<PAGE> 1
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 September 30, 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
--------------------- ----------------------
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)
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<S> <C>
Delaware 54-1486988
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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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</TABLE>
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
--- ---
As of November 12, 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
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Page
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998.........................3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1997 and 1998...........4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 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..............................13
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.................................................23
Items 2-4. Not applicable
Item 5. Other Information.................................................25
Item 6. Exhibits and Reports on Form 8-K..................................26
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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<CAPTION>
December 31, September 30,
1997 1998
-------------- --------------
(Unaudited)
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ASSETS
Current Assets:
Cash and cash equivalents ...................................... $ 9,125 $ 11,775
Trade accounts receivable, net ................................. 1,091 1,044
Notes receivable ............................................... 351 377
Prepaid expenses and other current assets ...................... 2,722 2,245
-------------- --------------
Total current assets .............................................. 13,289 15,441
Property and equipment, net ....................................... 60,166 43,385
Deferred license and leased license acquisition costs, net ........ 131,017 119,982
Cash available for asset purchases or debt repayment .............. 31,658 11,629
Restricted escrowed funds ......................................... 6,395 2,000
Goodwill, net ..................................................... 14,296 11,167
Deferred financing costs, net ..................................... 4,294 3,074
Other assets, net ................................................. 483 364
-------------- --------------
Total assets ............................................. $ 261,598 $ 207,042
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses ........................... $ 12,614 $ 12,153
Current portion of long-term obligations ........................ 3,284 409
Customer deposits ............................................... 363 209
-------------- --------------
Total current liabilities ................................ 16,261 12,771
Deferred income taxes ............................................. 1,275 102
2004 Notes ........................................................ 156,897 148,341
2005 Notes ........................................................ 135,137 118,539
Other long-term obligations, net of current portion ............... 1,252 899
-------------- --------------
Total liabilities ........................................ 310,822 280,652
COMMITMENTS AND CONTINGENCIES (SEE NOTE 4)
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) (273,409)
-------------- --------------
Total stockholders' deficit .................................. (49,224) (73,610)
-------------- --------------
Total liabilities and stockholders' deficit .............. $ 261,598 $ 207,042
============== ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1997 1998 1997 1998
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Revenues:
Service and other ............................... $ 14,061 $ 11,393 $ 45,179 $ 36,349
Installation .................................... 246 93 787 472
----------- ----------- ----------- -----------
Total revenues ..................................... 14,307 11,486 45,966 36,821
Costs and Expenses:
Operating ....................................... 8,100 8,151 27,227 23,870
Marketing ....................................... 666 200 2,197 1,609
General and administrative ...................... 5,287 4,404 15,736 15,740
Depreciation and amortization ................... 11,499 10,722 37,108 30,741
----------- ----------- ----------- -----------
Total costs and expenses ........................... 25,552 23,477 82,268 71,960
----------- ----------- ----------- -----------
Loss from operations ............................... (11,245) (11,991) (36,302) (35,139)
Interest expense ................................... (12,287) (9,940) (33,414) (31,216)
Interest income .................................... 422 155 772 1,241
Gain/(loss) on sale of wireless cable
systems and assets .............................. 35,944 (823) 35,944 2,396
Other income ....................................... 234 106 673 148
----------- ----------- ----------- -----------
Income/(loss) before income tax (expense)/benefit .. 13,068 (22,493) (32,327) (62,570)
Income tax (expense)/benefit ....................... (1,123) 1,173 (1,123) 1,173
----------- ----------- ----------- -----------
Income/(loss) before extraordinary item ............ 11,945 (21,320) (33,450) (61,397)
Extraordinary gain on extinguishment of debt ....... -- -- -- 37,011
----------- ----------- ----------- -----------
Net income/(loss) .................................. $ 11,945 $ (21,320) $ (33,450) $ (24,386)
=========== =========== =========== ===========
Basic and diluted net income/(loss) per share:
Loss per share before extraordinary gain on
extinguishment of debt ........................ $ .46 $ (.83) $ ( 1.32) $ (2.39)
Income per share from extraordinary gain on
extinguishment of debt ........................ -- -- -- 1.44
----------- ----------- ----------- -----------
Basic and diluted income/(loss) per share ....... $ .46 $ (.83) $ (1.32) $ (.95)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding ............................. $25,743,607 $25,743,607 $25,362,081 $25,743,607
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (33,450) $ (24,386)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary gain on early extinguishment of debt ......... -- (37,011)
Depreciation and amortization .............................. 37,108 30,741
Amortization of debt discount and deferred financing costs . 31,145 31,069
Bond appreciation rights and warrants ...................... 1,345 (45)
Minority interest income ................................... (327) (363)
Gain on disposition of wireless cable systems and assets ... (35,944) (2,396)
Other ...................................................... 1,111 259
Changes in operating assets and liabilities ................ 5,433 (4,188)
----------- -----------
Net cash used in operating activities ................... 6,421 (6,320)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................... (7,956) (10,390)
Additions to deferred license and leased license
acquisition costs .......................................... (995) (5,593)
Proceeds from disposition of wireless cable systems and assets 47,106 19,213
Cash available for asset purchases or debt repayment ......... (31,658) 20,029
Restricted escrowed funds .................................... (6,287) 6,560
Net cash used in acquisitions ................................ (3,416) (1,526)
----------- -----------
Net cash used in/provided by investing activities ........ (3,206) 28,293
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities ........................... 6,155 --
Principal payments on revolving credit facilities ............ (9,105) --
Increase in deferred financing costs ......................... (1,285) --
Contributions by minority interest holder .................... 462 --
Redemption of exchangeable debt warrants ..................... (850) --
Cash used in bond tender offer ............................... -- (17,996)
Principal payments on notes payable .......................... (1,700) (542)
Principal payments on capital lease obligations .............. (707) (785)
----------- -----------
Net cash used in financing activities ..................... (7,030) (19,323)
----------- -----------
Net increase in cash and cash equivalents .................... (3,815) 2,650
Cash and cash equivalents, beginning of period ............... 18,476 9,125
----------- -----------
Cash and cash equivalents, end of period ..................... $ 14,661 $ 11,775
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS DESCRIPTION
History and Organization
American Telecasting, Inc. ("the Company") owns and operates a
network of wireless cable television systems providing subscription
television service. The Company and its subsidiaries are collectively
referred to herein as the "Company." As of September 30, 1998, the
Company owned and operated 32 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
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 six operating systems to BellSouth
Wireless Cable, Inc. ("BellSouth Wireless") since August 1997 (see
"BellSouth Transaction") has resulted in a decline in operating cash
flow. The Company's business strategy to decrease analog video
subscribers has also resulted in a decline in revenue and operating
cash flow. Internet access service and two-way broadband data and
telephony trials are in the early stages of deployment and development,
respectively. The increased costs to introduce and test these digital
services is negatively impacting the Company's operating cash flow.
This negative trend is expected to continue for the foreseeable future.
Unless and until sufficient cash flow is generated from operations, the
Company will be required to utilize its current capital resources, or
sell assets, to satisfy its working capital and capital expenditure
needs. Under current capital market and capital structure conditions,
the Company does not expect to be able to raise significant capital by
issuing equity securities or additional debt.
Cash interest payments on the 2004 Notes and the 2005 Notes
are required to commence on December 15, 1999 and February 15, 2001,
respectively. The aggregate interest payments on the 2004 Notes and the
2005 Notes are approximately $11.4 million, $28.4 million and $40.7
million, in 1999, 2000, and 2001, respectively, after adjusting for the
completion of a bond tender offer that expired on October 8, 1998.
Without new investments in the Company, or a capital
restructuring, it is unlikely the Company will be able to make cash
interest payments on the 2004 and 2005 Notes or meet its obligations by
the end of 1999, or earlier. While any such restructuring, should it
occur, could take a variety of forms, it is likely a restructuring
could involve an exchange of some of the outstanding debt for stock in
the Company resulting in a very substantial dilution to existing
stockholders. If new investments are not received, or a capital
restructuring is not undertaken, the Company will be required, at a
minimum, to curtail its operations and development plans, which
curtailment could involve, among other things, further reductions in
the Company's workforce, closing certain operating businesses or
discontinuing certain activities, including but not limited to,
Internet access service and two-way broadband data and telephony
trials.
