEDINGS. In the event that Heartland or CS
Wireless shall have commenced a case under title 11 of the United States
Code (the "Bankruptcy Code"), the court(s) having jurisdiction over such
case(s) shall have entered an order (or orders, if both Heartland and CS
Wireless are debtors under the Bankruptcy Code) (a) authorizing the
assumption of this Agreement and the BTA Lease Agreement and (b) approving
the transactions contemplated herein, and such order(s) shall become
10
<PAGE>
final and non-appealable; PROVIDED, HOWEVER, nothing herein shall preclude
the parties from consummating the transactions contemplated herein if the
parties, in their discretion, waive the requirement that such order(s) be
final and non-appealable. No notice of such waiver of this or any other
condition to CAI's obligations to consummate the transactions contemplated
hereby need be given except to Heartland, as explicitly required in this
Agreement, it being the intention of the parties hereto that CAI shall be
entitled to, and is not waiving, the protections of Section 363(m) of the
Bankruptcy Code, the mootness doctrine, and any similar statute or body of
law if either or both of the Stage I and Stage II Closings occurs in the
absence of a final and non-appealable order.
(ix) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the Stage I Transactions contemplated by this Agreement
and all documents and instruments incident to such transactions shall be
reasonably satisfactory to Heartland, CAI and CS Wireless, as the case may
be, and each party hereto shall have received all such counterpart
originals or certified or other copies of such documents as it may
reasonably request.
(b) The obligations of Heartland and CS Wireless to consummate the Stage
II Transactions are subject to the fulfillment prior to or on the Stage II
Closing Date of the following conditions (each of which may be waived in whole
or in part by the party being benefitted thereby in its sole discretion):
(i) CONSUMMATION OF STAGE I TRANSACTIONS. The Stage I Transactions
shall have been consummated.
(ii) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Heartland and CS Wireless contained in this Agreement shall
be complete and correct in all material respects when made and at the Stage
II Closing Date (except to the extent that such representations and
warranties relate specifically to an earlier date).
(iii) COMPLIANCE. Each of Heartland and CS Wireless shall have
performed and complied in all material respects with all agreements and
conditions contained in this Agreement required to be performed or complied
with by each of them prior to or on the Stage II Closing Date.
(iv) COMPLIANCE CERTIFICATES. Each of Heartland and CS Wireless shall
have delivered to the other an Officer's Certificate dated the Stage II
Closing Date, certifying that (A) the conditions specified in subsections
(i) through (iii) of this Section 7(b), solely as such conditions relate to
the certifying party, have been fulfilled, (B)(1) resolutions adopted by
the Board of Directors of Heartland and CS Wireless delivered at the Stage
I Closing, and (2) such other corporate proceedings relating to the
authorization, execution and performance of the transactions contemplated
hereby are still in full force and effect and have not been rescinded,
modified or amended.
11
<PAGE>
(v) TRANSACTIONS PERMITTED UNDER APPLICABLE LAW. On the Stage II
Closing Date, the Stage II Transactions shall (A) be permitted by the laws
and regulations of each jurisdiction or Governmental Authority, including,
without limitation, the FCC, to which Heartland or CS Wireless or any of
their respective affiliates, as the case may be, is subject, and (B) not
violate any applicable law or regulation.
(vi) CERTAIN PROCEEDINGS AND REGULATORY MATTERS. At the Stage II
Closing, none of the parties hereto shall be subject to any judgment, writ,
order, decree or injunction of any court of competent jurisdiction which
restrains, enjoins or prohibits the consummation of the Stage II
Transactions contemplated by this Agreement, nor shall there be pending any
suit, action, investigation, inquiry or other proceeding by any person
(including, without limitation, any Governmental Authority) that (A) seeks
injunctive or other relief or remedies in connection with such
transactions or that makes consummation of the Stage II Transactions
subject to significant uncertainty, (B) could prevent or make illegal the
consummation of the Stage II Transactions contemplated hereby, of (C)
imposes or would be reasonably expected to impose any remedy, condition or
restriction on a party hereto which, in its reasonable judgment, is
material and adverse to such party.
(vii) THIRD PARTY AUTHORIZATION, CONSENT, ETC. All required
authorizations, consents, approvals or waivers of any third party,
including, without limitation, consents of Governmental Authorities, if
any, and any lender to any of the parties hereto, in connection with the
Stage II Transactions contemplated hereby shall have been obtained.
(viii) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the Stage II Transactions contemplated by
this Agreement and all documents and instruments incident to such
transactions shall be reasonably satisfactory to Heartland, CAI and CS
Wireless, as the case may be, and each party hereto shall have received all
such counterpart originals or certified or other copies of such documents
as it may reasonably request.
(ix) DUE DILIGENCE COMPLETE. Each of Heartland and CS Wireless shall
have completed their business and legal due diligence investigation of the
assets to be transferred under Section 4, the results of which shall be
reasonably acceptable to the party performing such investigation.
(c) The obligations of CAI and CS Wireless to consummate the Stage I
Transactions are subject to the fulfillment prior to or on the Stage I
Closing Date, of the following condition (which may be waived in whole or in
part by the party being benefitted thereby in its sole discretion):
(i) RESIGNATION OF HEARTLAND DIRECTORS. The Heartland Directors
and the Heartland Independent Director shall have resigned from the Board
of Directors of CS Wireless, and all committees thereof effective as of the
Stage I Closing Date.
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Section 8. REPRESENTATIONS AND WARRANTIES OF THE PARTIES.
(a) HEARTLAND REPRESENTATIONS AND WARRANTIES. As a material inducement to
CAI and CS Wireless to enter into this Agreement and effect the transactions
contemplated hereby, Heartland hereby represents and warrants that:
(i) TITLE TO CS WIRELESS COMMON STOCK HELD BY HEARTLAND. Heartland
has and, subject to the terms and conditions of this Agreement, will sell,
assign, transfer, convey and deliver, good and indefeasible title to
3,836,035 shares of CS Wireless Common Stock, which shares comprise
Heartland's entire equity interest in CS Wireless, free and clear of any
security interest, claim, lien, pledge, option, encumbrance, charge,
agreement, voting trust, proxy or other restriction (each, an
"Encumbrance"), other than those Encumbrances created or existing by virtue
of the Stockholders' Agreement.
(ii) TITLE TO HEARTLAND ASSETS TRANSFERRED HEREUNDER. Except as set
forth on SCHEDULE 8(a)(ii) attached hereto, Heartland has and, subject to
the terms and conditions of this Agreement, will sell, assign, transfer,
convey and deliver, good and indefeasible title to (or a valid leasehold
interest in) all of the Heartland FCC Assets, the Heartland Leases and the
Portsmouth Non-FCC Assets transferred hereunder, free and clear of any and
all Encumbrances.
(iii) ORGANIZATION AND QUALIFICATION. Heartland is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in each other jurisdiction in which the
ownership, lease or operation of its property and assets or the conduct of
its business requires such qualification. Heartland has all corporate and
other necessary power and authority, and the legal right, to own or to hold
under lease the properties it purports to own or hold under lease and to
transact the business it transacts and proposes to transact. Heartland has
all corporate and other necessary power and authority, and the legal right,
to execute and deliver this Agreement, and each of the other documents
contemplated hereby to which it is or is to be a party, and to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby.
(iv) AUTHORIZATION. The execution, delivery and performance of this
Agreement by Heartland does not and will not (A) conflict with or result in
a breach of the terms, conditions or provisions of, (B) constitute a
default under, (C) result in the creation of any Encumbrance upon any of
the Heartland FCC Assets or Heartland Leases pursuant to, (D) give any
third party the right to modify, terminate or accelerate any obligation
under, (E) result in a violation of, or (F) require any authorization,
consent, approval, exemption or other action by or notice or declaration or
filing with any Governmental Authority or any other Person (other than as
has been duly made or obtained) pursuant to, the charter or bylaws of
Heartland, or any law, statute, rule or
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regulation to which Heartland or any of its assets is subject, or any
agreement, instrument, order, judgment or decree to which Heartland or
any of its assets is subject.
(v) COMPLIANCE WITH LAWS. Except as set forth on SCHEDULE 8(a)(v),
Heartland is in compliance in all material respects with all laws, rules
and regulations applicable to the Portsmouth Non-FCC Assets, the Heartland
FCC Assets and Heartland Leases (including obtaining all authorizations,
consents, approvals, orders, licenses, exemptions from, and making all
filings or registrations or qualifications with, any Governmental
Authority), the noncompliance with which reasonably could have a material
adverse effect on such assets or the use thereof, and Heartland is in
compliance in all material respects with all provisions of applicable FCC
licenses including, without limitation, any build-out requirements and
other obligations, and with all leases, subleases and sublicenses to it of
MMDS or MDS channels comprising the Heartland FCC Assets or the Heartland
Leases, as the case may be. The FCC licenses and channel leases comprising
the Heartland FCC Assets and Heartland Leases conform in all material
respects to all applicable laws, ordinances, codes, licensing requirements,
rules and regulations, and Heartland has not received any notice to the
contrary. Except as set forth on SCHEDULE 8(a)(v), there are no
proceedings or complaints or, to the best of Heartland's knowledge,
investigations pending before or by any Governmental Authority which could
reasonably be expected to have a material adverse effect on any FCC license
or channel lease comprising the Heartland FCC Assets or Heartland Leases.
All applications, reports, fees, filings and other submissions required
under the Communications Act relating to the Heartland FCC Assets and
Heartland Leases have been made or paid in a timely fashion.
(vi) FCC LICENSES. Schedule 3(b) attached hereto correctly sets forth
all of the FCC licenses comprising the Heartland FCC Assets and correctly
sets forth the termination date of each such FCC license, and SCHEDULE
4(b)(i) attached hereto identifies all FCC licenses and the owner thereof
with respect to each of the leased channels comprising the Heartland
Leases. Each FCC license comprising the Heartland FCC Assets or the
Heartland Leases allowing the construction or the operation of radio
station facilities by a lessor of channel capacity who is obligated to
lease the capacity of the radio station (in whole or in part) under a lease
agreement or management/option agreement listed on SCHEDULES 3(b) or
4(b)(i) attached hereto is in full force and effect, and, to the best of
Heartland's knowledge, neither the licensee of such FCC license nor the FCC
license is subject to any complaint, investigation or proceeding by or
before the FCC, or on appeal from the FCC, which looks toward or would
result in the revocation, modification or non-renewal of the FCC license.
Except as set forth on SCHEDULE 8(a)(vi), each of such FCC licenses for an
MMDS or MDS station has a construction completion date which has not
elapsed or, if such date has elapsed, a request to the FCC to extend that
date for at least six (6) months has been properly filed and is pending, or
an application for certification or completion of construction has been
properly filed. Except as set forth on SCHEDULE 8(a)(vi), the FCC has
granted one or more FCC licenses to each lessor of the channel capacity
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subject to the lease and lease/option agreements comprising the Heartland
FCC Assets or the Heartland Leases allowing that lessor to construct and/or
operate each radio station required for the lessor to provide to lessee
under each such agreement executed by such lessor the channel capacity
subject to that agreement.
(vii) LITIGATION. Except as set forth on SCHEDULE 8(a)(vii),
there is no action, suit, proceeding, arbitration, litigation or government
proceeding (including, without limitation, those related to FCC,
environmental or similar matters), or inquiry or investigation by any
Governmental Authority known to Heartland, in each case domestic or
foreign, pending against, or involving the Heartland FCC Assets, the
Heartland Leases or the Portsmouth Non-FCC Assets or the use thereof which
(A) questions the validity of this Agreement or any action taken or to be
taken by Heartland pursuant to or in connection with this Agreement, (B) is
required to be, and has not been, so disclosed in the filings with the SEC
by Heartland (and such proceedings as are summarized in such SEC filings
are accurately described in all material respects), or (C) could reasonably
be expected to materially adversely affect the FCC licenses or channel
leases comprising the Heartland FCC Assets and the Heartland Leases or the
operation of the channels and transmission facilities relating thereto.
(viii) NO VIOLATION, ETC. Heartland has not violated any law or
any governmental regulation or requirement which violation has had or would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of
Heartland relating to the Heartland FCC Assets, the Heartland Leases or the
Portsmouth Non-FCC Assets, and Heartland has not received notice of any
such violation. Heartland is not subject to, or has reason to believe it
may become subject to, any material liability (contingent or otherwise) or
corrective or remedial obligation arising under any environmental law, rule
or regulation relating to the Heartland FCC Assets, the Heartland Leases or
the Portsmouth Non-FCC Assets.
(ix) COPYRIGHT MATTERS. Heartland has submitted all requisite notices
(if any are required) under the Copyright Act for the carriage of all
Broadcast Stations as currently carried over any of the Heartland FCC
Assets. Heartland has filed in a timely manner with the Copyright Office
all required documents, instruments and statements of account and have
remitted payments of all required royalty fees with respect to compulsory
licenses provided for in Section III of the Copyright Act for the carriage
of broadcast signals in connection with the Heartland FCC Assets.
Heartland is not liable to any Person for copyright infringement under the
Copyright Act as a result of its business operations relating to the
Heartland FCC Assets and the Heartland Leases. There have been no
inquiries received from the Copyright Office or any other party, which
questioned such statements of account or any copyright royalty payments
made by Heartland with respect to the Heartland FCC Assets or Heartland
Leases, and no claim, action or demand for copyright infringement or for
non-payment of royalties is pending or, to the knowledge of Heartland,
threatened against Heartland with respect to the Heartland FCC Assets or
Heartland Leases.
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<PAGE>
(x) CONDITION OF PORTSMOUTH NON-FCC ASSETS. Except as set forth on
SCHEDULE 8(a)(x) and except for ordinary wear and tear, the Portsmouth
Non-FCC Assets are in good working order for the purpose for which they
were intended. All transmitters included in the Portsmouth Non-FCC Assets
used in the Portsmouth market meet all material applicable FCC acceptance
and frequency stability requirements.
(xi) NO INTERFERENCE CAUSED BY PORTSMOUTH MARKET. With respect to its
Portsmouth market, Heartland has not received any written complaint that
it, or any channels used in its Portsmouth market, is causing interference
to any reception, transmission or detection system.
