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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1997
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
AMERICAN TELECASTING, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 54-1486988
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5575 TECH CENTER DRIVE, SUITE 300
COLORADO SPRINGS, COLORADO 80919
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S PHONE NUMBER, INCLUDING AREA CODE: (719) 260-5533
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, $0.01 Par Value
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ]
As of March 6, 1998, the aggregate market value of Class A Common Stock
held by non-affiliates* of the Registrant approximated $16.4 million based upon
the closing price of the Class A Common Stock as reported on the Nasdaq SmallCap
Market as of the close of business on that date.
As of March 6, 1998, 25,743,607 shares of the registrant's Class A Common
Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by
reference:
Proxy Statement for Annual Meeting of Stockholders to be held on April
23, 1998 Part III
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* Without acknowledging that any individual director or executive officer of the
Company is an affiliate, the shares over which they have voting control have
been included as owned by affiliates solely for purposes of this computation.
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PART I
ITEM 1. BUSINESS
All statements contained herein that are not historical facts, including
but not limited to, statements regarding the Company's plans for future
development and operation of its business, are based on current expectations.
These statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: a lack of
sufficient capital to finance the Company's business plan on terms satisfactory
to the Company; pricing pressures which could affect demand for the Company's
service; changes in labor, equipment and capital costs; the Company's inability
to develop and implement new services such as high-speed Internet access,
two-way multi-media services and digital video; the Company's inability to
obtain the necessary authorizations from the Federal Communications Commission
("FCC") for such new services; competitive factors, such as the introduction of
new technologies and competitors into the wireless communications business; a
failure by the Company to attract strategic partners; general business and
economic conditions; and the other risk factors described from time to time in
the Company's reports filed with the Securities and Exchange Commission ("SEC").
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995, and as such, speak only as of the date
made.
GENERAL
American Telecasting, Inc. ("ATI" or the "Company") was formed in 1988 to
develop wireless cable television systems in mid-sized markets throughout the
United States. As of December 31, 1997, the Company provided analog subscription
television service to approximately 138,900 subscribers through 33 operational
wireless cable systems located in selected U.S. markets (the "Developed
Markets"). The Company also has significant wireless cable (microwave) frequency
interests in 19 other U.S. markets (the "Undeveloped Markets" and together with
the Developed Markets, the "Markets"). As of December 31, 1997, the Company had
approximately 10.3 million Estimated Households in Service Area in its Markets,
although some of these households will be "shadowed" and unable to receive the
services offered by the Company due to certain characteristics of the particular
market, such as transmitter height and transmission power, terrain and foliage
("Line-of-Sight Constraints"). See "-- Markets."
Wireless cable systems use microwave frequencies licensed by the FCC to
transmit signals over the air from a transmission tower to a microwave receiver
installed at the subscriber's home or business. Licenses for wireless cable
frequencies, which utilize up to approximately 200 megahertz ("MHz") of radio
spectrum, are given a 35 mile protected service area to transmit signals from
their central transmission point, although increases in transmission power and
other factors may expand the coverage area of a system to approximately 40 to 50
miles from the central transmission point. Because microwave signals are
transmitted over the air, wireless cable technology does not require the large
networks of cable and amplifiers utilized by franchise cable operators to
deliver services. Thus, wireless cable technology has been developed as a
reliable, yet relatively low cost, medium to provide services to subscribers in
single family homes, multiple dwelling units and commercial properties.
The Company was incorporated in Delaware in December 1988 and has its
principal executive offices at 5575 Tech Center Drive, Suite 300, Colorado
Springs, Colorado 80919. The Company's telephone number is (719) 260-5533. The
Company operates its business through its subsidiaries. Except as otherwise
indicated, references in this Report to "ATI" or the "Company" refer to American
Telecasting, Inc. and its subsidiaries collectively.
BUSINESS STRATEGY
Analog Technology
Since inception, the Company has focused principally on developing analog
wireless cable systems to provide multiple channel television programming
similar to that offered by franchise cable companies. The
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Company's primary strategy has been to develop systems in mid-sized markets
where terrain and other conditions are well suited to wireless cable service. To
attract subscribers in these markets, the Company has sought to exploit the cost
advantage that wireless cable has over other analog subscription television
services by offering the most popular programming (including "basic" channels
such as ESPN, CNN, USA Network, Nickelodeon, Discovery, regional sports
channels, MTV, local broadcast channels, and one to three "premium" channels
such as Home Box Office, Showtime and The Disney Channel) at affordable prices
and by emphasizing a strong commitment to customer service. In developing and
implementing its business strategy, the Company also has sought to maintain the
flexibility to adapt to new digital technologies for the provision of video,
voice and data services.
During 1997, the Company operated its Developed Markets principally as an
analog video subscription television business. The Company's strategy was, in
part, to maximize operating cash flow from its analog video operations, while
continuing to explore the development of digital wireless services, such as
high-speed Internet access, two-way multimedia services (i.e., Internet and
telephony) and digital video. In certain markets, the Company intentionally
curtailed growth in its analog video business by not investing the capital
resources necessary to replace all those subscribers who chose to stop receiving
the Company's service ("subscriber churn"). The Company's analog video strategy
was based upon several factors, including the limited capital resources
available to maintain the Company's business at current levels and management's
belief that the most attractive returns on investment are likely to be based on
digital technologies.
The Company's subscriber base declined from 179,800 at December 31, 1996 to
138,900 at December 31, 1997. Approximately half of this decline (23,000
subscribers) resulted from a sale of assets to BellSouth Wireless Cable, Inc.
("BellSouth Wireless") See "-- Acquisitions and Divestitures -- BellSouth
Transaction." The balance of the decline resulted from the Company's revised
business strategy, as described above. As the Company's analog video subscriber
base decreases, its revenues are expected to decrease, unless and until it is
able to successfully introduce other revenue-producing digital wireless
services.
Digital Technologies
Management continues to believe that the most promising long-term use of
the Company's spectrum is to provide a variety of digital wireless services.
Such digital wireless services could include high-speed Internet access, two-way
multi-media services and digital video.
High-Speed Internet Access Service
Asymmetrical Internet Access. The Company's high-speed Internet access
strategy is to initially launch commercial operations in a small number of
markets in order to evaluate the long-term viability and financial returns
of the business. During the second quarter of 1997, the Company deployed an
asymmetrical high-speed Internet access service in its Colorado Springs,
Colorado market branded as "WantWEB." This technology utilizes a high-speed
wireless cable modem for downstream Internet access, while relying on a
telephone line for upstream Internet access. Shortly after its initial
launch, the Company's primary equipment vendor was unable to satisfactorily
resolve technical problems with certain equipment. During the third quarter
of 1997, the Company switched equipment vendors and exchanged all deployed
equipment in the Colorado Springs market. As of December 31, 1997, the
Company's Colorado Springs Internet access service had approximately 300
users. In the first quarter of 1998, the Company deployed asymmetrical
high-speed Internet services in Denver, Colorado, and Portland, Oregon. The
Company currently plans to launch a similar service in Seattle, Washington
in the second or third quarter of 1998.
Two-Way Internet Access. During 1996, the Company, along with other
industry participants, successfully tested a two-way wireless Internet
technology using existing transmission and reception equipment. This test
confirmed that wireless cable frequencies are capable of delivering two-way
Internet access at speeds that are significantly faster than speeds
commonly available using conventional telephone lines. However, before the
Company may begin offering two-way Internet access on a commercial basis,
it must secure certain regulatory approvals from the FCC. The Company,
together with other wireless
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cable operators, petitioned the FCC in March 1997 to expand its digital
authorizations to permit two-way transmission. The FCC issued a Notice of
Proposed Rule Making in October of 1997 soliciting comments on the
proposal. The comment period closed in February 1998. The final ruling on
the proposed rule making is currently pending at the FCC. See
"-- Regulation."
Multi-Media Services
During 1998, the Company intends to conduct technical demonstration trials
in Eugene, Oregon and Seattle, Washington, using its wireless spectrum to
deliver two-way multi-media (i.e. Internet and telephony) services. The trials
will utilize a transceiver and network interface unit ("gateway") located at the
subscriber's premises. The transceiver will receive and send information to the
transmission tower ("head-end"). The gateway will separate the information
streams into voice and data channels. The Company's plan in conducting these
trials is to demonstrate the commercial viability of the services by confirming
the reliability of the technologies involved, especially for providing broadband
wireless bundled services, including voice and high-speed Internet. The
equipment being used by the Company is not yet available in commercial
quantities.
While the Company intends to continue its development efforts with respect
to offering a full complement of multi-media services, the commercial
introduction of such services in any of the Company's markets would involve
substantial capital expenditures, which the Company is not in a position to make
at this time. The Company's ability to commence delivery of multi-media services
is also dependent upon, among other things, commercial availability of
appropriate transmission and reception equipment on satisfactory terms and
certain regulatory approvals and changes, especially with respect to routine
two-way licensing of the radio spectrum used by the Company. See
"-- Regulation."
Digital Video Service
Through the use of digital compression technology, wireless cable systems
are capable of significantly expanding the number of channels of video
programming delivered to subscribers. Digital compression technology allows the
capacity of each wireless cable channel to increase by at least four to ten
times and is also capable of delivering off-air programming. To date, wireless
cable operators have commercially introduced digital video compression
technology in the United States only on a limited basis. During 1997, management
considered the limited financial resources of the Company and the highly
competitive market for digital video subscribers and concluded that offering
digital video would not presently provide an adequate return relative to the
capital investment required. While management believes that the Company is
generally prepared for the introduction of digital video compression in certain
of its markets, the purchase of digital video compression transmission and
receiving equipment would involve substantial capital expenditures, which the
Company is not in a position to make at this time.
CERTAIN REQUIREMENTS AND UNCERTAINTIES
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 multi-media or
digital video services at all. 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 programming and channel lease
agreements), the availability of appropriate transmission and reception
equipment on satisfactory terms, the expertise of the Company's management, and
the Company's ability to obtain the necessary regulatory changes and approvals
in a timely fashion. There is also uncertainty regarding the degree of
subscriber demand for these services, especially at pricing levels at which the
Company can achieve an attractive return on investment. Moreover, the Company
expects that the market for any such services will be extremely competitive. See
"-- Competition."
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
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transactions with other providers of telecommunications and multi-media
services. These relationships could provide the Company with access to
technologies, products, capital and infrastructure. Such relationships or
transactions could involve, among other things, joint ventures, sales or
exchanges of stock or assets, or loans to or investments in the Company by
strategic partners. As of the date of this Report, except for the BellSouth
Agreement (as defined herein), the Company has not reached any agreements or
understandings with respect to such strategic relationships or transactions.
There can be no assurance that the Company will be successful in entering
into strategic relationships or transactions with other providers of
telecommunications or multi-media services, that sufficient capital will be
available on terms satisfactory to the Company, or at all, to fund the
introduction of digital wireless services in the Company's markets, that the
Company's development efforts will be successful, that the Company will be able
to obtain the necessary regulatory approvals and changes to commercially
introduce such services, that there will be sufficient subscriber demand for
such services to justify the cost of their introduction, or that the Company
will be successful in competing against existing or new competitors in the
market for such digital wireless services.
During 1998, the Company intends to continue to operate its Developed
Markets principally as an analog wireless cable business, to commercially launch
high-speed Internet access services in three markets (including Denver and
Portland, which were launched in the first quarter of 1998), and to initiate its
two multi-media technical demonstrations. Because of its current financial
condition and its increasing emphasis on the development of digital services,
the Company does not plan to make the capital expenditures necessary to add
enough new subscribers to replace all of its analog video subscriber churn. As a
result, the Company's subscriber base is expected to continue to decline in
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Moreover, at this time, the Company does not generally
intend to further develop any of its Undeveloped Markets using analog video
technology.
ACQUISITIONS AND DIVESTITURES
During 1997, the Company sold five operating wireless cable systems and
wireless cable channel rights in one additional market and completed the
acquisition of an operating wireless cable system and certain channel rights in
Cincinnati, Ohio. The Company also entered into an agreement to acquire certain
wireless cable channel rights in Bellingham, Washington and an agreement to sell
its operating hardwire cable television system in Lakeland, Florida. During the
first quarter of 1998, a first closing was held on the acquisition of the
Bellingham assets and the sale of the Lakeland system was completed.
BellSouth Transaction
On March 18, 1997, the Company entered into a definitive agreement (the
"BellSouth Agreement") with BellSouth Corporation and BellSouth Wireless which
provides for the sale of all of the Company's Florida and Louisville, Kentucky
wireless cable assets (the "Southeastern Assets") to BellSouth Wireless (the
"BellSouth Transaction"). The Southeastern Assets include operating wireless
cable systems in Orlando, Lakeland, Jacksonville, Daytona Beach and Ft. Myers,
Florida and Louisville, Kentucky and wireless cable channel rights in Bradenton,
Naples, Sebring and Miami, Florida. The purchase price for all of the
Southeastern Assets will range from $67.9 million to $103.2 million, depending
upon the number of wireless cable channel rights that are ultimately transferred
to BellSouth Wireless.
The BellSouth Agreement grants BellSouth Wireless a right of first refusal
in the event of a proposed sale by the Company of any wireless cable channel
rights that the Company owns or subsequently develops in Florida, Georgia,
Alabama, Mississippi, Louisiana, Kentucky, Tennessee, North Carolina or South
Carolina. The BellSouth Agreement also contains a covenant not-to-compete that
prohibits the Company from competing with BellSouth Wireless in the video
distribution business in the Florida and Louisville, Kentucky BTAs (as defined
herein) for a period of five years from the closing date.
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
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and certain rights in Miami, Florida. The proceeds received and related gain
recorded by the Company from the first closing totaled approximately $54 million
and $35.9 million, respectively. Of such proceeds, $7 million was placed in
escrow for a period of twelve months to satisfy any indemnification obligations
of the Company. As of December 31, 1997, the balance of escrow funds was
approximately $6.4 million. The markets sold in the first closing accounted for
approximately 23,000 subscribers and total revenues, operating expenses and
earnings before interest, taxes, depreciation and amortization ("EBITDA") of
$5.2 million, $4.3 million and $902,000 respectively, for the period from
January 1, 1997 through the closing date of the transaction. Under the terms of
the BellSouth Agreement, additional closings are anticipated over the next two
years.
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.
Bellingham Transaction
On December 4, 1997, the Company entered into an agreement (the "Bellingham
Agreement") with Advantage Cable Television, L.L.C. ("Advantage") which provides
for the purchase by the Company of all of Advantage's wireless cable assets in
Bellingham, Washington (the "Bellingham Transaction"). The purchased assets
include Advantage's right to acquire the MDS F Group channels, and rights to
transmit on 20 instructional television fixed service ("ITFS") channels. The
purchase price for all of the Bellingham Assets was $1.85 million in cash, plus
the issuance of warrants to purchase 40,000 shares of the Company's Class A
Common Stock at a price of $2.50 per share. On February 20, 1998, the Company
completed the first closing of the Bellingham Transaction. Payments of
approximately $1.65 million were made at the first closing. When the assignment
of the F group channels to the Company is approved by the FCC, a final payment
of approximately $200,000 will be made to Advantage.
Polk County (Lakeland) Transaction
On December 30, 1997, the Company entered into an agreement (the "Polk
County Agreement") with Time Warner Entertainment -- Advance/Newhouse
Partnership ("Time Warner") which provided for the sale to Time Warner of the
Company's hardwire cable television system in Lakeland, Florida, for
approximately $1.5 million. The closing of this transaction occurred on February
19, 1998. As of the date of closing, the Lakeland system served approximately
2,300 subscribers.
The Polk County Agreement also contained a covenant not-to-compete that
prohibits the Company from operating any multi-channel hardwire video cable
television system in Polk County, Florida, and from marketing the Company's
services, either hardwire or wireless, to any of the Company's former hardwire
cable subscribers in Polk County for a period of three years from the closing
date.
SUBSCRIPTION TELEVISION INDUSTRY
The subscription television industry began in the late 1940's and 1950's to
serve the needs of residents in predominantly rural areas with limited access to
local off-air VHF/UHF broadcasts. The industry expanded to metropolitan areas
due to, among other things, the fact that subscription television offered better
reception and more programming. Currently, subscription television systems offer
various types of programming, which generally include basic service, expanded
basic service, premium service, and, in some instances, pay-per-view service.
A subscription television subscriber generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
basic service fee varies from one area to another and is a function, in part, of
the number of channels and services included in the basic service package and
the cost of such services to the subscription television system operator. In
most instances, a separate monthly fee for each premium service and certain
other specific programming is charged to subscribers, with discounts generally
available to subscribers receiving multiple premium services. Monthly service
fees for basic, expanded basic, and premium services constitute the major source
of revenue for subscription television systems. Subscribers normally are free to
discontinue service at any time. Converter rentals, remote control rentals,
installation
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charges, reconnect charges, repair charges, late fees and advertising fees are
also included in a subscription television system's revenues, but generally are
not a significant component of such revenues.
TRADITIONAL HARDWIRE CABLE TECHNOLOGY
Most subscription television systems are franchise (hardwire) cable systems
that currently use a coaxial cable to deliver television signals to subscribers.
Traditional hardwire cable operators receive, at a headend, signals for
programming services, such as CBS, NBC, ABC, FOX, HBO, Cinemax and CNN, which
have been transmitted to them by a broadcast or satellite transmission. A
headend consists of signal reception equipment and decryption, retransmission,
encoding and related equipment. The operator then delivers the signal from the
headend to subscribers via a distribution network consisting of coaxial cable,
amplifiers and other components ("Cable Plant"). As a direct result of the use
of Cable Plant to deliver signals throughout a service area, traditional
hardwire cable systems are susceptible to signal problems. Signals can only be
transmitted via coaxial cable a relatively short distance without amplification.
Each time a television signal passes through an amplifier, some measure of noise
is added. A series of amplifiers between the headend and the viewing subscriber
leads to progressively greater noise, and thus a grainier picture for some
viewers. Also, unless an amplifier has been properly balanced, the signal may be
improperly amplified. Failure of any one amplifier in the chain of Cable Plant
will interrupt the system transmission signal from that point forward. Regular
system maintenance is required due to water ingress, temperature changes, and
other equipment problems, all of which may affect the quality of signals
delivered to subscribers. Some franchise cable operators have begun installing
fiber optic networks which will substantially reduce the transmission and
reception problems currently experienced by traditional franchise cable systems
and expand channel capacity of their systems. The installation of such networks
will require a substantial investment by franchise cable operators. Digital
equipment for traditional hardwire cable operations became commercially
available during 1997. The deployment of digital technology by hardwire
operators has been limited in 1997, in part, due to refinements in the set-top
converter boxes, and the substantial costs and time required to rebuild Cable
Plant on a digital platform.
WIRELESS CABLE TECHNOLOGY
The wireless cable industry was made commercially possible from a
regulatory standpoint in 1983, when the FCC reallocated a portion of the
electromagnetic radio spectrum located between 2500 and 2700 MHz and permitted
this spectrum to be used for commercial purposes. At that time, the FCC also
modified its rules on the usage of the remaining portion of such spectrum.
Nevertheless, regulatory and other obstacles impeded the growth of the wireless
cable industry through the remainder of the 1980s. For example, before the 1992
Cable Act (as defined herein) became effective, a continued supply of
programming from cable controlled programmers was not assured. The factors
contributing to the growth of wireless cable systems since that time include:
(i) regulatory reforms by the FCC to facilitate competition with franchise cable
operators; (ii) increased availability of programming for wireless cable
systems; (iii) consumer demand for an alternative to traditional franchise
cable; (iv) increased channel aggregation in part through the leasing of excess
capacity on ITFS frequencies, and (v) availability of capital to wireless cable
operators in the public and private markets.
Like a traditional franchise cable system, a wireless cable system receives
programming at a headend. Unlike a traditional franchise cable system, however,
the programming is then retransmitted by a microwave transmitter from an antenna
located on a tower associated with the headend directly to a small microwave
receiver located at each subscriber's premises. At the subscriber's location,
the signals are converted to frequencies that can pass through conventional
coaxial cable into a descrambling converter located on top of a television set.
Wireless cable requires a clear line-of-sight from the tower to the receiver
because the microwave frequencies used will not pass through dense foliage,
hills, buildings, or other obstructions. Some of these obstructions can be
overcome with the use of signal repeaters, which retransmit an otherwise blocked
signal over a limited area. Since wireless cable systems do not require
extensive Cable Plant, wireless cable operators are capable of providing
subscribers with a high-quality picture with few transmission disruptions at a
significantly lower system capital cost per installed subscriber than
traditional hardwire cable systems.
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DIGITAL WIRELESS TECHNOLOGY
Digital wireless equipment generally became commercially available during
1997, thus increasing the scope of potential services to be offered by wireless
cable operators, including the Company. Digital compression technology could
facilitate the Company's goal of providing a full complement of multi-media
(Internet, telephony and video) telecommunication services. Digital compression
technology could also give the Company the capacity to offer a significantly
increased number of programming channels and enhanced video image quality.
Using digital technology, the Company began offering high-speed Internet
access services in Colorado Springs in 1997, and Denver and Portland in the
first quarter of 1998. The Company has not commercially launched any services
involving telephony or digital video and does not currently have the necessary
financial resources to do so. Moreover, at this time, management believes that
the highly competitive market for telephone and digital video services would not
provide adequate return to the Company given the capital investment required to
commercially deploy such services. As circumstances change, the Company intends
to continue to evaluate the competitive market, costs of equipment, and consumer
demand for such services.
REGULATION
The subscription television industry is highly regulated by the FCC and
other governmental agencies. Wireless cable companies are subject to both
federal and local regulation, as described below.
Federal Communications Commission
The FCC has granted wireless cable service providers access to a series of
channel groups, consisting of multipoint distribution service ("MDS") channels,
which are specifically allocated for wireless cable, and ITFS channels which are
initially authorized for educational purposes. Currently, up to 33 total
channels are potentially available for licensing, lease or purchase by wireless
cable companies in each market. Up to 13 MDS channels in any given market
typically can be owned by commercial operators for full-time usage without
programming restrictions. The remaining 20 channels in a given market generally
are allocated for ITFS use. Excess capacity can be leased from ITFS licensees by
wireless cable providers. FCC rules generally prohibit the ownership or leasing
of MDS and ITFS authorizations by cable companies if the MDS facility is located
within 35 miles, or the ITFS facility is located within 20 miles, of the cable
company's franchise or service areas. Pursuant to the 1996 Act (as described
herein), the cable-MDS cross-ownership rule does not apply to a cable operator
in a franchise area in which the operator is subject to effective competition.
Authorizations have been issued, or are currently pending, for the majority
of MDS licenses in most major U.S. markets. Under the current regulatory
structure, as discussed below, only holders of a Basic Trading Area ("BTA")
authorization may apply for available, unlicensed, MDS frequencies within the
BTA. In a number of markets, certain ITFS frequencies are still available.
However, except as noted below, eligibility for ownership of ITFS licenses is
generally limited to accredited educational institutions, governmental
organizations engaged in the formal education of enrolled students and
non-profit organizations whose purposes are educational and include providing
educational and instructional television material to such accredited
institutions and governmental organizations ("qualified ITFS educational
entities"). Non-local, qualified applicants must demonstrate that they have
arranged with local educational entities to provide them with programming and
that they have established a local programming committee.
Of the 20 channels allocated for ITFS use in a given market, at least 12
channels must be licensed to qualified ITFS education entities. FCC rules allow
entities that lease or hold the authorizations, or have filed an unopposed
application, for at least four MDS channels in a market, to apply for
authorizations for up to eight of the 20 ITFS channels in that market if, after
such filing, there remain at least eight other ITFS channels available for
filing by qualified educational entities. Commercial applicants for ITFS
licenses must demonstrate that there are no MDS channels available for
application, purchase or lease in lieu of the ITFS channels applied for. All
licensees who hold authorizations for commercial ITFS channels are required to
provide a minimum number of hours of air time to local educators if no other
ITFS channels are available and if specifically requested to do so by a local
qualified ITFS educational entity.