The Company has been advised by its independent public
accountants that if additional financing or a capital restructuring has
not been resolved prior to the completion of their audit of the
Company's financial statements for the year ending December 31, 1998,
their auditors' report on those financial statements will be modified
to express substantial doubt as to the Company's ability to continue as
a going concern.
6
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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 Naples, Sebring and Miami, Florida.
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. The escrow balance, plus accrued interest
of approximately $200,000, was released to the Company on August 12,
1998. On March 25, 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.
In conjunction with the BellSouth Transaction, the Company
agreed to sell its hardwire cable television system in Lakeland,
Florida. On February 18, 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.
On July 15, 1998, the Company completed an additional closing
of the BellSouth Transaction, which transferred to BellSouth Wireless
the Company's wireless operating system and channel rights in Lakeland,
Florida. As of the date of closing, the Lakeland wireless cable system
served approximately 8,200 subscribers. The proceeds received by the
Company were approximately $12.0 million, of which $2.1 million was
placed in escrow. The Company closed on additional channels in the
Lakeland, Florida market for cash consideration of approximately $5.0
million. On August 12, 1998, the Company also received approximately
$165,000 on August 12, 1998, which represents a portion of the escrow
from the initial Lakeland closing which occurred on July 15, 1998. A
net loss of approximately $823,000 was recorded on the Lakeland
wireless cable system transactions. 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. If
additional closings occur, the Company presently estimates that total
gross proceeds will be less than $10 million.
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 and nine-month periods ended
September 30, 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.
7
<PAGE> 8
Reclassifications
Certain amounts from the prior year's consolidated financial
statements have been reclassified to conform with the 1998
presentation.
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 September
30, 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 or Debt Repayment and Restricted
Escrow Funds
Cash available for asset purchases or debt repayments
represents the amounts remaining as of December 31, 1997, and September
30, 1998, from the BellSouth closings that occurred in 1997 and 1998.
These funds were restricted pursuant to the Indentures (as defined
herein). As a result of certain waivers granted in connection with the
Company's First Tender Offer dated April 9, 1998 (more fully described
in Note 3), the remaining proceeds received from the BellSouth closings
occurring before May 7, 1998 are no longer restricted by the
Indentures. Restricted cash proceeds as of September 30, 1998 were
entirely used in a debt tender offer, which was completed in October
1998 (see Note 3).
Restricted escrowed funds as of December 31, 1997, represents
amounts placed in escrow at the closing of the five BellSouth
properties occurring on August 12, 1997, which was approximately $6.4
million. The escrowed funds, plus accrued interest of approximately
$200,000, were released to the Company on August 12, 1998. Restricted
escrowed funds of $2.0 million, as of September 30, 1998, represent a
twelve-month escrow related to the Lakeland wireless cable system sale,
which occurred on July 15, 1998.
Net Income (Loss) Per Share
Basic and diluted net income (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 net income (loss) per share as the
effect would not be dilutive. As a result, the basic and diluted losses
per share amounts are identical.
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."
On January 1, 1998, the Company adopted SFAS No. 130.
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 and nine months ended September 30, 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
8
<PAGE> 9
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.
The Accounting Standards Executive Committee ("ACSEC") has
issued Statement of Position 98-5 ("SOP 98-5") regarding the "Costs of
Start-Up Activities" which is effective for fiscal years beginning
after December 15, 1998. Under SOP 98-5 the Company will be required to
expense all unamortized pre-launch costs for non-operative systems as a
cumulative effect of change in accounting principles, and to expense
all future start-up costs. The Company currently estimates the adoption
of SOP 98-5 will result in a charge of approximately $2.0 million.
3. DEBT
Long-term debt at September 30, 1998 consisted of the
following (in thousands):
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2004 Notes............................... $ 148,341
2005 Notes............................... 118,539
Notes payable............................ 266
Capital leases........................... 460
----------
Total................................ 267,606
Less current portion................. 409
----------
Long-term debt....................... $ 267,197
==========
</TABLE>
In 1997, in connection with a credit facility that was later
terminated, the Company issued 4,500 Bond Appreciation Rights ("BARs")
that remain outstanding as of September 30, 1998. Amounts payable in
connection with the BARs is 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, or such lower
amount to reflect certain distributions to bondholders. The net value
of the BARs is payable to holders of the BARs in cash. As of September
30, 1998, the Company had no accrued liability associated with the
BARs.
Bond Tender Offers
On April 9, 1998, the Company offered $17.5 million (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").
On May 13, 1998, in connection with the Tender Offer, the
Company purchased approximately $30.2 million aggregate principal
amount at maturity of 2004 Notes (approximate accreted value of $25.3
million) and approximately $43.5 million aggregate principal amount at
maturity of 2005 Notes (approximate accreted value of $30.6 million).
The Company recognized an extraordinary gain of approximately $37.0
million upon the early extinguishment of the Notes.
In conjunction with and as a condition of the Tender Offer,
the Company also received on April 28, 1998, the consent of holders of
the majority of the outstanding Notes 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.
9
<PAGE> 10
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 received by the Company from
(i) dispositions under the BellSouth Agreement that close after May 7,
1998, and (ii) the approximately $2.0 million in proceeds that were
received from an escrow account related to a BellSouth closing
occurring on July 15, 1998.
Pursuant to the Amendments, no later than 30 days after the
aggregate amount of Net Available 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. 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 reduce the amount of Net Available Proceeds. 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.
The 43% of the Net Available Proceeds not to be utilized for a
required offer to purchase, as well as the amount of the 57% of Net
Available 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.
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.
The Company's recent transaction with BellSouth Wireless
involving the sale of the Company's operating system in Lakeland,
Florida, the closing on additional channels in Lakeland, Florida and
the release of the restricted escrowed funds from the first closing of
the BellSouth Transaction provided cash to the Company of approximately
$21.6 million. Because the combination of these funds, net of financial
advisor, legal and other costs, exceeded $10 million, the Company was
obligated to make the Initial Offer to purchase outstanding notes.
On September 11, 1998, the Company commenced the Initial Offer
of $11.6 million for a portion of its outstanding 2004 Notes and a
portion of its outstanding 2005 Notes at a cash price of $280.50 per
$1,000 principal amount at maturity of the 2004 Notes purchased and
$247.50 per $1,000 principal amount at maturity of the 2005 Notes
purchased.
10
<PAGE> 11
On October 15, 1998, in connection with the Initial Offer, the
Company purchased approximately $21.5 million aggregate principal
amount at maturity of 2004 Notes (approximate accreted value of $19.3
million) and approximately $22.6 million aggregate principal amount at
maturity of 2005 Notes (approximate accreted value of $17.0 million).
The Company will recognize an extraordinary gain, in the fourth quarter
of 1998, of approximately $22.0 million upon the early extinguishment
of the Notes.
Upon completion of the Initial Offer, the amount of Net
Available Proceeds was reset at zero. Thereafter, at such time the
amount of Net Available Proceeds from subsequent asset dispositions to
BellSouth Wireless exceeds $5 million, the Company shall be obligated
to utilize 57% of the amount of such Net Available Proceeds to make a
subsequent required offer, subject to the same terms and conditions set
forth above applicable to the Initial Offer.
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 Mr. Hostetler (a director, President and
Chief Executive Officer of the Company), the Company, and other named
(including Mr. Holmes, an employee of the Company) and unnamed
defendants. The Complaint alleged damages against the Company of
approximately $220 million and that all defendants, including the
Company, participated in a conspiracy to misappropriate corporate
opportunities belonging to FTI. The 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 had to be resolved by the Court, rather than
the jury, that verdict did not constitute a conclusive determination in
favor of the Company. Pursuant to a settlement, the complaint against
the Company and Mr. Holmes was dismissed with prejudice on July 10,
1998, thereby resolving all disputes between FTI and the Company and
Mr. Holmes. On October 20, 1998, the Court entered judgment in favor of
Mr. Hostetler on all claims against him and ordered plaintiff to pay
certain of his costs as required by law.
On or about December 24, 1997, Peter Mehas, Fresno County
Superintendent of Schools, filed an action against Fresno MMDS
Associates (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 trial is scheduled to
begin December 14, 1998. The parties are conducting discovery.
