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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number :
0-23008
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AMERICAN TELECASTING, INC.
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(Exact name of registrant as specified in its charter)
Delaware 54-1486988
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5575 Tech Center Drive, Colorado Springs, CO 80919
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (719) 260 - 5533
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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
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As of May 13, 1998, 25,743,607 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
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AMERICAN TELECASTING, INC.
INDEX
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and March 31, 1998.............................................................3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1998.......................................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1998.......................................................5
Notes to Condensed Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................12
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings................................................................................20
Items 2-4 Not applicable
Item 5. Other Information ...............................................................................21
Item 6. Exhibits and Reports on Form 8-K ................................................................22
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
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(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................................. $ 9,125 $ 5,957
Trade accounts receivable, net ......................................... 1,091 1,021
Notes receivable ...................................................... 351 360
Prepaid expenses and other current assets .............................. 2,722 5,649
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Total current assets ........................................ 13,289 12,987
Property and equipment, net ............................................... 60,166 56,592
Deferred license and leased license acquisition costs, net ................ 131,017 132,383
Cash available for asset purchases and debt repayment ..................... 31,658 26,600
Restricted escrowed funds ................................................. 6,395 6,395
Goodwill, net ............................................................. 14,296 14,080
Deferred financing costs, net ............................................. 4,294 4,193
Other assets, net ......................................................... 483 462
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Total assets ..................................................... $ 261,598 $ 253,692
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ................................... $ 12,614 $ 12,940
Current portion of long-term obligations ................................ 3,284 2,735
Customer deposits ....................................................... 363 291
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Total current liabilities ................................................. 16,261 15,966
Deferred income taxes ..................................................... 1,275 1,275
2004 Notes ................................................................ 156,897 162,736
2005 Notes ................................................................ 135,137 140,153
Other long-term obligations, net of current portion ....................... 1,252 1,056
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Total liabilities ................................................ 310,822 321,186
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Class A Common Stock, $.01 par value; 45,000,000 shares authorized;
25,743,607 shares issued and outstanding ................................. 257 257
Class B Common Stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding ....................................... -- --
Additional paid-in capital ................................................ 189,413 189,413
Common Stock warrants outstanding ......................................... 10,129 10,129
Accumulated deficit ....................................................... (249,023) (267,293)
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Total stockholders' deficit ...................................... (49,224) (67,494)
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Total liabilities and stockholders' deficit ...................... $ 261,598 $ 253,692
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1997 1998
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<S> <C> <C>
Revenues:
Service and other .................................... $ 15,760 $ 12,500
Installation ......................................... 260 213
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Total Revenues ......................................... 16,020 12,713
Costs and Expenses:
Operating ............................................ 9,826 7,762
Marketing ............................................ 864 701
General and administrative ........................... 5,076 5,672
Depreciation and amortization ........................ 12,833 9,644
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Total costs and expenses ............................... 28,599 23,779
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Loss from operations ................................... (12,579) (11,066)
Interest expense ....................................... (10,331) (10,975)
Interest income ........................................ 184 471
Gain on disposition of wireless cable systems and assets -- 3,219
Other income, net ...................................... 143 81
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Loss before income tax benefit ......................... (22,583) (18,270)
Income tax benefits .................................... -- --
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Net loss ............................................... $ (22,583) $ (18,270)
============ ============
Basic and diluted net loss per share ................... $ (.92) $ (.71)
============ ============
Weighted average number of shares outstanding .......... 24,586,313 25,743,607
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (22,583) $ (18,270)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................. 12,833 9,644
Amortization of debt discount and deferred financing costs .... 9,667 10,956
Bond appreciation rights ...................................... 301 (45)
Minority interest income ...................................... (127) (138)
Gain on disposition of wireless cable systems and assets ...... -- (3,219)
Other ......................................................... 142 62
Changes in operating assets and liabilities ................... (1,509) (2,620)
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Net cash used in operating activities ...................... (1,276) (3,630)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (2,318) (4,866)
Additions to deferred license and leased license
acquisition costs ............................................. (561) (1,871)
Proceeds from disposition of wireless cable systems and assets .. 554,377
Decrease in cash available for asset purchases and debt
repayment ..................................................... -- 5,058
Net cash used in acquisitions ................................... (1,293) (1,672)
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Net cash (used in) provided by investing activities ......... (4,117) 1,026
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities .............................. 6,155 --
Principal payments on revolving credit facilities ............... (2,950) --
Increase in deferred financing costs ............................ (1,285) --
Contributions by minority interest holder ....................... 462 --
Principal payments on notes payable ............................. (1,068) (123)
Principal payments on capital lease obligations ................. (272) (441)
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Net cash provided by (used in) financing activities .......... 1,042 (564)
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Net decrease in cash and cash equivalents ....................... (4,351) (3,168)
Cash and cash equivalents, beginning of period .................. 18,476 9,125
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Cash and cash equivalents, end of period ........................ $ 14,125 $ 5,957
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS DESCRIPTION
History and Organization
American Telecasting, Inc. ("ATI") owns and operates a network
of wireless cable television systems providing subscription television
service. ATI and its subsidiaries are collectively referred to herein
as the "Company." As of March 31, 1998, the Company owned and operated
33 wireless cable systems located throughout the United States (the
"Developed Markets"). The Company also has significant wireless cable
(microwave) frequency interests in 19 other U.S. markets (the
"Undeveloped Markets").
Risks and Other Important Factors
As more fully described in Note 2, on May 13, 1998, the
Company paid approximately $17.5 million to purchase approximately
$30.2 million aggregate principal amount at maturity of the Company's
Senior Discount Notes due 2004 (the "2004 Notes") and approximately
$43.5 million aggregate principal amount at maturity of the Company's
Senior Discount Notes due 2005 (the "2005 Notes"). Expenses related to
the debt repayment are estimated by the Company to be approximately
$550,000. In connection with such purchase , the Company will recognize
a gain of approximately $37.0 million which will be reflected as an
extraordinary item in its second quarter 1998 results.
Interest payments on the 2004 Notes and the 2005 Notes will
commence on December 15, 1999 and February 15, 2001, respectively.
Interest payments in 1999, 2000, and 2001 are expected to be
approximately $12.1 million, $24.2 million and $47.1 million,
respectively. The Company's ability to make these payments will depend
upon its ability to attract sufficient additional capital through
relationships or transactions with strategic partners or otherwise, or
to develop product lines that would fund such cash interest payments.
There can be no assurance that the Company will be able to generate the
cash to fund such interest payments. Without new investments in the
Company, it is unlikely the Company's resources will be sufficient to
meet its obligations through 1999.
Since inception, the Company has focused principally on
developing analog wireless cable systems to provide multiple channel
television programming similar to that offered by franchise cable
companies. The Company's strategy is, in part, to maximize operating
cash flow from its analog video operations, while continuing to explore
the development of digital wireless services, such as high-speed
Internet access, two-way multimedia services (i.e. Internet and
telephony) and digital video. In certain markets, the Company has
intentionally curtailed growth in its analog video business by not
investing the capital resources necessary to replace all those
subscribers who chose to stop receiving the Company's service
("Subscriber Churn"). The Company's analog video strategy is based upon
several factors, including the limited capital resources available to
maintain the Company's business at current levels and management's
belief that the most attractive returns on investment are likely to be
based on digital technologies. The Company's high-speed Internet access
strategy is to initially launch commercial operations in a small number
of markets in order to evaluate the long-term viability and financial
returns of the business. During 1997, the Company launched an
asymmetrical high-speed Internet access service in its Colorado
Springs, Colorado market branded as "WantWEB." In the first quarter of
1998, the Company launched asymmetrical high-speed Internet services in
Denver, Colorado, and Portland, Oregon. The Company currently plans to
deploy a similar service in Seattle, Washington later in 1998 if
sufficient capital resources are available.
While the Company has begun planning and testing the digital
wireless services described above, it has introduced high-speed
Internet access service only on a limited basis and has not
commercially introduced
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two-way multi-media or digital video services. The Company's ability to
introduce these services on a broad commercial basis will depend on a
number of factors, including the availability of sufficient capital,
the success of the Company's development efforts, competitive factors
(such as the introduction of new technologies or the entry of
competitors with significantly greater resources than the Company and
increased competition for the renewal of channel lease agreements), the
availability of appropriate transmission and reception equipment on
satisfactory terms, the expertise of the Company's management, and the
Company's ability to obtain the necessary regulatory changes and
approvals in a timely fashion. There is also uncertainty regarding the
degree of subscriber demand for these services, especially at pricing
levels at which the Company can achieve an attractive return on
investment. Moreover, the Company expects that the market for any such
services will be extremely competitive.
During 1998, the Company intends to continue to operate its
Developed Markets principally as an analog wireless cable business, to
commercially launch high-speed Internet access services in three
markets (including Denver and Portland, which were launched in the
first quarter of 1998), and to initiate two multi-media technical
demonstrations. Because of its current financial condition and its
increasing emphasis on the development of digital services, the Company
does not plan to make the capital expenditures necessary to add enough
new subscribers to replace all of its analog video subscriber churn.
Moreover, at this time, the Company does not generally intend to
further develop any of its Undeveloped Markets using analog video
technology. The Company's business strategy regarding analog video
subscribers is expected to result in a decline in subscribers, revenue
and operating cash flow. This negative trend is expected to continue
for the foreseeable future until the Company is able to successfully
introduce and market alternative digital services. Unless and until
sufficient cash flow is generated from operations, the Company will be
required to utilize its current capital resources or external sources
of funding, or to sell assets, to satisfy its working capital and
capital expenditure needs. Under current capital market conditions, the
Company does not expect to be able to raise significant capital by
issuing equity securities. If the Company's capital resources are not
sufficient to finance its operations, either in 1998 or thereafter, the
Company will be required, at a minimum, to curtail its operations and
development plans, which curtailment could involve, among other things,
a complete cessation of new subscriber additions in analog video and
high-speed Internet access.
Multi-Media Services
During 1998, the Company intends to conduct technical
demonstration trials in Eugene, Oregon and Seattle, Washington, using
its wireless spectrum to deliver two-way multi-media (i.e. Internet and
telephony) services. The trials will utilize a transceiver and network
interface unit ("gateway") located at the subscriber's premises. The
transceiver will receive and send information to the transmission
tower. The gateway will separate the information streams into voice and
data channels. The Company's plan in conducting these trials is to
demonstrate the commercial viability of the services by confirming the
reliability of the technologies involved, especially for providing
broadband wireless bundled services, including voice and high-speed
Internet. The equipment being used by the Company is not yet available
in commercial quantities.
While the Company intends to continue its development efforts
with respect to offering a full complement of multi-media services, the
commercial introduction of such services in any of the Company's
markets would involve substantial capital expenditures, which the
Company is not in a position to make at this time. The Company's
ability to commence delivery of multi-media services is also dependent
upon, among other things, commercial availability of appropriate
transmission and reception equipment on satisfactory terms and certain
regulatory approvals and changes, especially with respect to routine
two-way licensing of the radio spectrum used by the Company.