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FCC rules require ITFS operators to transmit a minimum amount of
educational programming per channel per week. If the educational programming
minimums are met, remaining airtime can be leased to wireless cable operators,
for profit, and used to transmit non-educational programming. ITFS licensees are
currently entitled to meet their minimum educational programming requirements
for all licensed channels using only one channel per four channel group via
"channel loading," if desired.
The 1997 Balanced Budget Act ("1997 Act") enacted revisions to Section 39
of the Communications Act requiring that the FCC auction authorizations among
certain mutually exclusive commercial broadcast license applicants. While the
1997 Act specifically excluded noncommercial educational and public broadcast
station applications from the auction requirement, it did not contain a similar
exclusion for mutually exclusive ITFS applications. Thus, the FCC has sought
comment on whether mutually exclusive ITFS applications should be subject to
auction or whether the current comparative "point system" should continue to
apply to select among such competing applicants. This matter remains pending
before the FCC.
From November 1995 through March 1996, the FCC auctioned all available MDS
rights on the basis of BTAs, with one such authorization available per BTA. The
winning bidder has the exclusive right to apply to operate one or more MDS
stations within the BTA, as long as each proposed station complies with the
FCC's interference requirements and certain other rules. In order to provide
wireless cable service in these markets, the BTA licensee must also secure the
right to a transmission facility. With regard to commercial ITFS channels, only
the BTA license holder may apply for available authorizations within the BTA. A
BTA licensee has a five-year build-out period within which to expand or initiate
new service within its BTA. It may sell, trade or otherwise alienate all or part
of its rights in the BTA and may also partition its BTA along geopolitical
boundaries and contract with eligible parties to allow them to apply for MDS
authorizations within the partitioned area, and conversely, acquire such rights
from other BTA licensees. The license term for each station authorized under
these BTA procedures is ten years from the date the BTA auction closed.
The Company was the winning bidder in 59 BTAs and, as of December 31, 1997,
had been issued BTA authorizations in 56 of its BTAs. See "-- Markets." The
Company expects to receive BTA authorizations in the other three BTAs in 1998.
There can be no assurance that the FCC will grant the Company's remaining BTA
applications. As long as the Company continues to hold the BTA rights in these
56 BTAs, other entities seeking new MDS licenses or certain modifications to
existing licenses within such BTAs must seek approval from the Company, as the
BTA owner. Similarly, to the extent the Company wishes to obtain new MDS
licenses or certain modifications to its existing MDS licenses in markets in
which it was not the BTA winner, it will be required to negotiate with the BTA
owner for approval of such licenses or modifications.
Certain of the Company's MDS applications were filed, and a substantial
majority of the Company's MDS licenses were granted, prior to adoption of the
BTA rules and thus are not subject to such rules. If and when the Company's
non-BTA MDS applications are processed by the FCC and the Company resolves any
deficiencies identified by the FCC, a conditional license will be issued,
allowing construction of the station to commence. Construction of such stations
generally must be completed within one year after the date of grant of the
conditional license. ITFS authorization holders generally have 18 months, after
the initial grant of their construction permit, within which to construct the
station. All ITFS licenses have terms of ten years and most current MDS licenses
will expire on or before May 1, 2001. At the time of expiration, licenses that
were granted prior to adoption of the BTA rules will be subject to renewal under
the pre-BTA regulatory structure. Such licenses also may be revoked for cause in
a manner similar to other FCC licenses. FCC rules prohibit the sale, for profit,
of an MDS authorization not obtained by auction or of a controlling interest in
the licensee of such a facility prior to construction of the station or, in
certain instances, prior to the completion of one year of operation. The FCC,
however, does permit the leasing of 100% of an MDS licensee's spectrum capacity
to a third party and the granting of options to purchase a controlling interest
in an authorization once the required time period has lapsed.
Many of the Company's Undeveloped Markets currently have licenses for less
than 20 wireless cable channels, which, in management's opinion, approximates
the minimum number of wireless cable channels necessary for the commencement of
commercial operations using analog technology. Management believes
8
<PAGE> 10
that high-speed Internet access technology requires substantially fewer channels
to operate on a commercial basis.
On July 10, 1996, the FCC adopted an Order in which it authorized the
interim use of certain digital compression technologies for the provision of
video, voice and data services over MDS and ITFS frequencies. Such technology
may be utilized by a wireless cable operator or an MDS or ITFS licensee, after
applying for, and being granted, such an authorization by the FCC. The Company
has filed and has received grants of, and will continue to file, applications
for permanent digital authorizations in many of its markets. Upon receiving a
digital authorization, a licensee also may transmit one-way downstream Internet
service.
The Company, along with other wireless cable industry companies, petitioned
the FCC in March 1997 to permit the grant of applications for two-way
transmission of interactive services over MDS and ITFS frequencies. The petition
proposes rule changes which would allow the FCC to routinely grant such
licensees the right to implement two-way wireless services. There can be no
assurance that the petition will be granted, or if granted, that the Company
will be able to develop commercially successful products using two-way
transmission.
Telecommunications Act of 1996
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act")
became law. Among other things, the 1996 Act eliminated the cable/telephone
cross-ownership restriction, allowing a telephone company the option of
providing video programming within its telephone service area over a cable
system or a video platform. Conversely, cable companies are now permitted to
provide telephone service. The 1996 Act also limited, and in some cases
eliminated, FCC regulation of cable rates established by the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"),
depending upon the size of the cable system and whether the system is subject to
effective competition and the nature of the rate. Specifically, regulation of
upper tier rates is scheduled to end March 31, 1999. Moreover, small cable
operators and systems subject to effective competition are now exempt from rate
regulation as a result of the 1996 Act. The 1996 Act also vests the FCC with
exclusive jurisdiction over the provision of DBS (as defined herein) service and
preempts the authority of local authorities to impose certain taxes on such
services.
While current FCC regulations are intended to promote the development of a
competitive subscription cable television industry, there can be no assurance
that these regulations will have a favorable impact on the Company. Changes in
FCC policies or procedures could have a negative effect on the wireless cable
industry as a whole and/or the Company in particular. In addition, the FCC's
regulation of other spectrum could permit the operation of other wireless
services to interfere with MDS and ITFS frequencies.
Pursuant to the 1996 Act, the FCC adopted regulations that prohibit
restrictions that "impair" a subscriber's ability to receive video programming
services through reception devices. These rules apply to restrictions affecting
the installation, maintenance or use of an antenna that receives wireless cable
signals, where the antenna is one meter or less in diameter or diagonal
measurement. A restriction "impairs" if it unreasonably delays, prevents or
increases the cost of installation, maintenance or use of an antenna or
precludes reception of an acceptable quality signal. Prohibited regulations
include, but are not limited to, any private covenant, homeowners' association
rule or similar restriction on property within the exclusive use or control of
the antenna user where the user has a direct or indirect ownership interest in
the property. The matter of whether the FCC's preemptive authority extends to
property not within the exclusive use or control of a person with an ownership
interest, such as a rental property, remains pending.
The 1996 Act also requires all providers of telecommunications services (as
defined by the 1996 Act) to contribute to a national Universal Service Fund (the
"Fund"). The Fund was created to promote the availability of telecommunications
services to those in low income, rural, insular, and high cost areas at rates
that are reasonably comparable to the lower rates charged in urban areas. The
1996 Act expanded the purpose of the Fund to include provision of affordable
access to advanced telecommunications services for schools, classrooms, health
care facilities, and libraries. Previously, only telephone companies were
required to contribute to the Fund. The FCC is considering whether and to what
extent wireless cable operators, such as the Company, must contribute to the
Fund. This matter remains pending before the FCC.
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<PAGE> 11
Pursuant to the 1996 Act, video programming distributors, including
wireless cable operators, will be required to provide closed captioned video
programming on a phased-in basis starting on January 1, 2000. Requirements to
pass-through captions already contained in programming and to maintain
captioning at 1997 levels became effective on January 1, 1998. Because ITFS
programming as a class is exempt from captioning requirements, wireless cable
operators that retransmit such programming are not required to provide closed
captioning.
Pending Legislation
Legislation has been introduced in several states that would authorize
state and local authorities to impose taxes on providers of subscription
television programming, including wireless cable operators, based upon their
gross receipts comparable to the franchise fee cable operators pay. While the
proposals vary among states, the bills all would require as much as five percent
of gross receipts to be paid by wireless cable operators to local authorities.
Although the majority of states impose a sales/use tax on the sale of
certain telecommunication services, the proliferation of new and emerging
services has made the distinction between taxable telecommunication services and
nontelecommunication services unclear. Internet access services could be
classified as telecommunication services in some states. Because the nature of
any such legislation, if enacted, is unknown, the Company cannot predict what
impact such legislation would have upon its operations.
Other Forms of Regulation
Federal law requires that all "cable companies," as defined by Section 602
of the Communications Act, obtain local or state franchises prior to
constructing a subscription television distribution system. Because wireless
cable systems deliver programming to subscribers by means of microwave
facilities rather than through coaxial cable and are not specifically defined as
"cable systems" in Section 602 of the Communications Act, the 1992 Cable Act, or
in earlier statutes or FCC regulations, they have not been considered cable
companies under FCC rules in this context. Accordingly, wireless cable companies
generally are not required to obtain franchises and are generally not subject to
state regulation by public utility or cable commissions.
The Company's subscription television assets in Cincinnati, Ohio include
both wireless cable and satellite master antenna television ("SMATV")
facilities, the latter of which have been deemed by the FCC to constitute cable
systems. By letter dated October 17, 1996, the FCC granted the Company a
temporary waiver of the cable/MDS cross-ownership rules to allow the common
ownership and operation of these facilities until November 5, 1997. The Company
was subsequently granted an extension of this deadline until May 5, 1998. By
that date, the Company will be required to take all actions necessary to comply
with these rules, including possible divestiture.
The Company also operates approximately 24 other rural systems which may be
defined as cable systems. In accordance with FCC procedure, on June 1, 1996, the
Company applied for special waivers from the cross-ownership rules to enable it
to continue to operate these systems. As of the date of this Report, the FCC has
yet to act on the Company's waiver requests. Should these waivers be denied by
the FCC, the Company will be required to take all actions necessary to comply
with these rules, which among other things, may include divestiture of these
systems. The aggregate number of subscribers served by these systems is
estimated by the Company to be less than 600.
The Company is also subject to various FCC regulatory limitations relating
to ownership and control. The Communications Act and FCC rules require the FCC's
approval before a license may be assigned or control of the license may be
transferred. Moreover, the Act provides that certain types of licenses,
including those for MDS stations, may not be held directly by corporations of
which non-U.S. citizens or entities ("Aliens") own of record or vote more than
20% of the capital stock. In situations in which such an FCC license is directly
or indirectly controlled by another corporation, Aliens may own of record or
vote no more than 25% of the controlling corporation's capital stock.
10
<PAGE> 12
In light of these restrictions, the Company amended its certificate of
incorporation in April 1995 to require that all of its officers and directors be
U.S. citizens and to empower the Board of Directors to redeem the Company's
outstanding capital stock to the extent necessary to protect the loss or secure
the reinstatement of any license or franchise from any governmental agency if a
situation arises whereby more than the permitted percentage of outstanding
capital stock of the Company is owned or voted by Aliens. Moreover, the
amendments adopted in April 1995 provide that, in such circumstances, no
transfers of shares may be made to Aliens and shares causing the Company to
exceed the statutory limit may neither be voted, receive dividends, nor be
entitled to any other rights, until transferred to U.S. citizens.
Wireless cable operators also are subject to regulation by the Federal
Aviation Administration and the FCC with respect to construction of transmission
towers and certain local zoning regulations affecting construction of such
towers and other facilities.
COMPETITION
Subscription Television Services
In the past year, competitive conditions in the cable industry have
increased dramatically. Currently, the Company's existing and potential
competitors in the subscription television arena consist of a broad range of
companies engaged in the communications and entertainment businesses, including
franchise cable operators, digital satellite program providers, television
networks, and home video products companies. The Company has experienced
increased competition in the subscription television business due, in part, to
the growth in market share of companies providing digital video. To date, the
Company has sought to differentiate itself from its competitors through lower
prices, streamlined pricing plans, service guarantees, high-quality customer
service and system performance, and local community involvement and support. As
the number of companies entering the industry increases, the impact of these
differentiating factors begins to decrease. Many of the current digital
satellite providers and cable companies are offering services similar to the
Company's services, but with a larger selection of programming at comparable or
lower monthly rates. Currently, the Company is limited by FCC regulation to
providing up to 33 analog channels of programming in any given market, plus
local off-air channels. In the past, the Company's ability to provide local
channels has been a distinguishing factor, but digital satellite providers soon
may be able to transmit local channels on a limited basis.
Many of the Company's existing or potential competitors have substantially
greater name recognition and financial, technical and human resources than the
Company and may be better equipped to develop and operate systems providing
subscription television service. The Company's principal existing competitors
for subscription television are described below.
Franchise Cable Systems
Currently, the Company's principal subscription television competitors are
franchise cable companies that hold local franchises to operate their systems in
the Company's markets. Cable television service is currently available to the
vast majority of U.S. television households. In most instances, the franchise
cable operators with which the Company competes serve more subscribers on both a
local and national level. In the United States, more than 61 million households
subscribe to cable television. Franchise cable companies typically offer a
larger selection of programming than the Company. The Company seeks to compete
with franchise cable companies by offering the most widely demanded programming
choices at lower prices combined with high-quality customer service.
In the current technological environment, most franchise cable operators
would be required to significantly upgrade their coaxial systems in order to
provide digital programming, which would involve a substantial investment of
capital. However, a number of proposed technological improvements, when fully
completed, will permit cable companies to increase channel capacity, offer
two-way capable systems, and deliver a higher quality picture and sound without
significant upgrades to their systems. While many of the franchise cable
operators plan to provide digital programming, the deployment of these services
has been slow to occur.
11
<PAGE> 13
Many of the largest cable systems in the United States have announced plans
to offer data and telephony service through upgraded networks and have entered
into agreements with major telephony providers to further these efforts. In some
cases, trials of data and telephony services are underway. Because these trials
are still in the development stage, it is uncertain what impact the combination
of cable systems and telephony providers will have on the Company. In the event
that these trials are successful, the cable operators who are capable of
offering both data and telephony services will have a competitive advantage over
wireless companies if consumers choose to receive both their cable and telephone
service from the same operator.
A critical competitive factor in the subscription television industry is
access to high-quality programming at a competitive price. Because programmers
are looking for access to a sufficient number of households to support the
introduction and success of their programming, franchise cable operators, which
have approximately 61 million subscribers nationwide, have a distinct
competitive advantage over wireless cable operators, which have only 1.1 million
subscribers nationwide. As a result, wireless companies typically pay a higher
rate per subscriber for the same programming offered to franchise operators,
and, in some cases, programmers are granting exclusive programming to franchise
cable operators. The Company's inability to renew its programming agreements on
satisfactory terms, or to obtain access to acceptable alternate programming,
would have a material adverse effect on its business, financial condition and
results of operations.
Direct Broadcast Satellite ("DBS")
DBS involves the transmission of an encoded signal directly from a
satellite to the subscriber's home. Because the signal is at a higher power
level and frequency than most satellite-transmitted signals, its reception can
be accomplished with a relatively small (typically 18-inch) dish mounted on a
rooftop or in a subscriber's yard.
The cost of constructing and launching the satellites used to distribute
DBS programming is substantial. When first introduced, DBS reception equipment
for a single television set cost approximately $650 per subscriber, plus
installation fees, service charges and off-air antenna installation, where
applicable. These prices have decreased as additional competitors have entered
the DBS market. Recent promotions have offered DBS reception equipment for less
than $150 (exclusive of installation and other charges) and programming packages
for $27 per month or less (providing greater than 50 channels of digital-quality
programming). DBS providers soon may be able to transmit local channels on a
limited basis. According to trade publications, DBS operators served 6.3 million
subscribers nationwide as of December 31, 1997 (representing a 43% increase from
1996). The Company is experiencing increased competition from DBS operators
primarily due to a decrease in DBS equipment costs, lower monthly subscription
rates, and the number of digital-quality channels offered.
To a lessor extent, the Company also competes with C-band satellite program
distributors (also referred to as "backyard dish" or television receive only
("TVRO") systems) and private cable operators in the provision of subscription
television services.
Internet Services
As of the date of this Report, the Company has launched asymmetrical
high-speed Internet access services in three markets and intends to launch such
service in one additional market during 1998. The demand for Internet services
is expected to grow dramatically, fueled by increased utility of the Internet,
increased corporate and consumer interest, rising personal computer penetration
and conversion of on-line users to the Internet. However, the Internet access
business is highly competitive with minimal barriers to entry. Current or
potential competitors include regional and national Internet service providers,
telephone companies, franchise cable operators and DBS service providers. The
Company's most distinct competitive advantage is the speed at which users can
download information. WantWEB users receive information at up to 750 kilobits
per second ("Kbps") via MDS channels and use a telephone line return. The
Company's competitors typically provide dial up access to the Internet at slower
speeds. Most of the Company's competitors can also provide high-speed Internet
service through a point-to-point committed line (i.e., T-1 or ISDN), but at
additional cost to the subscriber. The Company's target market is small- to
mid-size business
12
<PAGE> 14
customers. The Company believes that competition will intensify in the future
and its ability to be successful in the business will depend on a number of
factors, including customer demand for high-speed Internet access services,
affordable prices, and reliable subscriber equipment.
Many of the Company's existing or potential competitors in the Internet
access business have greater name recognition and financial, technical and human
resources than the Company and may be better equipped to develop, deploy and
operate Internet access systems.
Other Competition
The Company continues to believe that the most promising long-term use of
its spectrum is to provide a variety of digital wireless services. To date, the
Company has entered the Internet access business only on a limited basis and
does not currently have the capital resources necessary to enter the multi-media
or digital video businesses. While the nature of the multi-media industry is
constantly evolving, the Company expects that each of these businesses will be
extremely competitive and that a broad range of companies engaged in the
communications and entertainment businesses, including franchise cable
operators, digital satellite program providers, television networks and home
video products companies, will be actual or potential competitors. Pending and
future technological and regulatory developments may result in additional
competitors and alternate means of providing multi-media services. Two recent
regulatory developments that could affect the multi-media industry are described
below.
Local Multi-Point Distribution Service ("LMDS"). On March 13, 1997,
the FCC released service and competitive bidding rules for LMDS, which is
located at 27.5 to 28.35 GHZ, 29.1 to 29.25 GHZ and 31.0 to 31.3 GHZ in the
frequency band. There will be one 1150 MHz LMDS license and one 150 MHz
LMDS license awarded for each BTA, for a total of 986 authorizations. There
will be no restrictions on the number of licenses an entity may hold, but
incumbent local exchange carriers and cable companies will not be able to
obtain the 1150 MHz licenses in their regions for three years. A
simultaneous multiple round LMDS auction began on February 18, 1998. The
Company is participating in this auction. The rules for use of the LMDS
spectrum are relatively broad, but it is expected that the spectrum will be
used for multichannel video programming, telephony, video communications
and data services, including two-way video communications. Deployments are
anticipated to be primarily in densely populated metropolitan areas.
Wireless Communications Service ("WCS"). On February 19, 1997, the FCC
announced service and auction rules for WCS, which is located at about 2.3
GHz in the frequency band. There were two 10 MHz WCS licenses for each of
52 major economic areas and two 5 MHz WCS licenses for each of 12 regional
economic area groupings. A simultaneous, multiple-round electronic auction
for the WCS licenses was concluded in April 1997. The Company did not
participate in the auction. The rules for use of the WCS spectrum are
relatively broad. Since the licenses involve much less total spectrum than
is available to other providers of subscription television service, such as
the Company, in a typical market, it is unlikely that WCS license winners
will be able to effectively compete with such subscription television
providers. However, WCS license winners could increase competition in the
data and wireless telephony businesses in the future.
MARKETS
The Company operates under a decentralized management structure in order to
maximize the Company's local presence in each market. To enhance its operating
efficiency and maintain quality customer service, the Company has consolidated
or "clustered" operations of systems by geographical areas. Most of the
Company's operational systems or system clusters are managed by a general or
operations manager who reports directly to a regional manager. General and
operations managers are responsible for the day-to-day operations of their
respective systems. Each operating system is staffed with customer service and
sales representatives and service technicians. Most non-executive employees of
the Company have incentive compensation programs that are tied to service
quality levels and sales goals. Pricing and programming decisions are made at
the local level, subject to review by the Company's executive management.
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<PAGE> 15
The following table sets forth, by region, certain information relating to
the Company's Markets as of December 31, 1997:
<TABLE>
<CAPTION>
ESTIMATED
TOTAL DEVELOPED HOUSEHOLDS
REGION MARKETS MARKETS IN SERVICE AREA SUBSCRIBERS
------ ------- --------- --------------- -----------
<S> <C> <C> <C> <C>
Central.............................. 22 15 2,862,000 70,000
Southeast............................ 4 1 639,000 11,300
Western.............................. 17 11 3,728,000 35,500
Midwest.............................. 9 6 3,040,000 22,100
-- -- ---------- -------
52 33 10,269,000 138,900
== == ========== =======
</TABLE>
Information regarding each of the Company's Markets as of December 31, 1997
is presented in the following table. "Estimated Households in Service Area"
represents the approximate number of households within a 35 mile radius of the
Company's tower sites, subject to certain downward adjustments for overlapping
service areas. This information is based upon household estimates provided by
Strategic Mapping, Inc. using data obtained from the Donnelley Marketing, Inc.
Residential Database. Some of these households will be "shadowed" and therefore
unable to receive the Company's service due to Line-of-Sight Constraints. The
percentage of Estimated Households in Service Area that the Company estimates
may be shadowed due to Line-of-Sight Constraints generally ranges from 10% to
50% depending upon the market.