(b) CS WIRELESS REPRESENTATIONS AND WARRANTIES. As a material
inducement to Heartland and CAI to enter into this Agreement and effect the
transactions contemplated hereby, CS Wireless hereby represents and warrants
that:
(i) TITLE TO CPE AND RADCLIFFE NON-FCC ASSETS. CS Wireless has and,
subject to the terms and conditions of this Agreement, will sell, assign,
transfer, convey and deliver, good and indefeasible title to the CPE and
Radcliffe Non-FCC Assets, free and clear of any and all Encumbrances.
(ii) TITLE TO CS WIRELESS FCC ASSETS AND CS LEASES TRANSFERRED
HEREUNDER. Except as set forth on SCHEDULE 8(b)(ii) attached hereto, CS
Wireless has and, subject to the terms and conditions of this Agreement,
will sell, assign, transfer, convey and deliver, good and indefeasible
title to (or a valid leasehold interest in) all of the CS Wireless FCC
Assets and CS Leases transferred hereunder, free and clear of any and all
Encumbrances.
(iii) ORGANIZATION AND QUALIFICATION. CS Wireless is a corporation
duly organized, validly existing and in good standing under the laws of
its jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in each other jurisdiction in which the
ownership, lease or operation of its property and assets or the conduct of
its business requires such qualification. CS Wireless has all corporate
and other necessary power and authority, and the legal right, to own or to
hold under lease the properties it purports to own or hold under lease and
to transact the business it transacts and proposes to transact. CS
Wireless has all corporate and other necessary power and authority, and
the legal right, to execute and deliver this Agreement, and each of the
other documents contemplated hereby to which it is or is to be a party, and
to perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby.
(iv) AUTHORIZATION. The execution, delivery and performance of this
Agreement by CS Wireless does not and will not (A) conflict with or result
in a breach of the terms, conditions or provisions of, (B) constitute a
default under, (C) result in
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<PAGE>
the creation of any Encumbrance upon any of the CPE, the Radcliffe Non-FCC
Assets, the CS Leases or the CS Wireless FCC Assets pursuant to, (D) give
any third party the right to modify, terminate or accelerate any
obligation under, (E) result in a violation of, or (F) require any
authorization, consent, approval, exemption or other action by or notice
or declaration or filing with any Governmental Authority or any other
Person (other than as has been duly made or obtained) pursuant to, the
charter or bylaws of CS Wireless, or any law, statute, rule or regulation
to which CS Wireless or any of its assets is subject, or any agreement,
instrument, order, judgment or decree to which CS Wireless or any of its
assets is subject.
(v) COMPLIANCE WITH LAW. Except as set forth on SCHEDULE 8(b)(v), CS
Wireless is in compliance in all material respects with all laws, rules and
regulations applicable to the CPE, the Radcliffe Non-FCC Assets, the CS
Leases and the CS Wireless FCC Assets (including obtaining all
authorizations, consents, approvals, orders, licenses, exemptions from, and
making all filings or registrations or qualifications with, any
Governmental Authority), the noncompliance with which reasonably could have
a material adverse effect on such assets or the use thereof, and CS
Wireless is in compliance in all material respects with all provisions of
applicable FCC licenses including, without limitation, any build-out
requirements and other obligations, and with all leases, subleases and
sublicenses to it of MMDS, MDS, or ITFS channels comprising the CS Wireless
FCC Assets and CS Leases, as the case may be. The FCC licenses and channel
leases comprising the CS Wireless FCC Assets and CS Leases conform in all
material respects to all applicable laws, ordinances, codes, licensing
requirements, rules and regulations, and CS Wireless has not received any
notice to the contrary. Except as set forth on SCHEDULE 8(b)(v), there are
no proceedings or complaints or, to the best of CS Wireless' knowledge,
investigations pending before or by any Governmental Authority which could
reasonably be expected to have a material adverse effect on any FCC license
or channel lease comprising the CS Wireless FCC Assets or CS Leases. All
applications, reports, fees, filings and other submissions required under
the Communications Act relating to the CS Wireless FCC Assets and CS Leases
have been made or paid in a timely fashion.
(vi) FCC LICENSES. SCHEDULE 3(a)(ii) attached hereto correctly sets
forth all of the FCC licenses comprising any portion of the CS Wireless FCC
Assets and correctly sets forth the termination date of each such FCC
license, and SCHEDULE 4(a)(i) identifies all FCC licenses and the owner
thereof with respect to each of the leased channels comprising the CS
Leases. Each FCC license comprising the CS Wireless FCC Assets or CS
Leases allowing the construction or the operation of radio station
facilities by a lessor of channel capacity who is obligated to lease the
capacity of the radio station (in whole or in part) under a lease agreement
or management/option agreement listed on SCHEDULES 3(a)(ii) or 4(a)(i)
attached hereto is in full force and effect, and, to the best of CS
Wireless' knowledge, neither the licensee of such FCC license nor the FCC
license is subject to any complaint, investigation or proceeding by or
before the FCC, or on appeal from the FCC, which looks toward or would
result in the revocation, modification or non-renewal of the FCC license.
Except as set forth on SCHEDULE 8(b)(vi), each of such FCC licenses for an
ITFS, MMDS or MDS station has a construction completion date which has not
elapsed or, if such date has elapsed, a request to the FCC to extend that
date for at least six (6) months has been properly filed and is pending, or
an application for certification of completion of construction has been
properly filed. Except as set forth on
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SCHEDULE 8(b)(vi), the FCC has granted one or more FCC licenses to each
lessor of the channel capacity subject to the lease and lease/option
agreements comprising the CS Wireless FCC Assets or the CS Leases allowing
that lessor to construct and/or operate each radio station required for
the lessor to provide to lessee under each such agreement executed by such
lessor the channel capacity subject to that agreement.
(vii) LITIGATION. Except as set forth on SCHEDULE 8(b)(vii),
there is no action, suit, proceeding, arbitration, litigation or government
proceeding (including, without limitation, those related to FCC,
environmental or similar matters), or inquiry or investigation by any
Governmental Authority known to CS Wireless, in each case domestic or
foreign, pending against (or circumstances that may give rise to the same),
or involving the CPE, the CS Wireless FCC Assets, the CS Leases or the
Radcliffe Non-FCC Assets or the use thereof which (A) questions the
validity of this Agreement or any action taken or to be taken by CS
Wireless pursuant to or in connection with this Agreement, (B) is required
to be, and has not been, so disclosed in the filings with the SEC by CS
Wireless (and such proceedings as are summarized in such SEC filings are
accurately described in all material respects), or (C) could reasonably be
expected to materially adversely affect the FCC licenses or channel leases
comprising the CS Wireless FCC Assets or CS Leases or the operation of the
channels and transmission facilities relating thereto.
(viii) NO VIOLATION, ETC. CS Wireless has not violated any law or
any governmental regulation or requirement which violation has had or would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of
CS Wireless relating to the CPE, the CS Wireless FCC Assets, the CS Leases
or the Radcliffe Non-FCC Assets, and CS Wireless has not received notice of
any such violation. CS Wireless is not subject to, or has reason to
believe it may become subject to, any material liability (contingent or
otherwise) or corrective or remedial obligation arising under any
environmental law, rule or regulation relating to the CPE, the CS Wireless
FCC Assets, the CS Leases or the Radcliffe Non-FCC Assets.
(ix) COPYRIGHT MATTERS. CS Wireless has submitted all requisite
notices (if any are required) under the Copyright Act for the carriage of
all Broadcast Stations as currently carried over any of the CS Wireless FCC
Assets. CS Wireless has filed in a timely manner with the Copyright Office
all required documents, instruments and statements of account and have
remitted payments of all required royalty fees with respect to compulsory
licenses provided for in Section III of the Copyright Act for the carriage
of broadcast signals in connection with the CS Wireless FCC Assets. CS
Wireless is not liable to any Person for copyright infringement under the
Copyright Act
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as a result of its business operations relating to the CS Wireless FCC
Assets and CS Leases. There have been no inquiries received from the
Copyright Office or any other party, which questioned such statements of
account or any copyright royalty payments made by CS Wireless with
respect to the CS Wireless FCC Assets or CS Leases, and no claim, action
or demand for copyright infringement or for non-payment of royalties is
pending or, to the knowledge of CS Wireless, threatened against CS
Wireless with respect to the CS Wireless FCC Assets or CS Leases.
(x) CONDITION OF CPE AND RADCLIFFE NON-FCC ASSETS. Except as set
forth on SCHEDULE 8(b)(x) and except for ordinary wear and tear, the CPE
and the Radcliffe Non-FCC Assets are in good working order for the purpose
for which they were intended. All transmitters included in the Radcliffe
Non-FCC Assets used in the Radcliffe market meet all material applicable
FCC acceptance and frequency stability requirements.
(xi) NO INTERFERENCE CAUSED BY RADCLIFFE MARKET, CS WIRELESS FCC
ASSETS OR CS LEASES. With respect to its Radcliffe market, CS Wireless has
not received any written complaint that it, or any channels used in its
Radcliffe market or otherwise comprising CS Wireless FCC Assets and CS
Leases, is causing interference to any reception, transmission or detection
system.
(c) As a material inducement to Heartland and CS Wireless to enter into
this Agreement and effect the transactions contemplated hereby, CAI hereby
represents and warrants that as of the date hereof:
(i) ORGANIZATION AND QUALIFICATION. CAI is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in each other jurisdiction in which the
ownership, lease or operation of its property and assets or the conduct of
its business requires such qualification. CAI has all corporate and other
necessary power and authority, and the legal right, to own or to hold under
lease the properties it purports to own or hold under lease and to transact
the business it transacts and proposes to transact. CAI has all corporate
and other necessary power and authority, and the legal right, to execute
and deliver this Agreement, and each of the other documents contemplated
hereby to which it is or is to be a party, and to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated
hereby and thereby.
(ii) AUTHORIZATION. The execution, delivery and performance of this
Agreement by CAI does not and will not (A) conflict with or result in a
breach of the terms, conditions or provisions of, (B) constitute a default
under, (C) give any third party the right to modify, terminate or
accelerate any obligation under, (D) result in a violation of, of (E)
require any authorization, consent, approval, exemption or other action by
or notice or declaration or filing with any Governmental Authority or any
other Person (other than as has been duly made or obtained) pursuant to,
the charter or
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bylaws of CAI, or any law, statute, rule or regulation to which CAI or any
of its assets in subject, or any agreement, instrument, order, judgment or
decree to which CAI or any of its assets is subject.
(iii) Litigation. Except as set forth on SCHEDULE 8(c)(iii),
there is no action, suit, proceeding, arbitration, litigation or government
proceeding (including, without limitation, those related to FCC,
environmental or similar matters), or inquiry or investigation by any
Governmental Authority known to CAI, in each case domestic or foreign,
pending against or involving CAI which (A) questions the validity of this
Agreement or any action taken or to be taken by CAI pursuant to or in
connection with this Agreement or (B) is required to be, and has not been,
so disclosed in the filings with the SEC by CAI (and such proceedings as
are summarized in such SEC filings are accurately described in all material
respects).
(iv) NO VIOLATION, ETC. CAI has not violated any law or any
governmental regulation or requirement which violation has had or would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of
CAI, and CAI has not received notice of any such violation. CAI is not
subject to, or has reason to believe it may become subject to, any material
liability (contingent or otherwise) or corrective or remedial obligation
arising under any environmental law, rule or regulation.
(v) INVESTMENT REPRESENTATION. CAI is purchasing the CS Wireless
Common Stock for its own account and not with a view to the public
distribution thereof. CAI acknowledges that the CS Wireless Common Stock
has not been registered under the Securities Act , and that such shares may
be resold only if registered pursuant to the provisions of the Securities
Act, or if an exemption from registration is available.
Section 9. COVENANTS OF ALL OF THE PARTIES.
(a) Unless otherwise indicated:
(i) Each of the parties hereto agrees to use commercially reasonable
efforts to bring about the fulfillment of the conditions precedent to the
Stage I Closing.
(ii) Subject to the terms and conditions provided herein, each of the
parties hereto agrees to (A) use commercially reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable law and regulation to
consummate and make effective the Stage I Transactions in accordance with
the terms of this Agreement, perform each of its obligations hereunder,
including without limitation, the obligations of the parties set forth in
Section 6 hereof, and (B) cooperate following the Stage I Closing in the
taking of any actions necessary or desirable in order to effect the
purposes of this Agreement with respect to the Stage I Transactions.
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<PAGE>
(iii) Each party hereto shall promptly inform each of the other
parties hereto of any circumstance or set of circumstances which could
reasonably be expected to impair such party's ability to perform any of its
obligations under this Agreement.
(b) Unless otherwise indicated:
(i) Each of the parties hereto agrees to use commercially reasonable
efforts to bring about the fulfillment of the conditions precedent to the
Stage II Closing.
(ii) Subject to the terms and conditions provided herein, each of the
parties hereto agrees to (A) use commercially reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable law and regulation to
consummate and make effective the Stage II Transactions in accordance with
the terms of this Agreement and (B) cooperate following the Stage II
Closing in the taking of any actions necessary or desirable in order to
effect the purposes of this Agreement with respect to the Stage II
Transactions.
(iii) Each party hereto shall promptly inform each of the other
parties hereto of any circumstance or set of circumstances which could
reasonably be expected to impair such party's ability to perform any of its
obligations under this Agreement.
Section 10. COVENANTS OF HEARTLAND. In addition to the covenants set
forth in Section 9 above:
(a) Between the date hereof and the Stage I Closing, Heartland shall:
(i) Retain and safeguard the CS Wireless Common Stock held by it, and
maintain such CS Wireless Common Stock free and clear of any and all
Encumbrances and shall not allow, permit or suffer to exist any
Encumbrance, sale, assignment, lease, waiver of rights or granting of a
proxy with respect to, voting agreement or trust affecting other than the
Stockholders' Agreement, or otherwise transfer or dispose of the CS
Wireless Common Stock held by Heartland.