The Company will require significant additional capital to
fully implement its digital strategy. To meet such capital
requirements, the Company is pursuing opportunities to enter into
strategic relationships or transactions with other providers of
telecommunications and multi-media services. These relationships could
provide the Company with access to technologies, products, capital and
infrastructure. Such relationships or
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transactions could involve, among other things, joint ventures, sales
or exchanges of stock or assets, or loans to or investments in the
Company by strategic partners. As of the date of this Report, except
for the BellSouth Agreement (as defined herein), the Company has not
reached any agreements or understandings with respect to such strategic
relationships or transactions.
BellSouth Transaction
On March 18, 1997, the Company entered into a definitive
agreement (the "BellSouth Agreement") with BellSouth Corporation and
BellSouth Wireless which provides for the sale of all of the Company's
Florida and Louisville, Kentucky wireless cable assets (the
"Southeastern Assets") to BellSouth Wireless (the "BellSouth
Transaction"). The Southeastern Assets include operating wireless cable
systems in Orlando, Lakeland, Jacksonville, Daytona Beach and Ft.
Myers, Florida and Louisville, Kentucky and wireless cable channel
rights in Bradenton, Naples, Sebring and Miami, Florida. The purchase
price for all of the Southeastern Assets is expected to range from
$67.9 million to $103.2 million, depending upon the number of wireless
cable channel rights that are ultimately transferred to BellSouth
Wireless.
On August 12, 1997, the Company completed the first closing of
the BellSouth Transaction, which involved transferring to BellSouth
Wireless the Company's operating systems and channel rights in the
Florida markets of Orlando, Jacksonville, Ft. Myers and Daytona Beach,
along with the Louisville, Kentucky market and certain rights in Miami,
Florida. The proceeds received and related gain recorded by the Company
from the first closing totaled approximately $54 million and $35.9
million, respectively. Of such proceeds, $7 million was placed in
escrow for a period of twelve months to satisfy any indemnification
obligations of the Company. As of March 31, 1998, the balance of escrow
funds was approximately $6.4 million. In March 1998, the Company closed
on additional channels in the Ft. Myers and Jacksonville, Florida
markets for cash consideration of approximately $2.9 million which is
reflected as a gain in the accompanying Condensed Consolidated
Statements of Operations. Under the terms of the BellSouth Agreement,
additional closings are possible through August 1999. The BellSouth
Agreement contains customary conditions for each closing, including the
satisfaction of all applicable regulatory requirements. There can be no
assurance that all conditions will be satisfied or that further sales
of assets to BellSouth Wireless will be consummated.
In conjunction with the BellSouth Transaction, the Company
agreed to sell its hardwire cable television system in Lakeland,
Florida. In February 1998, this system was sold to Time Warner
Entertainment - Advance Newhouse Partnership for approximately $1.5
million. A gain on the disposition of approximately $300,000 is
reflected in the accompanying Condensed Consolidated Statements of
Operations. As of the date of closing, the Lakeland hardwire cable
television system served approximately 2,300 subscribers.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Operating results for the three-month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
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Cash and Cash Equivalents
The Company considers all short-term investments with original
maturities of 90 days or less to be cash equivalents. As of March 31,
1998, cash equivalents principally consisted of money market funds,
commercial paper, federal government/agency debt securities, and other
short-term, investment-grade, interest-bearing securities. The carrying
amounts reported in the balance sheet for cash and cash equivalents
approximate the fair values of those assets.
Cash Available for Asset Purchases and Debt Repayment and Restricted
Escrow Funds
Cash available for asset purchases and debt repayments
represents the net available proceeds as of March 31, 1998, received
from the BellSouth closing that occurred on August 12, 1997. These
funds are restricted pursuant to the Indentures (as defined herein).
Restricted escrowed funds represents amounts placed in escrow at the
closing, which are approximately $6.4 million. These funds will be
released when the Company and BellSouth Wireless jointly submit an
instruction to the escrow agent for the release of such funds.
On April 9, 1998, the Company tendered an offer (the "Tender
Offer") for a portion of its outstanding 2004 Notes and a portion of
its outstanding 2005 Notes at a cash price of $255 per $1,000 principal
amount at maturity of the 2004 Notes purchased and $225 per $1,000
principal amount at maturity of the 2005 Notes purchased (collectively
the "Notes"). The maximum aggregate amount of cash available for the
purchase of Notes pursuant to the offer was $17.5 million.
The Tender Offer expired on May 7, 1998. Approximately $95.3
million aggregate principal amount at maturity of 2004 Notes and
approximately $137.3 million aggregate principal amount at maturity of
2005 Notes were tendered pursuant to the Tender Offer. Because the
consideration required to purchase all Notes tendered pursuant to the
Tender Offer exceeded $17.5 million, all tenders were prorated to the
extent necessary to limit the aggregate Tender Offer consideration to
$17.5 million. After applying proration procedures, the Company
purchased, on May 13, 1998, approximately $30.2 million aggregate
principal amount at maturity of 2004 Notes and approximately $43.5
million aggregate principal amount at maturity of 2005 Notes. A total
of 31.7% of the Notes tendered pursuant to the Tender Offer were
purchased by the Company. All tendered Notes not purchased because of
proration are being returned to the tendering holder. After giving
effect to the offer, approximately $166.7 million aggregate principal
amount at maturity of 2004 Notes and approximately $158.2 million
aggregate principal amount at maturity of 2005 Notes remain
outstanding.
In conjunction with and as a condition of the Tender Offer,
the Company also sought and received on April 28, 1998, the consent of
the majority of noteholders to (i) waivers (the "Waivers") of certain
asset disposition covenants in the Indentures (the "Indentures")
relating to the Notes with respect to proceeds previously received from
certain asset dispositions, and (ii) amendments (the "Amendments") of
the Indentures regarding treatment of future proceeds from certain
asset dispositions pursuant to the BellSouth Transaction. The Waivers
and Amendments became operative May 7, 1998, the date on which the
Notes were accepted for purchase by the Company.
The Waivers and Amendments relate to provisions of the
Indentures (the "Asset Disposition Covenants") which require that
certain Net Available Proceeds (as defined in the related Indenture)
from asset sales by the Company that were not used by the Company
within 270 days following receipt to acquire certain new assets or to
retire certain indebtedness be used to make a pro rata offer to
purchase outstanding Notes at a purchase price equal to 100% of the
accreted value thereof.
The Waivers approved by the noteholders waived the application
of the Asset Disposition Covenants in the case of any and all net
proceeds previously received by the Company from dispositions completed
prior to the Tender Offer, including pursuant to the BellSouth
Transaction.
The Amendments amend the Asset Disposition Covenants in the
case of any and all net available proceeds (the "Affected Proceeds")
received by the Company from (i) dispositions under the BellSouth
Agreement that close after May 7, 1998, which could be up to $46.2
million in proceeds depending on the total number of channel leases and
licenses ultimately delivered by the Company to BellSouth, and (ii) the
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approximately $6.4 million in proceeds that may be received from an
escrow account that was established under the BellSouth Agreement in
connection with a disposition completed prior to the date of the Tender
Offer.
Pursuant to the Amendments, no later than 30 days after the
aggregate amount of Affected Proceeds first equals or is greater than
$10 million, the Company is obligated to utilize 57% of the amount of
such Net Available Proceeds to make an offer (the "Initial Offer") to
purchase the outstanding Notes, at a purchase price in cash equal to
the greater of (i) $280.50 per $1,000 principal amount at maturity in
the case of the 2004 Notes and $247.50 per $1,000 principal amount at
maturity in the case of the 2005 Notes or (ii) the market value of the
Notes as determined on the date preceding the date of the commencement
of the required offer by Donaldson, Lufkin & Jenrette Securities
Corporation, the financial advisor to the Company. If the aggregate
principal amount of Notes tendered by holders thereof pursuant to a
required offer exceeds the amount of the 57% of the net available
proceeds to be used for the purchase of the Notes, the Notes shall be
selected for purchase on a pro rata basis.
Upon completion of the Initial Offer, the amount of Net
Available Proceeds shall be reset at zero. Thereafter, when the amount
of Affected Proceeds from subsequent asset dispositions to BellSouth
Wireless is greater than $5 million, the Company shall be obligated to
utilize 57% of the amount of such Affected Proceeds to make a
subsequent required offer, subject to the same terms and conditions set
forth above applicable to the Initial Offer.
The 43% of the Affected Proceeds not to be utilized for a
required offer to purchase, as well as the amount of the 57% of
Affected Proceeds to be used to purchase Notes pursuant to a required
offer that is in excess of the amount required to purchase the Notes
tendered by holders thereof, (the "Unencumbered Net Available
Proceeds") shall not be subject to any such tender obligation and shall
be freely available for use by the Company as it deems appropriate. The
Amendments do not restrict the Company from using Unencumbered Net
Available Proceeds for the purchase or other retirement of Notes on
such terms as it determines to be appropriate.
In addition, any and all financial advisor, legal and other
costs and fees incurred by the Company in connection with completing or
facilitating any future BellSouth dispositions, escrow proceeds or any
required offer shall be deemed to be reduce the amount of Affected
Proceeds.
The Amendments do not apply to net proceeds that may be
received from dispositions of assets that the Company may undertake
other than pursuant to the BellSouth Agreement, and with respect to
such proceeds the Asset Disposition Covenants remain in effect.
On a pro forma basis, had the Tender Offer been completed on
March 31, 1998, the effects of the Tender Offer would have changed the
amounts in the balance sheet categories of "Cash available for asset
purchases and debt repayments", "Cash and cash equivalents", and "2004
Notes" and "2005 Notes" from approximately $26.6 million, $5.9 million,
$162.7 million, and $140.1 million to approximately $0, $14.5 million,
$132.5 million and $96.6 million, respectively. "Cash available for
asset purchases and debt repayments" would no longer be present because
of the Waivers.
Net Loss Per Share
Basic and diluted net loss per share is computed by dividing
income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Options and warrants to
purchase shares of common stock were not included in the computation of
loss per share as the effect would be antidilutive. As a result, the
basic and diluted loss per share amounts are identical.
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Recently Adopted Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information."
The Company adopted SFAS No. 130 during the three month period ended
March 31, 1998.
SFAS No. 130 requires "comprehensive income," to be reported
in the financial statements and/or notes thereto. Since the Company
does not have any components of "other comprehensive income," reported
net income is the same as "total comprehensive income" for the three
months ended March 31, 1997 and 1998.
SFAS No. 131 requires an entity to disclose financial and
descriptive information about its reportable operating segments. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is not
required for interim financial reporting purposes during 1998. The
Company is in the process of assessing the additional disclosures, if
any, required by SFAS No. 131. However, such adoption will not impact
the Company's results of operations or financial position, since it
relates only to disclosures.