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<PAGE> 16
WIRELESS CABLE CHANNELS
<TABLE>
<CAPTION>
1997 OWNED OR LEASED
ESTIMATED OWNED OR CHANNELS TOTAL EXPECTED
HOUSEHOLDS LEASED SUBJECT TO TOTAL ANALOG CHANNELS
IN SERVICE FCC PENDING FCC MICROWAVE (INCLUDING OFF-AIR
AREA CHANNELS APPLICATIONS(1) CHANNELS CHANNELS)(2)
----------- -------- --------------- --------- ------------------
<S> <C> <C> <C> <C> <C>
CENTRAL DIVISION
Denver, CO............................ 842,000 33 -- 33 41
Oklahoma City, OK..................... 389,000 29 -- 29 38
Omaha, NE(3).......................... 267,000 13 16 29 33
Little Rock, AR....................... 230,000 30 1 31 37
Wichita, KS........................... 206,000 31 -- 31 34
Colorado Springs, CO(3)............... 201,000 33 -- 33 38
Lincoln, NE(3)........................ 110,000 32 -- 32 39
Fargo, ND(3).......................... 86,000 32 1 33 38
Fort Collins, CO(3)................... 86,000 29 4 33 41
Mankato, MN........................... 66,000 30 -- 30 30
Pueblo, CO(3)......................... 54,000 28 5 33 38
Greeley, CO(3)........................ 53,000 26 7 33 41
Billings, MT.......................... 52,000 28 4 32 35
Rapid City, SD........................ 45,000 30 -- 30 35
Grand Island, NE(3)................... 42,000 32 -- 32 41
Bismark, ND........................... 35,000 18 -- 18 18
Windom, MN(3)......................... 29,000 12 -- 12 16
Geneva, NE(3)......................... 17,000 8 -- 8 15
Tecumseh, NE(3)....................... 15,000 20 -- 20 20
Alamosa, CO(3)........................ 14,000 13 4 17 17
Sheridan, WY.......................... 13,000 23 4 27 30
Sterling, CO.......................... 10,000 13 -- 13 13
----------
Region Total........................ 2,862,000
SOUTHEAST REGION
Bradenton, FL(4)...................... 266,000 9 4 13 19
Lakeland, FL(4)....................... 236,000 31 2 33 41
Naples, FL(4)......................... 87,000 22 1 23 27
Sebring, FL(4)........................ 50,000 16 -- 16 16
----------
Region Total........................ 639,000
WESTERN REGION
Seattle, WA........................... 1,163,000 13 -- 13 23
Portland, OR(3)....................... 669,000 28 -- 28 34
Las Vegas, NV(3)...................... 409,000 23 -- 23 35
Fresno, CA............................ 270,000 25 -- 25 39
Salem, OR(3).......................... 184,000 27 1 28 35
Monterey/Salinas, CA(3)............... 158,000 23 4 27 34
Eugene, OR(3)......................... 124,000 33 -- 33 36
Visalia, CA........................... 117,000 30 1 31 42
Santa Barbara, CA..................... 101,000 4 8 12 18
Anchorage, AK......................... 97,000 25 4 29 36
Medford, OR(3)........................ 97,000 33 -- 33 33
Yuba City, CA(3)...................... 89,000 27 -- 27 38
Redding, CA(3)........................ 65,000 29 3 32 37
Merced, CA............................ 58,000 25 8 33 38
Bend, OR.............................. 46,000 32 -- 32 36
Wenatchee, WA(3)...................... 43,000 9 12 21 23
Maui, HI(3)........................... 38,000 28 -- 28 34
----------
Region Total........................ 3,728,000
MIDWEST REGION
Cincinnati, OH(3)..................... 661,000 10 -- 10 16
Columbus, OH(3)....................... 578,000 20 9 29 34
Youngstown, OH(3)..................... 423,000 32 1 33 37
Toledo, OH............................ 326,000 28 4 32 40
South Bend/Elkhart, IN(3)............. 258,000 31 -- 31 36
Green Bay, WI(3)...................... 212,000 29 -- 29 35
Lansing, MI(3)........................ 212,000 15 16 31 37
Sheboygan, WI(3)...................... 191,000 2 -- 2 7
Jackson, MI(3)........................ 179,000 17 13 30 34
----------
Region Total........................ 3,040,000
----------
TOTAL......................... 10,269,000
==========
</TABLE>
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<PAGE> 17
- ---------------
(1) New station applications, petitions for reconsideration, and petitions for
reinstatement are subject to approval by the FCC. The entities with which
the Company has entered into leasing agreements have filed a series of
applications for wireless cable channels. In many cases, the Company's
applicant is the sole applicant. Due to the qualifications of the Company's
applicants relative to competing filings, the Company expects that most of
these applications will be approved by the FCC. However, there can be no
assurance that these FCC applications will be approved.
(2) Represents total expected wireless channels (including channels not yet in
service) plus local off-air broadcast channels which are generally available
in the Company's broadcast signal area and which the Company does not expect
to rebroadcast over its wireless cable channels.
(3) The Company is the BTA holder in this market. In certain cases, two or more
of the Company's existing or target markets may be contained within a single
BTA.
(4) Committed to be sold to BellSouth Wireless pursuant to the BellSouth
Agreement upon the satisfaction of certain conditions.
In addition to the channel interests detailed above, the Company holds
channel rights in a number of other U.S. markets. The Company may seek
additional channel rights in these markets or sell or exchange the channel
rights it already holds.
Pursuant to an Investment Agreement dated January 19, 1991, between CFW
Communications Company, a diversified publicly-traded telecommunications company
based in Waynesboro, Virginia ("CFW"), and ATI (which agreement provided for the
purchase by CFW of 1,209,678 shares of ATI's Series A Convertible Preferred
Stock), the Company is entitled to receive payments equal to 10% of the earnings
(as defined in the agreement) of each wireless cable system developed by CFW in
the Commonwealth of Virginia for a 15-year period after each respective system
has achieved accumulated pre-tax income. In return, the Company is required to
provide certain advisory services to CFW in connection with the development of
such systems. CFW currently operates wireless cable systems in Richmond,
Charlottesville and other cities within the Shenandoah Valley, and maintains
certain wireless cable channel rights in Lynchburg and Winchester, Virginia.
PROGRAMMING
The Company's analog wireless cable systems seek to offer popular
programming at affordable prices. The Company selects its basic programming
channels to appeal to a specific subscriber base and generally does not offer
programming which appeals to small, specialized market segments. The Company's
typical analog channel offering includes between 11 and 28 basic cable channels,
one to three premium channels (typically HBO, Showtime or the Disney Channel)
and one or two pay-per-view channels. Specific programming packages vary
according to particular market demand. Local off-air channels are received by
the subscriber along with the Company's wireless channels, thereby adding, on
average, four to eight channels to the number of basic channels offered. The
Company's aggregate channel offerings, including local off-air channels,
currently range from 7 to 42 channels. Programming expenses typically equal
approximately one-third of the Company's revenue and have been increasing
relative to revenues. The Company could be adversely affected if it cannot
increase subscriber rates, because of market pressures or otherwise, to offset
increases in programming and other expenses.
SERVICE
The Company's subscription television business emphasizes a strong
commitment to high-quality customer service. This commitment is evidenced, in a
number of the Company's Developed Markets, by fixed-appointment-time
installations; same-day response to service call requests; short telephone hold
times; and extended office, telephone and technical service hours.
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<PAGE> 18
SALES AND MARKETING
In marketing its subscription television service, the Company continues to
target specific consumer segments which have demonstrated a propensity toward
value-added choices and offers specific marketing programs based on local
demand, general market characteristics and subscriber surveys. High-speed
Internet access services are primarily marketed to small to mid-sized businesses
with multiple users.
EQUIPMENT AND FACILITIES
The Company's analog wireless cable systems utilize fully addressable
subscriber equipment. In-home wireless subscriber equipment components used in
the Company's systems are generally similar to those used in franchise cable
systems. Subscriber equipment includes a microwave receiver, downconverter,
set-top converter and remote control unit. Because the Company is not replacing
all of its subscriber churn, the Company's requirements for subscriber equipment
to operate its Developed Markets have been reduced. The Company is not dependent
upon any one supplier for its analog video equipment.
The Company's high-speed Internet access service utilizes the same
microwave antennas and down converters as its analog cable service. Subscribers
are required to purchase the cable modem, which is sold by the Company. The
Company is dependent upon a single supplier, Hybrid Networks, Inc. for Internet
cable modems. The Company's inability to purchase modems at satisfactory prices
from this supplier or a substitute supplier could have a material adverse effect
on the Company's Internet access business.
LICENSES AND CHANNEL LEASES
The majority of the licenses the Company uses to broadcast its programming
are under long-term leases with third party licensees. The average term of the
Company's channel leases, including renewals at the Company's option, is more
than ten years. Certain channel agreements permit only analog technologies.
Thus, the deployment of digital services may require renegotiation of these
channel leases. Although the Company anticipates that it will continue to have
access to a sufficient number of channels to operate a successful wireless cable
system, if a significant number of the Company's channel leases are not renewed,
a significant number of its pending FCC applications are not granted, or the FCC
terminates, forfeits, revokes or fails to renew the authorizations held by the
Company's channel lessors, ATI may be unable to provide a viable programming
package to subscribers in some or all of its markets.
EMPLOYEES
As of March 6, 1998, the Company had 410 employees. The Company considers
relations with its employees to be satisfactory. The Company also uses
independent contractors to perform some installations and door-to-door sales.
ITEM 2. PROPERTIES
The principal physical assets of a wireless cable system consist of
satellite signal reception equipment, radio transmitters and transmission
antennas, as well as office space and transmission tower space. The Company's
principal office is located in approximately 18,000 square feet of leased office
space in Colorado Springs, Colorado. The Company occupies this space under a
lease agreement that expires in 2000. The Company believes that such office
space in Colorado Springs is adequate for the near future. The Company currently
leases additional office and warehouse space in each of its Developed Markets
and certain of its Undeveloped Markets pursuant to lease agreements that expire
at various times over the next three to five years.
The Company also leases tower transmission space in all of its Developed
Markets (except for three markets where it owns transmission towers) and certain
of its Undeveloped Markets, pursuant to long-term lease arrangements. The
Company's tower lease agreements provide for locating transmitter, antenna and
other equipment at existing towers to broadcast wireless cable signals. The
agreements generally cover a period of five to seven years and are subject to
renewal upon expiration. To date, the Company has been able
17
<PAGE> 19
to obtain suitable tower space on satisfactory terms in each of its Developed
Markets. In the event that any one or more of these tower space leases is
terminated or not renewed upon expiration, the Company will be required to
obtain alternative tower space in order to broadcast its programming.
ITEM 3. LEGAL PROCEEDINGS
On or about February 17, 1994, Fresno Telsat, Inc. ("FTI"), the 35% general
partner of Fresno MMDS Associates ("the Fresno Partnership") which operates the
Company's Fresno, Merced and Visalia wireless cable systems, filed a Complaint
in the Superior Court of the State of California for the County of Monterey
against Robert D. Hostetler, Terry J. Holmes, the Company, and certain other
named and unnamed defendants. From 1989 through June 10, 1993, Mr. Hostetler was
a member of the Board of Directors and President of FTI. Mr. Hostetler and his
wife currently own 28% of the outstanding capital stock of FTI. Mr. Hostetler
has been employed by the Company since December 10, 1993 and became a Director
of the Company on March 22, 1994. In January 1996, Mr. Hostetler was appointed
President and Chief Executive Officer of the Company. From 1991 until June 1995,
Mr. Holmes was General Manager of the Fresno Partnership. He is currently
Managing Director of the Fresno Partnership. Mr. Holmes has been employed by the
Company since June 1995, and became Senior Vice President of the Company in
September 1997. The Complaint alleged that, while Mr. Hostetler was a director
and employee of FTI, he engaged in wrongful conduct, including misappropriation
of corporate opportunity, fraud and unfair competition by exploiting business
opportunities that were the property of FTI. The Complaint also alleged that Mr.
Holmes engaged in a misappropriation of corporate opportunities belonging to
FTI. The Complaint further alleged that all defendants, including the Company,
participated in a conspiracy to misappropriate corporate opportunities belonging
to FTI and that the Company and the unnamed defendants engaged in wrongful
interference with fiduciary relationship by intentionally causing Mr. Hostetler
to breach his fiduciary duty to FTI and causing Mr. Hostetler to wrongfully
transfer FTI's corporate opportunities to the Company.
On August 28, 1996, ATI filed a Cross-Complaint (the "Cross-Complaint")
against FTI and certain of its officers and directors (the "Cross-Defendants").
The Cross-Complaint alleges that the Cross-Defendants have engaged in a
violation of Section 26-1-8-401 of the Indiana Code, conversion, conspiracy, and
breach of trust by failing to acknowledge and record ATI's ownership of
approximately 7% of FTI's capital stock purchased by ATI from a former
shareholder of FTI, and continuing to represent that FTI qualifies for
Subchapter S status under the Internal Revenue Code. The Cross-Complaint seeks
specific performance of the transfer of shares to ATI, compensatory damages,
punitive damages, an injunction against any further actions by the
Cross-Defendants in breach of trust or with the effect of dissipating and
diverting the property and assets of FTI, and the appointment of a receiver to
handle the affairs of FTI during the pendency of the FTI proceeding.
On or about February 24, 1997, the Company and Mr. Holmes each filed a
motion for summary judgment seeking dismissal of the claims in the Complaint
relating to an alleged conspiracy to misappropriate corporate opportunities of
FTI. On or about March 5, 1997, FTI filed a motion for leave to amend the
Complaint to add allegations that the Company aided and abetted Mr. Hostetler's
misappropriation of corporate opportunity and that all defendants wrongfully
interfered with FTI's prospective business opportunities. On June 11, 1997, the
Court granted the Company's motion to dismiss the conspiracy claims against the
Company. Also on June 11, 1997, the Court (1) allowed FTI to amend its complaint
to assert a claim for unfair competition according to Section 17200 of the
California Business and Professions Code, and (2) refused to permit FTI to amend
the Complaint to allege against the Company either aiding and abetting or
tortious interference with prospective business opportunities. On July 23, 1997,
the Company filed a demurrer to dismiss the unfair competition claim against the
Company. On August 13, 1997, the Company filed a motion for judgment on the
claim for interference with fiduciary relationship. FTI stipulated to the
Company's demurrer and filed its Second Amended Complaint on or about September
15, 1997.
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 must be resolved by the Court, rather
than the jury, that verdict does not yet constitute a conclusive determination
in favor of the Company. The Court
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<PAGE> 20
intends imminently to convene a conference to address all remaining issues and
enter judgment. On advice of counsel, the Company believes that the Court will
enter judgment for all three defendants, including the Company, on all of the
plaintiff's claims because the jury's determination that neither Mr. Hostetler
nor Mr. Holmes engaged in wrongful conduct relating to any of the disputed
issues or property eliminates any basis for the Court to conclude that the
Company wrongfully acquired any of those properties, as alleged by the
plaintiff. Although the plaintiff has a right to appeal after judgment is
entered, management believes, on the advice of counsel, that the jury verdict
and the anticipated determination and judgment by the Court in favor of all
three defendants will survive appeal. Thus, ultimately this matter is not
expected to have a material impact on the Company's business, financial position
or future results of operations. The Company's Cross-Claim against FTI, filed on
August 28, 1996, remains unresolved.
On January 12, 1996, Videotron (Bay Area ) Inc. ("Videotron") filed a
complaint against the Company in the Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, Florida. The Complaint alleged the
Company had caused certain entities, from which ATI leases channels and airtime
for its Bradenton and Lakeland, Florida wireless cable markets, to actively
oppose Videotron's FCC applications to increase broadcast power in Videotron's
Tampa, Florida wireless cable system in violation of a Non-Interference
Agreement between Videotron and the Company. On February 20, 1996, the Company
removed the case from the Circuit Court to the United States District Court for
the Middle District of Florida, Tampa Division. A settlement agreement was
executed by all parties on December 22, 1997, and the case was dismissed with
prejudice on January 11, 1998.
On or about December 24, 1997, Peter Mehas, Fresno County Superintendent of
Schools, filed an action against the Fresno Partnership, the Company and others
entitled Peter Mehas, Fresno County Superintendent of Schools vs. Fresno Telsat
Inc., an Indiana corporation, et al., in the Superior Court of the State of
California, Fresno County, Case No. 602965-6. The complaint alleges that a
channel lease agreement between the Fresno Partnership and the Fresno County
school system has expired. The Plaintiff seeks a judicial declaration that the
lease has expired and that the defendants, including the Company, hold no right,
title or interest in the channel capacity which is the subject of the lease. The
Company believes that both it and the Fresno Partnership possess valid defenses
to the action. Management does not believe the lawsuit will have a material
impact on the business, financial condition or results of operations of the
Company.
In addition, the Company is occasionally a party to legal actions arising
in the ordinary course of its business, the ultimate resolution of which cannot
be ascertained at this time. However, in the opinion of management, resolution
of these matters will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1997.
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<PAGE> 21
EXECUTIVE OFFICERS OF THE REGISTRANT
(FURNISHED IN ACCORDANCE WITH ITEM 401(b) OF REGULATION S-K, PURSUANT TO GENERAL
INSTRUCTION G(3) OF FORM 10-K)
The following table sets forth certain data concerning the Company's
executive officers as of the date of this Report:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION BUSINESS EXPERIENCE AND OTHER INFORMATION
---- --- ---------------- -----------------------------------------
<S> <C> <C> <C>
Donald R. DePriest............. 58 Chairman of the Board of Chairman of the Board of Directors since
Directors March 1990; President of the Company from
1988 through March 1990; Chairman of the
Board of Directors, President and sole
stockholder of MedCom Development
Corporation ("MedCom"), the sole general
partner of MCT, an investment partnership
specializing in the communications and
health care industries and ATI's largest
stockholder; also a limited partner of
MCT; Chairman of the Board and President
of Boundary Healthcare Products
Corporation, a hospital products
manufacturer from 1987 through its sale
to Maxxim Medical, Inc. ("Maxxim") in
December 1992; Director of Maxxim, a
publicly-traded hospital products
manufacturer, since December 1992.
Richard F. Seney............... 43 Vice Chairman of the Board Vice Chairman of the Board of Directors
of Directors and Secretary since October 1993; Secretary of the
Company since 1988; Treasurer of the
Company from 1988 to March 1994; Vice
President and General Manager of MedCom
since 1987; limited partner of MCT.
Robert D. Hostetler............ 56 President and Chief President and Chief Executive Officer of
Executive Officer the Company since January, 1996; Vice
President -- Development from January
1995 through December 1995; Director of
Mergers and Acquisitions of the Company
from December 1993 through December 1994;
a member of the Board of Directors of the
Company since March 1994; Director and/or
officer of several affiliated wireless
cable entities, certain of which were
acquired by the Company in December 1993
(the "Choice TV Group") and President of
FTI from 1988 to December 1993.
David K. Sentman............... 47 Senior Vice President, Chief Senior Vice President and Chief Financial
Financial Officer, and Officer since January 1996; Vice
Treasurer President -- Finance and Chief Financial
Officer from July 1995 through December
1995; served in various capacities,
including Chief Financial Officer, with
Artisoft, Inc. from July 1992 through
February 1995.
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION BUSINESS EXPERIENCE AND OTHER INFORMATION
---- --- ---------------- -----------------------------------------
<S> <C> <C> <C>
Terry J. Holmes................ 43 Senior Vice President Senior Vice President since September
1997; Vice President -- Operations from
January 1996 through August 1997;
Regional Manager -- Western Region from
June 1995 through December 1995;
currently Managing Director of the Fresno
Partnership; General Manager of the
Fresno Partnership from June 1991 to June
1995.
John B. Suranyi................ 37 Senior Vice President Senior Vice President since September
1997; Vice President -- Operations from
January 1996 through August 1997;
Regional Manager-Rocky Mountain, Midwest
and Upper Midwest Regions from September
1993 through December 1995; prior to
September 1993, held various positions
with Telecommunications, Inc., United
Artists Cable and United Cable
Television.
Paul E. Beckelheimer........... 51 Vice President Vice President since September 1997;
Regional Manager -- Central Region from
October 1996 through August 1997;
Regional Manager -- Rocky Mountain Region
from July 1995 through September 1996;
General Manager of the Denver, Colorado
system from September 1994 through June
1995; prior to September 1994, held
various positions with
Telecommunications, Inc. and United Cable
Television.
Bryan H. Scott................. 39 Vice President -- Vice President -- Engineering since
Engineering September 1997; Director of Engineering
from April 1997 to August 1997; System
Development Manager from April 1994 to
March 1997; prior to April 1994, held
various positions with
Telecommunications, Inc., Fanch
Communications, Inc., Time Warner
Entertainment and American
Telecommunications Corporation.
</TABLE>
21
<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is quoted on the Nasdaq Stock Market
under the symbol "ATEL." The Class A Common Stock was moved to the Nasdaq
SmallCap Market from the Nasdaq National Market effective October 17, 1997. The
table below sets forth the high and low sale prices for the Class A Common Stock
on the Nasdaq Stock Market (as reported by Nasdaq) for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter............................................. $17 1/2 $13 3/4
Second Quarter............................................ 16 10 3/4
Third Quarter............................................. 14 3/4 8 1/2
Fourth Quarter............................................ 11 5/8 5 1/8
1997
First Quarter............................................. $ 6 1/2 $ 1 1/2
Second Quarter............................................ 2 3/32 1/2
Third Quarter............................................. 1 1/2 17/32
Fourth Quarter............................................ 2 3/4 11/16
</TABLE>
As of March 6, 1998, there were 442 record holders of the Company's Class A
Common Stock, not including stockholders who beneficially own Class A Common
Stock held in nominee or street name. As of March 6, 1998, there were
approximately 4,500 beneficial owners of the Company's Class A Common Stock held
in nominee or street name.
During the early part of 1997, the Company was notified by the Nasdaq Stock
Market, Inc. ("Nasdaq") that the Company no longer met the net tangible asset
requirements for continued listing on the Nasdaq National Market. The Company
submitted a proposal to Nasdaq to achieve compliance, which proposal was denied.
Upon appeal by the Company, a temporary exception was granted by Nasdaq. Prior
to the expiration of the temporary exception, the Company submitted a request to
Nasdaq to move the listing of the Company's Class A Common Stock from the Nasdaq
National Market to the Nasdaq SmallCap Market due the Company's assessment of
its inability to achieve compliance with the National Market requirements within
the time allowed. Effective October 17, 1997, the Class A Common Stock began
trading on the Nasdaq SmallCap Market.
During the early part of 1998, Nasdaq informed the Company that it was not
in compliance with the new quantitative maintenance requirements for continued
listing on the Nasdaq SmallCap Market, which require all listed companies to
have net tangible assets of at least $2 million, a market capitalization of at
least $35 million, or net income of at least $500,000 for two of the last three
years and a minimum bid price of $1 per share. The new maintenance criteria
became effective on February 23, 1998. On February 26, 1998, Nasdaq informed the
Company that the Company's securities were scheduled for delisting, effective as
of the close of business on March 16, 1998. The Company has applied for a
temporary exception under Nasdaq rules by requesting a hearing. The hearing
request has the effect of staying the delisting until completion of the hearing
process. The Company is required to make a written submission to Nasdaq by March
27, 1998, to support its request for continued listing. There can be no
assurance that the Company will be able to meet or continue to meet the minimum
requirements for continued listing on the SmallCap Market. If the Company is
unable to meet such requirements, the Class A Common Stock will likely be
delisted from the SmallCap Market. In such event, it will likely be more
difficult to buy or sell the Class A Common Stock or to obtain timely and
accurate quotations of trading prices. Delisting will likely result in a decline
in the trading market for the Class A Common Stock, which could depress the
Company's stock and bond prices, among other consequences.
The Company has never declared or paid any cash dividends on its Class A
Common Stock and does not expect to declare dividends in the foreseeable future.
Payment of any future dividends will depend upon the
22
<PAGE> 24
earnings and capital requirements of the Company, the Company's debt facilities,
and other factors the Board of Directors considers appropriate. The Company
currently intends to retain its earnings, if any, to support future growth and
expansion. The Company's ability to declare dividends is affected by covenants
in certain debt facilities that prohibit the Company from declaring dividends
and the Company's subsidiaries from transferring funds in the form of cash
dividends, loans or advances to ATI. See "Management's Discussion and Analysis
of Financial Condition and Results, of Operations -- Liquidity and Capital
Resources."
23
<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each period in the
five year period ended December 31, 1997 have been derived from, and are
qualified by reference to, the Company's Consolidated Financial Statements which
have been audited by Arthur Andersen LLP, independent public accountants. This
data should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes thereto for the three years ended December 31,
1997, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1993(1) 1994(2) 1995(3) 1996(4) 1997(5)
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Total revenues......................... $ 7,178 $ 21,629 $ 47,501 $ 62,032 $ 59,031
Costs and expenses:
Operating............................ 4,524 13,128 26,021 36,029 34,516
Marketing, general and
administrative.................... 2,937 13,486 27,870 26,256 23,544
Depreciation and amortization........ 2,563 12,032 29,276 44,665 49,033
Impairment of wireless cable
assets............................ -- -- -- 21,271 --
-------- -------- -------- --------- --------
Loss before interest and taxes......... (2,846) (17,017) (35,666) (66,189) (48,062)
Interest expense and other, net........ (1,665) (7,271) (22,300) (35,488) (41,537)
Gain on disposition of wireless cable
systems and assets................... -- -- -- -- 35,944
-------- -------- -------- --------- --------
Loss before income taxes............... $ (4,511) $(24,288) $(57,966) $(101,677) $(53,655)
======== ======== ======== ========= ========
Basic and diluted net loss applicable
to Class A Common Stock(6)........... $ (4,511) $(15,478) $(66,635) $(104,630) $(52,471)
======== ======== ======== ========= ========
Basic and diluted net loss per
share(7)............................. $ (0.63) $ (1.08) $ (4.17) $ (5.78) $ (2.06)
======== ======== ======== ========= ========
Net dividends declared............... $ -- $ -- $ -- $ -- $ --
======== ======== ======== ========= ========
Weighted average shares
outstanding(7)....................... 7,127 14,357 15,977 18,096 25,458
======== ======== ======== ========= ========
OPERATING AND OTHER DATA:
Earnings (loss) before interest,
income taxes, depreciation and
amortization(8)................... $ (283) $ (4,985) $ (6,390) $ (253) $ 971
Number of operational systems (at end
of period)........................ 10 26 38 38 33
Number of subscribers (at end of
period)........................... 31,400 106,500 173,700 179,800 138,900
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments(9).................... $ 36,377 $ 33,331 $ 32,514 $ 18,476 $ 9,125
Intangible assets, net............... 46,273 118,397 166,194 161,168 150,090
Total assets......................... 101,653 226,920 317,049 283,572 261,598
Long-term obligations (net of current
portion and deferred income
taxes)............................ 11,641 117,761 225,512 256,354 293,286
Stockholders' equity (deficit)....... 79,056 93,843 53,736 3,113 (49,224)
</TABLE>
- ---------------
(1) Includes the results of operations of the Billings, Denver and South
Bend/Elkhart systems from their respective acquisition dates.