(ii) Within three business days of its commencement of a case under
the Bankruptcy Code, if prior thereto the Stage I Closing has not occurred,
(a) file with the bankruptcy court a motion (together with appropriate
supporting papers) requesting the bankruptcy court to enter, an order in
form and substance reasonably acceptable to CAI and CS Wireless (1)
authorizing Heartland to assume this Agreement, (2) approving the
transactions contemplated herein, and (3) authorizing Heartland to assume
the BTA Lease Agreement, and (b) seek a hearing on such motion to be held
within 20 days of the date of the filing thereof.
(b) Between the date hereof and the Stage II Closing, Heartland shall:
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(i) Use its reasonable efforts (A) to cause to be maintained in full
force and effect, and (B) to cause the holders to renew when required to
prevent the lapse of, all FCC-issued licenses, conditional licenses and
authorizations comprising any portion of the Heartland FCC Assets or
Heartland Leases.
(ii) Use reasonable efforts to perform each and every obligation of
the lessee under any and all excess channel capacity lease agreements or
MDS transmission capacity lease agreements comprising any portion of the
Heartland FCC Assets or Heartland Leases.
(iii) Use reasonable efforts to cause each of its lessors to
prosecute in good faith and diligently pursue each MDS application and ITFS
application for facilities subject to a lease agreement with Heartland that
comprise any portion of the Heartland FCC Assets or Heartland Leases.
(iv) Operate the Heartland FCC Assets in the ordinary course of
business in accordance with past practices for such operation (except where
such conduct would conflict with any covenant or other obligation of
Heartland under this Agreement).
(v) Promptly notify CAI and CS Wireless in writing of any unusual or
material developments with respect to the business or operations of any of
the Heartland FCC Assets or Heartland Leases and of any material changes in
any of the information contained in Heartland's representation and
warranties contained in this Agreement.
(vi) Subsequent to its commencement of a case under the Bankruptcy
Code, seek bankruptcy court approval of, and use its best efforts to
obtain, an order in form and substance reasonably acceptable to CAI and CS
Wireless (1) authorizing the assumption of this Agreement, (2) approving
the transactions contemplated herein, and (3) authorizing Heartland to
assume the BTA Lease and Option Agreement.
(c) Between the date hereof and the Stage II Closing, Heartland shall not
allow, permit or suffer to exist:
(i) The creation, assumption or permitting to exist of any
Encumbrance, other than the lien for taxes not yet due and payable, on any
of the Heartland FCC Assets or Heartland Leases.
(ii) The sale, assignment, lease, waiver of rights with respect to,
sublease or other transfer or disposal of any and all FCC-issued licenses,
conditional licenses and authorizations, or the lessee's leasehold interest
in any excess channel capacity lease agreements or MDS transmission
capacity lease agreements comprising any portion of the Heartland FCC
Assets or Heartland Leases.
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(iii) Any material action, or material failure to act under excess
channel capacity lease agreements or MDS transmission capacity lease
agreements comprising any portion of the Heartland FCC Assets or Heartland
Leases, which would constitute a default or a potential default thereunder
(assuming that any requirements of notice or lapse of time have occurred).
Section 11. COVENANTS OF CS WIRELESS. In addition to the covenants set
forth in Section 9 above:
(a) Between the date hereof and the Stage I Closing,
(i) CS Wireless shall retain and safeguard the CS Wireless Non-FCC
Assets and the CS Wireless FCC Assets held by it, and maintain such CS
Wireless Non-FCC Assets free and clear of all Encumbrances and shall not
allow, permit or suffer to exist any Encumbrance, sale, assignment, lease,
waiver of rights with respect to, or otherwise transfer or dispose of the
CS Wireless Non-FCC Assets and the CS Wireless FCC Assets held by CS
Wireless; and
(ii) Within three business days of its commencement of a case under
the Bankruptcy Code, if prior thereto the Stage I Closing has not occurred,
(a) file with the bankruptcy court a motion (together with appropriate
supporting papers) requesting the bankruptcy court to enter, an order in
form and substance reasonably acceptable to Heartland and CAI (1)
authorizing CS Wireless to assume this Agreement, (2) approving the
transactions contemplated herein, and (3) authorizing CS Wireless to assume
the BTA Lease Agreement, and (b) seek a hearing on such motion to be held
within 20 days of the date of the filing thereof.
(b) Between the date hereof and the Stage II Closing, CS Wireless shall:
(i) Use its reasonable efforts (A) to cause to be maintained in full
force and effect, and (B) to cause the holders to renew when required to
prevent the lapse of, all FCC-issued licenses, conditional licenses and
authorizations comprising any portion of the CS Wireless FCC Assets or CS
Leases.
(ii) Use reasonable efforts to perform each and every obligation of
the lessee under any and all excess channel capacity lease agreements or
MDS transmission capacity lease agreements comprising any portion of the CS
Wireless FCC Assets or CS Leases.
(iii) Use reasonable efforts to cause each of its lessors to
prosecute in good faith and diligently pursue each MDS application and ITFS
application for facilities subject to a lease agreement with CS Wireless
that comprise any portion of the CS Wireless FCC Assets or CS Leases.
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(iv) Operate the CS Wireless FCC Assets in the ordinary course of
business in accordance with past practices for such operation (except where
such conduct would conflict with any covenant or other obligation of CS
Wireless under this Agreement).
(v) Promptly notify Heartland and CAI in writing of any unusual or
material developments with respect to the business or operations of any of
the CS Wireless FCC Assets or CS Leases and of any material changes in any
of the information contained in CS Wireless' representation and warranties
contained in this Agreement.
(vi) Subsequent to its commencement of a case under the Bankruptcy
Code, seek bankruptcy court approval of, and use its best efforts to
obtain, an order in form and substance reasonably acceptable to Heartland
(1) authorizing the assumption of this Agreement, (2) approving the
transactions contemplated herein, and (3) authorizing CS Wireless to assume
the BTA Lease and Option Agreement.
(c) Between the date hereof and the Stage II Closing, CS Wireless shall
not allow, permit or suffer to exist:
(i) The creation, assumption or permitting to exist of any
Encumbrance, other than the lien for taxes not yet due and payable, on any
of the CS Wireless FCC Assets or CS Leases.
(ii) The sale, assignment, lease, waiver of rights with respect to,
sublease or other transfer or disposal of any and all FCC-issued licenses,
conditional licenses and authorizations, or the lessee's leasehold interest
in any excess channel capacity lease agreements or MDS transmission
capacity lease agreements comprising any portion of the CS Wireless FCC
Assets or CS Leases.
(iii) Any material action, or material failure to act under excess
channel capacity lease agreements or MDS transmission capacity lease
agreements comprising any portion of the CS Wireless FCC Assets or CS
Leases, which would constitute a default or a potential default of the
lessee thereunder (assuming that any requirements of notice or lapse of
time have occurred).
Section 12. RELEASES AND INDEMNIFICATION. As further consideration for
the transactions contemplated hereby, the parties agree as follows:
(a) At the Stage I Closing, without further action by the parties, CS
Wireless shall release and forever discharge Heartland, its subsidiaries,
affiliates, stockholders, officers, directors, agents, employees, successors and
assigns from any and all actions claims, liabilities, damages, demands,
responsibility and accountability of every nature whatsoever ("Claims"), whether
known or unknown, which CS Wireless ever had, then has or may have for, upon or
by reason of any matter, cause or thing whatsoever against Heartland arising out
of that certain Administrative Services Agreement dated as of February 23, 1996
(the "Services Agreement")
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by and between Heartland and CS Wireless, including, without limitation, CS
WIRELESS SYSTEMS, INC. V. HEARTLAND WIRELESS COMMUNICATIONS, INC.; CAUSE NO.
98-CI-15104; 225TH DISTRICT COURT, BEXAR COUNTY, TEXAS, from the beginning of
the world to the Stage I Closing Date, or which CS Wireless may from and
after the Stage I Closing Date have against Heartland by reason of any
matter, act, omission, cause or event arising solely out of the Services
Agreement, which has occurred or which has been done or suffered to be done
before the Stage I Closing Date. CS Wireless hereby agrees to withdraw, with
prejudice, CS WIRELESS SYSTEMS, INC. V. HEARTLAND WIRELESS COMMUNICATIONS,
INC.; CAUSE NO. 98-CI-15104; 225TH DISTRICT COURT, BEXAR COUNTY, TEXAS on or
before the Stage I Closing.
(b) At the Stage I Closing, without further action by the parties,
Heartland shall release and forever discharge CS Wireless, its subsidiaries,
affiliates, stockholders, officers, directors, agents, employees, successors and
assigns from any and all Claims, whether known or unknown, which Heartland ever
had, then has or may have for, upon or by reason of any matter, cause or thing
whatsoever against CS Wireless arising out of the Services Agreement and any
Claim capable of being asserted in connection therewith from the beginning of
the world to the Stage I Closing Date, or which Heartland may hereafter have
against CS Wireless by reason of any matter, act, omission, cause or event
arising solely out of the Services Agreement, which has occurred or which has
been done or suffered to be done before the Stage I Closing Date.
(c) At the Stage I Closing, without further action by the parties, each of
the parties hereto shall release and forever discharges the other parties
hereto, their respective subsidiaries, affiliates, stockholders, officers,
directors, agents, employees, successors and assigns from any and all Claims,
whether known or unknown, which each such party ever had, then has or may have
for, upon or by reason of any matter, cause or thing whatsoever against the
other parties hereto arising solely out of the Participation Agreement or the
Stockholders' Agreement from the beginning of the world to the Stage I Closing
Date, or which each such party may hereafter have against the other parties
hereto by reason of any matter, act, omission, cause or event arising solely out
of the Participation Agreement or the Stockholders' Agreement, which has
occurred or which has been done or suffered to be done before the date hereof.
(d) CS Wireless acknowledges and ratifies the terms and conditions of
that certain Separation Agreement dated as of October 19, 1998 (the
"Separation Agreement") by and between Frank H. Hosea ("Hosea") and CS
Wireless. CS Wireless acknowledges that (i) Hosea has been employed by
Heartland as Senior Vice President - Video Operations and (ii) Hosea's
employment by Heartland does not violate or breach the Non-Compete
Restrictions as defined and set forth in Section 5 of the Separation
Agreement or any non-disclosure covenants contained in Paragraph 9(a) of the
Employment Agreement dated as of April 2, 1997 or the Non-Disclosure
Agreement dated as of April 2, 1997 between Hosea and CS Wireless.
Notwithstanding anything to the contrary set forth in this Section 12(d), CS
Wireless' acknowledgment set forth herein shall not modify or constitute a
waiver of CS Wireless' rights to enforce Hosea's non-disclosure covenants
relating to any person or entity other than Heartland or its existing
wholly-owned subsidiaries set forth in Section 2 of the Separation Agreement
or Hosea's obligations relating to any person or entity other than Heartland
or its existing wholly-owned subsidiaries under the Employment Agreement and
Non-Disclosure Agreement referred
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to above CS Wireless expressly agrees to assume the Separation Agreement
described above in any bankruptcy proceeding filed by or against CS Wireless.
(e) Notwithstanding anything to the contrary, CAI shall indemnify and hold
Heartland harmless from any and all Claims arising from or in connection with
CAI's purchase from Heartland of the CS Wireless Common Stock at the Stage I
Closing pursuant to Section 2 of this Agreement, including any such Claims
arising from, in connection with, or related to any subsequent disposition or
transfer of the CS Wireless Common Stock by CAI; PROVIDED, HOWEVER, any
liability of CAI to Heartland arising by operation of this Section 12(e) arising
from, in connection with, or related to a subsequent disposition or transfer of
the CS Wireless Common Stock by CAI to CS Wireless shall be deemed fully
satisfied by CAI with the return to CS Wireless of any and all consideration
received by CAI from CS Wireless for such disposition or transfer, and
thereafter, Heartland shall no longer have any claim for indemnification against
CAI under this Section 12(e).
(f) In the event CS Wireless commences a bankruptcy proceeding, CAI shall
use its best efforts in its capacity as a stockholder of CS Wireless, and shall
cause the CAI Directors and CAI Independent Directors (each as defined in the
Stockholders' Agreement) to use their best efforts, recognizing and taking into
consideration the various fiduciary duties owed by such directors to various CS
Wireless constituencies, to cause (i) CS Wireless to fulfill its obligations to
the Heartland Directors, the Heartland Independent Directors and Hosea, and (ii)
CS Wireless to treat its indemnity obligations to the Heartland Directors, the
Heartland Independent Directors and Hosea no less favorably than CS Wireless
treats its indemnity obligations to any other person who has served, is serving
or may hereafter serve as a member of the board of directors of CS Wireless.
Section 13. TERMINATION.
(a) This Agreement may be terminated at any time prior to the Stage I
Closing by mutual written consent of the parties hereto.
(b) This Agreement shall terminate (without further action or notice (in
writing or otherwise) by any of the parties hereto), unless CAI and Heartland
shall have extended in writing date or the period set forth in this Section 13
(or any of the extended dates or periods), if the Stage I Closing shall not have
occurred by December 4, 1998.
(c) In the event of a termination of this Agreement in accordance with
this Section 13, this Agreement shall forthwith become void and of no further
force and effect, and there shall be no liability hereunder on the part of any
party or its affiliates, directors, officers, shareholders, agents or other
representatives; PROVIDED, HOWEVER, that Sections 2(b), 13, 15 and 16,
inclusive, shall survive any termination of this Agreement, and (ii) nothing
herein shall relieve any party from liability for any breach of this Agreement;
PROVIDED FURTHER, HOWEVER, that if the Stage I Closing shall have occurred prior
to the termination of this Agreement, Section 12 shall survive and nothing
contained herein shall limit, abridge or
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otherwise affect, or relieve any party from, the continuing rights and
obligations arising out of such Stage I Closing.
Section 14. FURTHER ASSURANCES. The parties hereto agree to take all
actions necessary or advisable, in the opinion of the party taking such action,
to effect the terms of the provisions hereof.
Section 15. NO WAIVER. Failure by any party hereto to insist on strict
performance or observance of any provision of this Agreement or to exercise any
right or remedy shall not be construed as a waiver of any right or remedy with
respect to any existing or subsequent breach or default.
Section 16. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
attached hereto and the BTA Lease and Option Agreement, as amended, constitute
the entire agreement among the parties with respect to the subject matter hereof
and supersedes any and all previous agreements, representations and
understandings among the parties hereto with respect to such matters whether
oral or in writing.