On or about October 13, 1998, Bruce Merrill and Virginia
Merrill, as Trustees of the Merrill Revocable Trust dated as of August
20, 1982, filed a lawsuit against the Company entitled Bruce Merrill
and Virginia Merrill, as Trustees of the Merrill Revocable Trust dated
as of August 20, 1982 v. American Telecasting, Inc., in the United
States District Court for the District of Colorado. The complaint
alleges that the Company owes the plaintiffs $1,250,000 due on a note
which matured on September 15, 1998. The complaint seeks payment of
$1,250,000 plus attorneys fees, interest and consequential damages not
to exceed $1,000,000. The Company has responded to the complaint by
asserting that plaintiffs are not entitled as a matter of law to
recover any consequential damages. The Company believes that it has no
obligation to pay the $1,250,000 due under the note, which is the
subject of this complaint because certain conditions expressly set
forth in the note have not occurred. The Company has not yet answered
the complaint and no discovery has occurred. No trial date has been
set.
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.
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Executive and Key Employee Retention Program
Effective July 1, 1998, the Board of Directors approved a
Retention and Achievement Incentive Program ("Executive Program") for
certain of its executive officers. Under the Executive Program, the
executive officers of the Company are each eligible to receive cash
retention payments of $40,000-$50,000 if such individuals remain in the
Company's employment through June 30, 1999 or if the employment of such
individuals with the Company is terminated by the Company without cause
before June 30, 1999. The maximum aggregate retention payments that are
payable under the Executive Program are approximately $240,000. In
addition, the Executive Program also provides for the payment of
achievement incentives to these executives if the average closing price
of the Company's Class A Common Stock is $2.00 per share or higher for
the average of the last 20 trading days of June 1999. One-half of the
achievement incentives are payable if such average closing price is
$2.00 per share, and the full achievement incentives are payable if
such average closing price per share is $3.00 per share or higher. If
achievement incentives are payable, then the first 40% of such
incentives are payable by the Company in cash, and the remaining 60%
may be paid in cash or Class A Common Stock, or a combination thereof,
at the discretion of the Company. Appropriate adjustments in the
achievement incentives will be made to give effect to changes in the
Class A Common Stock resulting from subdivisions, consolidations or
reclassifications of the Class A Common Stock, the payment of dividends
or other distributions by the Company (other than in the ordinary
course of business), mergers, consolidations, combinations or similar
transactions or other relevant changes in the capital of the Company.
The maximum aggregate achievement payments that are payable under the
Executive Program are approximately $900,000. The Executive Program is
evidenced by agreements between the Company and each executive officer.
Amounts payable under the Executive Program are independent of any
obligations of the Company, including severance payments, under
employment agreements or other bonus programs. No amounts have been
paid by the Company under the Executive Program.
The Board of Directors also approved, effective July 1, 1998,
a Retention Program ("Key Employee Program") for key employees (other
than executive officers) as designated by the Chief Executive Officer.
Under the Key Employee Program, approximately 20 key employees selected
to date are each eligible to receive cash retention payments of
$12,500-$40,000 if such individuals remain in the Company's employment
through June 30, 1999, or if the employment of such individuals with
the Company is terminated by the Company without cause before June 30,
1999. The maximum aggregate retention payments presently payable under
the Key Employee Program are approximately $520,000. In addition, the
Key Employee Program offers severance benefits ranging from three to
nine months of base salary to certain key employees in the event that
their employment with the Company is terminated without cause on or
before December 31, 1999. The maximum aggregate termination payments
presently payable under the Key Employee Program are approximately
$570,000. The Key Employee Program is evidenced by agreements between
the Company and each key employee.
Approximately $183,000 was accrued under the Executive and Key
Employee Program as of September 30, 1998. No retention, achievement
incentives or termination payments are payable to any executive officer
or key employee who voluntarily terminates employment with the Company
or whose employment is terminated by the Company for cause.
Fresno MMDS Associates Transaction
On July 10, 1998, the Company purchased from FTI the remaining
35% partnership interest that it did not already own in Fresno MMDS
Associates for cash consideration of $1.5 million plus contingent cash
consideration of up to $255,000. The Company assumed no liabilities of
the partnership. Through two of its subsidiaries, the Company is now
the 100% owner of Fresno MMDS Associates. Payment of some or all of the
$255,000 is related to the outcome of the litigation entitled Peter
Mehas, Fresno County Superintendent of Schools v. Fresno Telstat Inc.,
an Indiana corporation et al. Mr. Hostetler and his wife currently own
approximately 28% of the outstanding capital stock of FTI. They have
asserted claims against FTI as creditors. Mr. and Mrs. Hostetler are
also engaged in disputes with other creditors and shareholders of FTI
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<PAGE> 13
regarding their respective entitlements to the assets of FTI. The money
already paid by the Company to FTI to acquire FTI's partnership
interest in Fresno MMDS Associates, and the contingent consideration
which may be paid in the future, presently constitute the principal
sources of funds available to satisfy the claims of the various parties
to the disputes. The parties are engaged in settlement discussions.
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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; or capital restructuring by the
Company, 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.
INTRODUCTION
Since inception, the Company has focused principally on
developing and operating 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. During 1997, the Company
launched an asymmetrical high-speed Internet access service in its
Colorado Springs, Colorado market branded as "WantWEB." WantWEB was
launched in Denver, Colorado and Portland, Oregon in February 1998. The
Company's Internet 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. As part of
this evaluation, the Company is planning to add subscribers at a
limited, measured pace in its Colorado and Oregon systems. The Company
has discontinued plans to deploy its WantWEB service commercially in
Seattle, Washington.
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 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 Federal
Communications Commission ("FCC") licenses 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 has taken certain actions aimed at
further reducing its costs and conserving its limited cash resources.
Such measures have included a reduction in the size of the Company's
workforce of about 15% since the beginning of the year and decreases in
capital expenditures and discretionary expenses. The Company has
intentionally curtailed growth in its analog video business by not
investing the capital resources necessary to replace 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
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belief that the most attractive returns on investment are likely to be
based on digital technologies. In an effort to minimize customer
growth and investment in new customer additions, the Company
significantly increased installation rates charged to new video
subscribers. These price increases have substantially reduced video
subscriber additions. The Company's business strategy regarding analog
video subscribers is expected to result in a further 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. Moreover, at this time, the Company does not generally
intend to further develop any of its Undeveloped Markets using analog
video technology. The Company is also exploring alternatives for
maximizing the value of its analog video subscribers. Unless and until
sufficient cash flow is generated from operations, the Company will be
required to utilize its current capital resources or sell assets to
satisfy its working capital and capital expenditure needs.
Without new investments in the Company, or a capital
restructuring, it is unlikely the Company will be able to make cash
interest payments on the 2004 and 2005 Notes or meet its obligations by
the end of 1999, or earlier. While any such restructuring, should it
occur, could take a variety of forms, it is likely a restructuring
could involve an exchange of some of the outstanding debt for stock in
the Company resulting in a very substantial dilution to existing
stockholders. If new investments are not received, or a capital
restructuring is not undertaken, the Company will be required, at a
minimum, to curtail its operations and development plans, which
curtailment could involve, among other things, further reductions in
the Company's workforce, closing certain operating businesses or
discontinuing certain activities, including but not limited to,
Internet access service and two-way broadband data and telephony
trials.
Multi-Media Services
During 1998, the Company initiated 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 by asynchronous transfer mode technology. 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 high-speed Internet and voice. The equipment being used by
the Company is not yet available commercially.
The Company intends to continue its development efforts with
respect to multi-media services, subject to available liquidity. The
commercial introduction of such services in any of the Company's
markets would involve substantial capital expenditures, which the
Company is unable 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 FCC licenses.
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, software and multi-media services. These
relationships could provide the Company with access to technologies,
products, capital and infrastructure. Such relationships or
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, likely accompanied by some type of
capital restructuring of the Company. As of the date of this Report,
the Company has not reached any agreements or understandings with
respect to such strategic relationships or transactions. However, the
Company is continually involved in discussions regarding possible
strategic partner investments.
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<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF FUNDS
The Company has experienced negative cash flow from operations
in each year since inception. Although certain of the Company's more
established systems currently generate positive cash flow from
operations, the sale of six operating systems to BellSouth Wireless
since August 1997 and the Company's business strategy to decrease
analog video subscribers have resulted in a decline in revenue and
operating cash flow. The Company expects the decline to continue.
Internet access service and two-way broadband data and telephony trials
are in the early stage of deployment and development, respectively. The
increased costs to introduce and test these digital services are
negatively impacting the Company's operating cash flow. This negative
trend is expected to continue for the foreseeable future. Unless and
until sufficient cash flow is generated from operations, the Company
will be required to utilize its current capital resources or sell
assets to satisfy its working capital and capital expenditure needs.