(2) Includes the results of operations of the Bend, FEN/WEN Group, Oklahoma
City, Wichita and Lakeland systems from their respective acquisition dates.
(3) Includes the results of operations of the Medford, Sheridan, Redding, Las
Vegas and Rapid City systems and Fresno Wireless Cable Television, Inc. from
their respective acquisition dates.
(4) Includes the results of operations of the Cincinnati system from its
acquisition date.
(5) 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,
24
<PAGE> 26
Florida were transferred to BellSouth Wireless in August 1997. The assets
sold accounted for total revenues, operating expenses and EBITDA of
approximately $5.2 million, $4.3 million and $902,000, respectively, for the
period from January 1, 1997 through the closing date of the transaction. The
proceeds received and related gain recorded by the Company in connection
with such sale totaled approximately $54 million and $35.9 million.
(6) Reflects, for 1995, the cumulative effect of the change in accounting for
installation costs effected January 1, 1995 (income, net of income taxes, of
$602,000 or $0.04 per share) and the extraordinary charge on early
retirement of debt recognized during the quarter ended September 30, 1995
(charge of $11.5 million or $0.72 per share). Net loss for the year ended
December 31, 1996 includes a dividend embedded in the conversion feature of
ATI's Series B Convertible Preferred Stock of $6.25 million.
(7) Pro forma net loss per share and weighted average shares outstanding for the
years ended December 31, 1993 and 1994 are $(0.46) and 9,831,000 and $(1.07)
and 14,445,000, respectively. Pro forma net loss per share and weighted
average shares outstanding for the years ended December 31, 1993 and 1994
give effect to the conversion in January 1994 of all outstanding shares of
ATI's Series A Convertible Preferred Stock into 2,014,098 shares of Common
Stock. Net loss per share for the year ended December 31, 1996 gives effect
to the dividend embedded in the conversion feature of ATI's Series B
Convertible Preferred Stock of $6.25 million.
(8) Earnings (loss) before interest, taxes, depreciation and amortization is a
commonly used measure of performance within the wireless cable industry.
However, it does not purport to represent cash provided by (used in)
operating activities and should not be considered in isolation or as a
substitute for measures of performance in accordance with generally accepted
accounting principles. The amount for 1996 excludes an impairment of
wireless cable assets of approximately $21.3 million. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Fiscal Year 1996 Compared to Fiscal Year 1995."
(9) Excludes, for 1997, available cash of approximately $31.7 million,
representing the Net Available Proceeds from the BellSouth Transaction as of
December 31, 1997, which is required to be used for asset purchases and debt
repayments pursuant to the Indentures.
25
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein that are not historical facts, including
but not limited to, statements regarding the Company's plans for future
development and operation of its business, are based on current expectations.
These statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: a lack of
sufficient capital to finance the Company's business plan on terms satisfactory
to the Company; pricing pressures which could affect demand for the Company's
service; changes in labor, equipment and capital costs; the Company's inability
to develop and implement new services such as high-speed Internet access,
two-way multi-media services and digital video; the Company's inability to
obtain the necessary authorizations from the Federal Communications Commission
("FCC") for such new services; competitive factors, such as the introduction of
new technologies and competitors into the wireless communications business; a
failure by the Company to attract strategic partners; general business and
economic conditions; and the other risk factors described from time to time in
the Company's reports filed with the Securities and Exchange Commission ("SEC").
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995, and as such, speak only as of the date
made.
INTRODUCTION
During 1997, the Company operated its Developed Markets principally as an
analog video subscription television business. The Company's strategy was, in
part, to maximize operating cash flow from its analog video operations, while
continuing to explore the development of digital wireless services. In certain
markets, the Company intentionally curtailed growth in its analog video business
by not investing the capital resources to replace all subscriber churn. The
Company's analog video strategy was based upon several factors, including the
limited capital resources available to maintain the business at current levels
and management's belief that the most attractive returns on investment are
likely to be based on digital technologies. As the Company's analog video
subscriber base decreases, its revenues and operating cash flow are expected to
decrease unless and until it is able to successfully introduce other
revenue-producing digital wireless services.
Management believes that the most promising long-term use of the Company's
spectrum is to provide a variety of digital wireless services. Such services
could include high-speed Internet access, two-way multi-media services (i.e.,
Internet and telephony) and digital video. The Company's high-speed Internet
access strategy is to initially launch commercial operations in a small number
of select markets in order to evaluate the actual long-term viability and
financial returns of the business. In 1997, the Company commercially launched a
high-speed Internet access service branded as "WantWEB" in the Colorado Springs,
Colorado market. WantWEB was launched in Denver, Colorado and Portland, Oregon
in February 1998 and is currently expected to be launched in Seattle, Washington
in the second or third quarter of 1998.
While the Company has begun planning and testing of two-way multi-media and
digital video services, it has not commercially introduced these services and
does not currently have the capital resources necessary to do so. The Company's
ability to introduce these services on a broad commercial basis will depend on a
number of factors, including the availability of sufficient capital, the success
of the Company's development efforts, competitive factors (such as the
introduction of new technologies or the entry of competitors with significantly
greater resources than the Company and increased competition for the renewal of
programming and channel lease agreements), the availability of appropriate
transmission and reception equipment on satisfactory terms, the expertise of the
Company's management, and the Company's ability to obtain the necessary
regulatory changes and approvals in a timely fashion. There is also uncertainty
regarding the degree of subscriber demand for these services, especially at
pricing levels at which the Company can achieve an attractive return on
investment. Moreover, the Company expects that the market for any such services
will be extremely competitive. See "-- Competition."
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<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Funds
The Company experienced negative cash flow from operations in each year
since its inception. Although certain of the Company's more established systems
currently generate positive cash flow from operations, the sale of five
operating systems to BellSouth Wireless in the third quarter of 1997 is expected
to result in a decline in operating cash flow in the future. The Company's
revised business strategy regarding analog video subscribers is also expected to
result in a decline in subscribers, revenue, and operating cash flow. This
negative trend is expected to continue for the foreseeable future until the
Company is able to successfully introduce and market alternative digital
services. Unless and until sufficient cash flow is generated from operations,
the Company will be required to utilize its current capital resources or
external sources of funding, or sell assets, to satisfy its working capital and
capital expenditure needs. Under current capital market conditions, the Company
does not expect to be able to raise significant capital by issuing equity
securities. If the Company's capital resources are not sufficient to finance its
operations, either in 1998 or thereafter, the Company will be required, at a
minimum, to curtail its operations and development plans, which curtailment
could involve, among other things, a complete cessation of new subscriber
additions in analog video and high-speed Internet access.
The Company's capital expenditures, exclusive of acquisitions of wireless
cable systems and additions to deferred license and leased license acquisition
costs, during the twelve months ended December 31, 1995, 1996 and 1997, were
approximately $49.3 million, $32.5 million, and $12.3 million, respectively. The
Company expects to make approximately $33.0 million in capital expenditures in
1998. The Company's principal capital expenditure requirements for 1998 are
expected to relate to the installation of analog video equipment in new
subscribers' premises, anticipated launches of high-speed Internet services in
three markets (including Portland and Denver, which were launched during the
first quarter of 1998), anticipated funding of high-speed Internet access growth
in its operational markets, trials of two-way broadband data and telephony
services, the purchase of transmission equipment for new channels and the
acquisition of additional wireless spectrum. The Company intends to finance
these expenditures from existing cash and investment balances and from
additional closings under the BellSouth Agreement, if such closings occur.
The commercial introduction of additional digital services, such as two-way
multi-media services and digital video, would require substantial capital
expenditures, which the Company is not in a position to make at this time. While
the Company may use a portion of the proceeds from the BellSouth Transaction to
acquire assets for the development of digital services, such proceeds will not
be sufficient to fully implement its digital strategy. The Company is pursuing
strategic relationships or transactions with other providers of
telecommunications and related services 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. See "Business -- Certain Requirements and Uncertainties." There can
be no assurance that sufficient capital will be available on terms satisfactory
to the Company, or at all. Except for the BellSouth Transaction, the Company has
not reached any agreements or understandings with respect to such relationships
or transactions and there can be no assurance that any such agreements or
understandings will be reached.
As a result of the Company's declining subscriber base and the growth of
digital video services by competitors, in the near future, the Company may
experience increased programming expenses beyond the normal annual escalations
due to renewals of programming contracts on less favorable terms. See
"Business -- Competition -- Subscription Television Services -- Franchise Cable
Systems." These cost increases are expected to place additional pressure on the
Company's ability to generate positive cash flow from operations. Marketing
expenses are also expected to increase, principally because of planned
commercial launches and growth of the Company's high-speed Internet services.
In addition, with the growth of the Internet access business and the advent
of other digital technologies, the Company is experiencing increased competition
for the renewal of channel lease agreements. As a result, the Company could lose
channels or incur higher costs to retain its existing channels. Furthermore,
certain of the Company's channel lease agreements permit only analog
technologies. Thus, the deployment of digital
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services may require renegotiation of these channel leases, which could also
result in increased operating costs. In the future, the Company also expects to
allocate capital resources to the acquisition of additional wireless spectrum.
On March 18, 1997, the Company entered into the BellSouth Agreement, which
provides for the sale of all of the Company's Southeastern Assets to BellSouth
Wireless. The Southeastern Assets include operating wireless cable systems in
Orlando, Lakeland, Jacksonville, Daytona Beach and Ft. Myers, Florida and
Louisville, Kentucky and wireless cable channel rights in Bradenton, Naples,
Sebring and Miami, Florida. The purchase price for all of the Southeastern
Assets will range from $67.9 million to $103.2 million, depending upon the
number of wireless cable channel rights that are ultimately transferred to
BellSouth Wireless.
On August 12, 1997, the Company completed the first closing of the sale of
certain of its assets to BellSouth Wireless as part of the BellSouth
Transaction. The first closing involved the sale to BellSouth Wireless of the
Company's operating systems and channel rights in the Florida markets of
Orlando, Jacksonville, Ft. Myers and Daytona Beach, along with the Louisville,
Kentucky market and certain rights in Miami, Florida. The proceeds received and
related gain recorded by the Company from the first closing totaled
approximately $54 million and $35.9 million, respectively. Of such proceeds, $7
million was placed in escrow for a period of twelve months to satisfy any
indemnification obligations of the Company. As of December 31, 1997, the balance
of escrowed funds was approximately $6.4 million. The markets sold in the first
closing accounted for approximately 23,000 subscribers and total revenue,
operating expenses and EBITDA of $5.2 million, $4.3 million and $902,000,
respectively. Under the terms of the BellSouth Agreement, additional closings
are scheduled over the next two years. If further BellSouth closings are
consummated, proceeds therefrom will provide further resources to help finance
certain of the Company's operations and development plans, acquisitions and
capital expenditures. The BellSouth Agreement contains customary conditions for
each closing, including the satisfaction of all applicable regulatory
requirements. There can be no assurance that all of such conditions will be
satisfied or that further sales of assets to BellSouth Wireless will be
consummated.
Pursuant to certain restrictive covenants in the Indentures ("the
Indentures") relating to the Company's Senior Discount Notes due 2004 (the "2004
Notes") and 14.5% Senior Discount Notes due 2005 (the "2005 Notes"), Net
Available Proceeds (as defined) from the first closing under the BellSouth
Agreement must be applied within 270 days (May 9, 1998) of such closing: (1)
first, to prepay or repay outstanding debt of the Company or any Restricted
Subsidiary (as defined) to the extent the terms of the governing documents
therefor require such prepayment, (2) second, to the extent of any such Net
Available Proceeds remaining after application thereof pursuant to item (1)
above, to the acquisition of assets used in the transmission of video, voice and
data and related businesses and services of the Company or a Restricted
Subsidiary and, (3) third, to the extent of any such Net Available Proceeds
remaining after the application thereof pursuant to items (1) and (2) above, (i)
first to prepay or repay all outstanding debt of the Company or any Restricted
Subsidiary that prohibits purchases of the 2004 Notes or 2005 Notes and (ii)
then, to the extent of any remaining Net Available Proceeds, to make a pro rata
offer to purchase outstanding 2004 Notes and 2005 Notes at a purchase price
equal to 100% of the accreted value thereof to any purchase date prior to
maturity.
The Company's obligations under the Indentures will significantly reduce
the Company's liquidity, financial flexibility and ability to fund certain
operations. The Company presently intends to apply the Net Available Proceeds
from the BellSouth Transaction in a manner that would not require it to offer to
purchase any of the 2004 Notes or 2005 Notes. However, the Company has not yet
applied all the net available proceeds in that manner and does not know if it
will be able to do so within the 270 day period specified by the Indentures. If
the Company is required to offer to purchase a portion of its 2004 Notes or 2005
Notes with any unapplied proceeds from BellSouth Transaction, such repurchases
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Interest payments on the 2004 Notes and the 2005 Notes will commence on
December 15, 1999 and February 15, 2001, respectively. Aggregate interest
payments on the 2004 Notes and the 2005 Notes are expected to be approximately
$14.3 million, $28.5 million and $57.8 million in 1999, 2000, and 2001,
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respectively. The Company's ability to make these interest payments will depend
on its ability to attract sufficient additional capital through relationships
with strategic partners or otherwise, or to develop product lines that would
fund such cash interest payments. Without new investments in the Company, it is
unlikely the Company's resources will be sufficient to meet its obligations in
1999.
As a result of certain limitations contained in the Indentures relating to
the 2004 Notes and the 2005 Notes, the Company's total borrowing capacity
outside the 2004 Notes and the 2005 Notes is currently limited to $17.5 million
(approximately $3.6 million of which had been utilized as of December 31, 1997).
Although the Company had the ability under the Indentures to borrow an
additional $13.9 million as of December 31, 1997, the Company does not presently
intend to incur any additional bank or other borrowings because of the high cost
of funds for the wireless cable industry. However, if subsequent closings under
the BellSouth Agreement either do not occur or are insufficient to provide funds
for operations, the Company may be forced 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.
On December 4, 1997, the Company entered into an agreement (the "Bellingham
Agreement") with Advantage Cable Television, L.L.C. ("Advantage") which provides
for the purchase by the Company of all of Advantage's wireless cable assets in
Bellingham, Washington (the "Bellingham Transaction"). The purchased assets
include Advantage's right to acquire the MDS F Group channels, and rights to
transmit on 20 instructional television fixed service ("ITFS") channels. The
purchase price for all of the Bellingham Assets was $1.85 million in cash, plus
the issuance of warrants to purchase 40,000 shares of the Company's Class A
Common Stock at a price of $2.50 per share. On February 20, 1998, the Company
completed the first closing of the Bellingham Transaction. Payments of
approximately $1.65 million were made at the first closing. When the assignment
of the F group channels to the Company is approved by the FCC, a final payment
of approximately $200,000 will be made to Advantage.
On February 26, 1997, the Company entered into a twelve-month $17.0 million
credit facility (the "Credit Facility") with a bank. At closing of the Credit
Facility, the Company also delivered 4,500 bond appreciation rights ("BARs") and
an option to exercise 141,667 exchangeable debt warrants or 141,667 equity
warrants. The Credit Facility was required to be repaid earlier than the
specified termination date and certain mandatory prepayments were required to be
made with the proceeds from certain debt issuances or asset sales, including the
BellSouth Transaction. Concurrent with the closing of the BellSouth Transaction,
the Credit Facility was repaid and the exchangeable debt warrants were redeemed.
The Company's total obligation under the Credit Facility for the aggregate
principal balance thereof, accrued interest, fees and redemption of the
exchangeable debt warrants was approximately $6.4 million, net of an unused
escrow deposit of $845,000. The Credit Facility has been terminated and the
Company does not currently intend to replace the Credit Facility.
As of the date of this Report, the BARs remain outstanding. Amounts payable
in connection with the BARs are based upon the appreciation in price of $4.5
million face value of the Company's 2004 Notes. The BARs are exercisable after
the earlier of June 15, 1999 or the occurrence of an Event of Default under the
2004 Notes. The payment due upon exercise of each BAR is equal to the market
price of each 2004 Note on the closing date less $290. The net value of the BARs
is payable to holders of the BARs in cash. As of December 31, 1997, the amount
payable under the BARs was approximately $45,000.
The Company was involved in the FCC's bidding process for wireless cable
channel authorizations in certain BTAs, which was completed in March 1996. The
Company was the highest bidder in 59 markets. In the aggregate, the Company's
bids in these markets totaled approximately $10.1 million. Of such amount, a
total of approximately $9.5 million had been paid as of December 31, 1997 and
approximately $117,000 was paid subsequent to year-end. The remaining amount
(approximately $498,000) is due upon the FCC's notification to the Company of
the issuance of the remainder of its BTA licenses, which the Company expects
will occur in 1998.
On June 28, 1996, the Company entered into a definitive agreement to
acquire wireless cable channel rights and certain other subscription television
assets in Cincinnati, Ohio (the "Cincinnati Acquisition") for aggregate
consideration of approximately $5.6 million, of which $2.2 million and $3.4
million was paid in 1996 and 1997, respectively. The final closing of the
Cincinnati Acquisition occurred on July 10, 1997. The
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subscription television assets acquired by the Company in connection with the
Cincinnati Acquisition served approximately 3,100 subscribers as of the date of
acquisition.
During 1997, the Company entered into an agreement with a vendor for the
purchase of cable modems used in its Internet business. The agreement expires in
the year 2000 and requires the Company to purchase a minimum number of units at
agreed upon prices. The aggregate minimum amount of the purchase commitment is
approximately $2.3 million over the term of the agreement.
During 1997, the Company also entered into an agreement for the purchase of
certain equipment, including cable modems, for use in its planned multi-media
demonstration trials. If the trials achieve a specified performance criteria,
the company is required to purchase a minimum amount of equipment at prices to
be negotiated in the future.
Prior to March 1997, the Fresno Partnership maintained a revolving credit
facility (the "Fresno Facility") with a bank that provided for borrowings for
the Fresno, Visalia and Merced systems. The Company is a 65% general partner in
the Fresno Partnership. The Fresno Facility was fully assigned from the bank to
the Company in March 1997. The assignment of the facility resulted in a note
receivable from the Fresno Partnership to the Company in the amount of $8.5
million, which is eliminated in consolidation. As of December 31, 1997, the
Fresno Partnership was not in compliance with certain of the restrictive
covenants contained in the Fresno Facility or with the requirements relating to
repayment of principal.
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00." This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken. The Company utilizes software and related computer technologies essential
to its operations, including its accounting and subscriber management systems,
that will be affected by the Year 2000 issue. The Company is studying what
actions it should take to make its computer systems Year 2000 compliant. The
expense associated with these actions cannot presently be determined, but could
be material. Any failure or delay by the Company in resolving its Year 2000
issues, or significant costs associated with resolution of such issues, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
As a result of the Company's history of net losses, the Company currently
has a negative tangible net worth and total liabilities exceeded total assets as
of December 31, 1997. During the early part of 1997, the Company was notified by
Nasdaq that the Company no longer met the net tangible asset requirements for
continued listing on the Nasdaq National Market. The Company submitted a
proposal to Nasdaq to achieve compliance, which proposal was denied. Upon appeal
by the Company, a temporary exception was granted by Nasdaq. Prior to the
expiration of the temporary exception, the Company submitted a request to Nasdaq
to move the listing of the Company's Class A Common Stock from the Nasdaq
National Market to the Nasdaq SmallCap Market due the Company's assessment of
its inability to achieve compliance with the National Market requirements within
the time allowed. Effective October 17, 1997, the Class A Common Stock began
trading on the Nasdaq SmallCap Market.
During the early part of 1998, Nasdaq informed the Company that it was not
in compliance with the new quantitative maintenance requirements for continued
listing on the Nasdaq SmallCap Market, which require all listed companies to
have net tangible assets of at least $2 million, a market capitalization of at
least $35 million, or net income of at least $500,000 for two of the last three
years and a minimum bid price of $1 per share. The new maintenance criteria
became effective on February 23, 1998. On February 26, 1998, Nasdaq informed the
Company that the Company's securities were scheduled for delisting, effective as
of the close of business on March 16, 1998. The Company has applied for a
temporary exception under Nasdaq rules by requesting a hearing. The hearing
request has the effect of staying the delisting until completion of the hearing
process. The Company is required to make a written submission to Nasdaq by March
27, 1998, to support its request for continued listing. There can be no
assurance that the Company will be able to meet or continue to meet the minimum
requirements for continued listing on the SmallCap Market. If the Company is
unable to meet such requirements, the Class A Common Stock will likely be
delisted from the SmallCap Market. In such event, it will likely be more
difficult to buy or sell the Class A Common Stock or to obtain timely and
accurate quotations of trading prices. Delisting will likely result in a decline
in the trading market
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for the Class A Common Stock, which could depress the Company's stock and bond
prices, among other consequences.
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared to Fiscal Year 1996
Service revenues decreased $2.7 million, or 4.4%, during the year ended
December 31, 1997 to $58.0 million, as compared to $60.7 million during the year
ended December 31, 1996. This decrease resulted primarily from the loss of
revenues from the markets sold to BellSouth Wireless on August 12, 1997 and from
an overall decline in analog video subscribers, offset partially by subscription
rate increases principally implemented during the first quarter of 1997. The
five operating markets sold in the first closing of the BellSouth Transaction
accounted for total revenue, operating expenses and EBITDA of $5.2 million, $4.3
million and $902,000, respectively, for the period from January 1, 1997 through
the closing date. The number of subscribers to the Company's wireless cable
systems decreased to 138,900 at December 31, 1997, compared to 179,800 at
December 31, 1996. Approximately half of this decline (23,000 subscribers)
resulted from the sale of assets to BellSouth Wireless. The balance of the
decline resulted from the Company's revised business strategy, as described
above under "Business -- Business Strategy."
On a "same system" basis (comparing systems that were operational for all
of each of the years ended December 31, 1997 and 1996), service revenues
increased $50,000, or 0.1%, to $50.9 million during the year ended December 31,
1997, as compared to $50.9 million for the year ended December 31, 1996. This
increase was attributable principally to rate increases implemented during the
first quarter of 1997. Same systems during these periods totaled 31 systems. The
Company's Cincinnati, Ohio, Portland, Oregon and Anchorage, Alaska systems were
omitted from same system revenues for both periods because these systems were
launched in the second quarter of 1996. Similarly, the St. James, Minnesota and
Yankton, South Dakota systems were omitted from same system revenues for both
periods because these systems were sold by the Company during the second and
fourth quarters, respectively, of 1996. The Company's Orlando, Daytona Beach,
Ft. Myers, Jacksonville, Florida and Louisville, Kentucky systems were also
omitted from same system revenues for both periods because these systems were
sold in the third quarter of 1997. The average number of same-system subscribers
decreased approximately 3.9% during the year ended December 31, 1997, as
compared to the year ended December 31, 1996.