(b) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, without regard to the
principles of conflicts of laws thereof.
(c) SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validly or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.
(d) NO THIRD PARTY BENEFICIARIES. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Except for the persons not parties to this
Agreement who are being released or indemnified pursuant to Section 12,
nothing in this Agreement shall create or be deemed to create any third party
beneficiary rights in any person not party to this Agreement, including,
without limitation, (i) any receiver appointed for any party hereto, or (ii)
any trustee, responsible officer or other person or entity appointed to
manage business or property of any party hereto in such party's case under
any chapter of the Bankruptcy Code.
(e) AMENDMENTS. This Agreement may be amended, supplemented or modified,
and any provision hereof may be waived, only pursuant to a written instrument
making specific reference to this Agreement signed by each of the parties
hereto.
(f) EXPENSES. Each of the parties hereto shall be solely responsible for
its fees and expenses incurred in connection with the negotiation, execution,
delivery and performance of this Agreement and the transactions contemplated
hereby.
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(g) COUNTERPARTS. This Agreement may be executed by facsimile and in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(h) PUBLIC ANNOUNCEMENTS. The parties hereto will agree upon the timing
and content of an initial press release to be issued describing the transactions
contemplated by this Agreement, and will not make any public announcement
thereof prior to reaching such agreement unless required to do so by applicable
law or regulation.
(i) NAMES, CAPTIONS, ETC. The name assigned this Agreement and the
section captions used herein are for convenience or reference only and shall not
affect the interpretation or construction thereof.
(j) NO STRICT CONSTRUCTION. The parties hereto have participated jointly
in the negotiation and drafting of this Agreement. In the event an ambiguity
or question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of
authorship of any of the provisions of this Agreement.
(k) ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any provision of this Agreement was not
performed in accordance with its specific terms or was otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce the terms and
provisions hereof in any state or federal court in the State of Delaware, this
being in addition to any other remedy to which they are entitled at law or in
equity.
[The balance of this page intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement through
their duly authorized representatives on the day and year first above written.
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By:___________________________________
Name:
Title:
CS WIRELESS SYSTEMS, INC.
By:___________________________________
Name:
Title:
CAI WIRELESS SYSTEMS, INC.
By:___________________________________
Name:
Title:
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EXHIBIT 10.17
SEPARATION AGREEMENT
SEPARATION AGREEMENT (this "Agreement") made as of the 1st day of
February, 1999 (the "Effective Date") by and between THOMAS DIXON, 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 4, 1997 (the "Employment Agreement") and the
Non-Qualified Stock Option Agreements dated as of February 23, 1996, and
April 2, 1997 (the "Stock Option Agreements"); and
WHEREAS, Employee and the Company have agreed to terminate the Employment
Agreement and the Stock Option Agreements upon the terms and conditions set
forth herein.
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. All payments made, and benefits provided, to Employee
hereunder shall be deemed made in full satisfaction of all Employee's rights
under the Employment Agreement. Employee hereby resigns from any and all
positions or offices held with the Company or any Affiliate (defined herein).
2. NON-DISCLOSURE. Notwithstanding the termination of the Employment
Agreement, the non-disclosure covenants contained in the Non-Disclosure
Agreement dated as of April 4, 1997 (the "Non-Disclosure Agreement") between the
parties shall remain in full force and effect.
3. SEVERANCE. Upon the Effective Date, 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. The Severance Amount shall be payable in
one single sum of $215,833.33 and 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 $185,000 payable annually during a calendar year. The
parties acknowledge that the Base Salary represents Employee's annual base
salary as of the Effective Date.
4. STOCK OPTIONS AND RETENTION BONUS. The parties acknowledge that options
(the "Original Options") to purchase 85,763 shares of the Company's common
stock, par value $.001 ("Common Stock"), were granted to Employee under the 1996
CS Wireless
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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 16,000 shares of Common Stock at an exercise price of
$6.50 per share, and options to purchase 53,763 shares of Common Stock at an
exercise price of $9.40 per share, are fully vested (the "Remaining
Options"). The Remaining Options and the balance of the Original Options,
which represent options to purchase 16,000 shares of Common Stock, are hereby
surrendered by Employee to the Company. Additionally, Employee hereby
surrenders all claims to the Retention Bonus authorized by the Compensation
Committee of the Board of Directors on November 12, 1998.
5. INSURANCE. To the extent permitted by the Company's insurance carriers and
applicable law, and provided Employee elects to continue such coverage and make
any required contributions, the Company shall provide to Employee medical and
dental benefits comparable to such benefits presently available in the Company's
medical and dental plans through the earlier to occur of (i) the expiration of
twelve (12) months from the Effective Date or (ii) such time as Employee accepts
full time employment and becomes eligible for coverage under the terms of the
applicable medical and dental plan.
6. RELEASE BY EMPLOYEE. (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
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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 6,
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 February 22, 1999 which is more
than twenty-one (21) calendar days from February 1, 1999 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 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.
7. RELEASE BY COMPANY: 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"), hereby
release, remise, and forever discharge, and by these presents does, release,
remise, and forever discharge Employee, his heirs, executors, administrators,
legal representatives and assigns, from any claim, known or unknown, asserted or
unasserted, suspected or unsuspected, arising in any way from any actions taken
by the Employee up to and including the date of the execution of this Agreement.
8. INDEMNIFICATION AGREEMENT. The Company hereby ratifies that certain
Indemnification Agreement between the Company and Employee dated September 4,
1997 (the "Indemnification Agreement"). In the event the Company commences a
proceeding under the applicable bankruptcy laws of the United States, the
Company shall assume the Indemnification Agreement and shall treat its indemnity
obligations to Employee under the terms of the Delaware General Corporation Law
and the Company's Certificate of Incorporation and By-laws, each as amended from
time to time, no less
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favorably than the Company treats its indemnity obligations to any other
person who has served, is serving or may hereafter serve as a member of the
Board of Directors or officer of the Company.
9. 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).
10. 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.
11. 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.
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 Delaware.
15. PRESS RELEASE. The parties will agree upon the timing and content of any
press release to be issued describing the transactions contemplated by this
Agreement, and will not make any public announcement thereto prior to reaching
such agreement unless required to do so by applicable law or regulation.
IN WITNESS WHEREOF, this Agreement is entered into as of the date and year
first above written.
4
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CS WIRELESS SYSTEMS, INC.
BY: _______________________________
NAME: JARED ABBRUZZESE
TITLE: CHAIRMAN OF THE BOARD
EMPLOYEE:
____________________________________
NAME: THOMAS DIXON
ADDRESS: 3600 ALMA ROAD, #3912
RICHARDSON, TEXAS 75080
5
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EXHIBIT 10.18
CONSULTING AGREEMENT
This Agreement (this "Agreement") is entered into as of February 1, 1999 by
and between CS Wireless Systems, Inc. (the "Company") and Thomas Dixon (the
"Consultant").
The party hereto agree as follows:
1. ENGAGEMENT. Company hereby engages Consultant and Consultant hereby agrees
to hold himself available to render, and to render at the request of Company,
independent advisory and consulting services, as more specifically described in
SECTION 4 below, for Company and its affiliates, to the best of his ability,
upon the terms and conditions hereinafter set forth.
2. TERM. The term of this Agreement shall begin as of the date of this
Agreement and continue in accordance with the terms hereof for twelve (12)
months ("The Term").
3. COMPENSATION. As compensation for all services rendered by Consultant
under this Agreement, Company shall pay Consultant the following sums:
(a) During the term of this Agreement, Company shall pay to Consultant
each month the sum of Thirteen Thousand and no/100 Dollars and No/100 ($13,000)
per month, which shall be paid, in advance on the first business day of each
month, commencing February 1, 1999 and thereafter until and through January 1,
2000, at which time the final payment hereunder shall be made.
(b) The Company shall pay to Consultant success fees (collectively,
"Success Fees") in connection with the matters set forth on SCHEDULE 1 attached
hereto and incorporated herein by reference.
(c) All compensation payable hereunder shall be paid without deduction,
including no deduction for federal income, withholding, social security, or
state payroll, unemployment or income taxes. Consultant shall be solely
responsible for paying all such taxes and any other amounts required by federal,
state or local law as a result of the compensation paid to Consultant hereunder.
4. DUTIES. Consultant shall hold himself available to render, and shall
render to the Company and its affiliates from time to time, consulting services,
including, without limitation, advice and assistance relating to the following:
(a) Provide operational and technical assistance to the Company in
connection with the negotiating, preparation and filing of applications with the
FCC for authority for two-way use of MMDS spectrum in the Target Markets;
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(b) Assist the Company in preserving and enhancing the value of its
interests, rights and obligation relative to ITFS leases and MMDS licenses and
leases in the Target Markets;
(c) Assist the Company with respect to its operations; and
(d) Assist the Company with respect to such transition matters as the
Company may reasonable request.
Consultant shall render all services conscientiously and shall devote his
reasonable commercial efforts and abilities thereto, at such times during the
term hereof, and in such manner, as Company and Consultant shall mutually agree,
it being acknowledged that Consultant's services shall be non-exclusive and
performed at such places and at such times as mutually agreed upon by the
Company and Consultant. Consultant shall be available at least sixty (60) hours
each month, at such times as reasonably requested by the Company, to provide
consulting services at such locations in the Target Markets as may be reasonably
requested by Company. Consultant shall observe all policies and directives
promulgated from time to time by Company's Officers.
5. EXPENSES AND SUPPORT. Consultant shall be reimbursed by Company for all
reasonable business expenses (including, without limitation, mileage,
telephone, data communication, etc.) which are deductible by Company for U.S.
federal income tax purposes and which were incurred by Consultant during the
performance of his services hereunder. Company's obligation to reimburse
Consultant pursuant to this Section shall be subject to the presentation to
Company by Consultant of an itemized account of such expenditures, together
with supporting vouchers, in accordance with Company's policies as in effect
from time to time. The Company shall reimburse Consultant's expenses within
ten (10) days of Company's receipt of the itemized account of expenditures.
Expenses incurred by Consultant in excess of $500 per month must be approved
in advance by the Company or Consultant shall not receive reimbursement from
the Company. Each month, the Company shall pay to Consultant on the first
business day, an allowance of Seven Hundred Fifty Dollars ($750) to cover the
cost of such office space, office equipment, telephone lines, facsimile lines
and equipment and secretarial support as may reasonably be necessary for
Consultant to perform the services described herein. During the Term,
Company shall furnish to Consultant a desk top computer selected by the
Company. Consultant shall not procure or occupy office space in any premises
leased or owned by the Company, without the prior written consent of the
Company.
6. LITIGATION. Consultant shall cooperate reasonably with the Company,
including the giving of truthful testimony, in the course of present or future
litigation about which Consultant has knowledge, and shall use his best efforts
to be available for depositions and other activities concerning such matter or
other matters without the necessity of a subpoena, provided that once that
services are requested by the Company, the Company shall reimburse Consultant
for all reasonable out-of-pocket expenses in providing such
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services and shall pay Consultant a per diem based on the compensation
payable pursuant to SECTION 3(A), or such other reasonable per diem as may be
mutually agreed upon between Consultant and the Company based upon the then
current industry standards. The parities agree that this section shall not
apply to litigation in which the Company is, or may reasonably be expected to
become, adverse to Consultant.
7. TERMINATION. Either party may terminate this Agreement in the event the
other party breaches any material term hereof and such breaching party does not
cure such default within thirty (30) days following receipt of notice of such
breach. Upon such termination, the Company shall pay Consultant all
compensation due through the effective date of termination, pro rated for any
partial month in which Consultant rendered services. In the event the Company
terminates this Agreement in the absence of any breach by Consultant of a
material term hereof, (i) the Company shall immediately pay to Consultant, in
cash, all compensation payable for the remainder of the Term (without giving
effect to the early termination), (ii) all rights of Consultant to the Success
Fees (defined herein) shall immediately vest and immediately become due and
payable. and (iii) Consultant shall be released from all obligations hereunder,
other than the obligations set forth in SECTION 9. In the event of death or
disability resulting in the inability of Consultant to perform the duties of
Consultant set forth herein, this Agreement may be terminated at the option of
Company immediately and all compensation due hereunder shall cease as of the
date of death or disability, provided that the Company pays to Consultant all
sums then due. The Consultant shall have no rights to the Success Fee, if any,
payable with respect to a Triggering Event occurring subsequent to death or
disability.
8. NON-COMPETITION. Because Consultant's services to the Company are special
and because Consultant had access to and been responsible for developing a
portion of the Company's confidential information, Consultant covenants and
agrees that from the date hereof through the termination of the Agreement 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 35 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
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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 Section shall not apply to
investments constituting not more than 5% of the common equity of a publicly
traded or privately held company.
9. CONFIDENTIAL INFORMATION.
(a) In connection with this Agreement, the Company may desire to
disclose to Consultant certain proprietary information on a confidential
basis. This proprietary information ("Information") includes any and all
technical and non-technical information, including without limitation,
information concerning financial, accounting or marketing reports, business
plans, analyses, forecasts, predictions, projections, intellectual property,
trade secrets and know-how. Information may take the form of documentation,
drawings, specifications, software, technical or engineering data, and other
forms, and may be communicated orally, in writing, by electronic or magnetic
media, by visual observation and by other means.
(b) With respect to Information disclosed under this Agreement, Consultant
and its Representatives (defined below) shall:
(i) hold the Information in confidence, exercising a degree of care
not less than the care used by Consultant to protect its own proprietary or
confidential information that it does not wish to disclose, and in no event
exercise less than a reasonable degree of care;
(ii) restrict disclosure of the Information solely to those
Representatives with a need to know and not disclose it to any other person;
(iii) advise those Representatives to whom the Information is
disclosed of their obligations as set out herein with respect to the
Information; and
(iv) use the Information only in connection with the performance of
its duties under this Agreement, except as may otherwise be mutually agreed upon
in writing, and reproduce such Information only to the extent necessary for such
purpose.
(c) "Representatives" means the controlled and controlling affiliates of
Consultant, and the directors, officers, employees, attorneys, consultants and
other agents and advisors of Consultant or of the controlled and controlling
affiliates of Consultant. Consultant shall take all reasonably necessary
measures to restrain its Representatives from unauthorized disclosure or use of
Information.