The Company's principal capital and other expenditure
requirements for the remainder of 1998 and through 1999 relate to legal
and consulting fees associated with pursuing strategic relationships or
transactions with telecommunication, software and multi-media
companies, the trials of two-way broadband data and telephony services,
the purchase of new channels previously committed by the Company, the
installation of analog video equipment in new subscribers' premises and
the purchase of transmission equipment for new channels. 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 further
curtail its planned capital and other 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 unable to make
at this time. The Company is pursuing strategic relationships or
transactions with telecommunications, software and multi-media
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. 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 advent of the high-speed Internet access
business and the development 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.
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 Naples, Sebring and
Miami, Florida.
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
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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. The escrow balance, plus accrued interest
of approximately $200,000, was released to the Company on August 12,
1998. 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.
On July 15, 1998, the Company completed an additional closing
of the BellSouth Transaction, which transferred to BellSouth Wireless
the Company's wireless operating system and channel rights in Lakeland,
Florida. As of the date of closing, the Lakeland wireless cable system
served approximately 8,200 subscribers. The proceeds received by the
Company were approximately $12.0 million, of which $2.1 million was
placed in escrow. On August 12, 1998, the Company closed on additional
channels in the Lakeland, Florida market for cash consideration of
approximately $5.0 million. A net loss of approximately $823,000 was
recorded on the Lakeland transactions. In addition, the Company also
received approximately $165,000, which represents a portion of the
escrow from the initial Lakeland closing, which occurred on July 15,
1998. 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.
Executive and Key Employee Retention Program
Effective July 1, 1998, the Board of Directors approved a
Retention and Achievement Incentive Program ("Executive Program") for
certain of its executive officers. Under the Executive Program, the
executive officers of the Company are each eligible to receive cash
retention payments of $40,000-$50,000 if such individuals remain in the
Company's employment through June 30, 1999, or if the employment of
such individuals with the Company is terminated by the Company without
cause before June 30, 1999. The maximum aggregate retention payments
that are payable under the Executive Program are approximately
$240,000. In addition, the Executive Program also provides for the
payment of achievement incentives to these executives if the average
closing price of the Company's Class A Common Stock is $2.00 per share
or higher for the average of the last 20 trading days of June 1999.
One-half of the achievement incentives are payable if such average
closing price is $2.00 per share, and the full achievement incentives
are payable if such average closing price per share is $3.00 per share
or higher. If achievement incentives are payable, then the first 40% of
such incentives are payable by the Company in cash, and the remaining
60% may be paid in cash or Class A Common Stock, or a combination
thereof, at the discretion of the Company. Appropriate adjustments in
the achievement incentives will be made to give effect to changes in
the Class A Common Stock resulting from subdivisions, consolidations or
reclassifications of the Class A Common Stock, the payment of dividends
or other distributions by the Company (other than in the ordinary
course of business), mergers, consolidations, combinations or similar
transactions or other relevant changes in the capital of the Company.
The maximum aggregate achievement payments that are payable under the
Executive Program are approximately $900,000. The Executive Program is
evidenced by agreements between the Company and each executive officer.
Amounts payable under the Executive Program are independent of any
obligations of the Company, including severance payments, under
employment agreements or other bonus programs. No amounts have been
paid by the Company under the Executive Program.
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The Board of Directors also approved, effective July 1, 1998,
a Retention Program ("Key Employee Program") for key employees (other
than executive officers) as designated by the Chief Executive Officer.
Under the Key Employee Program, approximately 20 key employees selected
to date are each eligible to receive cash retention payments of
$12,500-$40,000 if such individuals remain in the Company's employment
through June 30, 1999, or if the employment of such individuals with
the Company is terminated by the Company without cause before June 30,
1999. The maximum aggregate retention payments presently payable under
the Key Employee Program are approximately $520,000. In addition, the
Key Employee Program offers severance benefits ranging from three to
nine months of base salary to certain of the key employees in the event
that their employment with the Company is terminated without cause on
or before December 31, 1999. The maximum aggregate termination payments
presently payable under the Key Employee Program are approximately
$570,000. The Key Employee Program is evidenced by agreements between
the Company and each key employee.
Approximately $183,000 was accrued under the Executive and Key
Employee Program as of September 30, 1998. No retention, achievement
incentives or termination payments are payable to any executive officer
or key employee who voluntarily terminates employment with the Company
or whose employment is terminated by the Company for cause.
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 the Notes pursuant to the offer was $17.5 million.
On May 13, 1998, in connection with the Tender Offer, the
Company purchased approximately $30.2 million aggregate principal
amount at maturity of 2004 Notes (approximate accreted value $25.3
million) and approximately $43.5 million aggregate principal amount at
maturity of 2005 Notes (approximate accreted value of $30.6 million).
The Company recognized an extraordinary gain of approximately $37.0
million upon early extinguishment of the Notes.
In conjunction with and as a condition of the Tender Offer,
the Company also received on April 28, 1998, the consent of holders of
the majority of the outstanding Notes 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 received by the Company from
(i) dispositions under the BellSouth Agreement that close after May 7,
1998, which are presently estimated at less than $10 million in
proceeds depending on the total number of channel leases and licenses
ultimately delivered by the Company to BellSouth, and (ii) the
approximately $2.0 million in proceeds that were received from an
escrow account related to a BellSouth closing occurring on July 15,
1998.
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Pursuant to the Amendments, no later than 30 days after the
aggregate amount of Net Available 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. 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 reduce the amount of Net Available Proceeds. 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.
The 43% of the Net Available Proceeds not to be utilized for
such required offer to purchase, as well as the amount of the 57% of
Net Available 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.
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.
The Company's recent transaction with BellSouth Wireless
involving the sale of the Company's operating system in Lakeland,
Florida, the closing on additional channels in Lakeland, Florida and
the release of the restricted escrowed funds from the first closing of
the BellSouth Transaction have provided cash to the Company of
approximately $21.6 million. Because the combination of these funds,
net of financial advisor, legal and other costs, exceeds $10 million,
the Company was obligated, no later than September 11, 1998 or earlier,
to use 57 % of these Net Available Proceeds to make the Initial Offer
to purchase outstanding notes.
On September 11, 1998, the Company commenced the Initial Offer
of $11.6 for a portion of its outstanding 2004 Notes and a portion of
its outstanding 2005 Notes at a cash price of $280.50 per $1,000
principal amount at maturity of the 2004 Notes purchased and $247.50
per $1,000 principal amount at maturity of the 2005 Notes purchased.
On October 15, 1998, the Company purchased approximately $21.5
million aggregate principal amount at maturity of 2004 Notes
(approximate accreted value of $19.3 million) and approximately $22.6
million aggregate principal amount at maturity of 2005 Notes
(approximate accreted value of $17.0 million). The Company recognized
an extraordinary gain of approximately $22.0 million upon the early
extinguishment of the Notes.
Upon completion of the Initial Offer, the amount of Net
Available Proceeds shall be reset at zero. Thereafter, at such time the
amount of Net Available 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 Net Available Proceeds
to make a subsequent required offer, subject to the same terms and
conditions set forth above applicable to the Initial Offer.
The Company's capital expenditures, exclusive of acquisitions
of wireless cable systems and additions to deferred license and leased
license acquisition costs, during the nine months ended September 30,
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1998 and 1997 were approximately $10.4 million and $8.0 million,
respectively. The Company has revised its business plan and expects to
significantly curtail its original plans on capital spending for the
remainder of 1998.
Cash interest payments on the 2004 Notes and the 2005 Notes
are required to commence on December 15, 1999 and February 15, 2001,
respectively. The aggregate interest payments on the 2004 Notes and the
2005 Notes are approximately $11.4 million, $28.4 million and $40.7
million in 1999, 2000 and 2001, respectively, after adjusting for the
completion of the bond tender offer that expired on October 8, 1998.
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 $726,000 of which had
been utilized as of September 30, 1998). Although the Company had the
ability under the Indentures to borrow an additional $16.8 million as
of September 30, 1998, the Company does not presently intend to incur
any additional bank or other borrowings because of the probable high
cost of funds. 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.
On July 10, 1998, the Company purchased from FTI the remaining
35% partnership interest in Fresno MMDS Associates for cash
consideration of $1.5 million plus contingent consideration of up to
$225,000. The Company assumed no liabilities of the partnership.