Installation revenues decreased $303,000, or 23.0%, from $1.3 million for
the year ended December 31, 1996 to $1.0 million for the year ended December 31,
1997. The decrease in installation revenues was primarily the net result of
fewer subscriber installations due to the sale of certain assets to BellSouth
Wireless in August 1997 and the decision to not replace a portion of normal
subscriber churn. The decrease in installation revenues was partially offset by
increased installation rates for the year ended December 31, 1997, as compared
to installation rates during the same period of 1996. The number of
installations completed during the year ended December 31, 1997 decreased
approximately 54.0% as compared to the year ended December 31, 1996.
Installation rates vary widely by system based upon competitive conditions. The
Company occasionally reduces installation charges as part of selected
promotional campaigns.
Operating expenses, principally programming, site costs and other direct
expenses, decreased $1.5 million, or 4.2%, from $36.0 million (or 58.1% of total
revenues) during the year ended December 31, 1996 to $34.5 million (or 58.5% of
total revenues) during the year ended December 31, 1997. The decrease was
primarily the result of one-time programming rebates of approximately $400,000
received during the third quarter of 1997, decreased programming expense related
to the loss of subscribers due to the BellSouth Transaction and lower service
call and disconnect expenses of approximately $1.3 million as a result of a
lower subscriber base. The decrease in operating expenses was partially offset
by increased programming rates for basic and premium programming, and increased
channel lease costs due to annual rate increases.
Marketing and selling expenses decreased $4.6 million, or 62.2%, from $7.4
million (or 12.0% of total revenues) during the year ended December 31, 1996 to
$2.8 million (or 4.8% of total revenues) during the year ended December 31,
1997. The decrease in such expenses resulted from reductions in the number of
employees, which resulted in reduced salaries and related sales commissions, and
reduced advertising costs.
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This decrease in marketing efforts is consistent with the Company's strategy to
not replace all subscriber churn.
General and administrative expenses increased $1.9 million, or 10.1%, from
$18.8 million (or 30.4% of total revenues) in the year ended December 31, 1996
to $20.7 million (or 35.1% of total revenues) for the year ended December 31,
1997. This increase was principally attributable to the write-off of certain
merger and acquisition costs previously capitalized, higher legal costs related
to litigation with FTI, consulting fees relating to ongoing multi-media trials
and severance costs relating to the BellSouth Transaction.
In the fourth quarter of 1996, after considering the Company's 1996
operating loss, its history of such operating losses and the expectation of
future operating losses, changes in the Company's strategic direction,
developments relating to previously scheduled industry transactions and
ventures, and the industry factors described above under
"Business -- Regulation" and "Business -- Competition," the Company evaluated
the ongoing value of its wireless cable business in each Developed Market. Based
on this valuation, the Company determined that assets with a carrying value of
$95.1 million were impaired according to the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and wrote
down the carrying value of such assets by $21.3 million to their fair value. An
evaluation was made for each of the Company's Developed Markets individually,
not for the Company's markets as a whole. Fair value was based on recent
transactions in the wireless cable industry. In addition, during the fourth
quarter of 1996, the Company prospectively revised the lives of its subscriber
premise equipment from seven years to three or four years. During 1997, the
Company reviewed the requirements of SFAS No. 121 and evaluated the ongoing
value of its business in each Developed Market. As a result of this evaluation,
the Company concluded that an additional impairment adjustment was not needed at
such time.
The Company's loss from operations was $48.1 million during the year ended
December 31, 1997, as compared to $66.2 million during the year ended December
31, 1996. The decrease in loss from operations of $18.1 million was attributable
primarily to the absence of the 1996 impairment loss of $21.3 million described
above, and increased depreciation and amortization expense of $4.4 million. The
increase in depreciation and amortization expense was due to the revision in the
useful lives of subscriber premise equipment described above in the fourth
quarter of 1996 and a revision in the useful lives of transmission assets from
ten years to a remaining life of four years made by the Company during the
fourth quarter of 1997. The increase was also caused by additional expense
recorded for excess subscriber equipment. This increase was offset, in part, by
a net decrease in loss from operations of approximately $1.2 million as a result
of fluctuations in revenues and operating, marketing and general and
administrative expenses previously discussed.
Interest expense increased $6.4 million, or 17.2%, to $43.7 million during
the year ended December 31, 1997, as compared to $37.3 million during the year
ended December 31, 1996. The increase in interest expense primarily resulted
from increased noncash interest charges of approximately $5.3 million associated
with the increased accreted value of the Company's 2004 Notes and 2005 Notes.
Interest expense also increased $1.3 million due to interest charges associated
with the BARs, warrants and outstanding and unused loan balances recorded in
connection with the Credit Facility. These increases in interest expense were
offset, in part, by lower debt balances on various notes that were repaid with
borrowings from the Credit Facility.
During the year ended December 31, 1997, the Company recorded a gain of
approximately $35.9 million related to the sale of certain assets to BellSouth
Wireless in the BellSouth Transaction. There were no taxes on the gain because
of the application of net operating loss carry forwards.
EBITDA totaled $971,000 for the year ended December 31, 1997, as compared
to a loss before interest, taxes, depreciation, amortization and the impairment
write down described above of $253,000 during the year ended December 31, 1996.
The assets sold to BellSouth Wireless accounted for $902,000 of the $971,000 in
EBITDA for the year ended December 31, 1997.
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Fiscal Year 1996 Compared to Fiscal Year 1995
Service revenues increased $14.5 million, or 31.4%, during the year ended
December 31, 1996 to $60.7 million, as compared to $46.2 million during the year
ended December 31, 1995. This increase resulted primarily from the addition of
new subscribers. Subscriber increases resulted primarily from the 1996
acquisition of subscription television subscribers in Cincinnati, the 1995
acquisitions of the Redding, Las Vegas and Rapid City systems, and the
completion of construction and commencement of operation of systems in Yuba City
and Lincoln during 1995 and Anchorage and Portland during 1996. Service price
increases contributed only a small portion of the aggregate increase in service
revenues. The number of subscribers to the Company's wireless cable systems
increased to 179,800 at December 31, 1996, compared to 173,700 at December 31,
1995.
On a "same system" basis (comparing systems that were operational for all
of each of the years ended December 31, 1996 and 1995), service revenues
increased $6.7 million, or 16.9%, to $46.3 million during the year ended
December 31, 1996, as compared to $39.6 million for the year ended December 31,
1995. Same systems during these periods totaled 24 systems. The average number
of same-system subscribers increased approximately 13.2% during the year ended
December 31, 1996, as compared to the year ended December 31, 1995.
Installation revenues totaled $1.3 million in each of the years ended
December 31, 1996 and 1995. The number of installations completed during the
year ended December 31, 1996 decreased approximately 22.0% as compared to the
year ended December 31, 1995. However, this decrease was fully offset by less
discounting of installation rates. Installation rates vary widely by system
based upon competitive conditions. The Company occasionally reduces installation
charges as part of selected promotional campaigns.
Operating expenses, principally programming, site costs and other direct
expenses, aggregated $36.0 million (or 58.1% of total revenues) during the year
ended December 31, 1996, compared to $26.0 million (or 54.8% of total revenues)
during the year ended December 31, 1995. The increase of $10.0 million was
primarily the result of additional systems and subscribers, as well as increased
programming costs for additions to channel line-ups and increased pay-per-view
offerings in various systems.
Marketing and selling expenses totaled $7.4 million (or 12.0% of total
revenues) during the year ended December 31, 1996, compared to $8.7 million (or
18.3% of total revenues) during the year ended December 31, 1995. The decrease
in such expenses of $1.3 million resulted from decreased marketing activity, net
of marketing expenses associated with the addition of new systems. During the
year ended December 31, 1996, general and administrative expenses totaled $18.8
million (or 30.4% of total revenues), a $400,000 decrease over the year ended
December 31, 1995 ($19.2 million or 40.4% of total revenues). The decrease in
general and administrative expenses principally resulted from reductions in the
number of employees and certain non-recurring expenses totaling $1.1 million
recognized during 1995 relating to the recognition of certain lease termination
and severance costs. Such decreases were partially offset by increased general
and administrative expenses associated with the addition of new systems.
In the fourth quarter of 1996, after considering the Company's 1996
operating loss, its history of such operating losses and the expectation of
future operating losses, changes in the Company's strategic direction,
developments relating to previously scheduled industry transactions and
ventures, and the industry factors described above under
"Business -- Regulation" and "Business -- Competition," the Company evaluated
the ongoing value of its wireless cable business in each Developed Market. Based
on this valuation, the Company determined that assets with a carrying value of
$95.1 million were impaired according to the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and wrote down the carrying value of such assets by $21.3
million to their fair value. An evaluation was made for each of the Company's
Developed Markets individually, not for the Company's markets as a whole. Fair
value was based on recent transactions in the wireless cable industry. In
addition, during the fourth quarter of 1996, the Company prospectively revised
the lives of its subscriber premise equipment from seven years to three or four
years.
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The Company's loss from operations was $66.2 million during the year ended
December 31, 1996, as compared to $35.7 million during the year ended December
31, 1995. The increase in the loss from operations of $30.5 million during 1996
resulted primarily from the impairment loss of $21.3 million described above and
increased depreciation and amortization expense. Depreciation and amortization
expense (principally depreciation of property and equipment and amortization of
deferred license and leased license acquisition costs, goodwill and covenants
not-to-compete) increased $15.4 million in the year ended December 31, 1996,
compared to the year ended December 31, 1995, due to increases in deferred
license costs, goodwill and subscriber equipment resulting from the acquisition
and addition of new systems and the addition of equipment installed in new
subscribers' homes.
Interest expense increased $12.8 million during the year ended December 31,
1996 to $37.3 million, as compared to $24.5 million during the year ended
December 31, 1995. The increase in interest expense primarily resulted from
noncash interest charges associated with the Company's 2004 Notes and 2005
Notes. Interest expense associated with the 2004 Notes also increased due to an
increase in the interest rate on the 2004 Notes from 12.5% to 14.5% effected in
August 1995 in conjunction with the Company's offering of the 2005 Notes.
Loss before interest, taxes, depreciation and amortization and the
impairment write down described above totaled $253,000 for the year ended
December 31, 1996, as compared to a loss before interest, taxes, depreciation,
and amortization of $6.4 million during the year ended December 31, 1995.
INCOME TAX MATTERS
ATI and its subsidiaries file a consolidated federal tax return. The
Company has had no state or federal income tax expense since inception. As of
December 31, 1997, the Company had approximately $137.5 million in net operating
loss carryforwards for tax purposes, expiring in years 2008 through 2011.
Section 382 of the Internal Revenue Code limits the amount of loss carryforwards
that a company can use to offset future income upon the occurrence of certain
changes in ownership. The issuance of moderate amounts of certain types of new
equity could limit the Company's ability to use net operating losses to offset
future gains from the sale of assets, thus requiring the Company to pay income
taxes on gains received in such asset sales.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires dual presentation
of basic and diluted earnings per share on the face of the income statement for
all periods presented. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to Accounting Principles Bulletin
No. 15. SFAS No. 128 requires restatement of prior years' earnings per share.
Because the effect of outstanding options is antidilutive, they have been
excluded from the Company's computation of net loss per share. Accordingly, SFAS
No. 128 did not have an impact upon historical net loss per share as reported.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" governing the reporting and display of
comprehensive income and its components, and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" requiring that public
businesses report financial and descriptive information about its reportable
operating systems. Both Statements are applicable to reporting periods beginning
after December 15, 1997. Management believes that the impact of adopting these
Statements will not be material to the Company's financial statements.
34
<PAGE> 36
INFLATION
Inflation has not affected the Company's operations significantly during
the past three years. The Company believes that its ability to increase charges
for services in future periods will depend primarily on competitive pressures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements included in this Report on
pages F-1 through F-25 are incorporated in this Item 8 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the identity and
business experience of the Company's directors is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 23,
1998, under the caption "Election of Directors," which information is hereby
incorporated herein by reference.
The information required by this Item with respect to the identity and
business experience of the Company's executive officers is set forth on page 20
of this Report under the caption "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is set forth in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 23, 1998, under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance," which information is hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 23, 1998,
under the captions "Compensation and Other Information Concerning Executive
Officers," and "Board of Directors Interlocks and Insider Participation," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 23, 1998,
under the caption "Stock Ownership of Certain Beneficial Owners and Management,"
which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 23, 1998,
under the caption "Certain Relationships and Related Transactions," which
information is hereby incorporated herein by reference.
35
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
(2) Exhibits
<TABLE>
<C> <S>
3.1 -- Certificate of Designation for Series B Convertible
Preferred Stock of American Telecasting, Inc. dated
August 6, 1996 (incorporated by reference to Exhibit 4.1
to the Company's Form 8-K filed on August 7, 1996).
3.2 -- Amendment to Restated Certificate of Incorporation of
American Telecasting, Inc. dated April 24, 1996
(incorporated by reference to Exhibit 3.1(i) to the
Company's Quarterly Report on 10-Q for the period ended
June 30, 1996).
3.3 -- Restated Certificate of Incorporation of American
Telecasting, Inc., dated April 27, 1995 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1995).
3.4 -- Amended and Restated By-Laws of American Telecasting,
Inc. (incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1995).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 2 to the Company's Registration
Statement on Form 8-A filed on December 6, 1993).
4.2 -- Specimen Class A Common Stock Certificate (incorporated
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3 filed on April 26, 1996).
4.3 -- Specimen Class B Common Stock Certificate (incorporated
by reference to Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996).
4.4 -- Specimen Series B Convertible Preferred Stock Certificate
(incorporated by reference to Exhibit 4.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
4.5 -- Supplemental Indenture dated as of August 10, 1995
between American Telecasting, Inc. and First Trust
National Association, Trustee, supplementing and amending
the Indenture dated as of June 23, 1994 (incorporated by
reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1995).
</TABLE>
36
<PAGE> 38
<TABLE>
<C> <S>
4.6 -- Indenture dated as of June 23, 1994 between American
Telecasting, Inc. and First Trust National Association,
Trustee (incorporated by reference to Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1994).
4.7 -- Form of Senior Discount Note due 2004 (included within
Exhibits 4.5 and 4.6).
4.8 -- Supplemental Warrant Agreement dated as of August 10,
1995 between American Telecasting, Inc. and First Union
National Bank of North Carolina, as warrant agent
(incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1995).
4.9 -- Warrant Agreement dated as of June 23, 1994 between
American Telecasting, Inc. and First Union National Bank
of North Carolina, as warrant agent (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1994).
4.10 -- Form of Warrant (included within Exhibits 4.8 and 4.9).
4.11 -- Collateral and Disbursement Agreement dated as of June
23, 1994 between First Trust National Association and
American Telecasting, Inc. (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-K
for the period ended December 31, 1994).
4.12 -- Indenture dated as of August 10, 1995 between American
Telecasting, Inc., as Issuer, and First Trust National
Association, as Trustee (incorporated by reference to
Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1995).
4.13 -- Form of Senior Discount Note due 2005 (included within
Exhibit 4.12).
4.14 -- Warrant Agreement dated as of August 10, 1995 between
American Telecasting, Inc. and First Union National Bank
of North Carolina, as warrant agent (incorporated by
reference to Exhibit 4.5 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1995).
4.15 -- Form of Warrant (included within Exhibit 4.14).
4.16 -- Registration Rights Agreement dated as of August 10, 1995
by and among American Telecasting, Inc. and Dillon Read &
Co., Inc. and CS First Boston Corporation (incorporated
by reference to Exhibit 4.7 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1995).
10.1 -- Stock Purchase and Sale Agreement dated as of June 7,
1995 by and between Bruce Merrill and Virginia Merrill
and their successors in trust, as trustees of the Merrill
Revocable Trust dated August 20, 1982 and American
Telecasting, Inc. (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1995).
10.2 -- Binding Letter Agreement dated as of July 6, 1995 by and
between Red Rock Communications, Inc. and American
Telecasting, Inc. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1995).
10.3 -- Management Agreement dated as of February 3, 1996 between
Fresno MMDS Associates and American Telecasting
Development, Inc. (incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.4 -- Standard Commercial Lease Agreement, dated as of
September 18, 1995, between Tech Center VI Associates,
L.P., as Lessor, and American Telecasting, Inc., as
Lessee (incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
</TABLE>
37
<PAGE> 39
<TABLE>
<C> <S>
10.5 -- Employment Agreement effective as of July 1, 1997 between
American Telecasting, Inc. and Robert D. Hostetler
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1997).*
10.6 -- Employment Agreement dated August 10, 1995 between
American Telecasting, Inc. and David K. Sentman
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 1995).*
10.7 -- First Amendment to Amended and Restated Revolving Credit
Agreement dated as of June 30, 1996 among Fresno MMDS
Associates, First Union National Bank of North Carolina,
Fresno Telsat, Inc. and Fresno Wireless Cable Television,
Inc.; related Subordination Agreement dated as of June
30, 1996 by American Telecasting, Inc. and Fresno MMDS
Associates in favor of First Union National Bank of North
Carolina; related Assignment Acceptance and Intercreditor
Agreement dated as of July 18, 1996 among First Union
National Bank of North Carolina as agent and Fresno MMDS
Associates (incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1996).
10.8 -- Side agreement between Fresno Telsat, Inc. and American
Telecasting, Inc. dated July 18, 1996 (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1996).
10.9 -- Amended and Restated Revolving Credit Agreement between
Fresno MMDS Associates, First Union National Bank of
North Carolina, Fresno Telsat, Inc. and Fresno Wireless
Cable Television, Inc. dated as of September 30, 1994;
related Amended and Restated Revolving Credit Note by
Fresno MMDS Associates in favor of First Union National
Bank of North Carolina; related Pledge and Security
Agreement dated as of September 30, 1994 between Fresno
MMDS Associates and First Union National Bank of North
Carolina; related Collateral Assignment and Security
Agreement dated as of September 30, 1994 by and between
FMA Licensee Subsidiary, Inc. and First Union National
Bank of North Carolina (incorporated by reference to
Exhibit 10.21 to the Company's Form S-4 Registration
Statement filed on September 22, 1995).
</TABLE>
38
<PAGE> 40
<TABLE>
<C> <S>
10.10 -- Credit Agreement dated as of February 26, 1997, among
American Telecasting, Inc. and Banque Indosuez, New York
Branch, as Agent, and the lending institutions listed
therein (the "Banks"); related Option Agreement dated as
of February 26, 1997 among American Telecasting, Inc. and
Indosuez CM II, Inc.; related Bond Appreciation Rights
Certificate dated February 26, 1997; related Securities
Pledge Agreement dated as of February 26, 1997 in favor
of Banque Indosuez, New York Branch, as pledgee, assignee
and secured party, in its capacity as collateral agent
for the Banks; related Securities Pledge Agreement dated
as of February 26, 1997 made by American Telecasting of
Green Bay, Inc. in favor of Banque Indosuez, New York
Branch, as pledgee, assignee and secured party, in its
capacity as collateral agent for the Banks; related
General Security Agreement dated as of February 26, 1997
made by certain subsidiaries of American Telecasting,
Inc. in favor of Banque Indosuez, New York Branch, as
pledgee, assignee and secured party, in its capacity as
collateral agent for the Banks; related Registration
Rights Agreement dated as of February 26, 1997 among
American Telecasting, Inc. and the holders of the
warrants to purchase an aggregate of 141,667 shares of
the Class A Common Stock of American Telecasting, Inc.;
related Securities Pledge Agreement dated as of February
26, 1997 made by American Telecasting, Inc. in favor of
Banque Indosuez, New York Branch, as pledgee, assignee
and secured party, in its capacity as collateral agent
for the Banks (incorporated by reference to Exhibit 10.10
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.11 -- Form of Underwriting Agreement dated as of May 21, 1996
among Alex. Brown & Sons Incorporated, Dillon, Read & Co.
Inc., and American Telecasting, Inc. (incorporated by
reference to Exhibit 1.1 to the Company's Registration
Statement on Form S-3 filed on April 10, 1996).
10.12 -- Stock Purchase Agreement dated as of August 6, 1996 by
and among American Telecasting, Inc., Museum Assets Ltd.,
and Ashline, Ltd. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996).
10.13 -- Stock Purchase Agreement dated October 25, 1996 by and
among American Telecasting, Inc., Wartone Property
Holdings, Ltd., Harleko Ltd., and Tarian Properties, Ltd.
(incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1996).
10.14 -- Agreement for Purchase and Sale of Assets dated June 28,
1996 among Novner Enterprises, Inc., Alvin Novick,
Phyllis Novick, American Telecasting of Cincinnati, Inc.
and American Telecasting, Inc. (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1996).
10.15 -- Management Agreement dated as of June 28, 1996 between
Novner Enterprises, Inc. and American Telecasting of
Cincinnati, Inc. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1996).
10.16 -- Agreement for Exchange of Assets dated July 10, 1996
among Heartland Wireless Communications, Inc., Heartland
Wireless South Dakota Properties, Inc., Heartland
Wireless Florida Properties, Inc. and American
Telecasting, Inc. (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1996).
10.17 -- American Telecasting, Inc. 1990 Stock Option Program, As
Amended (Effective April 25, 1996) (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1996).*
</TABLE>
39
<PAGE> 41
<TABLE>
<C> <S>
10.18 -- Form of Registration Rights Agreement between American
Telecasting, Inc. and Stockholder (incorporated by
reference to Exhibit 10.40 to the Company's Form S-1
Registration Statement filed on October 8, 1993).
10.19 -- Asset Purchase Agreement dated as of March 18, 1997 by
and among BellSouth Corporation, BellSouth Wireless
Cable, Inc., American Telecasting of Central Florida,
Inc., American Telecasting Development, Inc., American
Telecasting of Fort Meyers, Inc., American Telecasting of
Jacksonville, Inc., American Telecasting of Louisville,
Inc., and American Telecasting of Yuba City, Inc.
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10Q for the period ended March
31, 1997).
10.20 -- Employment Agreement as of April 28, 1997 between
American Telecasting, Inc. and Terry J. Holmes
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10Q for the period
ended June 30, 1997).*
10.21 -- Employment Agreement as of April 28, 1997 between
American Telecasting, Inc. and John B. Suranyi
(incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10Q for the period
ended June 30, 1997).*
11.1 -- Statement regarding computation of per share earnings.