(d) Information shall be deemed the property of the Company and, within
five (5) business days upon written request from the Company, Consultant will
return all
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such Information received in tangible form to the Company, or at the
Company's written request, will destroy all such Information; Consultant
shall deliver to the Company written certification that the documents have
been destroyed. If Consultant loses or makes an unauthorized disclosure of
the Company's Information, it shall notify the Company immediately and use
reasonable efforts to retrieve and protect the lost or wrongfully disclosed
Information.
(e) Consultant shall have no obligation to preserve the proprietary nature
of any Information which:
(i) was known to Consultant before the date of this Agreement free of
any obligation to keep it confidential except for Information provided by
Company to Consultant prior to the execution of this Agreement, which
Information shall be deemed confidential;
(ii) is or becomes publicly available by means other than unauthorized
disclosure;
(iii) is developed by or on behalf of Consultant independent of
any Information furnished by Company or at its request;
(iv) is received from a third party whose disclosure does not violate
any confidentiality obligation; or
(v) is required to be disclosed pursuant to order of a court of
competent jurisdiction or a governmental agency (but only for the purpose and to
the extent of such required disclosure). In such circumstances, Consultant
shall provide the Company notice and a reasonable opportunity to object to such
proposed disclosure.
10. INDEPENDENT CONTRACTOR. It is expressly agreed that Consultant is
acting as an independent contractor in performing his services hereunder.
Company shall carry no Workmen's Compensation insurance for the benefit of
Consultant. Company shall not pay any contributions to Social Security,
unemployment insurance, federal or state withholding taxes, nor provide any
other contributions or benefits which might be expected in an
employer-employee relationship. Notwithstanding the foregoing, the parties
acknowledge the existence of that certain Separation Agreement dated of even
date herewith which provides for certain rights and obligations of the
parties hereto.
11. ASSIGNMENT. This Agreement is a personal one, being entered into in
reliance upon and in consideration of the singular personal skill and
qualifications of Consultant. Consultant shall therefore not voluntarily or
by operation of law assign or otherwise transfer the obligations incurred on
its part pursuant to the terms of this Agreement without the prior written
consent of the Company. Any attempted assignment or transfer by Consultant
of its obligation without such consent shall be wholly void. Company may
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assign this Agreement to an affiliate provided that the Company shall remain
liable for all sums due to Consultant.
12. MODIFICATION OF AGREEMENT. This Agreement may be modified by the
parties hereto only by a written supplemental agreement executed by both
parties.
13. NOTICE. Any notice required or permitted to be given hereunder shall be
sufficient if in writing, and if sent by registered or certified mail,
postage prepaid, by overnight courier, or by facsimile, addressed as follows:
IF TO COMPANY: CS Wireless Systems, Inc.
Attn: Chief Executive Officer
1101 Summit Avenue
Plano, Texas 75074
Facsimile (972) 398-1110
IF TO CONSULTANT: Thomas Dixon
3600 Alma Road, #3912
Richardson, Texas 75080
or to such other address as the parties hereto may specify, in writing, from
time to time. Such notice shall be effective as of the date of receipt in the
event of certified mail, overnight courier or facsimile.
14. WAIVER OF BREACH. The waiver by either party of any breach of any
provision of this Agreement shall not operate to be construed as a waiver of
any subsequent breach.
15. TITLES. The titles of the Sections herein are for convenience of
reference only and are not be to be considered in construing this Agreement.
16. GOVERNING LAW. This Agreement, and its interpretation, validity and
performance, shall be construed and enforced in accordance with the laws of
the State of Delaware.
17. ENTIRE AGREEMENT. This Agreement contains the entire contract of the
parties with respect to the subject matter hereof and supersedes all
agreements and understandings between the parties concerning the subject
matter hereof.
18. ADDITIONAL COVENANT OF COMPANY. In the event the Company commences a
proceeding under the applicable bankruptcy laws of the United States, the
Company shall assume this Consulting Agreement
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Executed as of the date first above written.
COMPANY: CONSULTANT:
CS WIRELESS SYSTEMS, INC. THOMAS DIXON
By: _____________________ _____________________
Name:____________________
Title:___________________
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EXHIBIT 10.19
SEPARATION AGREEMENT
SEPARATION AGREEMENT (this "Agreement") made as of the 16th day of
February, 1999 (the "Effective Date") by and between DAVID E. WEBB, 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, as amended, (the "Employment Agreement")
and the Non-Qualified Stock Option Agreement dated as of January 22, 1997 (the
"Stock Option Agreement"); and
WHEREAS, Employee and the Company have agreed to terminate the Employment
Agreement and the Stock Option Agreement upon the terms and conditions set forth
herein.
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. All payments made, and benefits provided, to Employee
hereunder shall be deemed made in full satisfaction of all Employee's rights
under the Employment Agreement. Employee hereby resigns from any and all
positions or offices held with the Company or any Affiliate (defined herein).
Notwithstanding the foregoing, Employee shall be reasonably available to assist
the Company with respect to such transition matters as the Company reasonably
deems necessary for the continued operation of the Company's business.
2. NON-DISCLOSURE. Notwithstanding the termination of the Employment
Agreement, the non-disclosure covenants contained in 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. Upon the Effective Date, 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. The Severance Amount shall be payable in
one single sum of $308,493.77 and 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 $275,000 payable annually during a calendar year. The
parties acknowledge that the Base Salary represents Employee's annual base
salary as of the Effective Date.
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4. STOCK OPTIONS AND RETENTION BONUS. The parties acknowledge that options
(the "Original Options") to purchase 200,000 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 100,000 shares of Common Stock at an exercise price of $6.50
per share are fully vested (the "Remaining Options"). The Remaining Options and
the balance of the Original Options, which represent options to purchase 100,000
shares of Common Stock, are hereby surrendered by Employee to the Company.
Additionally, Employee hereby surrenders all claims to the Retention Bonus
authorized by the Compensation Committee of the Board of Directors on November
12, 1998.
5. INSURANCE. To the extent permitted by the Company's insurance carriers and
applicable law, and provided Employee elects to continue such coverage and make
any required contributions, the Company shall provide to Employee medical and
dental benefits comparable to such benefits presently available in the Company's
medical and dental plans through the earlier to occur of (i) the expiration of
twelve (12) months from the Effective Date or (ii) such time as Employee accepts
full time employment and becomes eligible for coverage under the terms of the
applicable medical and dental plan.
6. RELEASE BY EMPLOYEE. (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
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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 6,
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 February 28, 1999 which is more
than twenty-one (21) calendar days from February 1, 1999 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 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.
7. RELEASE BY COMPANY: 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"), hereby
release, remise, and forever discharge, and by these presents does, release,
remise, and forever discharge Employee, his heirs, executors, administrators,
legal representatives and assigns, from any claim, known or unknown, asserted or
unasserted, suspected or unsuspected, arising in any way from any actions taken
by the Employee up to and including the date of the execution of this Agreement.
8. INDEMNIFICATION AGREEMENT. The Company hereby ratifies that certain
Indemnification Agreement between the Company and Employee dated September 4,
1997 (the "Indemnification Agreement"). In the event the Company commences a
proceeding under the applicable bankruptcy laws of the United States, the
Company shall assume the Indemnification Agreement and shall treat its indemnity
obligations to
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Employee under the terms of the Delaware General Corporation Law and the
Company's Certificate of Incorporation and By-laws, each as amended from time
to time, no less favorably than the Company treats its indemnity obligations
to any other person who has served, is serving or may hereafter serve as a
member of the Board of Directors or officer of the Company.
9. 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).
10. 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.
11. 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.
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 Delaware.
15. PRESS RELEASE. The parties will agree upon the timing and content of any
press release to be issued describing the transactions contemplated by this
Agreement, and will not make any public announcement thereto prior to reaching
such agreement unless required to do so by applicable law or regulation.
IN WITNESS WHEREOF, this Agreement is entered into as of the date and year
first above written.
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CS WIRELESS SYSTEMS, INC.
BY: _______________________________
NAME: JARED ABBRUZZESE
TITLE: CHAIRMAN OF THE BOARD
EMPLOYEE:
_____________________________
NAME: DAVID E. WEBB
ADDRESS: 4004 SYCAMORE LANE
PARKER, TEXAS 75002
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EXHIBIT 10.20
CONSULTING AGREEMENT
This Agreement (this "Agreement") is entered into as of February 16, 1999
by and between CS Wireless Systems, Inc. (the "Company") and David E. Webb (the
"Consultant").
The parties hereto agree as follows:
1. ENGAGEMENT. Company hereby engages Consultant and Consultant hereby agrees
to hold himself available to render, and to render at the request of Company,
independent advisory and consulting services, as more specifically described in
SECTION 4 below, for Company and its affiliates, to the best of his ability,
upon the terms and conditions hereinafter set forth.
2. TERM. The term of this Agreement shall begin as of the date of this
Agreement and continue in accordance with the terms hereof for fourteen (14)
months ("The Term").
3. COMPENSATION. As compensation for all services rendered by Consultant
under this Agreement, Company shall pay Consultant the following sums:
(a) During the term of this Agreement, Company shall pay to Consultant
each month the sum of Twenty Thousand and no/100 Dollars and No/100 ($20,000)
per month, which shall be paid in advance on the seventeenth (or next business
day) of each month, commencing February 17, 1999 and thereafter until and
through March 16, 2000, at which time the final payment hereunder shall be made.
(b) The Company shall pay to Consultant success fees (collectively,
"Success Fees") in connection with the matters set forth on SCHEDULE 1 attached
hereto and incorporated herein by reference.
(c) In addition to the above described compensation and Success Fees,
Company shall pay to Consultant certain transaction fees as set forth on
SCHEDULE 2 attached hereto and incorporated herein by reference.
(d) All compensation payable hereunder shall be paid without deduction,
including no deduction for federal income, withholding, social security, or
state payroll, unemployment or income taxes. Consultant shall be solely
responsible for paying all such taxes and any other amounts required by federal,
state or local law as a result of the compensation paid to Consultant hereunder.
4. DUTIES. Consultant shall hold himself available to render, and shall
render to the Company and its affiliates from time to time, consulting services,
including, without limitation, advice and assistance relating to the following:
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(a) Provide operational and technical assistance to the Company in
connection with the negotiating, preparation and filing of applications with
the Federal Communications Commission ("FCC") for authority for two-way use
of Multipoint Distribution Services ("MDS"), Multipoint Multichannel
Distribution Services (which, together with MDS, shall be collectively
referred to as "MMDS") and Instructional Television Fixed Services ("ITFS");
(b) Assist the Company in preserving and enhancing the value of its
interests, rights and obligation relative to ITFS leases and MMDS licenses and
leases in the Target Markets as defined and specified in SCHEDULE 2;
(c) Assist the Company with respect to its operations; and
(d) Assist the Company with respect to such transition matters as the
Company may reasonably request.
Consultant shall render all services conscientiously and shall devote his
reasonable commercial efforts and abilities thereto, at such times during the
term hereof, and in such manner, as Company and Consultant shall mutually agree,
it being acknowledged that Consultant's services shall be non-exclusive and
performed at such places and at such times as mutually agreed upon by the
Company and Consultant. Consultant shall be available at least sixty (60) hours
each month, at such times as reasonably requested by the Company to provide such
consulting services at such locations in the Target Markets as may be reasonably
requested by the Company. Consultant shall observe all policies and directives
promulgated from time to time by Company's Officers and Board of Directors.
5. EXPENSES AND SUPPORT. Consultant shall be reimbursed by Company for all
reasonable business expenses (including, without limitation, mileage,
telephone, data communication, etc.) which are deductible by Company for U.S.
federal income tax purposes and which were incurred by Consultant during the
performance of his services hereunder. Company's obligation to reimburse
Consultant pursuant to this Section shall be subject to the presentation to
Company by Consultant of an itemized account of such expenditures, together
with supporting vouchers, in accordance with Company's policies as in effect
from time to time. The Company shall reimburse Consultant's expenses within
ten (10) days of Company's receipt of the itemized account of expenditures.
Expenses incurred by Consultant in excess of $500 per month must be approved
in advance by the Company or Consultant shall not receive reimbursement from
the Company. Each month, the Company shall pay to Consultant on the first
business day, an allowance of One Thousand Dollars ($1,000) to cover the cost
of such office space, office equipment, telephone lines, facsimile lines and
equipment and secretarial support as may reasonably be necessary for
Consultant to perform the services described herein. During the Term, the
Company shall provide to Consultant a lap-top computer selected by the
Company. Consultant shall not procure or occupy office space in any premises
leased or owned by the Company, without the prior written consent of the
Company.
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6. LITIGATION. Consultant shall cooperate reasonably with the Company,
including the giving of truthful testimony, in the course of present or
future litigation about which Consultant has knowledge, and shall use his
best efforts to be available for depositions and other activities concerning
such matter or other matters without the necessity of a subpoena, provided
that once that services are requested by the Company, the Company shall
reimburse Consultant for all reasonable out-of-pocket expenses in providing
such services and shall pay Consultant a per diem based on the compensation
payable pursuant to SECTION3(A), or such other reasonable per diem as may be
mutually agreed upon between Consultant and the Company based upon the then
current industry standards. The parities agree that this section shall not
apply to litigation in which the Company is, or may reasonably be expected to
become, adverse to Consultant.
7. TERMINATION. Either party may terminate this Agreement in the event the
other party breaches any material term hereof and such breaching party does not
cure such default within thirty (30) days following receipt of notice of such
breach. Upon such termination, the Company shall pay Consultant all
compensation due through the effective date of termination, pro rated for any
partial month in which Consultant rendered services. In the event the Company
terminates this Agreement in the absence of any breach by Consultant of a
material term hereof, (i) the Company shall immediately pay to Consultant, in
cash, all compensation payable for the remainder of the Term (without giving
effect to the early termination), (ii) all rights of Consultant to the Success
Fees (defined herein) shall immediately vest and become immediately due and
payable and (iii) Consultant shall be released from all obligations hereunder
other than the obligations set forth in SECTION 9. In the event of death or
disability resulting in the inability of Consultant to perform the duties of
Consultant set forth herein, this Agreement may be terminated at the option of
Company immediately and all compensation due hereunder shall cease as of the
date of death or disability, provided that the Company pays to Consultant all
sums then due. Consultant shall have no rights to the Success Fees or
Transaction Fees, if any, payable with respect to a Triggering Event or
Disposition Transaction occurring subsequent to death or disability.