3. DEBT
Long-term debt at March 31, 1998 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
2004 Notes ........................................................... $162,736
2005 Notes ........................................................... 140,153
Notes payable ........................................................ 2,135
Capital leases ....................................................... 846
--------
Total ............................................................ 305,870
Less current portion ............................................. 2,735
--------
Long-term debt ................................................... $303,135
========
</TABLE>
On February 26, 1997, the Company entered into a twelve-month
$17.0 million credit facility (the "Credit Facility") with a bank. At
closing of the Credit Facility, the Company also delivered 4,500 bond
appreciation rights ("BARs") and an option to exercise 141,667
exchangeable debt warrants or 141,667 equity warrants. Concurrent with
the closing of the BellSouth Transaction, the Credit Facility was
repaid and the exchangeable debt warrants were redeemed. The Credit
Facility has been terminated.
The BARs remain outstanding as of March 31, 1998. Amounts
payable in connection with the BARs are based upon the appreciation in
price of $4.5 million face value of the Company's 2004 Notes. The
change in the value of the BARs is reflected as interest expense in the
accompanying financial statements. The BARs are exercisable after the
earlier of June 15, 1999 or the occurrence of an Event of Default under
the 2004 Notes. The payment due upon exercise of each BAR is equal to
the market price of each 2004 Note on the closing date less $290. The
net value of the BARs is payable to holders of the BARs in cash. As of
March 31, 1998, the Company had no accrued liability associated with
the BARs as the market price of the 2004 Notes was below $290.
4. COMMITMENTS AND CONTINGENCIES
Litigation
In February 1994, a complaint was filed by Fresno Telsat,
Inc. ("FTI") in the Superior Court of the State of California for the
County of Monterey against a director and officer of the Company, the
Company, and other named and unnamed defendants. The Complaint alleges
damages against the Company of approximately $220 million and that all
defendants, including the Company, participated in a conspiracy to
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misappropriate corporate opportunities belonging to FTI. A trial began
on February 2, 1998. On March 12, 1998, the jury returned a verdict.
The verdict essentially concluded that the defendants Hostetler and
Holmes engaged in no wrongful conduct as alleged by the plaintiff.
Because the plaintiff's claims against the Company must be resolved by
the Court, rather than the jury, that verdict does not yet constitute a
conclusive determination in favor of the Company. The Court intends
imminently to convene a conference to address all remaining issues and
enter judgment. Although the plaintiff has a right to appeal after
judgment is entered, management believes, on the advice of legal
counsel, that the jury verdict and the anticipated determination and
judgment by the Court in favor of all three defendants will survive
appeal. Although the ultimate outcome of this matter cannot be
predicted, management believes, based on its review of this claim and
discussion with legal counsel, that the resolution of this matter will
not have a material impact on the Company's business, financial
position or future results of operations.
On or about December 24, 1997, Peter Mehas, Fresno County
Superintendent of Schools, filed an action against the Fresno
Partnership, the Company and others entitled Peter Mehas, Fresno County
Superintendent of Schools v. Fresno Telsat Inc., an Indiana
corporation, et al., in the Superior Court of the State of California,
Fresno County. The complaint alleges that a channel lease agreement
between the Fresno Partnership and the Fresno County school system has
expired. The Plaintiff seeks a judicial declaration that the lease has
expired and that the defendants, including the Company, hold no right,
title or interest in the channel capacity which is the subject of the
lease. The Company believes that both it and the Fresno Partnership
possess valid defenses to the action. Management does not believe the
lawsuit will have a material impact on the business, financial
condition, or results of operations of the Company.
The Company is occasionally a party to other legal actions
arising in the ordinary course of its business, the ultimate resolution
of which cannot be ascertained at this time. However, in the opinion of
management, resolution of such matters will not have a material adverse
effect on the Company.
LMDS Auction
The Company participated in the FCC's bidding process for
Local Multi-Point Distribution Service ("LMDS") wireless spectrum
rights which was completed in February 1998. The Company was the
highest bidder in one market, Bremerton, Washington, and will pay
approximately $314,000 for certain LMDS rights in this market.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All statements contained herein that are not historical facts,
including but not limited to, statements regarding the Company's plans
for future development and operation of its business, are based on
current expectations. These statements are forward-looking in nature
and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to
differ materially are the following: a lack of sufficient capital to
finance the Company's business plan on terms satisfactory to the
Company; pricing pressures which could affect demand for the Company's
service; changes in labor, equipment and capital costs; the Company's
inability to develop and implement new services such as high-speed
Internet access, two-way multi-media services and digital video; the
Company's inability to obtain the necessary authorizations from the
Federal Communications Commission ("FCC") for such new services;
competitive factors, such as the introduction of new technologies and
competitors into the wireless communications business; a failure by the
Company to attract strategic partners; general business and economic
conditions; and the other risk factors described from time to time in
the Company's reports filed with the Securities and Exchange Commission
("SEC"). The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which statements are
made pursuant to the Private Securities Litigation Reform Act of 1995,
and as such, speak only as of the date made.
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INTRODUCTION
The Company operates its Developed Markets principally as an
analog video subscription television business. The Company's strategy
is, in part, to maximize operating cash flow from its analog video
operations, while continuing to explore the development of digital
wireless services. The Company has intentionally curtailed growth in
its analog video business by not investing the capital resources to
replace all Subscriber Churn. The Company's analog video strategy is
based upon several factors, including the limited capital resources
available to maintain the business at current levels and management's
belief that the most attractive returns on investment are likely to be
based on digital technologies. As the Company's analog video subscriber
base decreases, its revenues and operating cash flow are expected to
decrease unless and until it is able to successfully introduce other
revenue-producing digital wireless services.
Management believes that the most promising long-term use of
the Company's spectrum is to provide a variety of digital wireless
services. Such services could include high-speed Internet access,
two-way multi-media services (i.e. Internet and telephony) and digital
video. The Company's high-speed Internet access strategy is to
initially launch commercial operations in a small number of select
markets in order to evaluate the actual long-term viability and
financial returns of the business. In 1997, the Company commercially
launched a high-speed Internet access service branded as "WantWEB" in
its Colorado Springs, Colorado market. WantWEB was launched in Denver,
Colorado and Portland, Oregon in February 1998. The Company plans to
launch high-speed Internet access in Seattle, Washington in 1998 if
sufficient capital resources are available.
While the Company has begun planning and testing of two-way
multi-media and digital video services, it has not commercially
introduced these services and does not currently have the capital
resources necessary to do so. The Company's ability to introduce these
services on a broad commercial basis will depend on a number of
factors, including the availability of sufficient capital, the success
of the Company's development efforts, competitive factors (such as the
introduction of new technologies or the entry of competitors with
significantly greater resources than the Company and increased
competition for the renewal of channel lease agreements), the
availability of appropriate transmission and reception equipment on
satisfactory terms, the expertise of the Company's management, and the
Company's ability to obtain the necessary regulatory changes and
approvals in a timely fashion. There is also uncertainty regarding the
degree of subscriber demand for these services, especially at pricing
levels at which the Company can achieve an attractive return on
investment. Moreover, the Company expects that the market for any such
services will be extremely competitive.
Management believes that period-to-period comparisons of the
Company's financial results to date are not necessarily meaningful and
should not be relied upon as an indication of future performance due to
the changes in the Company's business strategy during the periods
presented, as discussed more fully above.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF FUNDS
The Company has experienced negative cash flow from operations
in each year since its inception. Although certain of the Company's
more established systems currently generate positive cash flow from
operations, the sale of five operating systems to BellSouth Wireless in
August 1997 has resulted in a decline in operating cash flow. The
Company's business strategy to decrease analog video subscribers is
also expected to result in a decline in subscribers, revenue and
operating cash flow. This negative trend is expected to continue for
the foreseeable future unless or until the Company is able to
successfully introduce and market alternative digital services. Unless
and until sufficient cash flow is generated from operations, the
Company will be required to utilize its current capital resources or
external sources of funding, or to sell assets, to satisfy its working
capital and capital expenditure needs.
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The Company's principal capital expenditure requirements for
1998 are expected to relate to the installation of analog video
equipment in new subscribers' premises, deployment of high-speed
Internet services in the Denver, Portland and possibly Seattle markets,
trials of two-way broadband data and telephony services, the purchase
of transmission equipment for new channels and the acquisition of
additional wireless spectrum. The Company intends to finance these
expenditures from existing cash and investment balances, from
additional closings under the BellSouth Agreement, if such closings
occur, or from other asset sales. Without such closings or sales, the
Company will be required, at a minimum, to curtail its planned capital
expenditures.
The commercial introduction of additional digital services,
such as two-way multi-media services and digital video, would require
substantial capital expenditures, which the Company is not in a
position to make at this time. While the Company may use a portion of
the proceeds from the BellSouth Transaction to acquire assets for the
development of digital services, such proceeds will not be sufficient
to fully implement its digital strategy. The Company is pursuing
strategic relationships or transactions with telecommunications and
software companies to facilitate access to additional capital, among
other things. The Company's ability to fully implement its business
strategy will depend, among other things, on its ability to attract
sufficient additional capital through relationships with strategic
partners or otherwise. There can be no assurance that sufficient
capital will be available on terms satisfactory to the Company, or at
all. Except for the BellSouth Transaction, the Company has not reached
any agreements or understandings with respect to such relationships or
transactions and there can be no assurance that any such agreements or
understandings will be reached.
The Company is experiencing increased programming expenses
beyond the normal annual escalations because of renewals of programming
contracts on less favorable terms and as a result of the Company's
declining subscriber base and the growth of digital video services by
competitors. These cost increases place additional pressure on the
Company's ability to generate positive cash flow from operations.
In addition, with the growth of the high-speed Internet access
business and the advent of other digital technologies, the Company is
experiencing increased competition for the renewal of channel lease
agreements. As a result, the Company could lose channels or incur
higher costs to retain its existing channels. Furthermore, certain of
the Company's channel lease agreements permit only analog technologies.
Thus, the deployment of digital services may require renegotiation of
these channel leases, which could also result in increased operating
costs. The Company expects to allocate capital resources, to the extent
available, to the acquisition of additional wireless spectrum in the
remainder of 1998.
On March 18, 1997, the Company entered into the BellSouth
Agreement which provides for the sale of all of the Company's
Southeastern Assets to BellSouth Wireless. The Southeastern Assets
include operating wireless cable systems in Orlando, Lakeland,
Jacksonville, Daytona Beach and Ft. Myers, Florida and Louisville,
Kentucky and wireless cable channel rights in Bradenton, Naples,
Sebring and Miami, Florida. The purchase price for all of the
Southeastern Assets is expected to range from $67.9 million to $103.2
million, depending upon the number of wireless cable channel rights
that are ultimately transferred to BellSouth Wireless.
In August 1997, the Company completed the first closing of the
BellSouth Agreement, which transferred to BellSouth Wireless the
Company's operating systems and current channel rights in the Florida
markets of Orlando, Jacksonville, Ft. Myers and Daytona Beach, along
with the Louisville, Kentucky market and certain rights in Miami,
Florida. The proceeds received from the first closing totaled
approximately $54 million. In March 1998, the Company closed on
additional channels in the Ft. Myers and Jacksonville, Florida markets
for cash consideration of approximately $2.9 million. The BellSouth
Agreement contains customary conditions to closing, including the
satisfaction of all applicable regulatory requirements. There can be no
assurance that all of such conditions will be satisfied or that any
future closings will occur related to the BellSouth Transaction.