21.1 -- Subsidiaries of American Telecasting, Inc. (incorporated
by reference to Exhibit 21.1 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
23.1 -- Consent of Independent Public Accountants.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management agreement or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
40
<PAGE> 42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Telecasting, Inc.:
We have audited the accompanying consolidated balance sheets of American
Telecasting, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Telecasting, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1998
F-2
<PAGE> 44
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 18,476 $ 9,125
Trade accounts receivable, net of allowance for
uncollectible accounts of $687 and $244,
respectively........................................... 1,867 1,091
Notes receivable.......................................... 322 351
Prepaid expenses and other current assets................. 2,468 2,722
--------- ---------
Total current assets.............................. 23,133 13,289
Property and equipment, net................................. 99,271 60,166
Deferred license and leased license acquisition costs,
net....................................................... 139,537 131,017
Cash available for asset purchases and debt repayment....... -- 31,658
Restricted escrowed funds................................... -- 6,395
Goodwill, net............................................... 15,163 14,296
Deferred financing costs, net............................... 4,704 4,294
Other assets, net........................................... 1,764 483
--------- ---------
Total assets...................................... $ 283,572 $ 261,598
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 15,022 $ 12,614
Current portion of long-term obligations.................. 5,852 3,284
Subscriber deposits....................................... 397 363
--------- ---------
Total current liabilities......................... 21,271 16,261
Deferred income taxes....................................... 2,834 1,275
Long-term obligations, net of current portion:
2004 Notes................................................ 135,484 156,897
2005 Notes................................................ 116,480 135,137
Notes payable............................................. 2,434 --
Capital lease obligations................................. 1,053 307
Minority interest and other............................... 903 945
--------- ---------
Total long-term obligations, net of current
portion......................................... 256,354 293,286
--------- ---------
Total liabilities................................. 280,459 310,822
Commitments and Contingencies (Notes 10 and 11)
Stockholders' Equity (Notes 2, 8 and 9):
Preferred Stock, $.01 par value; 2,500,000 shares
authorized, none issued and outstanding................ -- --
Series B Convertible Preferred Stock, $.01 par value;
500,000 shares authorized; 250,000 shares issued,
110,000 shares outstanding in 1996..................... 13,237 --
Class A Common Stock, $.01 par value; 45,000,000 shares
authorized; 20,784,238 and 25,743,607 shares issued and
outstanding, respectively.............................. 208 257
Class B Common Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding........... -- --
Additional paid-in capital................................ 176,091 189,413
Common Stock warrants..................................... 10,129 10,129
Accumulated deficit....................................... (196,552) (249,023)
--------- ---------
Total stockholders' equity........................ 3,113 (49,224)
--------- ---------
Total liabilities and stockholders' equity........ $ 283,572 $ 261,598
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE> 45
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Service and other..................................... $ 46,189 $ 60,713 $ 58,015
Installation.......................................... 1,312 1,319 1,016
----------- ----------- -----------
Total revenues.......................................... 47,501 62,032 59,031
Costs and Expenses:
Operating............................................. 26,021 36,029 34,516
Marketing............................................. 8,678 7,429 2,806
General and administrative............................ 19,192 18,827 20,738
Depreciation and amortization......................... 29,276 44,665 49,033
Impairment of wireless cable assets................... -- 21,271 --
----------- ----------- -----------
Total costs and expenses................................ 83,167 128,221 107,093
----------- ----------- -----------
Loss from operations.................................... (35,666) (66,189) (48,062)
Interest expense........................................ (24,473) (37,281) (43,682)
Interest income......................................... 2,178 1,106 1,528
Other income (expense), net............................. (5) 530 617
Gain on disposition of wireless cable systems and
assets................................................ -- 157 35,944
----------- ----------- -----------
Loss before income tax benefit.......................... (57,966) (101,677) (53,655)
Income tax benefit...................................... 2,270 3,297 1,184
----------- ----------- -----------
Loss before extraordinary charge and cumulative effect
of change in accounting for installation costs........ (55,696) (98,380) (52,471)
Extraordinary charge on early retirement of debt........ (11,541) -- --
Cumulative effect of change in accounting for
installation costs, net of income taxes of $369 in
1995.................................................. 602 -- --
----------- ----------- -----------
Net loss................................................ (66,635) (98,380) (52,471)
Dividend embedded in conversion of Series B Convertible
Preferred Stock....................................... -- (6,250) --
----------- ----------- -----------
Net loss applicable to Class A Common Stock............. $ (66,635) $ (104,630) $ (52,471)
=========== =========== ===========
Basic and diluted net income (loss) per share:
Loss per share applicable to Class A Common Stock
before extraordinary charge and cumulative effect
of accounting change............................... $ (3.49) $ (5.78) $ (2.06)
Loss per share from extraordinary charge.............. (0.72) -- --
Income per share from cumulative effect of accounting
change............................................. 0.04 -- --
----------- ----------- -----------
Basic and diluted net loss per share applicable to
Class A Common Stock............................... $ (4.17) $ (5.78) $ (2.06)
=========== =========== ===========
Weighted average number of shares outstanding........... 15,977,377 18,095,961 25,458,247
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 46
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE CLASS A
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
------------------ ------------------ PAID-IN STOCK ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL WARRANTS DEFICIT TOTAL
------ --------- ------ --------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... -- $ -- 15,249 $152 $113,476 $ 5,502 $ (25,287) $ 93,843
Exercise of Class A Common
Stock warrants........... -- -- 3 -- 30 (12) -- 18
Exercise of Class A Common
Stock options............ -- -- 176 2 491 -- -- 493
Issuance of Class A Common
Stock for acquisitions... -- -- 1,008 10 15,806 -- -- 15,816
Issuance of Class A Common
Stock warrants........... -- -- -- -- -- 10,130 -- 10,130
Amendment of 1994 Warrants.. -- -- -- -- 5,490 (5,490) -- --
Deferred compensation
pursuant to issuance of
Class A Common Stock
options.................. -- -- -- -- 71 -- -- 71
Net loss.................... -- -- -- -- -- -- (66,635) (66,635)
---- -------- ------ ---- -------- ------- --------- --------
Balance, December 31, 1995.... -- -- 16,436 164 135,364 10,130 (91,922) 53,736
Exercise of Class A Common
Stock warrants........... -- -- 62 1 172 (1) -- 172
Exercise of Class A Common
Stock options............ -- -- 85 1 484 -- -- 485
Issuance of Class A Common
Stock for acquisitions... -- -- 64 1 706 -- -- 707
Issuance of Class A Common
Stock pursuant to public
offering, net of issuance
costs of $1,532.......... -- -- 1,700 17 19,913 -- -- 19,930
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs of $1,233.......... 250 23,766 -- -- -- -- -- 23,766
Dividend embedded in
conversion of Series B
Convertible Preferred
Stock.................... -- 6,250 -- -- -- -- (6,250)
Conversion of Series B
Convertible Preferred
Stock.................... (140) (16,779) 2,274 23 16,860 -- -- 104
Conversion of note
payable.................. -- -- 163 1 2,524 -- -- 2,525
Deferred compensation
pursuant to issuance of
Class A Common Stock
options.................. -- -- -- -- 68 -- -- 68
Net loss.................... -- -- -- -- -- -- (98,380) (98,380)
---- -------- ------ ---- -------- ------- --------- --------
Balance, December 31, 1996.... 110 13,237 20,784 208 176,091 10,129 (196,552) 3,113
Conversion of Series B
Convertible Preferred
Stock.................... (110) (13,237) 4,960 49 13,322 -- -- 134
Net loss.................... -- -- -- -- -- -- (52,471) (52,471)
---- -------- ------ ---- -------- ------- --------- --------
Balance, December 31, 1997.... -- $ -- 25,744 $257 $189,413 $10,129 $(249,023) $(49,224)
==== ======== ====== ==== ======== ======= ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 47
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(66,635) $(98,380) $(52,471)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 29,276 44,665 49,033
Impairment of wireless cable assets......................... -- 21,271 --
Deferred income taxes....................................... (2,270) (3,297) (1,184)
Amortization of debt discount and deferred financing
costs..................................................... 21,363 35,402 41,767
Bond appreciation rights and warrants....................... -- -- 895
Minority interest........................................... -- (708) (420)
Extraordinary charge on early retirement of debt............ 11,541 -- --
Cumulative effect of change in accounting for installation
costs, net of income taxes................................ (602) -- --
Gain on disposition of wireless cable systems and assets.... -- (157) (35,944)
Other....................................................... 379 267 134
Changes in operating assets and liabilities, net of
acquisitions:
Trade accounts receivable................................. (906) 307 729
Prepaid expenses and other current assets................. 65 214 (719)
Other assets.............................................. (249) (247) 734
Accounts payable and other current liabilities............ 4,387 (6,876) (4,405)
-------- -------- --------
Net cash used in operating activities.............. (3,651) (7,539) (1,851)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term investments........................ 20,002 -- --
Collections of (and loans to) related parties and others.... (170) 252 --
Purchases of property and equipment......................... (49,342) (32,474) (12,267)
Additions to deferred license and leased license acquisition
costs..................................................... (7,412) (12,492) (311)
Proceeds from disposition of wireless cable systems and
assets.................................................... -- 2,776 54,106
Increase in cash available for asset purchases and debt
repayment................................................. -- -- (31,658)
Increase in restricted escrowed funds....................... -- -- (6,395)
Net cash used in acquisitions............................... (21,653) (1,956) (3,416)
-------- -------- --------
Net cash (used in) provided by investing
activities....................................... (58,575) (43,894) 59
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net of stock
issuance costs............................................ 511 20,587 --
Proceeds from issuance of Series B Convertible Preferred
Stock, net of stock issuance costs........................ -- 23,766 --
Proceeds from issuance of Common Stock warrants............. 5,480 -- --
Proceeds from issuance of 2005 Notes........................ 91,001 -- --
Borrowings under revolving credit facilities................ 24,600 200 6,155
Principal payments on revolving credit facilities........... (35,429) (5,500) (9,105)
Increase in deferred financing costs........................ (1,976) -- (1,285)
Contributions to subsidiaries by minority interest holder... -- 1,240 462
Principal payments on warrants.............................. -- -- (850)
Principal payments on notes payable......................... (2,359) (2,030) (2,149)
Principal payments on capital lease obligations............. (417) (868) (787)
-------- -------- --------
Net cash provided by (used in) financing
activities....................................... 81,411 37,395 (7,559)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 19,185 (14,038) (9,351)
Cash and cash equivalents, beginning of year................ 13,329 32,514 18,476
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 32,514 $ 18,476 $ 9,125
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 48
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
Organization
American Telecasting, Inc. ("ATI") owns and operates a network of wireless
cable television systems providing subscription television service to
residential and commercial subscribers. ATI and its subsidiaries are
collectively referred to herein as the "Company." As of December 31, 1997, the
Company owned and operated 33 wireless cable systems located throughout the
United States (the "Developed Markets"). The Company also has significant
wireless cable (microwave) frequency interests in 19 other U.S. markets (the
"Undeveloped Markets").
Risks and Other Important Factors
During 1997, the Company operated its Developed Markets principally as an
analog video subscription television business. The Company's strategy was, in
part, to maximize operating cash flow from its analog video operations, while
continuing to explore the development of digital wireless services. In certain
markets, the Company intentionally curtailed growth in its analog video business
by not investing the capital resources to replace all subscriber churn. The
Company's analog video strategy was based upon several factors, including the
limited capital resources available to maintain the business at current levels
and management's belief that the most attractive returns on investment are
likely to be based on digital technologies. As the Company's analog video
subscriber base decreases, its revenues and operating cash flow are expected to
decrease unless and until it is able to successfully introduce other
revenue-producing digital wireless services.
Management believes that the most promising long-term use of the Company's
spectrum is to provide a variety of digital wireless services. Such services
could include high-speed Internet access, two-way multi-media services (i.e.,
Internet and telephony) and digital video. The Company's high-speed Internet
access strategy is to initially launch commercial operations in a small number
of select markets in order to evaluate the actual long-term viability and
financial returns of the business. In 1997, the Company commercially launched a
high-speed Internet access service branded as "WantWEB" in the Colorado Springs,
Colorado market. WantWEB was launched in Denver, Colorado and Portland, Oregon
in February 1998 and is currently expected to be launched in Seattle, Washington
in the second or third quarter of 1998.
While the Company has begun planning and testing of two-way multi-media and
digital video services, it has not commercially introduced these services and
does not currently have the capital resources necessary to do so. The Company's
ability to introduce these services on a broad commercial basis will depend on a
number of factors, including the availability of sufficient capital, the success
of the Company's development efforts, competitive factors (such as the
introduction of new technologies or the entry of competitors with significantly
greater resources than the Company and increased competition for the renewal of
programming and channel lease agreements), the availability of appropriate
transmission and reception equipment on satisfactory terms, the expertise of the
Company's management, and the Company's ability to obtain the necessary
regulatory changes and approvals in a timely fashion. There is also uncertainty
regarding the degree of subscriber demand for these services, especially at
pricing levels at which the Company can achieve an attractive return on
investment. Moreover, the Company expects that the market for any such services
will be extremely competitive.
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 services. 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.
Except for the BellSouth Transaction, the Company has not reached any agreements
or understandings with respect to such relationships or transactions and there
can be no assurance that any such agreements or understandings will be reached.
F-7
<PAGE> 49
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While the Company may use a portion of the proceeds from the BellSouth
Transaction to acquire assets for the development of digital services, such
proceeds will not be sufficient to fully implement its high-speed Internet
access, telephony or digital video services throughout its markets. The Company
is pursuing strategic relationships or transactions with other providers of
telecommunications and related services to facilitate access to additional
capital, among other things. The Company's ability to fully implement its
business strategies will depend on its ability to attract sufficient additional
capital through relationships with strategic partners or otherwise. There can be
no assurance that sufficient capital will be available on terms satisfactory to
the Company, or at all. Except for the BellSouth Transaction, the Company has
not reached any agreements or understandings with respect to such relationships
or transactions and there can be no assurance that any such agreements or
understandings will be reached. Without such strategic partner arrangements,
future BellSouth closings or access to additional capital, the Company expects
that, at a minimum, it would have to begin curtailing certain operations and
activities during 1998 that could, in turn, adversely impact the Company's
liquidity and financial resources.
Pursuant to certain restrictive covenants in the Indentures ("the
Indentures") relating to the Company's Senior Discount Notes due 2004 (the "2004
Notes") and 14.5% Senior Discount Notes due 2005 (the "2005 Notes"), Net
Available Proceeds (as defined) from the first closing under the BellSouth
Agreement must be applied within 270 days (May 9, 1998) of such closing: (1)
first, to prepay or repay outstanding debt of the Company or any Restricted
Subsidiary (as defined) to the extent the terms of the governing documents
therefore require such prepayment, (2) second, to the extent of any such Net
Available Proceeds remaining after application thereof pursuant to item (1)
above, to the acquisition of assets used in the transmission of video, voice and
data and related businesses and services of the Company or a Restricted
Subsidiary and, (3) third, to the extent of any such Net Available Proceeds
remaining after the application thereof pursuant to items (1) and (2) above, (i)
first to prepay or repay all outstanding debt of the Company or any Restricted
Subsidiary that prohibits purchases of the 2004 Notes or 2005 Notes and (ii)
then, to the extent of any remaining Net Available Proceeds, to make a pro rata
offer to purchase outstanding 2004 Notes and 2005 Notes at a purchase price
equal to 100% of the accreted value thereof to any purchase date prior to
maturity.
The Company's obligations under the Indentures will significantly reduce
the Company's liquidity, financial flexibility and ability to fund certain
operations. The Company presently intends to apply the Net Available Proceeds
from the BellSouth Transaction in a manner that would not require it to offer to
purchase any of the 2004 Notes or 2005 Notes. However, the Company has not yet
applied all the net available proceeds in that manner and does not know if it
will be able to do so within the 270 day period specified by the Indentures. If
the Company is required to offer to purchase a portion of its 2004 Notes or 2005
Notes with any unapplied proceeds from BellSouth Transaction, such repurchases
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Interest payments on the Company's 2004 Notes and 2005 Notes will commence
on December 15, 1999 and February 15, 2001, respectively. Interest payments in
1999, 2000, and 2001 are expected to be approximately $14.3 million, $28.5
million and $57.8 million, respectively. The Company's ability to make these
payments will depend upon its ability to attract sufficient additional capital
through relationships with strategic partners or otherwise, to develop product
lines that would fund such cash interest payments. There can be no assurance
that the Company will be able to generate the cash to fund such interest
payments. Without new investments in the Company, it is unlikely the Company's
resources will be sufficient to meet its obligations in 1999.
Sale of Assets
On March 18, 1997, the Company entered into a definitive agreement (the
"BellSouth Agreement") with BellSouth Corporation and BellSouth Wireless
Corporation ("BellSouth Wireless") providing for the sale of all of the
Company's Florida and Louisville, Kentucky wireless cable assets (the
"Southeastern
F-8
<PAGE> 50
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assets") to BellSouth Wireless (the "BellSouth Transaction"). Depending upon the
number of wireless cable channel rights that are ultimately transferred to
BellSouth Wireless, the purchase price will range from $67.9 million to $103.2
million. A first closing of the BellSouth Transaction was completed on August
12, 1997. 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. At
December 31, 1997 the balance of escrow funds was approximately $6.4 million.
The use of the sale proceeds is restricted by certain covenants in the
Indentures related to the Company's 2004 and 2005 notes as described above.
The BellSouth Agreement contains customary conditions to closing, including
the satisfaction of all applicable regulatory requirements. There can be no
assurance that all of such conditions will be satisfied or that the BellSouth
Transaction will be consummated.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of ATI and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 December 31, 1996 and 1997,
cash equivalents principally consisted of money market funds, commercial paper,
federal government/agency debt securities, and other short-term,
investment-grade, interest-bearing securities. The carrying amounts reported in
the balance sheet for cash and cash equivalents approximate the fair values of
those assets.
Cash Available for Asset Purchases and Debt Repayment and Restricted Escrow
Funds
Restricted escrow funds represents the escrow funds related to the
BellSouth transaction of approximately $6.4 million. These funds will be
released upon both the Company and BellSouth Wireless jointly submitting an
instruction to the escrow agent for the release of such funds. Cash available
for asset purchases and debt repayments represents the net available proceeds as
of December 31, 1997, received from the BellSouth closing that occurred on
August 12, 1997. These funds are restricted pursuant to the Indentures (see Note
7).
Long-Lived Assets
Long-lived assets and identifiable assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed. Impairment is measured by comparing the
carrying value to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual dispositions for each of
the Company's markets. The Company considers relevant cash flow, estimated
future operating results, trends and other available information including the
fair value of frequency rights owned, in assessing whether the carrying value of
the asset can be recovered.
F-9
<PAGE> 51
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the fourth quarter of 1996, after considering the Company's 1996
operating loss, its history of such operating losses and the expectation of
future operating losses, changes in the Company's strategic direction,
developments relating to previously scheduled industry transactions and ventures
and certain industry factors, the Company evaluated the ongoing value of its
wireless cable business in each Developed Market. Based on this valuation, the
Company determined that assets with a carrying value of $95.1 million were
impaired according to the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and wrote down the carrying value of such assets by $21.3 million to their fair
value. An evaluation was made for each of the Company's Developed Markets
individually, not for the Company's markets as a whole. Fair value was based on
recent transactions in the wireless cable industry. During 1997, the Company
reviewed the requirements of SFAS No. 121 and evaluated its ongoing value in
each Developed Market. As a result of this evaluation, the Company concluded
that an additional impairment adjustment was not needed at such time.
The Company's estimates of anticipated gross revenues, the remaining
estimated lives of tangible and intangible assets, or both, could be reduced
significantly in the future due to changes in technology, regulation, available
financing or competitive pressures in any of the Company's individual markets.
As a result, the carrying amount of long-lived assets and intangibles including
goodwill could be reduced materially in the future.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization, including amortization of assets acquired
under capitalized lease agreements, are recorded on a straight-line basis
for financial reporting purposes. Repair and maintenance costs are charged
to expense when incurred. Renewals and betterments are capitalized.
Subscriber installation costs are capitalized and amortized over a
three-year period, the approximate average subscription term of a
subscriber. Prior to January 1, 1995, the Company expensed subscriber
installation costs to the extent of installation revenues and capitalized
installation costs in excess of installation revenues. The cumulative
effect of this change in accounting method for the periods prior to January
1, 1995 was a reduction in the Company's net loss of approximately
$602,000, net of deferred income taxes of approximately $369,000. The
effect of this change on the Company's results of operations for the year
ended December 31, 1995 was to decrease the net loss before cumulative
effect of change in accounting method by approximately $668,000. Pro forma
net loss and net loss per share for the year ended December 31, 1995,
assuming the change in accounting for installation costs was applied
retroactively, was $(67,237,000) and $(4.21).
Deferred License and Leased License Acquisition Costs. Deferred
license and leased license acquisition costs include costs incurred to
develop or acquire wireless cable licenses. Costs incurred to acquire or
lease licenses issued by the Federal Communications Commission ("FCC") are
deferred and are amortized ratably over useful lives of 20 years beginning
with inception of service in each respective market, or charged to expense
if development is not pursued. As of December 31, 1997, approximately $14.7
million of the Company's deferred license and leased license acquisition
costs were not yet subject to amortization. Accumulated amortization
related to deferred license and leased license acquisition costs
approximated $14.9 million and $22.0 million at December 31, 1996 and 1997,
respectively.
Goodwill
Goodwill is amortized on a straight-line basis for financial reporting
purposes over a period of 20 years. Accumulated amortization related to goodwill
was approximately $2.2 million and $3.0 million at December 31, 1996 and 1997,
respectively.
Deferred Financing Costs
Deferred financing costs represent fees and other costs incurred in
connection with the issuance of long-term debt. These costs are amortized over
the term of the related debt using the effective interest rate method.
F-10
<PAGE> 52
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets
Other assets, net of accumulated amortization, consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ----
<S> <C> <C>
Covenants not-to-compete, net............................... $ 648 $155
Long-term deposits.......................................... 394 307
Other....................................................... 722 21
------ ----
Other assets, net........................................... $1,764 $483
====== ====
</TABLE>
Covenants not-to-compete are amortized over their respective terms, which
is typically three years. Accumulated amortization related to covenants
not-to-compete and other intangible assets was $3.6 million and $4.1 million as
of December 31, 1996 and 1997, respectively.
Revenue Recognition
Monthly service fees are recognized in the period service is provided.
Installation revenue is recognized upon origination of service to a subscriber
to the extent of direct selling costs incurred. To date, direct selling costs
have exceeded installation revenues.
Operating Costs and Expenses
Operating costs and expenses consist principally of programming fees,
channel lease costs, tower rental and other costs of providing services. The
Company capitalizes certain pre-launch costs for non-operating systems. These
costs include tower and site rentals and channel lease payments. The total of
such costs capitalized in 1995, 1996 and 1997 approximated $411,000, $445,000,
and $477,000, respectively.
The Accounting Standards Executive Committee ("AcSEC") has issued a
Statement of Position ("SOP") regarding the "Costs of Start-up Activities" which
is effective for fiscal years beginning after December 15, 1998. Under the SOP,
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. At December 31, 1997 capitalized
pre-launch costs for non-operating systems totaled approximately $3.5 million.
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred.
Net Loss Per Share
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS No.
128 requires dual presentation of basic and diluted earnings per share on the
face of the income statement for all periods presented. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Options and warrants to purchase
shares of common stock were not included in the computation of loss per share as
the effect would be antidilutive. As a result, the basic and diluted earnings
per share amounts are identical.
F-11
<PAGE> 53
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain amounts from the prior years' consolidated financial statements
have been reclassified to conform with the 1997 presentation.
Supplemental Cash Flow Disclosures
Non-cash investing and financing activities consisted of the acquisition of
vehicles and equipment by acceptance of bank notes, capitalized leases and other
financing arrangements totaling approximately $1.9 million, $604,000 and
$208,000 during 1995, 1996 and 1997, respectively. Cash paid during 1995, 1996
and 1997 for interest approximated $2.9 million, $2.0 million and $3.5 million,
respectively. As discussed in Note 3, the Company entered into notes totaling
$3.8 million, issued Class A Common Stock valued at $15.2 million, assumed
certain liabilities totaling $11.2 million during the year ended December 31,
1995, and issued Class A Common Stock valued at $707,000 during the year ended
December 31, 1996. During 1995 and 1996, the Company acquired certain wireless
cable channel rights for which the final purchase consideration of approximately
$1.1 million and $1.0 million, respectively, was payable upon the FCC's consent
to the assignment of such licenses. Of such amounts, approximately $614,000
remained payable at December 31, 1997.
3. ACQUISITIONS AND DIVESTITURES
1995 Activity
During 1995, the Company acquired wireless cable systems in Medford, Oregon
(from Cardiff Communications Partners III), Sheridan, Wyoming (from Cardiff
Communications Partners I), Redding, California (from the Cardiff Communications
Partners IV), and Rapid City, South Dakota (from Rapid Choice TV, Inc.). Also
during 1995, the Company acquired Fresno Wireless Cable Television, Inc.
("FWCTI") and a 58% ownership interest in Superchannels of Las Vegas, Inc.