8. NON-COMPETITION. Because Consultant's services to the Company are special
and because Consultant had access to and been responsible for developing a
portion of the Company's confidential information, Consultant covenants and
agrees that, except (i) as may be otherwise agreed by the Company or (ii) as may
be addressed in the definitive documents evidencing the terms of a Disposition
Transaction, from the date hereof through the termination of the Agreement 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
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consulting services to or be an investor, limited partner or shareholder in,
any entity or other person engaged in the Related Business within 35 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 Section shall not apply to
investments constituting not more than 5% of the common equity of a publicly
traded or privately held company.
9. CONFIDENTIAL INFORMATION.
(a) In connection with this Agreement, the Company may desire to
disclose to Consultant certain proprietary information on a confidential
basis. This proprietary information ("Information") includes any and all
technical and non-technical information, including without limitation,
information concerning financial, accounting or marketing reports, business
plans, analyses, forecasts, predictions, projections, intellectual property,
trade secrets and know-how. Information may take the form of documentation,
drawings, specifications, software, technical or engineering data, and other
forms, and may be communicated orally, in writing, by electronic or magnetic
media, by visual observation and by other means.
(b) With respect to Information disclosed under this Agreement, Consultant
and its Representatives (defined below) shall:
(i) hold the Information in confidence, exercising a degree of care
not less than the care used by Consultant to protect its own proprietary or
confidential information that it does not wish to disclose, and in no event
exercise less than a reasonable degree of care;
(ii) restrict disclosure of the Information solely to those
Representatives with a need to know and not disclose it to any other person;
(iii) advise those Representatives to whom the Information is
disclosed of their obligations as set out herein with respect to the
Information; and
(iv) use the Information only in connection with the performance of
its duties under this Agreement, except as may otherwise be mutually agreed upon
in writing, and reproduce such Information only to the extent necessary for such
purpose.
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(c) "Representatives" means the controlled and controlling affiliates of
Consultant, and the directors, officers, employees, attorneys, consultants and
other agents and advisors of Consultant or of the controlled and controlling
affiliates of Consultant. Consultant shall take all reasonably necessary
measures to restrain its Representatives from unauthorized disclosure or use of
Information.
(d) Information shall be deemed the property of the Company and, within
five (5) business days upon written request from the Company, Consultant will
return all such Information received in tangible form to the Company, or at the
Company's written request, will destroy all such Information; Consultant shall
deliver to the Company written certification that the documents have been
destroyed. If Consultant loses or makes an unauthorized disclosure of the
Company's Information, it shall notify the Company immediately and use
reasonable efforts to retrieve and protect the lost or wrongfully disclosed
Information.
(e) Consultant shall have no obligation to preserve the proprietary nature
of any Information which:
(i) was known to Consultant before the date of this Agreement free of
any obligation to keep it confidential except for Information provided by
Company to Consultant prior to the execution of this Agreement, which
Information shall be deemed confidential;
(ii) is or becomes publicly available by means other than unauthorized
disclosure;
(iii) is developed by or on behalf of Consultant independent of
any Information furnished by Company or at its request;
(iv) is received from a third party whose disclosure does not violate
any confidentiality obligation; or
(v) is required to be disclosed pursuant to order of a court of
competent jurisdiction or a governmental agency (but only for the purpose and to
the extent of such required disclosure). In such circumstances, Consultant
shall provide the Company notice and a reasonable opportunity to object to such
proposed disclosure.
10. INDEPENDENT CONTRACTOR. It is expressly agreed that Consultant is
acting as an independent contractor in performing his services hereunder.
Company shall carry no Workmen's Compensation insurance for the benefit of
Consultant. Company shall not pay any contributions to Social Security,
unemployment insurance, federal or state withholding taxes, nor provide any
other contributions or benefits which might be expected in an
employer-employee relationship. Notwithstanding the foregoing, the
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parties acknowledge the existence of that certain Separation Agreement dated
of even date herewith which provides for certain rights and obligations of
the parties hereto.
11. ASSIGNMENT. This Agreement is a personal one, being entered into in
reliance upon and in consideration of the singular personal skill and
qualifications of Consultant. Consultant shall therefore not voluntarily or
by operation of law assign or otherwise transfer the obligations incurred on
its part pursuant to the terms of this Agreement without the prior written
consent of the Company. Any attempted assignment or transfer by Consultant
of its obligation without such consent shall be wholly void. Company may
assign this Agreement to an affiliate provided that the Company shall remain
liable for all sums due Consultant.
12. MODIFICATION OF AGREEMENT. This Agreement may be modified by the
parties hereto only by a written supplemental agreement executed by both
parties.
13. NOTICE. Any notice required or permitted to be given hereunder shall be
sufficient if in writing, and if sent by registered or certified mail,
postage prepaid, by overnight courier, or by facsimile, addressed as follows:
IF TO COMPANY: CS Wireless Systems, Inc.
Attn: Chief Executive Officer
1101 Summit Avenue
Plano, Texas 75074
Facsimile (972) 398-1110
IF TO CONSULTANT: David E. Webb
4004 Sycamore Lane
Parker, Texas 75002
or to such other address as the parties hereto may specify, in writing, from
time to time. Such notice shall be effective as of the date of receipt in the
event of certified mail, overnight courier or facsimile.
14. WAIVER OF BREACH. The waiver by either party of any breach of any
provision of this Agreement shall not operate to be construed as a waiver of
any subsequent breach.
15. TITLES. The titles of the Sections herein are for convenience of
reference only and are not be to be considered in construing this Agreement.
16. GOVERNING LAW. This Agreement and its interpretation, validity and
performance shall be construed and enforced in accordance with the laws of
the State of Delaware.
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17. ENTIRE AGREEMENT. This Agreement contains the entire contract of the
parties with respect to the subject matter hereof and supersedes all
agreements and understandings between the parties concerning the subject
matter hereof.
18. ADDITIONAL COVENANT OF THE COMPANY. In the event the Company commences a
proceeding under the applicable bankruptcy laws of the United States, the
Company shall assume this Consulting Agreement
Executed as of the date first above written.
COMPANY: CONSULTANT:
CS WIRELESS SYSTEMS, INC. DAVID E. WEBB
By: _____________________ _____________________
Name:____________________
Title:___________________
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EXHIBIT 10.21
ENGINEERING AND SPECTRUM MANAGEMENT AGREEMENT
ENGINEERING AND SPECTRUM MANAGEMENT AGREEMENT (this "Agreement"), dated
as of the 1ST day of MARCH, 1999, by and among CS Wireless Systems, Inc.
("Company"), a Delaware corporation having a place of business at 1101 Summit
Avenue, Plano, TX 75074, CAI Wireless Systems, Inc. ("CAI"), a Connecticut
corporation, having a place of business at 18 Corporate Woods Boulevard,
Albany New York and CAI/AMI Spectrum Management, Inc. ("AMI" or "Manager"), a
Delaware corporation and wholly owned subsidiary of CAI, having a place of
business at 2101 Wilson Boulevard, Suite 100, Arlington, VA 22201.
WHEREAS, the Company desires to continue to expand the uses to which the
microwave radio frequencies, including without limitation MMDS, MDS, ITFS and
WCS spectrum under its control ("Spectrum" as further defined below) can be put,
in order to maximize the value of the Spectrum and perform its obligations under
the terms of various frequency leases;
WHEREAS, the Federal Communications Commission has approved the grant of
broad authority for flexible two-way use of the Spectrum in a digital format
pursuant to complex procedures that require significant engineering effort
("Two-Way Authority", as further defined below);
WHEREAS, the Company does not have the experienced personnel that would
allow it to pursue and take advantage of the Two-Way Authority within the
earliest filing periods contemplated by the FCC orders authorizing Two-Way
Authority and has concluded that it would not be possible to hire such
experienced personnel or to arrange for such work to be conducted by unrelated
contractors except at significant expense to the Company, if at all;
WHEREAS, AMI has experienced engineering/licensing capability, directly and
through affiliated and unaffiliated third parties, and because of the extensive
work done by its personnel to date, has substantial experience with respect to
the industry, the FCC and the specific Business Plan (defined herein) of the
Company;
WHEREAS, CAI is engaged in the development of its Spectrum in a manner
contemplated by the Business Plan and directly and through AMI has significant
experience in the industry and has had extensive contact with potential
strategic users of the Spectrum;
WHEREAS, CAI and the Company believe that by coordinating their Two Way
Authority efforts and by combining the access to their Spectrum through a single
plan engineered and managed by AMI personnel as a single cohesive platform
across their respective markets, the Company is more likely to achieve the goals
reflected in the Business Plan or otherwise maximize the value of its Spectrum
for all of its stakeholders;
WHEREAS, CAI is prepared to incorporate the Company's Spectrum and Markets
in the arrangements it is discussing with potential strategic investors on the
terms herein set forth and to make AMI's services available to the Company
substantially on a pro rata cost plus
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administrative fee basis;
WHEREAS, AMI is prepared to assume the engineering and licencing functions
of the Company and to undertake to assume all responsibility for applications
and negotiations for Two-Way Authority, subject to the terms and conditions
hereinafter set forth;
WHEREAS, Company previously retained CAI to perform certain engineering
services pursuant to that certain Engineering Services Agreement dated as of
March __, 1998, to which CAI is not prepared to continue to devote resources and
which, in any event, did not provide the Company sufficiently comprehensive
services to be able to complete its filings for Two Way Authority in accordance
with its Business Plan and maintain and enhance the value of its Spectrum;
WHEREAS, Company and CAI terminated the Engineering Services Agreement, and
the Company and Manager are prepared to establish a comprehensive contractual
relationship whereby Manager will provide various managerial, operational and
engineering services to Company for the benefit of Company and its stakeholders;
and
WHEREAS, Company, the Manager and CAI intend that this Agreement shall set
forth the terms and conditions of the comprehensive contractual relationship of
the parties and effect the termination of the Engineering Services Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Manager, CAI and Company hereby
agree as follows:
ARTICLE 1
DEFINITIONS
1.1 The following terms shall have the meanings assigned below:
(a) "Approved Budget" means the budget appended to the Business Plan.
(b) "Business Plan" means the joint Business Plan of the Company and CAI
for the development of their Spectrum, as approved by the Board of Directors of
the Company, and attached as Exhibit A1/2 to this Agreement no later than March
9, 1999, together with the five (5) year budget attached thereto, which shall
include the associated budget for the Two Way Authority and for the estimated
cost of the services hereunder, together with such amendments thereto as may be
approved by majority vote of the independent directors of each of the Company
and CAI.
(c) "Spectrum Rights" means MMDS/MDS/ITFS and WCS bandwidth leased,
licensed, or otherwise controlled by the Company.
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(d) "Market" means any geographic area in which the Company or CAI, as the
case may be, has Spectrum Rights, at any time during the term of this Agreement.
(e) "FCC" means the Federal Communications Commission and its staff.
(f) "Analog Video and One Way Internet Operations" means the business of
the Company in providing retail video service and, where applicable, Internet
delivery telephone return/services to the public, and related support services,
including video analog engineering, call center operations, installation and
similar services including such services provided by independent contractors.
(g) "Fully Allocated Cost of Performance" has the meaning set forth in
SECTION 3.1(B) hereof.
(h) "AMI Personnel Costs" has the meaning set forth in SECTION 3.1(B)
hereof.
(i) "AMI Office Rent Expenses" has the meaning set forth in SECTION
3.1(A) hereof.
(j) "AMI Equipment Expense" has the meaning set forth in SECTION 3.1(B)
hereof.
(k) "Operational Management Services" has the meaning set forth in SECTION
2.6 hereof.
(l) "Engineering/Spectrum Management Contract Price" has the meaning set
forth in SECTION 3.1(A) hereof.
(m) "CAI Personnel Costs" shall be the full cost of a CAI employee,
including, without limitation, such employee's base salary, cash bonus (not to
exceed 20% of base salary), retirement and health and welfare benefits and all
associated taxes and withholdings, but excluding any equity-based compensation.
ARTICLE 2
OBLIGATIONS OF THE PARTIES WITH RESPECT TO THE SPECTRUM
2.1 GENERALLY. Subject to the terms and conditions provided for herein,
each of the parties hereto shall assume the responsibilities and obligations set
forth below and hereby covenants and agrees to take the actions consistent with,
or to refrain from taking action inconsistent with, meeting such
responsibilities and obligations all as set forth herein.
2.2 ENGINEERING/SPECTRUM MANAGEMENT SERVICES.
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(a) GENERAL. Manager shall furnish, or otherwise arrange for, manage and
supervise, all engineering and technical advice, services and consulting
relating to the organization, transmission and/or delivery of (i) wireless
cable, (ii) voice, video and data delivery and/or access and (iii) telephony
services in each of the Company's Markets. The Manager shall formulate for and
on behalf of the Company, a plan for each of the Company's Markets to overlay
the Company's existing platform, which plan shall be engineered to address
interference and functionality issues, and shall, to the fullest extent
possible, be uniform among the Company's Markets and the Markets of CAI, so as
to facilitate access by one or more strategic users of the bandwidth represented
by the Spectrum Rights across all Markets of the two companies.
(b) SPECTRUM MANAGEMENT SERVICES. Manager shall act for and on behalf
of the Company in all matters relating to the ownership, acquisition,
disposition, maintenance and operation of the Spectrum, subject to the terms
of this Agreement and, if necessary, under applicable law, to the approval of
the Company's Board of Directors. Manager shall be responsible for the
planning and presentations to the Company's Board of Directors and senior
management (as required hereunder and as may be required under applicable
law) and any proposals relating to the acquisition, disposition, maintenance,
and operation of the Company's Spectrum that vary from the Business Plan.
Manager shall maintain a Licensing Committee, which shall be comprised of
Gerald Stevens-Kittner, Steve Moncrieff and Derwood Edge and/or such
additional or different members as it shall reasonably determine appropriate
after consultation with the Company's Board of Directors.