Through two of its subsidiaries the Company is now the 100% owner of
Fresno MMDS Associates. Payment of some or all of the $255,000 is
related to the outcome of the litigation involving Peter Mehas, Fresno
County Superintendent of Schools v. Fresno Telstat Inc., an Indiana
corporation et al. Mr. Hostetler and his wife currently own
approximately 28% of the outstanding capital stock of FTI. They have
asserted claims against FTI as creditors. Mr. and Mrs. Hostetler are
also engaged in disputes with other creditors and shareholders of FTI
regarding their respective entitlements to the assets of FTI. The money
already paid by the Company to FTI to acquire FTI's partnership
interest in Fresno MMDS Associates, and the contingent consideration
which may be paid in the future, presently constitute the principal
sources of funds available to satisfy the claims of the various parties
to the disputes. The parties are engaged in settlement discussions.
In February 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. Effective with the close of business October 28, 1998, Nasdaq
delisted the Company's Class A Common Stock. The delisting by Nasdaq
may make it more difficult to buy or sell the Company's Class A Common
Stock or obtain timely and accurate quotations to buy or sell. In
addition, the delisting process could result in a decline in the
trading market for the Class A Common Stock, which could potentially
further depress the Company's stock and bond prices, among other
consequences. Subsequent to the delisting, the Company's Class A Common
Stock has commenced trading on the OTC Bulletin Board.
Year 2000
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,
such as its accounting and subscriber management (including customer
invoicing) systems, headend equipment, Internet equipment, phone
systems and network hardware and software servers that will be affected
by the Year 2000 issue.
The Company continues to assess the impact of the Year 2000 on
its operations using a team of internal staff. The Company is following
a six step process to evaluate its state of readiness for Year 2000
compliance - awareness, inventory, assessment, remediation, testing and
risk management. To date, the
20
<PAGE> 21
Company has partially completed its inventory/assessment phase with
some remediation and testing taking place. The inventory/assessment
phase includes the accounting software, subscriber management systems,
headend equipment, Internet equipment, phone systems and network
hardware and software servers. The Company is working to implement new
accounting software during 1998 that has been certified as Year 2000
compliant from the vendor. The Company's current plans call for
modifying its subscriber management system with a Year 2000 patch from
the current vendor. The Company's current subscriber management system
vendor has agreed to provide a Year 2000 patch before the end of the
third quarter of 1999. The Company expects to test and implement this
Year 2000 patch on or before the end of 1999.
The Company presently estimates that it will spend
approximately $1.5 to $3.0 million to remediate or replace existing
accounting, subscriber management, hardware and other systems over the
course of this project. Most of these costs relate to the replacement
of the existing accounting software. The Company will refine its cost
estimates as testing and remediation proceeds and as additional
information becomes available. To date, the Company has spent
approximately $500,000 in remediating its Year 2000 issues for the
accounting software.
It is possible that the Company will be adversely affected by
problems encountered by key customers and suppliers. The Company
believes that the likely worst case scenario would be the failure of
the Company's subscriber management system addressing the Company's
headend equipment which sends the signals to the addressable controller
units, as well as the addressable controller units themselves. The
controller units communicate to the customer's set-top box. The loss of
the ability to transmit such signals would result in the loss of
customers and related revenues, among other things.
The Company does not presently have a contingency plan in the
event that its systems are not Year 2000 compliant. Such contingency
plans could include using back up systems that do not rely on computers
or stockpiling subscriber premises equipment.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Service revenues decreased $2.7 million, or 19.0%, for the
three months ended September 30, 1998 to $11.4 million, compared to
$14.1 million during the same period of 1997. This decrease resulted
primarily from the loss of revenues from the markets sold to BellSouth
Wireless and from an overall decline of analog video subscribers. This
decline was offset, in part, by subscription rate increases in certain
markets. The six operating markets sold to BellSouth since August 1997
accounted for total revenue, operating expenses and EBITDA (as defined
herein) of approximately $1.7 million, $1.4 million, and $313,000,
respectively, for the three months ended September 30, 1997. Revenues,
operating expenses and EBITDA for the Lakeland wireless cable system,
sold to BellSouth during the three months ending September 30, 1998,
were immaterial. The number of subscribers to the Company's wireless
cable systems decreased to 114,700 at September 30, 1998, compared to
138,900 at December 31, 1997 and 141,600 at September 30, 1997.
Internet access revenues were negligible in the third quarter of 1998.
On a "same system" basis (comparing systems that were
operational for all of each of the three-month periods ended September
30, 1998 and 1997), service revenues decreased approximately $969,000,
or 8.1%, to $11.0 million, compared to $12.0 million for the three
months ended September 30, 1997. Same systems during these periods
totaled 32 systems. 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 and wireless cable television
system were omitted from both periods because the systems were sold
during the first and third quarters of 1998, respectively. The average
number of subscribers in these same systems decreased approximately
9.3% for the three months ended September 30, 1998, compared to the
same period of 1997. The Company anticipates the average number of
subscribers to decline further during the remainder of 1998 and into
1999.
21
<PAGE> 22
Installation revenues for the three months ended September 30,
1998 totaled $93,000, compared to $246,000 during the same period of
1997. The decrease in installation revenues of approximately $153,000,
or 62.2%, was the result of fewer subscriber installations. The number
of installations completed during the three months ended September 30,
1998 decreased approximately 67.2% as compared to the same period
during 1997. Installation rates vary widely by system based upon
competitive conditions.
Operating expenses, principally programming, site costs and
other direct expenses, aggregated $8.2 million (or 71.0% of total
revenues) during the three months ended September 30, 1998, compared to
$8.1 million (or 56.6% of total revenues) during the same period of
1997. Operating expenses decreased primarily because of the sale of six
systems in the BellSouth Transaction. However, these decreases were
offset by increased channel lease expenses related to a retroactive
channel lease accrual, certain system development and installation
costs that were determined to not be capitalizable and connectivity
costs associated with Internet operations.
Marketing and selling expenses totaled $200,000 (or 1.7% of
total revenues) during the three months ended September 30, 1998,
compared to $666,000 (or 4.7% of total revenues) during the same period
of 1997. The decrease in such expenses of approximately $466,000 is
attributable to the Company's continued strategy to replace only a
limited amount of Subscriber Churn.
General and administrative expenses were $4.4 million
(approximately 38.4% of total revenues) for the three months ended
September 30, 1998, compared to $5.3 million (approximately 37% of
total revenues) during the same period of 1997. A portion of the
decrease in general and administrative expenses is due to the sale of
six operating systems in the BellSouth Transaction. Legal expenses also
declined; however, the decrease was offset by increased consulting
expenses associated with strategic partnering efforts and the advanced
technology trials being conducted by the Company in Eugene, Oregon and
Seattle, Washington. Salary expenses increased due to accruals related
to the Executive and Key Employee Retention programs.
The Company's loss before interest, taxes, depreciation and
amortization was $1,269,000 for the three months ended September 30,
1998, compared to earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $254,000 during the same period of 1997. The
decline in EBITDA is attributable to decreased revenues, increased
operating expenses, and the six systems sold to BellSouth since August
1997.
Depreciation and amortization expenses decreased approximately
$800,000 to $10.7 million for the quarter ended September 30, 1998,
compared to $11.5 million for the third quarter of 1997. The decrease
is as a result of the Company's having a smaller depreciable asset base
as a result of its sale of assets in conjunction with the BellSouth
Transaction.
Interest expense decreased $2.3 million during the quarter
ended September 30, 1998 to $9.9 million, compared to $12.3 million
during the same period of 1997. The decrease in interest expense
primarily resulted from interest charges of approximately $1.8 million
incurred in the third quarter of 1997 relating to a credit facility
which was terminated in August 1997 and a decrease of approximately
$536,000 in non-cash interest charges associated with the Company's
2004 Notes and 2005 Notes as a result of the Tender Offer.
During the three months ended September 30, 1997, the Company
recorded a gain of approximately $35.9 million related to the sale of
the Orlando, Jacksonville, Daytona Beach and Ft. Myers, Florida and
Louisville, Kentucky markets to BellSouth Wireless. During the three
months ended September 30, 1998, the Company recorded a loss of
approximately $823,000 related to the sale of the Lakeland, Florida
market to BellSouth Wireless.