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In conjunction with the BellSouth Transaction, the Company
agreed to sell its hardwire cable television system in Lakeland,
Florida. In February 1998, this system was sold to Time Warner
Entertainment - Advance Newhouse Partnership for approximately $1.5
million. As of the date of closing the Lakeland hardwire cable
television system served approximately 2,300 subscribers.
As a result of certain waivers granted in connection with the
Company's recent Tender Offer, the remaining proceeds from the
BellSouth closings occurring before May 7, 1998, are unrestricted.
Thus, the Company is no longer obligated to reinvest these remaining
proceeds within 270 days from the date of closing. - See "Other
Liquidity and Capital Resources Requirements and Limitations."
The Company participated in the FCC's bidding process for
Local Multi-Point Distribution Service ("LMDS") wireless spectrum
rights which was completed in February 1998. The Company was the
highest bidder in one market, Bremerton, Washington, and will pay
approximately $314,000 for certain LMDS rights in this market.
OTHER LIQUIDITY AND CAPITAL RESOURCES REQUIREMENTS AND LIMITATIONS
On April 9, 1998, the Company tendered an offer (the "Tender
Offer") for a portion of its outstanding 2004 Notes and a portion of
its outstanding 2005 Notes at a cash price of $255 per $1,000 principal
amount at maturity of the 2004 Notes purchased and $225 per $1,000
principal amount at maturity of the 2005 Notes purchased (collectively
the "Notes"). The maximum aggregate amount of cash available for the
purchase of Notes pursuant to the offer was $17.5 million.
The Tender Offer expired on May 7, 1998. Approximately $95.3
million aggregate principal amount at maturity of 2004 Notes and
approximately $137.3 million aggregate principal amount at maturity of
2005 Notes were tendered pursuant to the Tender Offer. Because the
consideration required to purchase all Notes tendered pursuant to the
Tender Offer exceeded $17.5 million, all tenders were prorated to the
extent necessary to limit the aggregate Tender Offer consideration to
$17.5 million. After applying proration procedures, the Company
purchased, on May 13, 1998, approximately $30.2 million aggregate
principal amount at maturity of 2004 Notes and approximately $43.5
million aggregate principal amount at maturity of 2005 Notes. A total
of 31.7% of the Notes tendered pursuant to the Tender Offer were
purchased by the Company. All tendered Notes not purchased because of
proration are being returned to the tendering holder. After giving
effect to the offer, approximately $166.7 million aggregate principal
amount at maturity of 2004 Notes and approximately $158.2 million
aggregate principal amount at maturity of 2005 Notes remain
outstanding.
In conjunction with and as a condition of the Tender Offer,
the Company also sought and received on April 28, 1998, the consent of
the majority of noteholders to (i) waivers (the "Waivers") of certain
asset disposition covenants in the Indentures (the "Indentures")
relating to the Notes with respect to proceeds previously received from
certain asset dispositions, and (ii) amendments (the "Amendments") of
the Indentures regarding treatment of future proceeds from certain
asset dispositions pursuant to the BellSouth Transaction. The Waivers
and Amendments became operative May 7, 1998, the date on which the
Notes were accepted for purchase by the Company.
The Waivers and Amendments relate to provisions of the
Indentures (the "Asset Disposition Covenants") which require that
certain Net Available Proceeds (as defined in the related Indenture)
from asset sales by the Company that were not used by the Company
within 270 days following receipt to acquire certain new assets or to
retire certain indebtedness be used to make a pro rata offer to
purchase outstanding Notes at a purchase price equal to 100% of the
accreted value thereof.
The Waivers approved by the noteholders waived the application
of the Asset Disposition Covenants in the case of any and all net
proceeds previously received by the Company from dispositions completed
prior to the Tender Offer, including pursuant to the BellSouth
Transaction.
The Amendments amend the Asset Disposition Covenants in the
case of any and all net available proceeds (the "Affected Proceeds")
received by the Company from (i) dispositions under the BellSouth
Agreement that close after May 7, 1998, which could be up to $46.2
million in proceeds depending on the total number of channel leases and
licenses ultimately delivered by the Company to BellSouth, and (ii) the
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approximately $6.4 million in proceeds that may be received from an
escrow account that was established under the BellSouth Agreement in
connection with a disposition completed prior to the date of the Tender
Offer.
Pursuant to the Amendments, no later than 30 days after the
aggregate amount of Affected Proceeds first equals or is greater than
$10 million, the Company is obligated to utilize 57% of the amount of
such net available proceeds to make an offer (the "Initial Offer") to
purchase the outstanding Notes, at a purchase price in cash equal to
the greater of (i) $280.50 per $1,000 principal amount at maturity in
the case of the 2004 Notes and $247.50 per $1,000 principal amount at
maturity in the case of the 2005 Notes and (ii) the market value of the
Notes as determined on the date preceding the date of the commencement
of the required offer by Donaldson, Lufkin & Jenrette Securities
Corporation, the financial advisor to the Company. If the aggregate
principal amount of Notes tendered by holders thereof pursuant to a
required offer exceeds the amount of the 57% of the net available
proceeds to be used for the purchase of the Notes, the Notes shall be
selected for purchase on a pro rata basis.
Upon completion of the Initial Offer, the amount of net
available proceeds shall be reset at zero. Thereafter, when the amount
of Affected Proceeds from subsequent asset dispositions to BellSouth
Wireless is greater than $5 million, the Company shall be obligated to
utilize 57% of the amount of such Affected Proceeds to make a
subsequent required offer, subject to the same terms and conditions set
forth above applicable to the Initial Offer.
The 43% of the Affected Proceeds not to be utilized for such
required offer to purchase, as well as the amount of the 57% of
Affected Proceeds to be used to purchase Notes pursuant to such
required offer that is in excess of the amount required to purchase the
Notes tendered by holders thereof, (the "Unencumbered Net Available
Proceeds") shall not be subject to any such tender obligation and shall
be freely available for use by the Company as it deems appropriate. The
Amendments do not restrict the Company from using Unencumbered Net
Available Proceeds for the purchase or other retirement of Notes on
such terms as it determines to be appropriate.
In addition, any and all financial advisor, legal and other
costs and fees incurred by the Company in connection with completing or
facilitating any future BellSouth dispositions, escrow proceeds or any
required offer shall be deemed to be reduce the amount of Affected
Proceeds.
The Amendments do not apply to net proceeds that may be
received from dispositions of assets that the Company may undertake
other than pursuant to the BellSouth Agreement, and with respect to
such proceeds the Asset Disposition Covenants remain in effect.
On a pro forma basis, had the Tender Offer been completed on
March 31, 1998, the effects of the Tender Offer would have changed the
balances in the balance sheet categories of "Cash available for asset
purchases and debt repayments", "Cash and cash equivalents", and "2004
Notes" and "2005 Notes" from approximately $26.6 million, $5.9 million,
$162.7 million, and $140.1 million to approximately $0, $14.5 million,
$132.5 million and $96.6 million, respectively. "Cash available for
asset purchases and debt repayments" would no longer be present due to
the Waivers.
The Company's capital expenditures, exclusive of acquisitions
of wireless cable systems and additions to deferred license and leased
license acquisition costs, during the three months ended March 31, 1998
and 1997 were approximately $4.9 million and $2.3 million,
respectively. Prior to the Tender Offer, the Company planned to make
approximately $33 million in capital expenditures in 1998. With the
completion of the Tender Offer, the Company is revising its business
plan and expects to significantly curtail its original plans on capital
spending for 1998. The revised capital expenditures for the remainder
of 1998 are not estimable at this time. Furthermore, if the Company
does not consummate any additional BellSouth closings (including the
release of the restricted escrow funds) the Company may not have
sufficient capital resources
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to operate through the remainder of 1998 without a substantial
curtailment of its operations and/or sale of additional assets.
Interest payments on the 2004 Notes and the 2005 Notes will
commence on December 15, 1999 and February 15, 2001, respectively. As a
result of the Tender Offer, the revised aggregate interest payments on
the 2004 Notes and the 2005 Notes are expected to be approximately
$12.1 million, $24.2 million and $47.1 million in 1999, 2000, and 2001,
respectively. The Company's ability to make these interest payments
will depend on its ability to attract sufficient additional capital
through relationships with strategic partners or otherwise, or to
develop product lines that would fund such cash interest payments.
Without new investments in the Company, it is unlikely the Company's
resources will be sufficient to meet its obligations through 1999.
As a result of certain limitations contained in the Indentures
relating to the 2004 Notes and the 2005 Notes, the Company's total
borrowing capacity outside the 2004 Notes and the 2005 Notes is
currently limited to $17.5 million (approximately $3.0 million of which
had been utilized as of March 31, 1998). Although the Company had the
ability under the Indentures to borrow an additional $14.5 million as
of March 31, 1998, the Company does not presently intend to incur any
additional bank or other borrowings because of the high cost of funds
for the wireless cable industry. However, if subsequent closings under
the BellSouth Agreement either do not occur or are insufficient to
provide funds for operations, the Company may be required to seek
additional debt financing. There can be no assurance that the Company
would be able to borrow additional funds on satisfactory terms or at
all.
Under current capital market conditions, the Company does not
expect to be able to raise significant capital by issuing equity
securities. If the Company's capital resources are not sufficient to
finance its operations, either in 1998 or thereafter, the Company will
be required, at a minimum, to curtail its operations and development
plans, which curtailment could involve, among other things, a complete
cessation of new subscriber additions in analog video and high-speed
Internet access.
Historically, the Company has generated operating and net
losses on a consolidated basis and can be expected to do so for the
foreseeable future. Such losses may increase as the Company's analog
subscriber base declines, unless and until the Company is able to
successfully introduce other revenue-producing wireless services. As a
result of the Company's history of net losses, the Company currently
has a negative tangible net worth and total liabilities exceeded total
assets as of March 31, 1998. During the early part of 1997, the Company
was notified by Nasdaq that the Company no longer met the net tangible
asset requirements for continued listing on the Nasdaq National Market.
The Company submitted a proposal to Nasdaq to achieve compliance, which
proposal was denied. Upon appeal by the Company, a temporary exception
was granted by Nasdaq. Prior to the expiration of the temporary
exception, the Company submitted a request to Nasdaq to move the
listing of the Company's Class A Common Stock from the Nasdaq National
Market to the Nasdaq SmallCap Market due the Company's assessment of
its inability to achieve compliance with the National Market
requirements within the time allowed. Effective October 17, 1997, the
Class A Common Stock began trading on the Nasdaq SmallCap Market.