2.3 FULL DELEGATION OF AUTHORITY TO MANAGER. The Company hereby delegates
to the Manager all authority necessary to act in its name and place for all
purposes of dealing with the FCC and any other governmental agency or body, and
with respect to any licensee of Spectrum with which the Company has a lease or
other contractual relationship or with which the Company may enter into a lease
or other contractual relationship during the term hereof, with respect to the
subject matter of this Agreement. Without limiting the generality of the
foregoing, the Manager shall have full discretion (subject to such approvals as
may be required of the Company's Board of Directors under applicable law) in
negotiating or renegotiating all leases or other contracts for Spectrum Rights,
including all terms thereof, the filing of all applications, formulating
strategies and designing engineering and related plans and such discretion shall
be absolute; provided, however, that such discretion shall be exercised only in
good faith in furtherance of the Company's Business Plan. Notwithstanding the
foregoing, the Manager shall not have the authority to increase the amounts
payable to any lessor under a lease for Spectrum Rights or to enter into a new
lease of Spectrum Rights on behalf of the Company, which increase or new lease
requires payments in excess of 3% of the amounts assumed in the Business Plan or
the Approved Budget. Manager and Company agree that Manager shall have the sole
discretion in determining the scope of the services appropriate in any
particular Market at any particular time and, recognizing that applications and
related work will not occur simultaneously in all Markets, that Manager shall
determine in its sole
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discretion, consistent with the Business Plan, the order in which the Markets
shall be engineered, the timetable for completing the necessary work, the
scope of the work in the particular Market and whether and to what extent
work in a particular Market may be delayed or accelerated. The Manager shall
be responsible for coordinating all communicationswith the FCC and the
Company agrees that it shall not interfere or otherwise deal with any of the
matters under the authority of the Manager during the term of this Agreement,
except for such action as Company must take to preserve the value of its
assets for its stakeholders. Manager shall have full discretion in
determining which services shall be conducted by its own personnel and which
services, if any, shall be performed by independent contractors retained by
Manger on its own behalf or on behalf of the Company, subject to the
parameters set forth in the Business Plan or the Approved Budget. The
Company acknowledges that the work product of the Manager is its exclusive
proprietary information and that the Company shall not have access to any
such work product nor the right to share or exploit such work product in any
Market without the prior written consent of the Manager, beyond the uses
necessary to implement the Business Plan in the particular Market.
2.4 ARRANGEMENTS FOR WHOLESALE/RETAIL USE OF THE SPECTRUM. The Company
hereby delegates irrevocably to CAI and to AMI during the term of this Agreement
the right and authority to act in its stead in respect of the use of its
Spectrum for any commercial purpose consistent with the Business Plan, subject
to such approvals as may be required of the Company's Board of Directors under
applicable law. CAI and AMI covenant and agree that if and to the extent the
Company's Spectrum is included in any arrangement with one or more third
parties, the arrangements involving the Company's Spectrum shall be no less
favorable than the arrangements entered into by CAI with respect to its
Spectrum, except where such modified arrangement is due to factors that are not
present in the case of the CAI Spectrum and such modification has been approved
by a majority of the independent members of the Board of Directors of the
Company. The Company shall be bound by the terms of any agreement entered into
on its behalf hereunder by Manager or CAI with third parties for the duration of
such agreements, without regard to the expiration of the term of this Agreement.
2.5 ACTING CEO SERVICES. During the term of this Agreement, Manager shall
provide executive management services to the Company, which services shall
consist of oversight of the Company's strategic direction, including the
development and implementation of the Business Plan and the provision of an
acting chief executive officer ("CEO") who shall initially be Jared E.
Abbruzzese. The individual named to serve as CEO herein shall not be replaced,
nor have his responsibilities or authority reduced, absent prior written
approval of a majority of the independent members of the Board of Directors of
the Company.
2.6 OPERATIONAL MANAGEMENT SERVICES. During the term of this Agreement,
Manger shall provide supervisory services with respect to the Company's Analog
Video and One-Way Internet Operations. Supervisory services shall consist of
oversight of all of the Company's operations and the provision of an acting
chief operating officer ("COO") who shall initially be Derwood Edge, and which
COO shall provide operational management
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services to the Company (collectively, the "Operational Management
Services"). The individual named herein to serve as COO shall not be
replaced, nor have his responsibilities or authority reduced, absent prior
written approval of a majority of the independent members of the Board of
Directors of the Company.
2.7 EMPLOYEES. All personnel assigned by Manager to perform Services
will be employees of Manager and Manager will pay all salaries and expenses of
and all federal, social security, federal and state unemployment taxes, and any
other payroll or withholding taxes relating to such employees. Manager will be
considered, for all purposes, an independent contractor, and it will not,
directly or indirectly, act as an agent, servant or employee of the Company, or
make any commitments or incur any liabilities on behalf of Company without its
prior written consent (except that nothing herein shall be interpreted to
restrict the rights of the Manager and CAI delegated pursuant to Sections 2.3
and 2.4 hereof).
2.8 STANDARD OF CARE. Manager shall perform the Services with the same
degree of care, skill and prudence customarily exercised by it in respect of its
own business operations and affairs, which standards shall be in accordance with
the standards generally applicable in the MMDS industry.
2.9 INFORMATION. Company will provide Manager with complete access to
all the Company's facilities and to all information and data deemed by Manager
to be necessary for Manager to provide the Services described herein and such
other information that Manager may require to perform its services under this
Agreement. Manager shall be entitled to rely upon the accuracy and completeness
of all information that it reasonably believes to have been furnished to it by
Company or at Company's direction, and shall have no duty to inquire about such
information. Company shall fully cooperate with the Manager.
2.10 EXCLUSIVE RELATIONSHIP. During the term of this Agreement, Manager
shall have the exclusive authority to act on behalf of the Company with respect
to the Spectrum and the Company shall not engage any other person to act for or
on its behalf in respect thereof without the prior written consent of the
Manager, which shall not be unreasonably withheld, conditioned or delayed.
ARTICLE 3
TERMS OF PAYMENT
3.1 ENGINEERING/SPECTRUM MANAGEMENT SERVICES CONTRACT PRICE.
(a) CONTRACT BASE PRICE. In consideration of the Services described in
ARTICLE 2 above, the Company shall pay to the Manager at the times set forth in
this ARTICLE 3, an amount equal to 40% of the Fully Allocated Cost of
Performance (the "Contract Base Price") together with an Administrative Services
Fee equal to 20% of the Contract Base Price (the "Engineering/Spectrum
Management Services Contract Price"). The Company shall also be
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responsible for reimbursement of expenses associated with the performance of
Manager's responsibilities hereunder directly related to the Company's
Spectrum or properly allocated thereto, including but not limited to travel
and lodging, filing fees, legal and accounting fees, and the costs associated
with any independent contractor retained to deal solely with the Company's
Spectrum; provided, that all such amounts are authorized and identified in
the Business Plan or Approved Budget. All such amounts shall be determined
and paid as provided in this SECTION 3.1.
(b) FULLY ALLOCATED COST OF PERFORMANCE. The "Fully Allocated Cost of
Performance" shall be calculated by taking the sum of (i) all AMI Personnel
Costs, (ii) all AMI Office Rent Expenses, (iii) all AMI Equipment Expense and
(iv) AMI Contractor Expenses. The "AMI Personnel Costs" shall be the full costs
of each AMI employee (including professional, support and secretarial staff),
including without limitation their base salary, bonus (not to exceed 20% of base
salary), retirement and health and welfare benefits and all associated taxes and
withholdings. The "AMI Office Rent Expenses" shall include all payments
required under the lease of the office space at 2102 Wilson Blvd., Arlington,
VA. "AMI Equipment Expense" shall mean the cost of all equipment purchased for
use by AMI Personnel (including computer equipment), but shall not include any
allocation of general office supplies, which shall be absorbed by AMI as part of
the Administrative Services Fee.
(c) REIMBURSABLE EXPENSES. The Company will also be responsible for
paying all of the Manager's out-of-pocket expenses related to the
Engineering/Spectrum Management Services (including, without limitation, third
party copying charges) and the Manager's expenses related to the
Engineering/Spectrum Management Services performed directly for the benefit of
the Company's business, such as postage, telephone and facsimile bills,
dedicated telephone lines, transition services, etc., all such amounts to be
authorized and identified in the Approved Budget appended to the Business Plan,
without the Company's consent. Office supplies and general office expenses
(such as coffee machines and similar non-essential sundry items) shall not be
reimbursed but shall be considered a part of the Administrative Service Fee.
(d) PAYMENT TERMS. The Engineering/Spectrum Management Contract Price
shall be estimated for a three month period and paid at the beginning of each
such three (3) month period during the term of this Agreement, with the actual
Fully Allocated Cost of Performance calculated and an appropriate adjustment
payment made for actual expenses within 20 days following the end of each such
period during the term. Reimbursable Expenses as provided in SECTION 3.1(C)
shall be payable immediately upon submission of invoices therefor, with
appropriate supporting documentation, all in form and substance reasonably
acceptable to the Company. Late amounts shall bear interest after the fifth day
at the rate of one half of one percent per month, compounded monthly, or such
lesser amount as may be provided under applicable law.
(e) COMPANY'S RIGHT TO AUDIT. The Company at its own expense and through
its
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independent accountants, shall have access at reasonable times upon
reasonable notice, to inspect all records relating to the services performed
hereunder and all fees, charges and expenses payable by the Company. Should
there be found a variance of 5% or more from the Approved Budget, which
variance shall have been reasonably conceded by Manager, then Manager shall
pay the reasonable cost of such investigation.
3.2 ACTING COO. In consideration for Manager's provision of an acting
COO, the Company shall pay to Manager, for the first 6 months of the term of
this Agreement, 75% of the applicable CAI Personnel Cost for the individual
provided by Manager to the Company as acting COO. Amounts payable under this
Section 3.2 shall be payable monthly in advance and shall not exceed the amount
for such services contained in the Approved Budget. The parties hereto agree to
negotiate in good faith an appropriate percentage of the CAI Personnel Cost for
the acting COO for the period following the initial 6 months of the term of this
Agreement.
3.3 ACTING CEO SERVICES. In consideration for Manager's provision of an
acting CEO, the Company shall pay to Manager, for the first 6 months of the term
of this Agreement, 30% of the applicable CAI Personnel Cost for the individual
provided by Manager to the Company as acting CEO. Amounts payable under this
Section 3.3 shall be payable monthly in advance and shall not exceed the amount
for such services contained in the Approved Budget. The parties hereto agree to
negotiate in good faith an appropriate percentage of the CAI Personnel Cost for
the acting CEO for the period following the initial 6 months of the term of this
Agreement.
ARTICLE 4
TERM OF AGREEMENT/IP RIGHTS
4.1 TERM. This Agreement shall be effective from the date hereof and
shall terminate on the fifth anniversary hereof, at which time it may be
renewed, extended, or modified by a written agreement signed by both parties
hereto; provided, however, that, in the event that either party hereto
materially or repeatedly defaults in the performance of any of its duties or
obligations hereunder and does not substantially cure such default within
thirty (30) days after being given written notice specifying the default, or,
with respect to those defaults which cannot reasonably be cured within thirty
(30) days, if the defaulting party fails to proceed promptly after being
given such notice to commence curing the default and thereafter to proceed to
cure the same, then the party not in default may, by giving notice thereof to
the defaulting party, terminate this Agreement as of a date specified in such
notice of termination.
4.2 EARLY TERMINATION OF SECTIONS 2.5, 2.6, 3.2 AND 3.3. The Company may,
upon ten (10) business days written notice and payment in full of all
outstanding amounts hereunder, if any, terminate either or both of the Acting
CEO Services under SECTION 2.5 and the Operational Management Services under
SECTION 2.6, provided that the Company is not otherwise in default of its
obligations hereunder. Upon such termination the Company's obligations under
SECTION 3.3 and/or SECTION 3.2, as the case may be, shall cease and the
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balance of this Agreement shall continue in full force and effect.
4.3 RIGHTS TO INTELLECTUAL PROPERTY. The Company agrees that all
inventions, discoveries, improvements, computer software, firmware, programs,
documentation, manuals and other works or authorship (collectively
"Intellectual Property"), whether or not copyrightable or patentable, made,
created, developed, written or conceived by Manager during the provision of
services under this Agreement will not be deemed work for hire. All such
Intellectual Property will be property of Manager. Company hereby assigns to
Manager all right, title and interest in and to all Intellectual Property.
Notwithstanding anything to the contrary set forth herein, Manager hereby
grants a royalty-free license in perpetuity to Company to use the
Intellectual Property in the markets in which the Company has Spectrum during
the term of this Agreement and notwithstanding the termination of this
Agreement.
4.4 SURVIVAL OF CERTAIN PROVISIONS. Company agrees that notwithstanding
the termination of this Agreement pursuant to SECTION 3.1 hereto Section 4.3,
and ARTICLES 6 and 9 shall survive any such termination and remain in full force
and effect.
ARTICLE 5
RISK OF LOSS; INSURANCE AND LAWS
5.1 RISK. Manager shall provide for all proper safeguards and shall
assume all risks of loss to Manager and its employees incurred in performing
Services hereunder.
5.2 INSURANCE. Manager shall provide the insurance coverage written with
an authorized carrier rated "B+" or better, and deliver to Company certificates
for the following insurance:
(a) Comprehensive General Liability, with limits of liability to be
$1,000,000 general aggregate including products and completed operations,
contractual liability and personal injury, such policy to be written on an
occurrence form;
(b) Comprehensive Automobile Liability, with limits of liability to be
$500,000 combined single limit, such coverage to include all owned autos, hired
and non-owned, automobile bodily injury, personal liability and automobile
property damage;
(c) Workers' Compensation with limits of liability to be $100,000 for each
accident, $500,000 Disease-Policy Limit, $500,000 Disease with respect to each
Employee; and
(d) All policies shall name CS Wireless Systems, Inc. as an additional
insured regarding any work performed pursuant to the terms hereof.
5.3 LAWS. Manager shall comply with applicable federal, state and local
laws and
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regulations (i) governing health and safety of its employees assigned to
perform Services, (ii) applicable to the performance of its Services and
(iii) to all acts taken and omissions on behalf of the Company.