22
<PAGE> 23
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Service revenues decreased $8.8 million, or 19.5%, for the
nine months ended September 30, 1998, to $36.3 million, compared to
$45.2 million during the same period of 1997. This decrease resulted
primarily from the loss of revenues from the markets sold to BellSouth
Wireless and from an overall decline of analog video subscribers. This
decline was offset, in part, by subscription rate increases in certain
markets. The six operating markets sold to BellSouth since August 1997
accounted for total revenue, operating expenses and EBITDA of $7.6
million, $6.0 million, and $1.6 million, respectively, for the nine
months ended September 30, 1997. The Lakeland wireless cable system
contributed revenue, operating expenses and EBITDA of $1.4 million,
$1.1 million and $377,000, respectively for the nine months ended
September 30, 1998. Revenues, operating expenses, and EBITDA for the
Lakeland hardwire system were immaterial for the nine months ended
September 30, 1998.
On a "same system" basis (comparing systems that were
operational for all of each of the nine-month periods ended September
30, 1998 and 1997), service revenues decreased $2.6 million, or 7.2%,
to $33.8 million, compared to $36.4 million for the nine-month period
ended September 30, 1997. Same systems during these periods totaled 32
systems. Revenues 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 systems 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 wireless and hardwire cable television
systems were omitted from both periods because the system were sold
during the first and third quarters of 1998, respectively. The average
number of subscribers in these same systems decreased approximately
9.4% for the nine months ended September 30, 1998, compared to the same
period of 1997. The Company anticipates the average number of
subscribers to decline further during the remainder of 1998 and into
1999.
Installation revenues for the nine months ended September 30,
1998 totaled $472,000, compared to $787,000 during the same period of
1997. The decrease in installation revenues of $315,000, or 40.0%, was
the result of fewer subscriber installations, as a portion of normal
customer churn was not replaced. The decrease in installation revenues
was partially offset by increased installation rates company-wide for
the nine-month period ending September 30, 1998, compared to
installation rates during the same period of 1997. The number of
installations completed during the nine months ended September 30, 1998
decreased approximately 43.8% as compared to the same period during
1997. Installation rates vary widely by system based upon competitive
conditions.
Operating expenses, principally programming, site costs and
other direct expenses, aggregated $23.9 million (or 64.8% of total
revenues) during the nine months ended September 30, 1998, compared to
$27.2 million (or 59.2% of total revenues) during the same period of
1997. The decrease of approximately $3.3 million was primarily
attributable to the operations of the six systems sold to BellSouth.
These decreases were offset by increased programming rates for basic
and premium programming, increased channel lease costs due to annual
rate increases, a retroactive channel lease accrual, certain system
development and installation costs that were not capitalizable, and
connectivity costs associated with Internet operations.
Marketing and selling expenses totaled $1.6 million (or 4.4%
of total revenues) during the nine months ended September 30, 1998,
compared to $2.2 million (or 4.8% of total revenues) during the same
period of 1997. The decrease in such expenses of approximately $588,000
is attributable to the Company's continued strategy to replace only a
limited amount of Subscriber Churn.
The Company's loss before interest, taxes, depreciation and
amortization was $4.4 million during the nine-month period ended
September 30, 1998, compared to EBITDA of $806,000 for the same period
of 1997. The decline in EBITDA is primarily because of decreased
revenues, expenses associated with multimedia technical demonstrations,
the sale of systems in the BellSouth Transaction and decreased
marketing expenses as discussed above.
23
<PAGE> 24
Depreciation and amortization expenses decreased approximately
$6.4 million to $30.7 million for the nine months ended September 30,
1998, compared to $37.1 million for the same period of 1997. The
decrease is a result of the Company's smaller depreciable asset base
from the sale of systems in the BellSouth Transaction.
Interest expense decreased $2.2 million during the nine months
ended September 30, 1998 to $31.2 million, compared to $33.4 million
during the same period of 1997. The decrease in interest expense
primarily related to a credit facility that was in place only during
1997. This decrease was offset, in part, by an increase in non-cash
interest charges associated with the Company's 2004 and 2005 Notes.
Interest income increased approximately $469,000 compared to
the nine months ending September 30, 1997 primarily because of
increased cash balances from asset sales to BellSouth.
The Company recognized an extraordinary gain of $37.0 million
in conjunction with its Tender Offer for a portion of its outstanding
2004 and 2005 Notes.
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 former 35% general partner of
Fresno 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 approximately 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, and 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.
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 had to be resolved by the Court, rather than the jury, that
verdict did not constitute a conclusive determination in favor of the
Company. Pursuant to a settlement, the complaint against the Company
and Mr. Holmes was dismissed with prejudice on July 10, 1998, thereby
resolving all disputes between FTI and the Company and Mr. Holmes. On
October 20, 1998 the Court entered judgment in favor of Mr. Hostetler
on all claims against him and ordered plaintiff to pay certain of his
costs as required by law.
On or about December 24, 1997, Peter Mehas, Fresno County
Superintendent of Schools, filed an action against Fresno MMDS
Associates (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
24
<PAGE> 25
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 trial is scheduled to begin December 14, 1998. The parties are
conducting discovery.
On or about October 13, 1998, Bruce Merrill and Virginia
Merrill, as Trustees of the Merrill Revocable Trust dated as of August
20, 1982, filed a lawsuit against the Company entitled Bruce Merrill
and Virginia Merrill, as Trustees of the Merrill Revocable Trust dated
as of August 20, 1982 v. American Telecasting Inc., in the United
States District Court for the District of Colorado. The complaint
alleges that the Company owes the plaintiffs $1,250,000 due on a note
which matured on September 15, 1998. The complaint seeks payment of
$1,250,000 plus attorneys fees, interest and consequential damages not
to exceed $1,000,000. The Company has responded to the complaint by
asserting that plaintiffs are not entitled as a matter of law to
recover any consequential damages. The Company believes that it has no
obligation to pay the $1,250,000 due under the note, which is the
subject of this complaint, because certain conditions expressly set
forth in the note have not occurred. The Company has not answered the
complaint and no discovery has occurred. No trial date has been set.
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.
25
<PAGE> 26
ITEM 5. OTHER INFORMATION
Two-way Authorization
In March 1997, the Company, in consortium with several other
wireless cable operators and entities, filed a petition for rule making
with the Federal Communications Commissions ("FCC") for two-way use of
its spectrum. In October 1997, the FCC issued a notice of proposed rule
making to authorize two-way use of Multi-point Distribution System
("MDS") and Instructional Television Fixed Service ("ITFS") channels.
The initial comment period closed in January 1998. The period for reply
comments closed in February 1998. Another public comment period was
opened by the FCC in June 1998 and closed in July 1998.
The FCC issued formal rules for two-way use of MDS and ITFS
spectrum, as well as rules expediting the process to grant two-way
licenses, in September 1998. The Company expects to begin applying for
two-way licenses in selected markets during subsequent filing windows
established by the FCC. The Company estimates the earliest it could
have a two-way license granted is the third quarter of 1999. There can
be no assurance regarding the ability of the Company to obtain such
licenses.
The two-way licensing process will require substantial
frequency engineering studies and negotiations with other MDS and ITFS
license holders in markets adjacent to that of a two-way license
application. These studies and negotiations are expected to
significantly increase the implementation costs of two-way digital
services. The process may involve channel swapping among licensees
within individual markets. Without a strategic partner, the Company
will not have the capital resources necessary to fund all of these
costs and implement its digital strategy.
26
<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment agreement effective as of July 1, 1998,
between the Company and Robert D. Hostetler
10.2 Second amendment to Employment Agreement effective as
of October 7, 1998, between the Company and David K.
Sentman
10.3 Key Employee Retention Agreement with Lee G. Haglund
27. Financial Data Schedule (filed only electronically with
the SEC).
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during
the quarter ended September 30, 1998:
(i) Current Report on Form 8-K dated July 15, 1998 to
report, under Item 5, that the Company completed the
closing for the Lakeland, Florida market under the
BellSouth Agreement, which involved transferring to
BellSouth Wireless the Company's operating wireless
cable systems and current channel rights in the
Lakeland, Florida market;
(ii) Current Report on Form 8-K dated July 21, 1998 to
report, under Item 5, that the Nasdaq Stock Market,
Inc. informed the Company by letter dated July 20,
1998 that a Nasdaq Listing Qualifications Panel has
determined not to grant the Company's request for an
exception to the net tangible assets/market
capitalization/net income and bid price requirements
for continued listing on the Nasdaq SmallCap Market;
(iii) Current Report on Form 8-K dated September 11, 1998 to
report, under Item 5, that the Company commenced a
tender offer for a portion of its outstanding Senior
Discount Notes due 2004 and a portion of its
outstanding Senior Discount Notes due 2005.