During the early part of 1998, Nasdaq informed the Company
that it was not in compliance with the new net tangible asset/market
capitalization/net income requirements for continued listing on the
Nasdaq SmallCap Market, which require all listed companies to have net
tangible assets of at least $2 million, a market capitalization of at
least $35 million, or net income of at least $500,000 for two of the
last three years. The new maintenance criteria became effective on
February 23, 1998. By letter dated February 26, 1998, Nasdaq informed
the Company that the Company's Class A Common Stock was scheduled for
delisting, effective as of the close of business on March 16, 1998. The
Company has requested a temporary exception under Nasdaq rules by
appealing the delisting. The appeal has the effect of staying the
delisting until completion of the appeal process. The Company made a
written submission to Nasdaq on March 27, 1998, to support its request
for continued listing. To date, Nasdaq has not responded to the written
submission made on March 27, 1998.
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There can be no assurance that the Company will be able to
meet or continue to meet the minimum requirements for continued listing
on the SmallCap Market. If the Company is unable to meet such
requirements, the Class A Common Stock will likely be delisted from the
SmallCap Market. In such event, it will likely be more difficult to buy
or sell the Class A Common Stock or to obtain timely and accurate
quotations of trading prices. Delisting will likely result in a decline
in the trading market for the Class A Common Stock, which could depress
the Company's stock and bond prices, among other consequences.
Many computer systems in use today were designed and developed
using two digits, rather than four, to specify the year. As a result,
such systems will recognize the year 2000 as "00." This could cause
many computer applications to fail completely or to create erroneous
results unless corrective measures are taken. The Company utilizes
software and related computer technologies essential to its operations,
including its accounting and subscriber management (including customer
invoicing) systems, that will be affected by the Year 2000 issue.
Currently, the Company is in the process of converting to new, Year
2000 compliant, accounting systems. The estimated cost of this
conversion is approximately $800,000. The Company is studying what
actions it should take to make its subscriber management systems Year
2000 compliant. The expense associated with converting the subscriber
management systems cannot presently be determined, but could be
material and could further adversely impact the Company's liquidity.
Any failure or delay by the Company in resolving its Year 2000 issues,
or significant costs associated with resolution of such issues, could
have a material adverse effect on the Company's business, financial
condition and results of operations.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997
Service revenues decreased $3.3 million, or 20.7%, for the
three months ended March 31, 1998 to $12.5 million, as compared to
$15.8 million during the same period of 1997. This decrease resulted
primarily from the loss of revenues from the markets sold to BellSouth
Wireless on August 12, 1997 and from an overall decline in analog video
subscribers, offset partially by subscription rate increases in certain
markets. The five operating markets sold in the first closing of the
BellSouth Transaction accounted for total revenue, operating expenses
and EBITDA of $2.2 million, $1.8 million, and $388,000 for the three
months ended March 31, 1997. The number of subscribers to the Company's
wireless cable systems decreased to 133,700 at March 31, 1998, compared
to 138,900 at December 31, 1997 and 173,600 at March 31, 1997 (which
included approximately 23,000 subscribers in the five operating systems
sold to BellSouth Wireless in August 1997). Internet access revenues
were negligible in the first quarter of 1998.
On a "same system" basis (comparing systems that were
operational for all of each of the three month periods ended March 31,
1998 and 1997), service revenues decreased approximately $1 million, or
7.7%, to $12.3 million, as compared to $13.4 million for the
three-month period ended March 31, 1997. Same systems during these
periods totaled 33 systems. Revenue from Internet operations are
excluded from the analysis because these operations were launched in
the second quarter of 1997. Revenues from the Orlando, Jacksonville,
Daytona Beach and Ft. Myers, Florida and Louisville, Kentucky were
omitted from same system revenues for both periods as these systems
were sold by the Company during the third quarter of 1997. Similarly,
the revenues from the Company's Lakeland, Florida, hardwire cable
television system were omitted from both periods because the system was
sold during the first quarter of 1998. The average number of
subscribers in these same systems decreased approximately 10.3% for the
three months ended March 31, 1998, as compared to the same period of
1997.
Installation revenues for the three months ended March 31,
1998 totaled $213,000, compared to $260,000 during the same period of
1997. The decrease in installation revenues of approximately $47,000,
or 18.1%, was primarily the net result of fewer subscriber
installations because a portion of normal Subscriber Churn was not
replaced. The number of installations completed during the three months
ended March 31, 1998 decreased approximately 37.5% as compared to the
same period during 1997. Installation
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rates vary widely by system based upon competitive conditions. The
Company occasionally reduces installation charges as part of selected
promotional campaigns.
Operating expenses, principally programming, site costs and
other direct expenses, aggregated $7.8 million (or 61.0% of total
revenues) during the three months ended March 31, 1998, compared to
$9.8 million (or 61.3% of total revenues) during the same period of
1997. The decrease of approximately $2.1 million was primarily
attributable to the operations of the five systems sold in the
BellSouth Transaction. Programming expense, as a percent of revenues,
has increased from 33.9% to 35.0% primarily because of rate increases.
Generally, these programming rate increases occur in the first quarter,
therefore, these costs, as a percentage of revenues, should continue at
comparable levels for the remainder of 1998. The Company's smaller
subscriber base has adversely impacted the Company's ability to
negotiate favorable programming contracts, thus resulting in larger
than average increases in programming costs.
Marketing and selling expenses totaled $701,000 (or 5.5% of
total revenues) during the three months ended March 31, 1998, compared
to $864,000 (or 5.4% of total revenues) during the same period of 1997.
The decrease in such expenses of approximately $163,000 is attributable
to the sale of systems in the BellSouth Transaction and the Company's
continued strategy to replace some, but not all of its Subscriber
Churn.
General and administrative expenses were $5.7 million
(approximately 44.6% of revenue) for the three months ended March 31,
1998, compared to $5.1 million (approximately 31.6% of revenue) for the
1997 period. General and administrative expenses increased principally
because of higher legal expenses, related to litigation with Fresno
Telsat, Inc. (see "Legal Proceedings") and because of consulting
expenses in 1998 associated with advanced technology trials being
conducted by the Company in Eugene, Oregon and Seattle, Washington.
The Company's loss before interest, taxes, depreciation and
amortization was $1.4 million for the three months ended March 31,
1998, as compared to earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $254,000 during the same period of 1997. The
decline in EBITDA is predominantly due to decreased revenues, increased
programming costs, expenses associated with multi-media technical
demonstrations, additional operating costs associated with launches of
WantWEB service in new markets and increased legal expenses as
discussed above.
Depreciation and amortization expenses decreased approximately
$3.2 million to $9.6 million for the quarter ended March 31, 1998
compared to $12.8 million for the first quarter of 1997. The decrease
is the due to the Company having a smaller depreciable asset base as a
result of its sales of assets in conjunction with the BellSouth
Transaction.
Interest expense increased $644,000 during the quarter ended
March 31, 1998 to $11.0 million, as compared to $10.3 million during
the same period of 1997. The increase in interest expense primarily
resulted from noncash interest charges associated with the Company's
2004 Notes and 2005 Notes.
The Company consummated an additional closing in conjuction
with the BellSouth Transaction resulting in the majority of its $3.2
million gain on sale of wireless cable systems and assets for the
period ended March 31, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, on or about February 17,
1994, Fresno Telsat, Inc. ("FTI"), the 35% general partner of Fresno
19
<PAGE> 20
MMDS Associates ("the Fresno Partnership") which operates the Fresno,
Merced and Visalia wireless cable systems (65% owned by the Company),
filed a Complaint in the Superior Court of the State of California for
the County of Monterey against Robert D. Hostetler, Terry J. Holmes,
the Company, and certain other named and unnamed defendants. From 1989
through June 10, 1993, Mr. Hostetler was a member of the Board of
Directors and President of FTI. Mr. Hostetler and his wife currently
own 28% of the outstanding capital stock of FTI. Mr. Hostetler has been
employed by the Company since December 10, 1993 and became a Director
of the Company in March 1994. In January 1996, Mr. Hostetler was
appointed President and Chief Executive Officer of the Company. From
1991 until June 1995, Mr. Holmes was General Manager of the Fresno
Partnership. He is currently Managing Director of the Fresno
Partnership. Mr. Holmes has been employed by the Company since June
1995, and became Senior Vice President of the Company in September
1997. The Complaint alleged that, while Mr. Hostetler was a director
and employee of FTI, he engaged in wrongful conduct, including
misappropriation of corporate opportunity, fraud and unfair competition
by exploiting business opportunities that were the property of FTI. The
Complaint also alleged that Mr. Holmes engaged in a misappropriation of
corporate opportunities belonging to FTI. The Complaint further alleged
that all defendants, including the Company, participated in a
conspiracy to misappropriate corporate opportunities belonging to FTI
and that the Company and the unnamed defendants engaged in wrongful
interference with fiduciary relationship by intentionally causing Mr.
Hostetler to breach his fiduciary duty to FTI and causing Mr.
Hostetler to wrongfully transfer FTI's corporate opportunities to the
Company.
On August 28, 1996, ATI filed a Cross-Complaint (the
"Cross-Complaint") against FTI and certain of its officers and
directors (the "Cross-Defendants"). The Cross-Complaint alleges that
the Cross-Defendants have engaged in a violation of Section 26-1-8-401
of the Indiana Code, conversion, conspiracy, and breach of trust by
failing to acknowledge and record the Company's ownership of
approximately 7% of FTI's capital stock purchased by ATI from a former
shareholder of FTI, and continuing to represent that FTI qualifies for
Subchapter S status under the Internal Revenue Code. The
Cross-Complaint seeks specific performance of the transfer of shares to
ATI, compensatory damages, punitive damages, an injunction against any
further actions by the Cross-Defendants in breach of trust or with the
effect of dissipating and diverting the property and assets of FTI, and
the appointment of a receiver to handle the affairs of FTI during the
pendency of the FTI proceeding.
On or about February 24, 1997, the Company and Mr. Holmes each
filed a motion for summary judgment seeking dismissal of the claims in
the Complaint relating to an alleged conspiracy to misappropriate
corporate opportunities of FTI. On or about March 5, 1997, FTI filed a
motion for leave to amend the Complaint to add allegations that the
Company aided and abetted Mr. Hostetler's misappropriation of corporate
opportunity and that all defendants wrongfully interfered with FTI's
prospective business opportunities. On June 11, 1997, the Court granted
the Company's motion to dismiss the conspiracy claims against the
Company. Also on June 11, 1997, the Court (1) allowed FTI to amend its
complaint to assert a claim for unfair competition according to Section
17200 of the California Business and Professions Code, and (2) refused
to permit FTI to amend the Complaint to allege against the Company
either aiding and abetting or tortious interference with prospective
business opportunities. On July 23, 1997, the Company filed a demurrer
to dismiss the unfair competition claim against the Company. On August
13, 1997, the Company filed a motion for judgment on the claim for
interference with fiduciary relationship. FTI stipulated to the
Company's demurrer and filed its Second Amended Complaint on or about
September 15, 1997.