ARTICLE 6
PERFORMANCE OF SERVICES
6.1 CONDUCT OF PERSONNEL. Without limiting the responsibility of
Manager for the proper conduct of its personnel in the performance of
services hereunder, the conduct of the personnel performing Services is to be
guided by the representative designated by the Management Committee of
Company and any additional special written instructions as may be agreed to
by Manager and Company. Company acknowledges that Manager shall recruit and
use its best efforts to hire, either as an employee or consultant, third
parties to provide engineering and technical services and/or assist the
Manager and Company with respect to the Services. Manager agrees that its
personnel rendering Services shall cooperate with Company's employees and
consultants and accept all assistance provided.
6.2 SUPERVISION. Manager is responsible for the direct management and
supervision of its personnel through such representative approved by Company
and such representative will, in turn, be available at all reasonable times
to report and confer with the designated agents or representatives of Company
with respect to Services being rendered.
6.3 QUALIFICATIONS AND REMOVAL. Manager agrees that services to be
provided will be performed by qualified, careful and efficient employees in
strict conformity with the best practices and highest applicable Standards.
Manager further agrees that upon request of Company, it will remove from the
performance of services at a facility of the Company any of its employees
who, in the reasonable opinion of Company are not acting in the best
interests of the Company and after notice to Manager and a period of two
business days to correct the behavior, continue to act in a manner materially
adverse to the best interests of the Company.
6.4 REPORTS. Manager shall supply Company promptly after such reports
become available with all internal written reports describing the progress and
results of all services performed during the term hereof. In addition, Manager
and its personnel shall deliver to Company oral reports concerning the Services
from time to time as reasonably requested by Company.
ARTICLE 7
CONFIDENTIAL INFORMATION
7.1 RESTRICTION. Each party hereto agrees not to use or disclose to
anyone other than their respective employees who need to know, during the term
of this Agreement and thereafter, any Confidential Information (as hereinafter
defined). If requested by another party hereto, the non-requesting party shall
require its employees to execute confidentiality
10
<PAGE>
agreements prohibiting use or disclosure of Confidential Information. For
purposes of this Agreement, "Confidential Information" is (a) information
contained in any materials delivered by a party hereto pursuant to this
Agreement, and (b) information that relates to a party's business affairs or
that of any of its customers or affiliates.
7.2 DELIVERY. Upon termination of this Agreement, each party hereto
shall deliver to the other or, at such other's election, destroy (which
destruction shall be confirmed by the destroying company in writing), all
Confidential Information.
7.3 EXCLUSIVE OWNERSHIP. Manager shall be the sole owner and shall
have the exclusive ownership of and right to use and to license others to use
the Intellectual Property.
ARTICLE 8
EXCUSE FOR NONPERFORMANCE
8.1 FORCE MAJEURE. Each party hereto shall be excused from performance
hereunder for any period and to the extent that it is prevented from performing
any services pursuant hereto, in whole or in part, as a result of delays caused
by the other party or by an act of God, war, civil disturbance, court order,
labor dispute, third party nonperformance, or other cause beyond its reasonable
control, including without limitation failures or fluctuations in electrical
power, heat, light air conditioning or telecommunications equipment, and such
nonperformance shall not be a default hereunder or a grounds for termination
hereof. Notwithstanding the foregoing, in the event such condition exists for a
period of greater than thirty (30) days, either party may terminate this
Agreement by giving the other party written notice of termination, which
termination shall be effective as of the date set forth in such notice.
ARTICLE 9
COMPETITION AND EMPLOYEES
9.1 SOLICITATION OF MANAGER'S EMPLOYEES. Each party hereto agrees that
during the term of this Agreement and for a period of two (2) years immediately
following the termination of this Agreement, it shall not solicit employees of
any other party hereto or any affiliate thereof to leave the employ of such
party and become employees or consultant or otherwise provide services to the
soliciting party.
9.2 HIRING COMPANY EMPLOYEES. Manager agrees that it will assume the
financial obligations associated with the individuals specified on SCHEDULE 9.2
hereof forthwith and may, within 30 days of the execution of this Agreement,
assume their employment.
11
<PAGE>
ARTICLE 10
INDEMNIFICATION AND DISCLAIMER OF CONSEQUENTIAL DAMAGES
10.1 INDEMNIFICATION. Manager agrees to indemnify, defend and hold
harmless the Company and its affiliates and their respective directors,
officers, agents, employees and controlling persons from and against any and
all losses, claims, damages, liabilities and expenses (including the
reasonable cost of investigating and defending against any claims therefor
and reasonable counsel fees and expenses incurred in connection therewith)
that result solely from the willful bad faith or gross negligence of the
Manager in the performance of the Services that are the subject of this
Agreement. No express or implied warranty is made by Manager in respect of
any Service or product provided hereunder including, without limitation, any
implied warranty or merchantability or fitness for a particular purpose. The
Company agrees to indemnify, defend and hold harmless the Manager and its
affiliates and their respective directors, officers, agents, employees and
controlling persons from and against any and all losses, claims, damages,
liabilities and expenses (including the reasonable cost of investigating and
defending against any claims therefor and reasonable counsel fees and expense
incurred in connection therewith) that result solely from the willful bad
faith or gross negligence of the Company.
10.2 DISCLAIMER OF CONSEQUENTIAL DAMAGES. IN NO EVENT WILL EITHER PARTY
BE LIABLE FOR PUNITIVE DAMAGES OR FOR INDIRECT OR CONSEQUENTIAL DAMAGES,
INCLUDING, WITHOUT LIMITATION, LOST PROFITS OF ANY PARTY, INCLUDING THIRD
PARTIES. FURTHER, NO CAUSE OF ACTION WHICH ACCRUED MORE THAN ONE (1) YEAR PRIOR
TO THE FILING OF A SUIT ALLEGING SUCH CAUSE OF ACTION MAY BE ASSERTED AGAINST
EITHER PARTY.
ARTICLE 11
SECURITY AND RECORDS
11.1 SECURITY. Manager and the Company will each maintain strict
security (i) with respect to any facilities granted access to by one to the
other and (ii) regarding any materials or information delivered from one to
the other or developed by Manager in the performance of Services, and Manager
shall allow no person other than its employees, independent contractors and
those of Company access to such materials, information or facilities.
11.2 RECORDS. Manager will maintain a daily record of Services rendered
hereunder. Manager will keep such records throughout the term of this
Agreement which records shall be available for inspection by the Company at
Manager's reasonable request. At the termination of this Agreement all such
records shall be delivered to Company.
ARTICLE 12
GENERAL
12.1 ASSIGNMENT. This Agreement shall be binding on, and inure to the
benefit of, the parties hereto and their respective representatives,
successors, and permitted assigns, but
12
<PAGE>
neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be assigned or delegated by any of the parties hereto,
whether by operation of law or otherwise, without the prior written consent
of the other party (which consent may not be unreasonably withheld and/or
delayed), nor is this Agreement intended to confer upon any other person
other than the parties hereto any rights or remedies hereunder. Any
assignment or delegation in violation of this Agreement shall be null and
void AB INITIO. Nothing in the foregoing shall be interpreted to limit the
right of the Manager to retain third party independent contractors to provide
all or any part of the services required hereunder; provided, however, that
such persons shall be subject to the supervision of the Manager who shall
remain liable for the performance of the duties hereunder, directly or
through such third persons.
12.2 GOVERNING LAW. This Agreement shall be governed by, and construed
and interpreted in accordance with, the substantive laws of the State of
Delaware without giving effect to any conflict of laws principle or rule that
might require the application of the laws of another jurisdiction.
12.3 AMENDMENT. This Agreement, including the Schedules hereto, may be
amended only by an instrument in writing executed by the parties.
12.4 SECTION HEADINGS. Section and Article headings are for reference
purposes only and shall not affect the interpretation or meaning of this
Agreement.
12.5 NOTICES. All notices pursuant to this Agreement shall be in
writing, except as provided herein. Notices in writing shall be sufficient
if hand delivered or mailed by first class mail, postage prepaid, or sent by
nationally recognized overnight courier or sent by confirmed facsimile
transmission, with a copy by first class mail or courier, in each case to the
attention of the person listed below and to the party intended as the
recipient thereof at the address of such party set forth in the preamble, or
at such other address or to the attention of such other person as such party
shall have designated for such purpose in a written notice complying as to
delivery with the terms of this Section.
AMI or CAI: CAI Wireless Systems, Inc.
18 Corporate Woods Boulevard, Third Floor
Albany, New York 12211
Attn: Chief Financial Officer
Fax: (518) 462-3045
Company: CS Wireless Systems, Inc.
1101 Summit Avenue, Plano, TX 75074
Attn: Chief Financial Officer
Fax: (972)398-1110
13
<PAGE>
12.6 NO WAIVER OF PERFORMANCE. Failure by either party at any time to
require performance by the other party or to claim a breach of any provision
of this Agreement will not be construed as a waiver of any right accruing
under this Agreement nor affect any subsequent breach, nor affect the
effectiveness of this Agreement or any part hereof nor prejudice either party
as regards any subsequent action.
12.7 ENTIRE AGREEMENT; CONFLICTING PROVISIONS. This Agreement, together
with the Schedules hereto, constitutes the entire agreement between Manager and
Company with respect to the subject matter hereof and no representation or
statement not contained in the main body of this Agreement or such Schedules
shall be binding upon Manager or Company as a warranty or otherwise in the event
of any conflict between the terms of the main body of this Agreement and any of
the Schedules hereto, the terms of the main body of this Agreement shall govern.
12.8 TRADEMARKS. Manager shall use its own name or trademarks in all
dealings. It may not use any trademarks or trade names or rights to use same
belonging to the Company and/or its subsidiaries or affiliates (other than the
Manager) without the Company's prior written consent in each instance. Company
shall use its own name or trademarks in all dealings. It may not use any
trademarks or trade names or rights to use same belonging to the Manager and/or
its subsidiaries or affiliates (other than the Company) without the Manager's
prior written consent in each instance.
12.9 NO THIRD PARTY BENEFICIARIES. This Agreement and the rights and
obligations hereunder do not and shall not confer any rights to any third
parties and no third parties shall have any rights under this Agreement
12.10 ATTORNEYS' FEES. In the event that attorneys' fees or other
costs are incurred to secure performance of any of the obligations set forth in
this Agreement, to establish damages for the breach thereof, or to obtain any
other appropriate relief, whether by way or prosecution or defense, the
prevailing party (as determined by the judge, or other trier of fact, in its
sole discretion) shall be entitled to recover reasonable attorneys' fees and
costs incurred therein.
12.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts for the convenience of the parties hereto, all of which together
shall constitute one and the same instrument.
12.12 SEVERABILITY. If any provision of this Agreement is declared or
found to be illegal, unenforceable or void, then each party will be relieved
of its obligations arising under such provision to the extent such provision
is declared or found to be illegal, unenforceable or void (it being the
intent and agreement of the parties that this Agreement shall be deemed
amended by modifying such provision to the extent necessary to make it legal
and enforceable while preserving its intent or, if that is not possible, by
substituting therefor another provision that is legal and enforceable and
achieves the same objective), and each provision not so affected will be
enforced to the full extent permitted by law.
14
<PAGE>
12.13 RELATIONSHIP OF PARTIES. It is the express intention and
understanding of the Manager and the Company that the relationship of the
Manager to the Company shall be at all times that of an independent
contractor, with the Manager having full and complete liberty to use its own
free and uncontrolled will, judgment and discretion as to the method and
manner of performing the obligations of the Manager hereunder. Other than
the Services specifically stated herein to be performed by Manager, Manager
does not undertake by this Agreement or otherwise to perform any regulatory
or contractual obligation of Company, or to assume any responsibility for
Company's business or operations. Nothing herein contained or done pursuant
to this Agreement shall constitute the Manager or its agents or employees a
partner or joint venturer of the Company, or a fiduciary of (i) the Company,
(ii) any benefit plan of the Company, or (iii) any employee of the Company.
12.14 OTHER DOCUMENTS. Each party hereto agrees to execute any and all
documents, and to perform such other acts, that may be necessary or expedient
to further the purposes of this Agreement.
IN WITNESS WHEREOF, the parties hereto have respectively caused this
Agreement to be executed by their duly authorized officers as of the day and
year first written above.
CS Wireless Systems, Inc.
By: /s/ John M. Lund
Name: John M. Lund
Title: CFO
CAI Wireless Systems, Inc.
By: /s/ James P. Ashman
Name: James P. Ashman
Title: EVP and CFO
CAI/AMI Spectrum Management, Inc.
By: /s/ James P. Ashman
Name: James P. Ashman
Title: EVP
15
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
MetroCable, Inc., an Ohio corporation
Metropolitan Satellite Corp., an Ohio corporation
ACS California, Inc., a Delaware corporation
Valley Wireless Cable, Inc., a California corporation
USA Wireless Cable, Inc., a Nebraska corporation
CS Wireless Battle Creek, Inc., a Delaware corporation
Wireless Programming Cooperative, L.L.C., a Delaware limited liability company
(25% owned by the Company)
D&W TV LLC
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 41,839
<SECURITIES> 0
<RECEIVABLES> 1,542
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 44,019
<PP&E> 69,521
<DEPRECIATION> 25,876
<TOTAL-ASSETS> 258,817
<CURRENT-LIABILITIES> 7,280
<BONDS> 314,835
0
0
<COMMON> 11
<OTHER-SE> (68,699)
<TOTAL-LIABILITY-AND-EQUITY> (68,688)
<SALES> 26,259
<TOTAL-REVENUES> 26,259
<CGS> 0
<TOTAL-COSTS> 128,522<F1>
<OTHER-EXPENSES> (1,419)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,679
<INCOME-PRETAX> (137,515)
<INCOME-TAX> 0
<INCOME-CONTINUING> (137,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,868)<F2>
<NET-INCOME> (139,383)
<EPS-PRIMARY> (13.41)
<EPS-DILUTED> (13.41)
<FN>
<F1>INCLUDES IMPAIRMENT OF LONG-LIVED ASSETS OF $63,900.
<F2>DUE TO ADOPTION OF SOP 98-5, "REPORTIN ON THE COST OF START-UP ACTIVITIES."
</FN>
</TABLE>