27
<PAGE> 28
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: November 16, 1998 By: /s/ David K. Sentman
-------------------- ----------------------------------
David K. Sentman
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date: November 16, 1998 By: /s/ Fred C. Pattin Jr.
-------------------- ----------------------------------
Fred C. Pattin Jr.
Controller
(Principal Accounting Officer)
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- - ------- -----------
<S> <C>
10.1 Employment agreement effective as of July 1, 1998, between the Company and
Robert D. Hostetler
10.2 Second amendment to Employment Agreement effective as of October 7, 1998
between the Company and David K. Sentman
10.3 Key Employee Retention Agreement with Lee G. Haglund
27. Financial Data Schedule (filed only electronically with the SEC).
</TABLE>
<PAGE> 1
EMPLOYMENT AGREEMENT
This Agreement is entered into, effective as of the 1st day of July,
1998, by and between American Telecasting, Inc., ("ATI") a Delaware corporation,
and Robert D. Hostetler ("Employee").
W I T N E S S E T H:
WHEREAS, Employee has served as an employee of ATI pursuant to
Employment Agreements dated January 4, 1996 and July 1, 1997 between ATI and
Employee; and
WHEREAS, ATI wishes to engage Employee's services as President and
Chief Executive Officer of ATI upon the terms and conditions hereinafter set
forth; and
WHEREAS, Employee wishes to work for ATI upon the terms and conditions
hereinafter set forth; and
NOW, THEREFORE, in consideration of the premises and mutual promises
set forth herein, the sufficiency of which is hereby acknowledged, the parties
hereby agree as follows:
1. Employment; Duties. ATI hereby agrees to employ Employee effective
as of the Effective Date as President and Chief Executive Officer, or in any
other executive capacity as ATI shall determine is necessary or appropriate in
connection with the operation of ATI, and Employee hereby agrees to serve in
such capacity. Employee's principal areas of responsibility, subject to
modification by ATI, shall be the general supervision and management of the
business of ATI. Employee shall perform such additional duties of a responsible
nature and not inconsistent with his position with ATI as shall be designated
from time to time by ATI. Employee agrees to use his best efforts to promote the
interests of ATI and to devote his full business time and energies to the
business and affairs of ATI.
2. Term of Agreement. The employment hereunder shall be for the
period which shall commence on July 1, 1998 (the "Effective Date") and shall
continue, unless earlier terminated in accordance with the terms of Paragraph 4,
until June 30, 1999 (the "Term of Employment").
<PAGE> 2
3. Compensation.
(a) Base Salary. As compensation for Employees's services rendered by
the Employee hereunder, ATI shall pay to Employee, as of the Effective Date, a
base salary at an annual rate equal to $215,400 per year ("Base Salary"). The
Base Salary shall be payable to the Employee on a semi-monthly basis, in
accordance with ATI's standard policies for management personnel.
(b) Bonus. Employee shall be eligible to participate in the Executive
Bonus program established by the Compensation Committee of the Board of
Directors.
(c) Benefits. Employee shall be entitled to participate in all
benefit programs established by ATI and generally applicable to ATI's executive
employees. Employee shall be reimbursed for legitimate business expenses
incurred in the course of his employment with ATI pursuant to ATI policies as
established from time to time.
4. Termination of Employment Relationship.
(a) Death or Incapacity. This Agreement shall terminate immediately
upon the death or incapacity of Employee.
(b) Termination by ATI. This Agreement may be terminated by ATI with
or without cause and, in such event, the Term of Employment shall terminate at
the termination date designated by ATI. For the purpose of this Agreement,
"Termination for Cause" or "Cause" shall include, but is not limited to, any
conduct involving dishonesty or moral turpitude or failure of the Employee to
devote full business time and energies to the business and affairs of ATI. ATI
may terminate Employee with or without Cause without prior notice.
(c) Termination by Employee. Employee may terminate this Agreement
for any reason and at any time upon giving thirty (30) days prior notice;
provided, however, that Employee's obligations under Paragraph 5 shall survive
any termination of this Agreement by Employee, by ATI or otherwise.
(d) Payment Upon Termination. If this Agreement is terminated by
Employee or by ATI for Cause prior to the completion of the Term of Employment,
the employee shall not be entitled to severance pay of any kind but shall be
entitled to all reasonable reimbursable expenses incurred by Employee and the
Base Salary earned by Employee prior to the date of termination, and all
obligations of ATI under Paragraph 3 hereof shall terminate upon the termination
date designated by ATI, except to the extent otherwise required by law. In the
event that Employee is terminated without Cause, ATI shall pay Employee twelve
months Base Salary, payable in installments on a semi-monthly basis as severance
pay.
-2-
<PAGE> 3
5. Non-Competition Agreement. Employee acknowledges that his
services to be rendered hereunder have a unique value to ATI, for the loss of
which ATI cannot be adequately compensated by damages in an action at law. In
view of the unique value to ATI of the services of Employee, and because of the
Confidential Information to be obtained by or disclosed to Employee, and as a
material inducement to ATI to enter into this Employment Agreement and to pay to
Employee the compensation referred to in Paragraph 3 hereof, Employee covenants
and agrees that:
(a) While Employee is employed by ATI, and for a period of one (1)
year thereafter, the Employee will not, either personally, whether as principal,
partner, employee, agent, distributor, representative, stockholder or otherwise,
or with or through any other person or entity operate or participate in the
wireless cable business or any other business which competes with ATI as of the
date of Employee's termination date (for purposes of Paragraph 5 hereof, ATI
shall be deemed to include all subsidiaries and joint ventures of ATI whether
now or hereafter affiliated with ATI) nor will Employee directly or indirectly
(i) solicit any person who has been a supplier or customer of ATI during the
period of one (1) year prior to the termination of employment, or (ii) solicit
or acquire wireless cable television channel licenses or leases of wireless
cable television channel licenses; provided, however, that during the period of
one (1) year following termination of his employment with ATI Employee may own
up to 5% of the stock of another company in the wireless cable business which is
traded on a national stock exchange or on the NASDAQ National Market System.
This noncompetition clause shall apply in the geographic territory comprised of
the entire United States and any other geographic area in which ATI is engaged
in business.
(b) It is agreed that the Employee's services are unique, and that
any breach or threatened breach by the Employee of any provisions of this
Paragraph 5 may not be remedied solely by damages. Accordingly, in the event of
a breach or threatened breach by the Employee of any of the provisions or this
Paragraph 5, ATI shall be entitled to injunctive relief, restraining the
Employee and any business, firm, partnership, individual, corporation, or entity
participating in such breach or attempted breach, from engaging in any activity
which would constitute a breach of this Paragraph 5. Nothing herein, however,
shall be construed as prohibiting ATI from pursuing any other remedies available
at law or in equity for such breach or threatened breach, including the recovery
of damages.
-3-
<PAGE> 4
(c) The provisions of this Paragraph 5 shall survive the termination
of this Agreement and the termination of Employee's employment.
6. Assignability. Neither party may assign its rights and
obligations under this Agreement without the prior written consent of the other
party, which consent may be withheld for any reason or for no reason; provided
that in the event ATI is reorganized or restructured, ATI may assign its rights
and obligations under this Agreement without restriction or limitation to any
assignee which continues to conduct substantially the same business as ATI and
in which ATI controls, directly or indirectly, 50% or more of the voting power.
7. Severability. In the event that any of the provisions of this
Agreement shall be held to be invalid or unenforceable, the remaining provisions
shall nevertheless continue to be valid and enforceable as though invalid or
unenforceable parts had not been included therein. Without limiting the
generality of the foregoing, in the event that any provision of Paragraph 5
relating to time period and/or areas of restriction shall be declared by a court
of competent jurisdiction to exceed the maximum time period or area(s) such
court deems enforceable, said time period and/or area(s) of restriction shall be
deemed to become, and thereafter be, the maximum time period and/or area for
which such are enforceable.
8. Entire Agreement. This Agreement constitutes the entire agreement
between the parties relating to the subject matter hereof and supersedes all
prior agreements or understandings among the parties hereto with respect to the
subject matter hereof.
9. Amendments. This Agreement shall not be amended or modified
except by a writing signed by both parties hereto.