("Superchannels"). FWCTI is the 65% general partner of Fresno MMDS Associates
which owns wireless cable systems and frequency rights in the Fresno, Visalia
and Merced, California markets. Superchannels operates a wireless cable system
in the Las Vegas, Nevada market. The aggregate purchase price for these
acquisitions of approximately $46.7 million was paid through a combination of
cash ($16.5 million), notes ($3.8 million), shares of ATI Common Stock
(approximately 964,000 shares valued at approximately $15.2 million), and
assumption of certain liabilities (approximately $11.2 million). In addition,
the Company recognized a deferred income tax liability of approximately $6.3
million for the excess of the value allocated to certain of the assets acquired
over their related tax basis. In February 1996, $2.5 million of the notes issued
in connection with the acquisition of the Las Vegas system were converted into
162,854 shares of ATI Common Stock.
All of the Company's acquisitions have been accounted for as purchases for
financial reporting purposes. The Company's consolidated statements of
operations for the year ended December 31, 1995 include the
F-12
<PAGE> 54
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
results of operations for each of the entities described above from their
respective acquisition dates. The aggregate purchase prices for the acquisitions
completed during 1995 were allocated as follows (in thousands):
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Deferred license and leased license acquisition costs....... $ 33,999
Property and equipment...................................... 11,579
Goodwill.................................................... 6,335
Covenants not-to-compete.................................... 425
Cash, receivables and other assets.......................... 682
Deferred income taxes....................................... (6,335)
Assumed liabilities......................................... (14,972)
--------
$ 31,713
========
</TABLE>
The unaudited pro forma information presented below for the year ended
December 31, 1995 reflects the 1995 acquisitions of the Medford, Sheridan,
Redding, Las Vegas and Rapid City systems and FWCTI as if each had occurred on
January 1, 1995. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisitions been
consummated at that time (dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
1995
-----------
(UNAUDITED)
<S> <C>
Revenues.................................................... $ 52,979
Loss before extraordinary charge and cumulative effect of
accounting change......................................... (57,939)
Net loss.................................................... (68,878)
Loss per share before extraordinary charge and cumulative
effect of accounting change............................... (3.55)
Net loss per share.......................................... (4.22)
</TABLE>
1996 Activity
During 1996, the Company acquired wireless cable channel rights in various
markets for aggregate consideration of $1.1 million. The Company also acquired
the remaining interest in its Little Rock, Arkansas operating system for
$707,000 in Class A Common Stock. Also during 1996, the Company sold its
wireless cable systems in St. James, Minnesota and Yankton, South Dakota and its
wireless cable channel assets in Sioux Falls, South Dakota for aggregate cash
consideration totaling $3.1 million. During the year ended December 31, 1996,
the Company acquired wireless cable channel rights in various markets for
aggregate consideration of $7.0 million (cash of $6.3 million and Class A Common
Stock valued at $653,000).
The Company was involved in the bidding process for wireless cable channel
authorizations in certain basic trading areas ("BTAs"), which was completed in
March 1996. The Company was the highest bidder in 59 markets. In the aggregate,
the Company's bids in these markets totaled approximately $10.1 million. Of such
amount, a total of approximately $9.5 million has been paid as of December 31,
1997. Approximately $117,000 was paid subsequent to year end. The remaining
amount (approximately $498,000) is due upon the FCC's notification to the
Company of the issuance of the remainder of its BTA licenses, which the Company
expects will occur in 1998.
On June 28, 1996, the Company entered into a definitive agreement to
acquire wireless cable channel rights and certain other subscription television
assets in Cincinnati, Ohio (the "Cincinnati Acquisition") for aggregate
consideration of approximately $5.6 million in cash, of which $2.2 million and
$3.4 million was paid in 1996 and 1997, respectively. The subscription
television assets acquired by the Company in connection with the Cincinnati
Acquisition served approximately 3,100 subscribers as of the date of
acquisition.
F-13
<PAGE> 55
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 Activity
On March 18, 1997, the Company entered into a definitive agreement (the
"BellSouth Agreement") with BellSouth Corporation and BellSouth Wireless Cable,
Inc. ("BellSouth Wireless") which provides for the sale of all the Company's
Florida and Louisville, Kentucky wireless cable assets (the "Southern Assets")
to BellSouth Wireless. The Southeastern Assets include operating wireless cable
systems in Orlando, Lakeland, Jacksonville, Daytona Beach, Ft. Myers, Florida
and Louisville, Kentucky and wireless cable channel rights in Bradenton, Naples,
Sebring and Miami, Florida. The purchase price for all of the Southeastern
Assets will range from $67.9 million to $103.2 million, depending upon the
number of wireless cable channel rights that are ultimately transferred to
BellSouth Wireless.
On August 12, 1997, the Company completed the first closing of the
BellSouth Transaction, which involved transferring to BellSouth Wireless the
Company's operating systems and current channel rights in the Florida markets of
Orlando, Jacksonville, Ft. Myers and Daytona Beach, along with the Louisville,
Kentucky market and certain rights in Miami, Florida. The proceeds received and
related gain recorded by the Company from the first closing totaled
approximately $54 million and $35.9 million, respectively. Of such proceeds, $7
million was placed in escrow for a period of twelve months to satisfy any
indemnification obligations of the Company. As of December 31, 1997, the balance
of escrowed funds was $6.4 million. The use of the sale proceeds is restricted
by certain restrictive covenants in the Indentures related to the Company's 2004
and 2005 notes as disclosed in Note 7. The markets sold in the first closing
accounted for approximately 23,000 subscribers as of the date of sale. Total
revenue, operating expenses and net loss (exclusive of the gain on sale) for the
markets sold in the first closing was $5.2 million, $4.3 million and $(3.9)
million, respectively, for the year ended December 31, 1997. Total revenue,
operating expenses and net loss for such markets was $8.7 million, $7.9 million
and $(6.0) million, respectively, for the year ended December 31, 1996 and $7.9
million, $9.0 million, and $(6.6) million for the year ended December 31, 1995.
Under the terms of the BellSouth Agreement, additional closings are anticipated
over the next two years.
The BellSouth Agreement contains customary conditions for each closing,
including the satisfaction of all applicable regulatory requirements. There can
be no assurance that all of such conditions will be satisfied or that further
sales of assets to BellSouth Wireless will be consummated.
On December 4, 1997, the Company entered into an agreement to acquire
wireless cable channel rights and certain other subscription television assets
in Bellingham, Washington for aggregate consideration of approximately $1.85
million in cash (of which $125,000 had been paid as of December 31, 1997) and
the issuance of warrants to purchase 40,000 shares of unregistered Class A
Common Stock of American Telecasting, Inc. at a purchase price of $2.50.
On December 30, 1997, the Company entered into an agreement (the "Polk
County Agreement") with Time Warner Entertainment -- Advance/Newhouse
Partnership ("Time Warner") which provided for the sale to Time Warner of the
Company's hardwire cable television system in Lakeland, Florida, for
approximately $1.5 million. The closing of this transaction occurred on February
19, 1998. As of the date of closing, the Lakeland system served approximately
2,300 subscribers.
The Company also acquired certain wireless cable channel rights in various
markets for aggregate consideration of $127,000.
Pro forma information was not presented for acquisitions during 1996 and
1997 as the impact was immaterial to the Company's operating results.
F-14
<PAGE> 56
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Miscellaneous receivables................................... $ 859 $1,350
Prepaid rent and other...................................... 731 532
Prepaid insurance........................................... 422 393
Prepaid programming and channel leases...................... 251 134
Equipment and other short-term deposits..................... 162 247
Accrued investment income................................... 43 66
------ ------
Total prepaid expenses and other current assets........ $2,468 $2,722
====== ======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997 LIFE
-------- -------- ----
<S> <C> <C> <C>
Subscriber premises equipment.................. $ 58,773 $ 50,299 3-4 years
Deferred installation costs.................... 28,631 30,220 3 years
Transmission equipment and system construction
costs........................................ 39,278 34,948 4 years
Office furniture and equipment................. 8,108 8,177 3-5 years
Vehicles....................................... 3,827 3,207 3-4 years
Land, building and leasehold improvements...... 1,780 1,869 Lesser of useful
-------- -------- life or duration
of lease
Total property and equipment................... 140,397 128,720
Accumulated depreciation and amortization...... (41,126) (68,554)
-------- --------
Property and equipment, net.................... $ 99,271 $ 60,166
======== ========
</TABLE>
During the fourth quarter of 1996, the Company prospectively revised the
lives of its subscriber premise equipment to three or four years, and in the
fourth quarter of 1997, it revised the lives of its transmission equipment from
10 years to a remaining life of four years. These revisions were a result of a
change in the Company's strategic direction and certain industry factors. The
revisions decreased net income and increased net loss per share for the years
ended December 31, 1996 and 1997 by approximately $600,000 and $0.03, and
$929,000 and $0.04, respectively.
F-15
<PAGE> 57
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Accounts payable............................................ $ 6,996 $ 4,138
Accrued payroll and related taxes........................... 2,114 1,745
Accrued programming......................................... 1,673 1,929
Accrued property, sales and franchise taxes................. 1,173 1,243
Acquisition of channel rights payable....................... 1,070 614
Accrued interest and other.................................. 1,996 2,945
------- -------
Total accounts payable and accrued expenses............... $15,022 $12,614
======= =======
</TABLE>
7. LONG-TERM DEBT
Senior Discount Notes
On June 23, 1994, ATI issued Units (the "1994 Units Offering") consisting
of Senior Discount Notes due 2004 (the "2004 Notes") which mature on June 15,
2004 and warrants to purchase Common Stock. The 1994 Units Offering resulted in
net proceeds to the Company of approximately $100.1 million (including amounts
attributable to the issuance of the 1994 Warrants (see Note 8) and before
payment of underwriting discounts and other issuance costs aggregating
approximately $4.4 million). On August 10, 1995, ATI issued Units (the "1995
Units Offering") consisting of Senior Discount Notes due 2005 (the "2005 Notes")
which mature on August 15, 2005 and warrants to purchase Common Stock. The 1995
Units Offering resulted in net proceeds to the Company of approximately $94.9
million, including amounts attributable to the issuance of the 1995 Warrants
(see Note 8), and after payment of underwriting discounts and other issuance
costs aggregating approximately $5.1 million.
The 2004 Notes bear interest at a rate of 14.5%, computed on a semi-annual
bond equivalent basis. The aggregate principal balance at stated maturity of the
2004 Notes approximates $196.9 million. Cash interest on the 2004 Notes will be
payable on June 15 and December 15 of each year at a rate of 14.5% per annum
commencing December 15, 1999.
The issue price of the 2005 Notes represents a yield to maturity of 14.5%
per annum computed on a semi-annual bond equivalent basis. Cash interest on the
2005 Notes will be payable on February 15 and August 15 of each year at a rate
of 14.5% per annum commencing February 15, 2001. The 2005 Notes have an
aggregate principal balance at stated maturity of $201.7 million.
Both the 2004 Notes and the 2005 Notes are effectively subordinated to all
indebtedness of ATI's subsidiaries, including trade payables, and rank pari
passu with all existing and future unsubordinated and unsecured indebtedness of
ATI.
Both the 2004 Notes and the 2005 Notes were issued pursuant to Indentures
which contain certain restrictive covenants and limitations. Among other things,
the Indentures limit the incurrence of additional debt, limit the making of
restricted payments (as defined) including the declaration and/or payment of
dividends, place limitations on dividends and other payments by ATI's
subsidiaries, prohibit ATI and its subsidiaries from engaging in any business
other than the transmission of video, voice and data and related businesses and
services, and place limitations on liens, certain asset dispositions and
merger/sale of assets activity.
Pursuant to certain restrictive covenants in the Indentures relating to the
Company's 2004 Notes and 2005 Notes, Net Available Proceeds (as defined) from
the BellSouth closing must be applied within 270 days
F-16
<PAGE> 58
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of such closing: (1) first, to prepay or repay outstanding debt of the Company
or any Restricted Subsidiary (as defined) to the extent the terms of the
governing documents therefore require such prepayment (2) second, to the extent
of any such Net Available Proceeds remaining after application thereof pursuant
to item (1) above, to the acquisition of assets used in the transmission of
video, voice and data and related businesses and services of the Company or a
Restricted Subsidiary and (3) third, to the extent of any such Net Available
Proceeds remaining after the application thereof pursuant to items (1) and (2)
above, (i) first to prepay or repay all outstanding debt of the Company or any
Restricted Subsidiary that prohibits purchases of the 2004 Notes or 2005 Notes
and (ii) then, to the extent of any remaining Net Available Proceeds, to make an
offer to purchase outstanding 2004 Notes and 2005 Notes at a purchase price
equal to 100% of the accreted value thereof to any purchase date prior to
maturity.
Pursuant to the Indentures, the Company may not incur additional debt,
other than Permitted Debt (as defined), unless after giving effect to the
incurrence of such debt and the receipt and application of the net proceeds
thereof on a pro forma basis, the Company's consolidated debt to annualized
operating cash flow (as defined) ratio would be less than 5.0 to 1.0 in the case
of any such incurrence. Permitted Debt is defined as (a) the 2004 Notes and the
2005 Notes; (b) debt of up to $100.0 million in aggregate principal amount lent
by a strategic equity investor (as defined), provided, that such debt (i) is
subordinated in right of payment to the prior payment in full of all obligations
(including principal, interest and premium, if any) of the Company under the
2004 Notes and the 2005 Notes and related Indentures, (ii) is not guaranteed by
any of the Company's subsidiaries and is not secured by any lien on any property
or asset of the Company or any subsidiary of the Company, and (iii) has no
scheduled maturity of principal earlier than a date at least one year after the
scheduled maturity of the 2004 Notes and the 2005 Notes; (c) debt of up to $35.0
million under one or more credit agreements, under other existing debt
facilities, or to a seller, vendor or bank or other financial institution that
has financed or refinanced the purchase or lease of property, materials or a
business, not to exceed $17.5 million until the Company's number of basic
subscribers exceeds 200,000; (d) any debt of the Company (other than debt
described in clause (a), (b), or (c) above) in an amount outstanding not
exceeding, at the time of incurrence, the product of the Company's number of
basic subscribers in excess of 200,000 multiplied by (1) $375, if such debt is
incurred prior to January 1, 1998, (2) $325, if such debt is incurred thereafter
and prior to January 1, 1999, and (3) $275, if such debt is incurred thereafter,
if the net proceeds of such debt are invested exclusively in the transmission of
video, voice and data and related businesses and services conducted by the
Company and its subsidiaries; and (e) replacements, renewals, refundings or
extensions of any debt referred to in clauses (a) - (d) above, subject to
certain restrictions. As a result of such limitations, the Company's total
borrowing capacity outside the 2004 Notes and the 2005 Notes is currently
limited to $17.5 million (approximately $3.6 million of which had been utilized
as of December 31, 1997). Although the Company has the ability under the
Indentures to borrow an additional $13.9 million as of December 31, 1997, the
Company, at this time, does not intend to incur any additional bank borrowings
unless subsequent BellSouth closings either do not occur or are insufficient to
provide funds for operations.
The 2004 Notes and the 2005 Notes are redeemable, at the option of ATI at
any time, in whole or in part, on or after June 15, 1999 and August 15, 2000,
respectively, at specified redemption prices, plus accrued and unpaid interest,
if any, to the date of redemption. The redemption prices are as follows:
<TABLE>
<CAPTION>
YEAR 2004 NOTES 2005 NOTES
---- ---------- ----------
<S> <C> <C>
1999........................................................ 107.250% --
2000........................................................ 104.833% 107.250%
2001........................................................ 102.417% 104.833%
2002........................................................ 100.000% 102.417%
2003 and thereafter......................................... 100.000% 100.000%
</TABLE>
F-17
<PAGE> 59
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Both the 2004 Notes and the 2005 Notes are subject to mandatory redemption
provisions in the event of a change of control (as defined) of ATI. Upon the
occurrence of such an event, each holder of the 2004 Notes will have the right
to require ATI to repurchase all of such holder's 2004 Notes at 101% of the
accreted value (as defined) thereof, or, in the case of any such repurchase on
or after June 15, 1999, 101% of the principal amount at stated maturity thereof
plus accrued and unpaid interest, if any, to the date of repurchase. Similarly,
in the event of a change of control of ATI, each holder of the 2005 Notes will
have the right to require ATI to repurchase all of such holder's 2005 Notes at
101% of the accreted value (as defined) thereof, or, in the case of any such
repurchase on or after August 15, 2000, 101% of the principal amount at stated
maturity thereof plus accrued and unpaid interest, if any, to the date of
repurchase. In addition, in the event of a sale by ATI prior to August 15, 1998
of at least $10 million of its capital stock to a strategic equity investor, up
to a maximum of 35% of the aggregate accreted value of outstanding 2005 Notes
may be redeemed at ATI's option within 30 days after such sale from the net cash
proceeds thereof at 113.50% of accreted value to the date of redemption;
provided that there remain outstanding 2005 Notes having an aggregate principal
amount at maturity equal to at least 65% of the aggregate principal amount at
maturity of all 2005 Notes originally issued.
Future debt service payments on the 2004 Notes and the 2005 Notes
representing cash interest only, for the next five years are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR 2004 NOTES 2005 NOTES TOTAL
---- ---------- ---------- -------
<S> <C> <C> <C>
1998.............................................. $ -- $ -- $ --
1999.............................................. 14,273 -- 14,273
2000.............................................. 28,546 -- 28,546
2001.............................................. 28,546 29,247 57,793
2002.............................................. 28,546 29,247 57,793
</TABLE>
Fresno Facility
During 1996, the Fresno Partnership maintained a revolving credit facility
(the "Fresno Facility") with a bank that provided for borrowings for the Fresno,
Visalia and Merced systems. The Fresno Facility was fully assigned to ATI prior
to March 31, 1997. All amounts due to the bank under the Fresno Facility were
repaid by ATI in February 1997 with proceeds from the Credit Facility (as
defined below). The Fresno Facility also contained various financial covenants
and other restrictive covenants. As of December 31, 1997, the Fresno Partnership
was not in compliance with certain of the restrictive covenants of the Fresno
Facility or with the requirements relating to repayment of principal.
Credit Facility
On February 26, 1997, the Company entered into a twelve month $17,000,000
credit facility (the "Credit Facility") with a bank. The loan was required to be
repaid earlier than the specified termination date and certain mandatory
prepayments were required to be made with the proceeds from certain debt
issuances or asset sales, including the BellSouth Transaction. At closing of the
Credit Facility, the Company also delivered 4,500 bond appreciation rights
("BARs") and an option to exercise 141,667 exchangeable debt warrants or 141,667
equity warrants. Concurrent with the closing of the BellSouth Transaction,
proceeds from the BellSouth Transaction were used to repay the Credit Facility
and redeem the exchangeable debt warrants. The Company's total obligation under
the Credit Facility for the aggregate principal balance, accrued interest, fees
and redemption of the exchangeable debt warrants was approximately $6.4 million,
net of an unused escrow deposit of $845,000. The Credit Facility has been
terminated and the Company does not currently intend to replace the Credit
Facility.
The BARs remain outstanding as of December 31, 1997. Amounts payable in
connection with the BARs are based upon the appreciation in price of $4.5
million face value of the Company's 2004 Notes. The change
F-18
<PAGE> 60
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the value of the BARs is reflected as interest expense in the accompanying
financial statements. The BARs are exercisable after the earlier of June 15,
1999 or the occurrence of an Event of Default under the 2004 Notes. The payment
due upon exercise of each BAR is equal to the market price of each 2004 Note on
the closing date less $290. The net value of the BARs is payable to holders of
the BARs in cash. As of December 31, 1997, the Company has recorded an accrued
liability of $45,000 associated with the BARs based on the market price of the
2004 Notes at that date.
The following table summarizes the book and fair values of the Company's
long-term debt facilities at December 31, 1997 (dollars in thousands). Fair
values for the Company's 2004 Notes and 2005 Notes are based on quoted market
prices. The carrying amount of accrued interest approximates its fair value. The
fair values of the Company's notes payable are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
<TABLE>
<CAPTION>
BOOK VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
2004 Notes.................................................. $156,897 $ 59,061
2005 Notes.................................................. 135,137 56,476
Notes payable............................................... 2,304 1,910
-------- --------
$294,338 $117,447
======== ========
</TABLE>
Future maturities of amounts outstanding under the Company's long-term debt
facilities as of December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
2004 2005 NOTES
YEAR ENDING DECEMBER 31, NOTES NOTES PAYABLE TOTAL
------------------------ -------- -------- ------- ---------
<S> <C> <C> <C> <C>
1998......................................... $ -- $ -- $2,304 $ 2,304
1999......................................... -- -- -- --
2000......................................... -- -- -- --
2001......................................... -- -- -- --
Thereafter................................... 196,869 201,700 -- 398,569
Unamortized discount......................... (39,972) (66,563) -- (106,535)
-------- -------- ------ ---------
Total.............................. $156,897 $135,137 $2,304 $ 294,338
======== ======== ====== =========
</TABLE>
8. COMMON STOCK, STOCK OPTIONS AND WARRANTS
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options is equal to
the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting and Disclosure of Stock-Based Compensation," which
established an alternative method of expense recognition for stock-based
compensation awards to employees based on fair values. The Company elected not
to adopt SFAS No. 123 for expense recognition purposes.
The Company maintains a stock option plan reserving 1,525,000 shares of
Class A Common Stock to be issued to officers and key employees under terms and
conditions to be set by the Company's Board of Directors. The options vest over
periods of up to three years and expire six to eight years from the date of
issuance. On October 30, 1997, the Company repriced options for all current
exempt employees at the fair market value on that date.
F-19
<PAGE> 61
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1997, respectively: risk-free interest rates of 6.31%
and 5.25%; dividend yields of 0.0% during each period; volatility factors of the
expected market price of the Company's common stock of .64 and .95 and a
weighted-average expected life of the option of four years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The weighted average fair value of options granted during 1996 and 1997 was
$3.91 and $1.56, respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma net loss and pro forma net loss per
share applicable to Class A Common Stock as if the Company had used the fair
value accounting provisions of SFAS No. 123 were $105.7 million and $5.84 and
$54.2 million and $2.13 for the years ended December 31, 1996 and 1997,
respectively.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 559,000 $ 6.16 696,000 $ 9.55 734,800 $5.96
Granted.................. 390,000 13.02 752,000 9.12 763,800 2.26
Exercised................ (176,500) 15.47 (85,000) 15.53 -- --
Forfeited................ (76,500) 18.91 (628,200) 13.76 (675,825) 6.39
-------- -------- --------
Options outstanding at
end of year............ 696,000 $ 9.55 734,800 $ 5.96 822,775 $2.13
======== ======== ========
Exercisable at end of
year................... 249,250 $ 4.79 178,000 $ 2.69 392,175 $2.27
======== ======== ========
</TABLE>
Exercise prices for options outstanding as of December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -------------------------------------
WEIGHTED NUMBER
NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AS OF DECEMBER 31, REMAINING AVERAGE AS OF DECEMBER 31, AVERAGE EXERCISE
EXERCISE PRICES 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 PRICE
- --------------- ------------------ ---------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$2.00 - $2.00 758,100 5.56 $ 2.00 327,500 $ 2.00
$2.69 - $2.69 50,000 1.33 2.69 50,000 2.69
$6.875 - $6.875 14,675 6.96 6.875 14,675 6.875
------- ---- ------ ------- ------
$2.00 - $6.875 822,775 5.33 $ 2.13 392,175 $ 2.27
======= =======
</TABLE>
F-20
<PAGE> 62
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrants
In conjunction with the 1995 Units Offering described in Note 7, ATI issued
201,700 warrants (the "1995 Warrants") to purchase an aggregate of 943,956
shares of ATI's Common Stock at an exercise price of $12.65 per share, subject
to adjustment under certain circumstances. Warrant holders may exercise the 1995
Warrants at any time on or after August 10, 1996 and on or prior to August 10,
2000. The 1995 Warrants will terminate and become void at the close of business
on August 10, 2000. Approximately $5.5 million of the proceeds from the 1995
Units Offering was allocated to the 1995 Warrants. As of December 31, 1997, no
1995 Warrants had been exercised.
In conjunction with the 1994 Units Offering described in Note 7, ATI issued
915,000 warrants (the "1994 Warrants") to purchase an equal number of shares of
ATI's Common Stock. The 1994 Warrants have an exercise price of $12.68 per
share. Warrant holders may exercise the 1994 Warrants for cash at any time after
June 23, 1995 and on or prior to June 23, 1999. The 1994 Warrants will terminate
and become void at the close of business on June 23, 1999. As described in Note
7, the unamortized debt discount (approximately $5.1 million) for amounts
ascribed to the 1994 Warrants was written-off in August 1995 upon execution of
the Supplemental Indenture. The 1994 Warrants, as amended, were valued at
approximately $4.6 million. During 1996, 1994 Warrants for the purchase of 100
shares had been exercised.