A trial began on February 2, 1998. On March 12, 1998, the jury
returned a verdict. The verdict essentially concluded that the
defendants Hostetler and Holmes engaged in no wrongful conduct as
alleged by the plaintiff. Because the plaintiff's claims against the
Company must be resolved by the Court, rather than the jury, that
verdict does not yet constitute a conclusive determination in favor of
the Company. The Court intends to address all remaining issues and
enter judgment. On advice of legal counsel, the Company believes that
the Court will enter judgment for all three defendants, including the
Company, on all of the plaintiff's claims because the jury's
determination that neither Mr. Hostetler nor Mr. Holmes engaged in
wrongful conduct relating to any of the disputed issues or property
eliminates any basis for the Court to conclude that the Company
wrongfully acquired any of those properties, as alleged by the
plaintiff. Although the plaintiff
20
<PAGE> 21
has a right to appeal after judgment is entered, management believes,
on the advice of counsel, that the jury verdict and the anticipated
determination and judgment by the Court in favor of all three
defendants will survive appeal. Although the ultimate outcome of this
matter cannot be predicted, management believes, based upon its review
of this claim and discussions with legal counsel, that resolution of
this matter will not have a material impact on the Company's business,
financial position or future results of operations. The Company's
Cross-Claim against FTI, filed on August 28, 1996, remains unresolved.
On or about December 24, 1997, Peter Mehas, Fresno County
Superintendent of Schools, filed an action against the Fresno
Partnership, the Company and others entitled Peter Mehas, Fresno County
Superintendent of Schools vs. Fresno Telsat Inc., an Indiana
corporation, et al., in the Superior Court of the State of California,
Fresno County. The complaint alleges that a channel lease agreement
between the Fresno Partnership and the Fresno County school system has
expired. The Plaintiff seeks a judicial declaration that the lease has
expired and that the defendants, including the Company, hold no right,
title or interest in the channel capacity which is the subject of the
lease. The Company believes that both it and the Fresno Partnership
possess valid defenses to the action. Management does not believe the
lawsuit will have a material impact on the business, financial
condition or results of operations of the Company.
In addition, the Company is occasionally a party to legal
actions arising in the ordinary course of its business, the ultimate
resolution of which cannot be ascertained at this time. However, in the
opinion of management, resolution of these matters will not have a
material adverse effect on the Company.
ITEM 5. OTHER INFORMATION
None
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4. First Supplemental Indenture Dated as of April 28, 1998
to Indenture Dated as of August 10, 1995 - Senior
Discount Notes due 2005.
4.1 Second Supplemental Indenture Dated as of April 28, 1998
to Indenture Dated as of June 23, 1994 - Senior Discount
Notes due 2004.
11. Statement regarding computation of earnings per share.
27. Financial Data Schedule (filed only electronically with
the SEC).
(b) Reports on Form 8-K.
The following report on Form 8-K was filed during the
quarter ended March 31, 1998:
(i) Current Report on Form 8-K dated March 13, 1998 to
report, under Item 5, that the Company was informed by
Nasdaq that it is not in compliance with the new net
tangible assets/market capitalization/net income
requirements.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN TELECASTING, INC.
Date: May 15, 1998 By:/s/ David K. Sentman
----------------------------- -----------------------------------
David K. Sentman
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date: May 15, 1998 By:/s/ Fred C. Pattin Jr.
----------------------------- -----------------------------------
Fred C. Pattin Jr.
Controller
(Principal Accounting Officer)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
4. First Supplemental Indenture Dated as of April 28, 1998 to Indenture
Dated as of August 10, 1995 - Senior Discount Notes due 2005.
4.1 Second Supplemental Indenture Dated as of April 28, 1998 to Indenture
Dated as of June 23, 1994 - Senior Discount Notes due 2004.
11. Statement regarding computation of basic and diluted earnings per
share.
27. Financial Data Schedule (filed only electronically with the SEC).
</TABLE>
24
<PAGE> 1
EXHIBIT 4
- --------------------------------------------------------------------------------
AMERICAN TELECASTING, INC.,
and
U.S. BANK TRUST NATIONAL ASSOCIATION
as Trustee
------------------------------
First Supplemental Indenture
Dated as of April 28, 1998
to Indenture
Dated as of August 10, 1995
------------------------------
Senior Discount Notes due 2005
- --------------------------------------------------------------------------------
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE, dated as of April 28, 1998 (the
"First Supplemental Indenture"), to the Indenture, dated as of August 10, 1995
(the "Indenture"), between AMERICAN TELECASTING, INC., a Delaware corporation
(the "Company") and U.S. BANK TRUST NATIONAL ASSOCIATION (formerly known as
FIRST TRUST NATIONAL ASSOCIATION)(the "Trustee").
RECITALS
WHEREAS, the Company has heretofore executed and delivered to the
Trustee the Indenture, providing for, among other things, the creation and
issuance by the Company of its Senior Discount Notes due 2005 (the
"Securities"); and
WHEREAS, Section 902 of the Indenture provides that the Company,
when authorized by a Board Resolution, and the Trustee, with the written consent
of the Holders of at least a majority in aggregate principal amount at Stated
Maturity of the Outstanding Securities, may enter into an indenture or
indentures supplemental to the Indenture, subject to certain exceptions
specified in Section 902 of the Indenture; and
WHEREAS, the parties hereto are entering into this First
Supplemental Indenture to amend Section 1016 of the Indenture and to waive
application of certain covenants contained in Section 1016 of the Indenture in
the case of certain prior dispositions (the "Proposals"); and
WHEREAS, the Holders of at least a majority in aggregate
principal amount of the Securities outstanding have duly consented to the
Proposals; and
WHEREAS, the conditions set forth in the Indenture for the
execution and delivery of this First Supplemental Indenture have been complied
with; and
WHEREAS, all things necessary to make this First Supplemental
Indenture a valid agreement of the Company and the Trustee, in accordance with
its terms, and a valid amendment of, and supplement to, the Indenture have been
done;
<PAGE> 3
NOW THEREFORE:
In consideration of the premises, the parties have executed and
delivered this First Supplemental Indenture, and the Company hereby covenants
and agrees with the Trustee, for the equal and proportionate benefit of all
Holders of the Securities, that the Indenture is supplemented and amended, to
the extent and for the purposes expressed herein, as follows:
Section 1. Definitions. For all purposes of this First Supplemental
Indenture, except as otherwise expressly provided or unless the context
otherwise requires, terms used herein shall have the meanings assigned to them
in the Indenture.
Section 2. Waiver of Section 1016 of the Indenture. The application of
Section 1016 of the Indenture is hereby waived in the case of any and all net
proceeds received by the Company or any of its subsidiaries prior to April 9,
1998 from dispositions that have been completed prior to April 9, 1998,
including pursuant to an Asset Purchase Agreement, dated as of March 18, 1997,
by and among certain subsidiaries of the Company, BellSouth Corporation
("BellSouth") and a subsidiary of BellSouth.
Section 3. Amendment of Section 1016(a)(iii) of the Indenture. Section
1016(a)(iii) of the Indenture is hereby amended to read in its entirety as
follows:
SECTION 1016. LIMITATIONS ON CERTAIN ASSET DISPOSITIONS
The Company shall not, and shall not permit any Restricted Subsidiary
to, make any Asset Disposition unless:
(a) the Company or the Restricted Subsidiary, as the case may be,
receives consideration for such disposition at least equal to the fair market
value (as determined by the Board of Directors, whose good faith determination
shall be conclusive) for the assets sold or disposed of as part of such
disposition and (b) if such disposition along with other dispositions during the
twelve months immediately preceding such disposition would result in Net
Available Proceeds in excess of $1,000,000, then
<PAGE> 4
(i) the Company or the Restricted Subsidiary, as the case
may be, receives consideration for such disposition at
least equal to the fair market value of the assets sold
or disposed of as part of such disposition (as
determined by the Board of Directors whose good faith
determination shall be conclusive and evidenced by a
board resolution),
(ii) if less than 85% of the consideration for such
disposition consists of cash or readily marketable cash
equivalents or the assumption of Debt of the Company or
such Restricted Subsidiary or other obligations
relating to such assets and release from all liability
on the Debt or other obligations assumed, then the
remainder of such consideration consists of property or
assets that will be owned by the Company or a
Restricted Subsidiary and used in the transmission of
video, voice and data and related businesses and
services that thereafter will be conducted by the
Company or such Restricted Subsidiary,
(iii) if the fair market value of the property and assets
being disposed of as part of such Asset Disposition
exceeds $20 million (as determined by the Board of
Directors, whose good faith determination shall be
conclusive and evidenced by a Board Resolution), then
the Company receives a written opinion from an
independent banking or appraisal firm of national
standing with experience in appraising the terms and
conditions of the type of transaction involved as to
the fairness to the Company or such Restricted
Subsidiary, as the case may be, from a financial point
of view of such disposition, and
3
<PAGE> 5
(iv) all Net Available Proceeds from such disposition are
applied within 270 days of such disposition:
(1) first, to prepay or repay Outstanding Debt of the
Company or any Restricted Subsidiary to the extent
the terms of the governing documents therefor require
such repayment and, at the Company's option, to
prepay or repay Debt of the Company or any Restricted
Subsidiary that prohibits purchases of the Securities
and/or Debt of the Company that ranks pari passu in
right of payment with the Securities and/or Debt of
any Restricted Subsidiary;
(2) second, to the extent of any such Net Available
Proceeds remaining after application thereof pursuant
to clause (1) above, to the acquisition of assets
(including interests in a Person that becomes a
Restricted Subsidiary as a result of such
acquisition) used in the transmission of video, voice
and data and related businesses and services of, the
Company or a Restricted Subsidiary; and
(3) third, to the extent of any such Net Available
Proceeds remaining after application thereof pursuant
to clauses (1) and (2) above, (i) first prepay or
repay all Outstanding Debt of the Company or any
Restricted Subsidiary that prohibits purchases of the
Securities and (ii) then, to the extent of any
remaining Net Available Proceeds, to make an Offer to
Purchase Outstanding Securities at a purchase price
equal to 100% of the Accreted Value thereof to any
Purchase Date prior to August 15, 2000 or 100% of the
principal amount thereof plus accrued and unpaid
4
<PAGE> 6
interest, if any, to any Purchase Date on or after
August 15, 2000 (and to any other Debt of the Company
ranking pari passu with the Securities containing
substantially similar provisions requiring offers to
purchase upon asset sales), provided that if the
amount of such Net Available Proceeds remaining after
application thereof pursuant to clauses (1) and (2)
and subclause (i) of this clause (3) above is less
than $5 million, the Company's obligation to make an
Offer to Purchase may be deferred until such time as
Net Available Proceeds, plus the aggregate amount of
Net Available Proceeds resulting from any subsequent
Asset Disposition or Asset Dispositions and remaining
after application thereof pursuant to clauses (1) and
(2) and subclause (i) of this clause (3) above are
equal to or greater than $5 million (such lesser
amount to be carried forward on a cumulative basis
for any fiscal year), at which time the Company shall
be obligated to make such Offer to Purchase at a
purchase price equal to 100% of the Accreted Value
thereof to any Purchase Date prior to August 15, 2000
or 100% of the principal amount thereof plus accrued
and unpaid interest, if any, to any Purchase Date on
and after August 15, 2000. If the aggregate principal
amount of Net Available Proceeds, the Trustee shall
select the Securities to be purchased on a pro rata
basis. Upon completion of such Offer to Purchase, the
amount of Net Available Proceeds shall be reset at
zero.