10. Miscellaneous. The failure of either party at any time to require
performance of the other party of any provision of this Agreement shall in no
way affect the right of such party thereafter to enforce the same provision, nor
shall the waiver by either party of any breach of any provision hereof be taken
or held to be a waiver of any other or subsequent breach, or as a waiver of the
provision itself. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Colorado, without regard to the
conflict of laws of such State. The benefits of this Agreement may not be
assigned nor any duties under this Agreement be delegated by the Employee
without the prior written consent of ATI, except as contemplated in this
Agreement. This Agreement and all of its rights, privileges, and obligations
will be binding upon the parties and all successors and agreed to assigns
thereof.
-4-
<PAGE> 5
11. Survival. The rights and obligations of the parties shall survive
the Term of Employment to the extent that any performance is required under this
Agreement after the expiration or termination of such Term of Employment.
12. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
together constitute one and the same document.
13. Notices. Any notice to be given hereunder by either party to the
other may be effected in writing by personal delivery, or by mail, certified
with postage prepaid, or by overnight delivery service. Notices sent by mail or
by an overnight delivery service shall be addressed to the parties at the
addresses appearing following their signatures below, or upon the employment
records of ATI but either party may change its or his address by written notice
in accordance with this paragraph.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first written above.
AMERICAN TELECASTING, INC. EMPLOYEE
By:
--------------------------------- --------------------------------
Robert D. Hostetler
---------------------------------
-5-
<PAGE> 6
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the "Amendment") is made
as of the ____ day of __________, 1998, by and between American Telecasting,
Inc., a Delaware corporation (the "Company"), and David K.
Sentman ("Employee").
WHEREAS, the Company and the Employee have entered into an Employment
Agreement dated as of the 10th day of August, 1995, as amended by First
Amendment to Employment Agreement dated as of September 9, 1997 (collectively
the "Employment Agreement"); and
WHEREAS, the Company and the Employee wish to extend the term of the
Employment Agreement.
NOW, THEREFORE, in consideration of the premises and mutual promises
set forth herein, the sufficiency of which is hereby acknowledged, the parties
hereby agree as follows:
1. Section 2 of the Employment Agreement is hereby amended in its
entirety to read as follows:
2. Term of Agreement. The term of this Agreement shall
commence on the date first written above (the "Effective
Date") and such term and the employment hereunder shall
continue, unless earlier terminated in accordance with terms
of Paragraph 4, for a period of five (5) years (the "Term of
Employment").
2. Except as set forth herein, the Employment Agreement remains in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have properly and duly executed
this Amendment as of the date first written above.
AMERICAN TELECASTING, INC. EMPLOYEE
By:
---------------------------------- ------------------------------------
Robert D. Hostetler David K. Sentman
Chief Executive Officer
and President
<PAGE> 1
RETENTION AGREEMENT
THIS RETENTION AGREEMENT dated as of July 16, 1998 by and between
American Telecasting, Inc. (the "Company") and Lee G. Haglund, (the "Employee").
WITNESSETH:
WHEREAS, the Company recognizes the competitive nature of the market
for executive talent; and
WHEREAS, the Company has determined that appropriate steps should be
taken to encourage certain key persons to remain employed by the Company by
providing for certain benefits;
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree to the following:
1. Definitions. The capitalized terms used herein shall have the
meanings ascribed to them below.
(a) "Cause" shall mean (A) the willful and continued failure by
the Employee substantially to perform the Employee's duties
with the Company (other than any such failure resulting from
the Employee's incapacity due to physical or mental illness)
as determined by the Board of Directors of the Company (the
"Board"), after a demand for substantial performance is
delivered to the Employee by the Company, which demand
specifically identifies the manner in which the Company
believes that the Employee has not substantially performed
the Employee's duties or (B) the willful engaging by the
Employee in misconduct which is demonstrably and materially
injurious to the Company, momentarily or otherwise.
Notwithstanding the foregoing, the Employee's employment
shall not be deemed to have been terminated for Cause unless
and until there shall have been delivered to the Employee by
the Company a copy of a Notice of Termination authorized by
the Board stating that in the good faith opinion of the
Board the Employee is guilty of conduct set forth in clauses
(A) or (B) above and specifying the particulars there of in
detail.
(b) "Disability" shall be deemed the reason for the termination
by the Company of the Employee's employment, if, as a result
of the Employee's incapacity due to physical or mental
illness, the Employee shall have been absent from the
full-time performance of the Employee's duties with the
Company for a period of six (6) or more consecutive months.
1
<PAGE> 2
Retention Agreement
Lee G. Haglund
Page 2
(c) "Material Employment Change" shall mean any of the
following:
(i) a reduction in the Employee's base or other
compensation as in effect on the date hereof or as
the same may be increased from time to time during
the term of this Agreement; or
(ii) the relocation of the Employee's principal place of
employment to a location that increases the
Employee's one-way commuting distance from his
primary residence to such principal place of
employment by more than 25 miles - or the Company's
requiring the Employee to be based anywhere other
than such principal place of employment (or permitted
relocation thereof) except for required travel on the
Company's business to an extent substantially
consistent with the Employee's present business
travel obligations.
2. Retention Incentive.
(a) Upon the earliest to occur of the following dates and events
while the Employee is employed by the Company, the Employee
shall be entitled to receive a lump sum cash payment of
$40,000 (the "Retention Incentive"):
(i) the termination of the Employee's employment by the
Company other than for Cause;
(ii) the termination of the Employee's employment by the
Employee following the occurrence of a Material
Employment Change;
(iii) June 30, 1999; or
(iv) the death or Disability of the Employee.
(b) If the Employee's employment is terminated prior to June 30,
1999 by the Company for Cause or by the Employee other than
(i) following a Material Employment Change or (ii) on
account of the Employee's death or Disability, no Retention
Incentive shall be paid to the Employee.
2
<PAGE> 3
Retention Agreement
Lee G. Haglund
Page 3
(c) In addition to the Retention Incentive, if the Employee's
employment with the Company terminates under circumstances
enumerated in Item (2)(a)(i)-(iii) above on or before
December 31, 1999, then the Employee shall be entitled to
receive an additional lump sum cash payment equivalent to
nine (9) months of compensation at the highest base rate of
salary in effect at the Company for the Employee between the
date of this Agreement and December 31, 1999.
3. No Effect on Other Contractual Rights. The provisions of this
Agreement, and any payment provided for hereunder, shall not
reduce any amounts otherwise payable, or in any way diminish the
Employee's existing rights or rights (or rights which would accrue
solely as a result of the passage of time) under any employee
benefit plan or employment agreement or other contract, plan
or arrangement nor shall any amounts payable hereunder be
considered in determining the amount of benefits payable to the
Employee under any such plan, agreement or contract. If no
employment agreement or other contract, plan or arrangement by the
Company is in effect with respect to the Employee, then any
amounts payable under this Agreement during its duration, in the
event of a termination of employment of the Employee with the
Company, shall constitute the Company's entire termination of
employment benefit to the Employee, other than accrued wages and
paid time off, expense account reimbursements and amounts due
under the Company's employee benefit plans or under applicable
laws.
4. Successor to the Company.
(a) This Agreement shall be binding on the Company's successors
and assigns.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal and legal
representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Employee
should die while any amounts are still payable to the
Employee hereunder, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms
of this Agreement to the Employee's personal representative,
devisee, legatee, or other designee or, if there be no such
designee, to the Employee's estate.
5. Notice. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt requested,
postage prepaid as follows:
3
<PAGE> 4
Retention Agreement
Lee G. Haglund
Page 4
If to the Company:
5575 Tech Center Drive, Suite 300
Colorado Springs, CO 80919
Attention: Chairman of the Board
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attention: Randall H. Doud
If to the Employee:
Lee G. Haglund
505 SW Chestnut
Portland, OR 97219
or such other address as either party may have furnished to the
other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
6. Amendment Waiver. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Employee and the
Company. No waiver by either party hereto at any time of any
breach of the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made
by either party which are not set forth expressly in this
Agreement.
7. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforce ability of
any other provision of this Agreement, which shall remain in full
force and effect.
4
<PAGE> 5
Retention Agreement
Lee G. Haglund
Page 5
8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
9. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Colorado.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
--------------------------------------
By:
Title:
--------------------------------------
Lee G. Haglund
5
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,775
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0
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<COMMON> 189,670
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