Provided, that the provisions described in the preceding paragraph
shall not apply (i) to a transaction of the type described in clause (x) or (y)
of the first paragraph of Section 801 and consummated in compliance
5
<PAGE> 7
with the provisions of Article Eight, or (ii) to any and all net proceeds
received by the Company or any of its subsidiaries from (1) the up to $46.2
million in proceeds that may be received in connection with dispositions
("Future BellSouth Dispositions") contemplated by the Asset Purchase Agreement,
dated as of March 18, 1997 (the "BellSouth Agreement"), by and among certain
subsidiaries of the Company, BellSouth Corporation ("BellSouth") and a
subsidiary of BellSouth, that close after the expiration date of the April 1998
Offer, depending on the total number of channel leases and licenses ultimately
delivered by the Company to BellSouth, and (2) the up to approximately $6.4
million in proceeds that may be received from an escrow account that was
established under the BellSouth Agreement in connection with a disposition
completed prior to April 8, 1998 (the "Escrow Proceeds"). In the case of
proceeds received pursuant to subsection (ii) above, no later than 30 days after
the aggregate amount of Net Available Proceeds resulting from Future BellSouth
Dispositions and the Escrow Proceeds first equals or is greater than $10
million, the Company shall be obligated to utilize 57% of the amount of such Net
Available Proceeds to make an offer to purchase the outstanding 2004 Notes and
the Securities (a "Required Offer"), which Required Offer shall remain open for
a minimum of 20 business days, unless extended, at a purchase price in cash
equal to the greater of (i) $280.50 per $1,000 principal amount at maturity in
the case of the 2004 Notes and $247.50 per $1,000 principal amount at maturity
in the case of the Securities and (ii) the market value of the 2004 Notes and
the Securities as determined on the date preceding the date of the commencement
of the Required Offer by Donaldson, Lufkin & Jenrette Securities Corporation,
the financial advisor to the Company. If the aggregate principal amount of 2004
Notes and Securities is tendered by Holders thereof pursuant to a Required Offer
exceeds the amount of the 57% of the Net Available Proceeds to be used for the
purchase of the 2004 Notes and the Securities, the 2004 Notes and the Securities
shall be selected for purchase on a pro rata basis. Upon completion of a
Required Offer, the amount of Net Available Proceeds shall be reset at zero. The
43% of the amount of such Net Available Proceeds not to be utilized for such
Required Offer to purchase, as well as the amount of the 57% of the Net
Available Proceeds to be used to purchase 2004 Notes and Securities pursuant to
such Required Offer that
6
<PAGE> 8
is in excess of the amount required to purchase the 2004 Notes and Securities
tendered by holders thereof (the "Unencumbered Net Available Proceeds"), shall
not be subject to any such tender obligation and shall be freely available for
use by the Company as it deems appropriate. In addition, any and all financial
advisor, legal and other costs and fees incurred by the Company in connection
with completing or facilitating any Future BellSouth Dispositions, Escrow
Proceeds, or any Required Offer as described in this Statement shall be deemed
to be reduce Net Available Proceeds resulting from Future BellSouth Dispositions
and Escrow Proceeds that are required to be used to purchase Notes. At such time
that the amount of Net Available Proceeds resulting from additional Future
BellSouth Dispositions or Escrow Proceeds equals or is greater than $5 million
(which amount shall not include the Unencumbered Net Available Proceeds), the
Company shall be obligated to utilize 57% of the amount of such additional Net
Available Proceeds to make a subsequent Required Offer, subject to the same
terms and conditions set forth above applicable to the initial Required Offer.
This proviso does not restrict the Company from using Unencumbered Net Available
Proceeds for the purchase or other retirement of 2004 Notes or Securities on
such terms as it determines to be appropriate.
For purposes of this Section 1016, the "April 1998 Offer" shall mean
the offer by the Company to purchase for cash a portion of the 2004 Notes and a
portion of the Securities at a cash price in the case of the 2004 Notes equal to
$255 per $1,000 principal amount at maturity of the 2004 Notes purchased and in
the case of the Securities equal to $225 per $1,000 principal amount at maturity
of the Securities purchased pursuant to the Offer to Purchase and Consent
Solicitation Statement, dated April 9, 1998, and the accompanying Consent and
Letter of Transmittal.
Section 4. Operation of Proposed Amendment. The Supplemental Indenture
will become effective upon the execution by the Company and the Trustee on the
Consent Date. The Proposals, however, will not become operative unless the 2004
Notes and Securities validly tendered pursuant to the April 1998 Offer are
accepted for purchase by the Company in accordance with the terms and conditions
set forth therein. Thereafter, the Proposals
7
<PAGE> 9
will be binding on each Holder of the Securities remaining outstanding, whether
or not such Holder tendered Securities pursuant to the April 1998 Offer. The
Indenture, without giving effect to the Proposals, will remain in effect until
the Proposals becomes operative. If the April 1998 Offer is terminated or
withdrawn, or the Securities are never accepted for purchase, the Supplemental
Indenture will never become operative.
Section 5. Recitals. The recitals of fact contained herein shall be
taken as the statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or adequacy of this First Supplemental
Indenture or the due execution hereof by the Company.
Section 6. Ratification and Confirmation of Indenture. Except as hereby
expressly amended, the Indenture is in all respects ratified and confirmed and
all the terms, provisions and conditions thereof shall be and remain in full
force and effect.
Section 7. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK
SHALL GOVERN AND BE USED TO CONSTRUE THIS FIRST SUPPLEMENTAL INDENTURE, WITHOUT
REGARD TO CONFLICTS OF LAW PRINCIPLES.
Section 8. Successors. All agreements of the Company in this First
Supplemental Indenture and the Securities shall bind its successors. All
agreements of the Trustee in this First Supplemental Indenture shall bind its
successors.
Section 9. Duplicate Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all such
executed copies together represent the same agreement.
Section 10. Separability. In case any provision of this First
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby, and a Holder shall have no claim therefor against
any party hereto.
Section 11. Headings. The headings of the sections
8
<PAGE> 10
of this First Supplemental Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions hereof.
Section 12. Trust Indenture Act Controls. If any provision of this
First Supplemental Indenture limits, qualifies or conflicts with the duties
imposed by TIAss.ss.310-317 by operation of TIAss.318(c), the imposed duties
shall control.
9
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the day and year first above
written.
AMERICAN TELECASTING, INC.
By:
---------------------------------
Name:
Title:
U.S. BANK TRUST NATIONAL
ASSOCIATION,
as Trustee
By:
---------------------------------
Name:
Title:
10
<PAGE> 1
EXHIBIT 4.1
- --------------------------------------------------------------------------------
AMERICAN TELECASTING, INC.,
and
U.S. BANK TRUST NATIONAL ASSOCIATION
as Trustee
---------------------------
Second Supplemental Indenture
Dated as of April 28, 1998
to Indenture
Dated as of June 23, 1994
---------------------------
Senior Discount Notes due 2004
- --------------------------------------------------------------------------------
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE, dated as of April 28, 1998 (the
"Second Supplemental Indenture"), to the Indenture, dated as of June 23, 1994
and as amended as of August 10, 1995 (the "Indenture"), between AMERICAN
TELECASTING, INC., a Delaware corporation(the "Company") and U.S. BANK TRUST
NATIONAL ASSOCIATION (formerly known as FIRST TRUST NATIONAL ASSOCIATION) (the
"Trustee").
RECITALS
WHEREAS, the Company has heretofore executed and delivered to
the Trustee the Indenture, providing for, among other things, the creation and
issuance by the Company of its Senior Discount Notes due 2004 (the
"Securities"); and
WHEREAS, Section 902 of the Indenture provides that the
Company, when authorized by a Board Resolution, and the Trustee, with the
written consent of the Holders of at least a majority in aggregate principal
amount at Stated Maturity of the Outstanding Securities, may enter into an
indenture or indentures supplemental to the Indenture, subject to certain
exceptions specified in Section 902 of the Indenture; and
WHEREAS, the parties hereto are entering into this First
Supplemental Indenture to amend Section 1016 of the Indenture and to waive
application of certain covenants contained in Section 1016 of the Indenture in
the case of certain prior dispositions (the "Proposals"); and
WHEREAS, the Holders of at least a majority in aggregate
principal amount of the Securities outstanding have duly consented to the
Proposals; and
WHEREAS, the conditions set forth in the Indenture for the
execution and delivery of this Second Supplemental Indenture have been complied
with; and
WHEREAS, all things necessary to make this Second Supplemental
Indenture a valid agreement of the Company and the Trustee, in accordance with
its terms, and a valid amendment of, and supplement to, the Indenture have been
done;
<PAGE> 3
NOW THEREFORE:
In consideration of the premises, the parties have executed and
delivered this Second Supplemental Indenture, and the Company hereby covenants
and agrees with the Trustee, for the equal and proportionate benefit of all
Holders of the Securities, that the Indenture is supplemented and amended, to
the extent and for the purposes expressed herein, as follows:
Section 1. Definitions. For all purposes of this Second Supplemental
Indenture, except as otherwise expressly provided or unless the context
otherwise requires, terms used herein shall have the meanings assigned to them
in the Indenture.
Section 2. Waiver of Section 1016 of the Indenture. The application of
Section 1016 of the Indenture is hereby waived in the case of any and all net
proceeds received by the Company or any of its subsidiaries prior to April 9,
1998 from dispositions that have been completed prior to April 9, 1998,
including pursuant to an Asset Purchase Agreement, dated as of March 18, 1997,
by and among certain subsidiaries of the Company, BellSouth Corporation
("BellSouth") and a subsidiary of BellSouth.
Section 3. Amendment of Section 1016(a)(iii) of the Indenture. Section
1016(a)(iii) of the Indenture is hereby amended to read in its entirety as
follows:
SECTION 1016. LIMITATIONS ON CERTAIN ASSET DISPOSITIONS
The Company shall not, and shall not permit any Restricted Subsidiary
to, make any Asset Disposition unless:
(a) the Company or the Restricted Subsidiary, as the case may be,
receives consideration for such disposition at least equal to the fair market
value (as determined by the Board of Directors, whose good faith determination
shall be conclusive) for the assets sold or disposed of as part of such
disposition and (b) if such disposition along with other dispositions during the
twelve months immediately preceding such disposition would result in Net
Available Proceeds in excess of $1,000,000, then
<PAGE> 4
(i) the Company or the Restricted Subsidiary, as the case
may be, receives consideration for such disposition
at least equal to the fair market value of the assets
sold or disposed of as part of such disposition (as
determined by the Board of Directors whose good faith
determination shall be conclusive and evidenced by a
board resolution),
(ii) if less than 85% of the consideration for such
disposition consists of cash or readily marketable
cash equivalents or the assumption of Debt of the
Company or such Restricted Subsidiary or other
obligations relating to such assets and release from
all liability on the Debt or other obligations
assumed, then the remainder of such consideration
consists of property or assets that will be owned by
the Company or a Restricted Subsidiary and used in
the transmission of video, voice and data and related
businesses and services that thereafter will be
conducted by the Company or such Restricted
Subsidiary,
(iii) if the fair market value of the property and assets
being disposed of as part of such Asset Disposition
exceeds $20 million (as determined by the Board of
Directors, whose good faith determination shall be
conclusive and evidenced by a Board Resolution), then
the Company receives a written opinion from an
independent banking or appraisal firm of national
standing with experience in appraising the terms and
conditions of the type of transaction involved as to
the fairness to the Company or such Restricted
Subsidiary, as the case may be, from a financial
point of view of such disposition, and
3
<PAGE> 5
(iv) all Net Available Proceeds from such disposition are
applied within 270 days of such disposition:
(1) first, to prepay or repay Outstanding Debt of
the Company or any Restricted Subsidiary to the
extent the terms of the governing documents
therefor require such repayment and, at the
Company's option, to prepay or repay Debt of the
Company or any Restricted Subsidiary that
prohibits purchases of the Securities and/or Debt
of the Company that ranks pari passu in right of
payment with the Securities and/or Debt of any
Restricted Subsidiary;
(2) second, to the extent of any such Net Available
Proceeds remaining after application thereof
pursuant to clause (1) above, to the acquisition
of assets (including interests in a Person that
becomes a Restricted Subsidiary as a result of
such acquisition) used in the transmission of
video, voice and data and related businesses and
services of, the Company or a Restricted
Subsidiary; and
(3) third, to the extent of any such Net Available
Proceeds remaining after application thereof
pursuant to clauses (1) and (2) above, (i) first
prepay or repay all Outstanding Debt of the
Company or any Restricted Subsidiary that
prohibits purchases of the Securities and (ii)
then, to the extent of any remaining Net Available
Proceeds, to make an Offer to Purchase Outstanding
Securities at a purchase price equal to 100% of
the Accreted Value thereof to any Purchase Date
prior to June 15, 1999 or 100% of the principal
amount thereof plus accrued and unpaid
4
<PAGE> 6
interest, if any, to any Purchase Date on or after
June 15, 1999 (and to any other Debt of the
Company ranking pari passu with the Securities
containing substantially similar provisions
requiring offers to purchase upon asset sales),
provided that if the amount of such Net Available
Proceeds remaining after application thereof
pursuant to clauses (1) and (2) and subclause (i)
of this clause (3) above is less than $5 million,
the Company's obligation to make an Offer to
Purchase may be deferred until such time as Net
Available Proceeds, plus the aggregate amount of
Net Available Proceeds resulting from any
subsequent Asset Disposition or Asset Dispositions
and remaining after application thereof pursuant
to clauses (1) and (2) and subclause (i) of this
clause (3) above are equal to or greater than $5
million (such lesser amount to be carried for ward
on a cumulative basis for any fiscal year), at
which time the Company shall be obligated to make
such Offer to Purchase at a purchase price equal
to 100% of the Accreted Value thereof to any
Purchase Date prior to June 15, 1999 or 100% of
the principal amount thereof plus accrued and
unpaid interest, if any, to any Purchase Date on
and after June 15, 1999. If the aggregate
principal amount of Net Available Proceeds, the
Trustee shall select the Securities to be pu
chased on a pro rata basis. Upon completion of
such Offer to Purchase, the amount of Net
Available Proceeds shall be reset at zero.
Provided, that the provisions described in the preceding paragraph
shall not apply (i) to a transaction of the type described in clause (x) or (y)
of the first paragraph of Section 801 and consummated in compliance
5
<PAGE> 7
with the provisions of Article Eight, or (ii) to any and all net proceeds
received by the Company or any of its subsidiaries from (1) the up to $46.2
million in proceeds that may be received in connection with dispositions
("Future BellSouth Dispositions") contemplated by the Asset Purchase Agreement,
dated as of March 18, 1997 (the "BellSouth Agreement"), by and among certain
subsidiaries of the Company, BellSouth Corporation ("BellSouth") and a
subsidiary of BellSouth, that close after the expiration date of the April 1998
Offer, depending on the total number of channel leases and licenses ultimately
delivered by the Company to BellSouth, and (2) the up to approximately $6.4
million in proceeds that may be received from an escrow account that was
established under the BellSouth Agreement in connection with a disposition
completed prior to April 8, 1998 (the "Escrow Proceeds"). In the case of
proceeds received pursuant to subsection (ii) above, no later than 30 days after
the aggregate amount of Net Available Proceeds resulting from Future BellSouth
Dispositions and the Escrow Proceeds first equals or is greater than $10
million, the Company shall be obligated to utilize 57% of the amount of such Net
Available Proceeds to make an offer to purchase the outstanding 2005 Notes and
the Securities (a "Required Offer"), which Required Offer shall remain open for
a minimum of 20 business days, unless extended, at a purchase price in cash
equal to the greater of (i) $280.50 per $1,000 principal amount at maturity in
the case of the Securities and $247.50 per $1,000 principal amount at maturity
in the case of the 2005 Notes and (ii) the market value of the 2005 Notes and
the Securities as determined on the date preceding the date of the commencement
of the Required Offer by Donaldson, Lufkin & Jenrette Securities Corporation,
the financial advisor to the Company. If the aggregate principal amount of 2005
Notes and Securities is tendered by Holders thereof pursuant to a Required Offer
exceeds the amount of the 57% of the Net Available Proceeds to be used for the
purchase of the 2005 Notes and the Securities, the 2005 Notes and the Securities
shall be selected for purchase on a pro rata basis. Upon completion of a
Required Offer, the amount of Net Available Proceeds shall be reset at zero. The
43% of the amount of such Net Available Proceeds not to be utilized for such
Required Offer to purchase, as well as the amount of the 57% of the Net
Available Proceeds to be used to purchase 2005 Notes and Securities pursuant to
such Required Offer that
6
<PAGE> 8
is in excess of the amount required to purchase the 2005 Notes and Securities
tendered by holders thereof (the "Unencumbered Net Available Proceeds"), shall
not be subject to any such tender obligation and shall be freely available for
use by the Company as it deems appropriate. In addition, any and all financial
advisor, legal and other costs and fees incurred by the Company in connection
with completing or facilitating any Future BellSouth Dispositions, Escrow
Proceeds, or any Required Offer as described in this Statement shall be deemed
to be reduce Net Available Proceeds resulting from Future BellSouth Dispositions
and Escrow Proceeds that are required to be used to purchase Notes. At such time
that the amount of Net Available Proceeds resulting from additional Future
BellSouth Dispositions or Escrow Proceeds equals or is greater than $5 million
(which amount shall not include the Unencumbered Net Available Proceeds), the
Company shall be obligated to utilize 57% of the amount of such additional Net
Available Proceeds to make a subsequent Required Offer, subject to the same
terms and conditions set forth above applicable to the initial Required Offer.
This proviso does not restrict the Company from using Unencumbered Net Available
Proceeds for the purchase or other retirement of 2005 Notes or Securities on
such terms as it determines to be appropriate.
For purposes of this Section 1016, the "April 1998 Offer" shall mean
the offer by the Company to purchase for cash a portion of the 2005 Notes and a
portion of the Securities at a cash price in the case of the Securities equal to
$255 per $1,000 principal amount at maturity of the Securities purchased and in
the case of the 2005 Notes equal to $225 per $1,000 principal amount at maturity
of the 2005 Notes purchased pursuant to the Offer to Purchase and Consent
Solicitation Statement, dated April 9, 1998, and the accompanying Consent and
Letter of Transmittal.
Section 4. Operation of Proposed Amendment. The Supplemental Indenture
will become effective upon the execution by the Company and the Trustee on the
Consent Date. The Proposals, however, will not become operative unless the 2005
Notes and Securities validly tendered pursuant to the April 1998 Offer are
accepted for purchase by the Company in accordance with the terms and conditions
set forth therein. Thereafter, the Proposals
7
<PAGE> 9
will be binding on each Holder of the Securities remaining outstanding, whether
or not such Holder tendered Securities pursuant to the April 1998 Offer. The
Indenture, without giving effect to the Proposals, will remain in effect until
the Proposals becomes operative. If the April 1998 Offer is terminated or
withdrawn, or the Securities are never accepted for purchase, the Supplemental
Indenture will never become operative.
Section 5. Recitals. The recitals of fact contained herein shall be
taken as the statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or adequacy of this Second Supplemental
Indenture or the due execution hereof by the Company.
Section 6. Ratification and Confirmation of Indenture. Except as hereby
expressly amended, the Indenture is in all respects ratified and confirmed and
all the terms, provisions and conditions thereof shall be and remain in full
force and effect.
Section 7. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK
SHALL GOVERN AND BE USED TO CONSTRUE THIS SECOND SUPPLEMENTAL INDENTURE, WITHOUT
REGARD TO CONFLICTS OF LAW PRINCIPLES.
Section 8. Successors. All agreements of the Company in this Second
Supplemental Indenture and the Securities shall bind its successors. All
agreements of the Trustee in this Second Supplemental Indenture shall bind its
successors.
Section 9. Duplicate Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all such
executed copies together represent the same agreement.
Section 10. Separability. In case any provision of this Second
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby, and a Holder shall have no claim therefor against
any party hereto.
Section 11. Headings. The headings of the sections
8
<PAGE> 10
of this Second Supplemental Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions hereof.
Section 12. Trust Indenture Act Controls. If any provision of this
Second Supplemental Indenture limits, qualifies or conflicts with the duties
imposed by TIA Sections 310-317 by operation of TIA Sections 318(c), the
imposed duties shall control.
9
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed as of the day and year first above
written.
AMERICAN TELECASTING, INC.
By:
---------------------------------
Name:
Title:
U.S. BANK TRUST NATIONAL
ASSOCIATION,
as Trustee
By:
---------------------------------
Name:
Title:
10
<PAGE> 1
EXHIBIT 11
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
Earnings Per Share
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net loss ......................................... $ (22,583) $ (18,270)
Common Stock weighted average shares ............. 24,586,313 25,743,607
Basic and diluted net loss per share ............. $ (.92) $ (.71)
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,957
<SECURITIES> 0
<RECEIVABLES> 1,021
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,987
<PP&E> 56,592
<DEPRECIATION> 0
<TOTAL-ASSETS> 253,692
<CURRENT-LIABILITIES> 15,966
<BONDS> 302,889
0
0
<COMMON> 189,670
<OTHER-SE> (257,164)
<TOTAL-LIABILITY-AND-EQUITY> 253,692
<SALES> 0
<TOTAL-REVENUES> 12,713
<CGS> 0
<TOTAL-COSTS> 23,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,975
<INCOME-PRETAX> (18,270)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,270)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