During the year ended December 31, 1996, additional warrants for the
purchase of 62,286 shares of Common Stock were exercised at a price of $2.74 per
share while warrants for the purchase of 61,284 shares at a price of $4.67 per
share expired unexercised.
9. SERIES B CONVERTIBLE PREFERRED STOCK
During 1996, the Company completed private placements of a total of 250,000
shares of Series B Convertible Preferred Stock, resulting in total net proceeds
to the Company of $23.8 million. During 1996, 140,000 shares of Series B
Convertible Preferred Stock were converted into a total of 2,273,785 shares of
the Company's Class A Common Stock at conversion prices ranging from $4.33 to
$7.87. During the first quarter of 1997, the remaining 110,000 shares of Series
B Convertible Preferred Stock were converted into a total of 4,959,369 shares of
the Company's Class A Common Stock at conversion prices ranging from $2.10 to
$4.37.
Each share of Series B Preferred Stock was convertible, at the option of
the holder, into that number of shares of Common Stock determined by dividing
(a) the sum of (i) the original issuance price for each such share of Series B
Preferred Stock plus (ii) the amount of all accrued but unpaid dividends on each
share of Series B Preferred Stock so converted, by (b) the Conversion Price in
effect at the time of conversion. The "Conversion Price" at any given time was
equal to 80% of the prevailing market price of the Class A Common Stock,
provided that the Conversion Price could not exceed $12.50 or be less than
$2.00. Accordingly, the Company recognized the discount on the conversion as a
dividend in the amount of $6,250,000.
10. LEASES
Channel Lease Commitments
The Company has entered into various agreements to lease FCC channel
authorizations to provide wireless cable services. Certain of these lease
agreements provide buy-out options to the Company based upon the number of
subscribers at the time of such buy-out. The leases typically provide for
five-year minimum terms and renewals thereafter at the option of the Company.
The Company's obligations under certain of the leases are subject to receipt by
the lessor of all necessary FCC approvals to begin providing service. Channel
lease expense during 1995, 1996 and 1997 approximated $1.9 million, $2.6 million
and $2.9 million, respectively.
F-21
<PAGE> 63
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, aggregate minimum annual channel lease payments
are summarized as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $1,526
1999........................................................ 1,355
2000........................................................ 1,198
2001........................................................ 1,066
2002........................................................ 943
Thereafter.................................................. 2,762
------
Total....................................................... $8,850
======
</TABLE>
The Company assigned certain of its channel licenses to a group affiliated
with the Company in November 1993 and entered into agreements to lease those
channels for an initial term of five years, renewable at the Company's option,
for an unlimited number of one-year terms thereafter. Annual lease payments
required to be paid by the Company in connection with the aforementioned channel
leases were nominal. The majority of such licenses were reassigned to the
Company during 1996.
Operating Leases
The Company leases various office, warehouse and transmission tower space
and certain office equipment, furniture and vehicles. Rent expense during 1995,
1996 and 1997 was approximately $2.4 million, $2.7 million, and $2.9 million,
respectively. Future minimum commitments as of December 31, 1997 under these
leases are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $2,470
1999........................................................ 1,944
2000........................................................ 1,530
2001........................................................ 878
2002........................................................ 708
Thereafter.................................................. 1,419
------
Total....................................................... $8,949
======
</TABLE>
Capital Leases
The Company leases certain vehicles and office equipment under
noncancelable capital leases. Equipment capitalized under such leases as of
December 31, 1996 and 1997 was approximately $2.2 million and $1.3 million,
respectively. Future minimum payments for capital leases as of December 31, 1997
are approximately $996,000, $290,000, $64,000, $29,000 and $2,000 for the years
ending December 31, 1998 through 2002, respectively, including interest of
approximately $101,000.
11. COMMITMENTS AND CONTINGENCIES
Seattle Agreement
Pursuant to a consulting and shareholder agreement, the Company issued 10%
of the Common Stock of American Telecasting of Seattle, Inc., to a third party,
and is required to issue up to an additional 5% in the event that a certain
subscriber level is achieved in the Seattle system once it becomes operational.
F-22
<PAGE> 64
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Programming Agreements
The Company has entered into a series of noncancelable agreements to
purchase entertainment programming for rebroadcast which expire through 2005.
The agreements generally require monthly payments based upon the number of
subscribers to the Company's systems, subject to certain minimums. Such expenses
totaled approximately $14.4 million, $19.3 million and $19.3 million in 1995,
1996 and 1997, respectively.
Vendor Commitments
During 1997, the Company entered into an agreement with a vendor for the
purchase of cable modems used in its Internet business. The agreement expires in
the year 2000 and requires the Company to purchase a minimum number of units at
agreed upon prices. The aggregate minimum amount of the purchase commitment is
approximately $2.3 million over the term of the agreement.
During 1997, the Company also entered into an agreement for the purchase of
certain equipment, including cable modems, for use in its planned multi-media
demonstration trials. If the trials achieve a specified performance criteria,
the company is required to purchase a minimum amount of equipment at prices to
be negotiated in the future.
Litigation
In February 1994, a complaint was filed by Fresno Telsat, Inc. ("Fresno
Telsat") in the Superior Court of the State of California for the County of
Monterey against a director and officer of the Company, the Company, and other
named and unnamed defendants. The Complaint alleges damages against the Company
of approximately $220 million and that all defendants, including the Company,
participated in a conspiracy to misappropriate corporate opportunities belonging
to Fresno Telsat. 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 must be resolved by the
Court, rather than the jury, that verdict does not yet constitute a conclusive
determination in favor of the Company. The Court intends imminently to convene a
conference to address all remaining issues and enter judgment. Although the
plaintiff has a right to appeal after judgment is entered, management believes,
on the advice of counsel, that the jury verdict and the anticipated
determination and judgment by the Court in favor of all three defendants will
survive appeal. Although the ultimate outcome of this matter cannot be
predicted, management believes, based on its review of this claim and discussion
with legal counsel, that the resolution of this matter will not have a material
impact on the Company's business, financial position or future results of
operations.
On January 12, 1996, Videotron (Bay Area ) Inc. ("Videotron") filed a
complaint against the Company in the Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, Florida. The Complaint alleged the
Company had caused certain entities from which ATI leases channels and airtime
for its Bradenton and Lakeland, Florida wireless cable markets to actively
oppose Videotron's FCC applications to increase broadcast power in Videotron's
Tampa, Florida wireless cable system in violation of a Non-Interference
Agreement between Videotron and the Company. A settlement agreement was executed
by all parties on December 22, 1997. Part of the agreement required the parties
to stipulate to a dismissal with prejudice. A dismissal with prejudice was
ordered by the court on January 11, 1998.
On or about December 24, 1997, Peter Mehas, Fresno County Superintendent of
Schools, filed an action against the Fresno Partnership, the Company and others
entitled Peter Mehas, Fresno County Superintendent of Schools v. Fresno Telsat
Inc., an Indiana corporation, et al., in the Superior Court of the State of
California, Fresno County, Case No. 602965-6. 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
F-23
<PAGE> 65
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest in the channel capacity which is the subject of the lease. The Company
believes that both it and the Fresno Partnership possess valid defenses to the
action. Management does not believe the lawsuit will have a material impact on
the business, financial condition, or results of operations of the Company.
The Company is occasionally a party to other legal actions arising in the
ordinary course of its business, the ultimate resolution of which cannot be
ascertained at this time. However, in the opinion of management, resolution of
such matters will not have a material adverse effect on the Company.
12. INCOME TAXES
As of December 31, 1997, the Company's estimated net operating loss
carry-forwards ("NOLs") for Federal income tax purposes were approximately
$137.5 million. The NOLs expire in years 2008 through 2011. The use of the NOLs
is subject to statutory and regulatory limitations regarding changes in
ownership. SFAS No. 109 requires that the tax benefit of NOLs for financial
reporting purposes be recorded as an asset. A valuation allowance is
established, if based on the weight of available evidence it is more likely than
not, that a portion of the deferred tax asset will not be realized.
The carry-forwards and temporary differences which give rise to deferred
tax assets and liabilities as of December 31, 1996 and 1997, are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry-forwards......................... $ 59,494 $ 52,249
Interest expense not currently deductible................. 22,278 37,339
Other..................................................... 664 1,855
-------- --------
Total gross deferred tax assets............................. 82,436 91,443
-------- --------
Deferred tax liabilities:
Basis differences attributable to purchase accounting..... (20,897) (20,466)
Property and equipment, principally due to differences in
depreciation and capitalized installation costs........ (9,654) (1,802)
-------- --------
Total deferred tax liabilities.............................. (30,551) (22,268)
-------- --------
Valuation reserve........................................... (54,719) (70,450)
-------- --------
Net deferred tax liability.................................. $ (2,834) $ (1,275)
======== ========
</TABLE>
The income tax benefit for the years ended December 31, 1996 and 1997 is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Currently Payable:
Federal................................................... $ -- $ (375)
State..................................................... -- --
Deferred:
Federal................................................... 2,769 1,269
State..................................................... 528 290
------ ------
$3,297 $1,184
====== ======
</TABLE>
F-24
<PAGE> 66
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax benefit for the years ended December 31, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Tax at U.S. statutory rates................................. 35% 35%
State income taxes, net of federal tax benefit.............. 4 5
Losses not benefited for financial reporting purposes....... (27) (28)
Other, net.................................................. (9) (10)
--- ---
3% 2%
=== ===
</TABLE>
13. BENEFIT PLANS
The Company sponsors a defined contribution profit sharing plan, the
"American Telecasting, Inc. 401(K) Retirement Plan" (the "Plan"). Substantially
all of the Company's employees are eligible to participate in the Plan, which
commenced existence on September 1, 1994. Company contributions to the Plan are
based on a percentage of employee's contributions, subject to certain maximum
limits. Employer contributions and administrative costs paid by the Company
relating to the Plan for the years ended December 31, 1995, 1996 and 1997
approximated $249,000, $122,000 and $193,000, respectively.
The Company also sponsors an employee stock ownership plan, the "American
Telecasting, Inc. Associate Stock Purchase Plan" (the "Stock Purchase Plan").
Generally, all full-time employees who have been employed by the Company for at
least one year are eligible to participate in the Stock Purchase Plan. The
purchase price of each share of the Company's Class A Common Stock purchased by
Stock Purchase Plan participants is 90% of the closing price of the Class A
Common Stock at the end of each calendar quarter. The shares are purchased in
the open market and the Company pays ten percent of the purchase price and all
administrative costs. An aggregate of 250,000 shares of the Company's Class A
Common Stock may be sold pursuant to the Stock Purchase Plan. As of December 31,
1997, 26,507 shares have been sold pursuant to the Stock Purchase Plan. Employer
contributions and administrative costs paid by the Company related to the Stock
Purchase Plan aggregated $16,000, $22,000 and $11,000 during the years ended
December 31, 1995, 1996 and 1997, respectively.
14. RELATED PARTY TRANSACTIONS
As of December 31, 1996, the Company had loans in the form of demand
promissory notes to current and former officers, employees and others totaling
$322,000. Such notes generally bore interest at rates ranging from the prime
rate plus 1.0% to the prime rate plus 1.25% and are due on demand. As of
December 31, 1997, the remaining balance due from the former officers and
employees is $351,000.
F-25
<PAGE> 67
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes the Company's unaudited quarterly results of
operations for 1997 and 1996 (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Total Revenues.................... $ 16,020 $ 15,639 $ 14,306 $ 13,066
Loss from operations.............. (12,579) (12,478) (11,245) (11,760)
Gain on disposition of wireless
cable systems and assets(A).... -- -- 35,944 --
Net loss.......................... (22,583) (22,813) 11,946 (19,021)
Net loss applicable to Class A
Common Stock................... (22,583) (22,813) 11,946 (19,021)
Net loss per share applicable to
Class A Common Stock........... (.92) (.89) .46 (.74)
Year Ended December 31, 1996:
Total Revenues.................... 15,423 15,422 15,456 15,731
Loss from operations.............. (10,419) (10,111) (11,360) (34,299)
Impairment of wireless cable
assets(B)...................... -- -- -- 21,271
Net loss.......................... (18,749) (18,396) (20,212) (41,023)
Net loss applicable to Class A
Common Stock(C)................ (18,749) (18,396) (20,212) (47,273)
Net loss per share applicable to
Class A Common Stock........... $ (1.13) $ (1.06) $ (1.09) $ (2.38)
</TABLE>
- ---------------
(A) During the third quarter of 1997, the company completed the first closing
of the sale of certain of its assets to BellSouth Wireless as part of the
BellSouth Transaction. The related gain recorded by the Company from the
first closing totaled approximately $35.9 million.
(B) During the fourth quarter of 1996, the Company recognized an impairment
loss on its wireless cable assets of approximately $21.3 million.
(C) During the fourth quarter of 1996, the Company recognized a preferred
dividend of approximately $6.3 million relating to its Series B Convertible
Preferred Stock.
The total of net loss per share for the 1997 and 1996 quarters does not
equal net loss per share for the respective years as per share amounts for each
quarter and for the year are computed based on their respective discrete
periods.
F-26
<PAGE> 68
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS(1) PERIOD
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
For the Year ended December 31, 1995
Deducted from asset accounts:
Allowance for uncollectible
accounts........................ $544 $2,714(2) $2,342 $916
==== ====== ====== ====
For the Year ended December 31, 1996
Deducted from asset accounts:
Allowance for uncollectible
accounts........................ $916 $2,322 $2,551 $687
==== ====== ====== ====
For the Year ended December 31, 1997
Deducted from asset accounts:
Allowance for uncollectible
accounts........................ $687 $1,344 $1,787 $244
==== ====== ====== ====
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Includes additions of $287 attributable to purchase accounting.
F-27
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN TELECASTING, INC.
By: /s/ ROBERT D. HOSTETLER
----------------------------------
Robert D. Hostetler
President, Chief Executive
Officer and Director
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 1998:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
By: /s/ DONALD R. DEPRIEST Chairman of the Board and Director
-------------------------------------------------
Donald R. DePriest
By: /s/ ROBERT D. HOSTETLER President, Chief Executive Officer and
------------------------------------------------- Director (Principal Executive Officer)
Robert D. Hostetler
By: /s/ RICHARD F. SENEY Vice Chairman of the Board, Secretary and
------------------------------------------------- Director
Richard F. Seney
By: /s/ DAVID K. SENTMAN Senior Vice President, Chief Financial Officer
------------------------------------------------- and Treasurer (Principal Financial Officer)
David K. Sentman
By: /s/ FRED C. PATTIN, JR. Controller (Principal Accounting Officer)
-------------------------------------------------
Fred C. Pattin, Jr.
By: /s/ MITCHELL R. HAUSER Director
-------------------------------------------------
Mitchell R. Hauser
By: /s/ JAMES S. QUARFORTH Director
-------------------------------------------------
James S. Quarforth
By: /s/ CARL A. ROSBERG Director
-------------------------------------------------
Carl A. Rosberg
</TABLE>
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Certificate of Designation for Series B Convertible
Preferred Stock of American Telecasting, Inc. dated
August 6, 1996 (incorporated by reference to Exhibit 4.1
to the Company's Form 8-K filed on August 7, 1996).
3.2 -- Amendment to Restated Certificate of Incorporation of
American Telecasting, Inc. dated April 24, 1996
(incorporated by reference to Exhibit 3.1(i) to the
Company's Quarterly Report on 10-Q for the period ended
June 30, 1996).
3.3 -- Restated Certificate of Incorporation of American
Telecasting, Inc., dated April 27, 1995 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1995).
3.4 -- Amended and Restated By-Laws of American Telecasting,
Inc. (incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1995).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 2 to the Company's Registration
Statement on Form 8-A filed on December 6, 1993).
4.2 -- Specimen Class A Common Stock Certificate (incorporated
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3 filed on April 26, 1996).
4.3 -- Specimen Class B Common Stock Certificate (incorporated
by reference to Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996).
4.4 -- Specimen Series B Convertible Preferred Stock Certificate
(incorporated by reference to Exhibit 4.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
4.5 -- Supplemental Indenture dated as of August 10, 1995
between American Telecasting, Inc. and First Trust
National Association, Trustee, supplementing and amending
the Indenture dated as of June 23, 1994 (incorporated by
reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1995).
4.6 -- Indenture dated as of June 23, 1994 between American
Telecasting, Inc. and First Trust National Association,
Trustee (incorporated by reference to Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1994).
4.7 -- Form of Senior Discount Note due 2004 (included within
Exhibits 4.5 and 4.6).
4.8 -- Supplemental Warrant Agreement dated as of August 10,
1995 between American Telecasting, Inc. and First Union
National Bank of North Carolina, as warrant agent
(incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1995).
4.9 -- Warrant Agreement dated as of June 23, 1994 between
American Telecasting, Inc. and First Union National Bank
of North Carolina, as warrant agent (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1994).
4.10 -- Form of Warrant (included within Exhibits 4.8 and 4.9).
4.11 -- Collateral and Disbursement Agreement dated as of June
23, 1994 between First Trust National Association and
American Telecasting, Inc. (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-K
for the period ended December 31, 1994).
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.12 -- Indenture dated as of August 10, 1995 between American
Telecasting, Inc., as Issuer, and First Trust National
Association, as Trustee (incorporated by reference to
Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1995).
4.13 -- Form of Senior Discount Note due 2005 (included within
Exhibit 4.12).
4.14 -- Warrant Agreement dated as of August 10, 1995 between
American Telecasting, Inc. and First Union National Bank
of North Carolina, as warrant agent (incorporated by
reference to Exhibit 4.5 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1995).
4.15 -- Form of Warrant (included within Exhibit 4.14).
4.16 -- Registration Rights Agreement dated as of August 10, 1995
by and among American Telecasting, Inc. and Dillon Read &
Co., Inc. and CS First Boston Corporation (incorporated
by reference to Exhibit 4.7 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1995).
10.1 -- Stock Purchase and Sale Agreement dated as of June 7,
1995 by and between Bruce Merrill and Virginia Merrill
and their successors in trust, as trustees of the Merrill
Revocable Trust dated August 20, 1982 and American
Telecasting, Inc. (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1995).
10.2 -- Binding Letter Agreement dated as of July 6, 1995 by and
between Red Rock Communications, Inc. and American
Telecasting, Inc. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1995).
10.3 -- Management Agreement dated as of February 3, 1996 between
Fresno MMDS Associates and American Telecasting
Development, Inc. (incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.4 -- Standard Commercial Lease Agreement, dated as of
September 18, 1995, between Tech Center VI Associates,
L.P., as Lessor, and American Telecasting, Inc., as
Lessee (incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.5 -- Employment Agreement effective as of July 1, 1997 between
American Telecasting, Inc. and Robert D. Hostetler
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1997).*
10.6 -- Employment Agreement dated August 10, 1995 between
American Telecasting, Inc. and David K. Sentman
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 1995).*
10.7 -- First Amendment to Amended and Restated Revolving Credit
Agreement dated as of June 30, 1996 among Fresno MMDS
Associates, First Union National Bank of North Carolina,
Fresno Telsat, Inc. and Fresno Wireless Cable Television,
Inc.; related Subordination Agreement dated as of June
30, 1996 by American Telecasting, Inc. and Fresno MMDS
Associates in favor of First Union National Bank of North
Carolina; related Assignment Acceptance and Intercreditor
Agreement dated as of July 18, 1996 among First Union
National Bank of North Carolina as agent and Fresno MMDS
Associates (incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1996).
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.8 -- Side agreement between Fresno Telsat, Inc. and American
Telecasting, Inc. dated July 18, 1996 (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1996).
10.9 -- Amended and Restated Revolving Credit Agreement between
Fresno MMDS Associates, First Union National Bank of
North Carolina, Fresno Telsat, Inc. and Fresno Wireless
Cable Television, Inc. dated as of September 30, 1994;
related Amended and Restated Revolving Credit Note by
Fresno MMDS Associates in favor of First Union National
Bank of North Carolina; related Pledge and Security
Agreement dated as of September 30, 1994 between Fresno
MMDS Associates and First Union National Bank of North
Carolina; related Collateral Assignment and Security
Agreement dated as of September 30, 1994 by and between
FMA Licensee Subsidiary, Inc. and First Union National
Bank of North Carolina (incorporated by reference to
Exhibit 10.21 to the Company's Form S-4 Registration
Statement filed on September 22, 1995).
10.10 -- Credit Agreement dated as of February 26, 1997, among
American Telecasting, Inc. and Banque Indosuez, New York
Branch, as Agent, and the lending institutions listed
therein (the "Banks"); related Option Agreement dated as
of February 26, 1997 among American Telecasting, Inc. and
Indosuez CM II, Inc.; related Bond Appreciation Rights
Certificate dated February 26, 1997; related Securities
Pledge Agreement dated as of February 26, 1997 in favor
of Banque Indosuez, New York Branch, as pledgee, assignee
and secured party, in its capacity as collateral agent
for the Banks; related Securities Pledge Agreement dated
as of February 26, 1997 made by American Telecasting of
Green Bay, Inc. in favor of Banque Indosuez, New York
Branch, as pledgee, assignee and secured party, in its
capacity as collateral agent for the Banks; related
General Security Agreement dated as of February 26, 1997
made by certain subsidiaries of American Telecasting,
Inc. in favor of Banque Indosuez, New York Branch, as
pledgee, assignee and secured party, in its capacity as
collateral agent for the Banks; related Registration
Rights Agreement dated as of February 26, 1997 among
American Telecasting, Inc. and the holders of the
warrants to purchase an aggregate of 141,667 shares of
the Class A Common Stock of American Telecasting, Inc.;
related Securities Pledge Agreement dated as of February
26, 1997 made by American Telecasting, Inc. in favor of
Banque Indosuez, New York Branch, as pledgee, assignee
and secured party, in its capacity as collateral agent
for the Banks (incorporated by reference to Exhibit 10.10
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.11 -- Form of Underwriting Agreement dated as of May 21, 1996
among Alex. Brown & Sons Incorporated, Dillon, Read & Co.
Inc., and American Telecasting, Inc. (incorporated by
reference to Exhibit 1.1 to the Company's Registration
Statement on Form S-3 filed on April 10, 1996).
10.12 -- Stock Purchase Agreement dated as of August 6, 1996 by
and among American Telecasting, Inc., Museum Assets Ltd.,
and Ashline, Ltd. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996).
10.13 -- Stock Purchase Agreement dated October 25, 1996 by and
among American Telecasting, Inc., Wartone Property
Holdings, Ltd., Harleko Ltd., and Tarian Properties, Ltd.
(incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1996).
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.14 -- Agreement for Purchase and Sale of Assets dated June 28,
1996 among Novner Enterprises, Inc., Alvin Novick,
Phyllis Novick, American Telecasting of Cincinnati, Inc.
and American Telecasting, Inc. (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1996).
10.15 -- Management Agreement dated as of June 28, 1996 between
Novner Enterprises, Inc. and American Telecasting of
Cincinnati, Inc. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1996).
10.16 -- Agreement for Exchange of Assets dated July 10, 1996
among Heartland Wireless Communications, Inc., Heartland
Wireless South Dakota Properties, Inc., Heartland
Wireless Florida Properties, Inc. and American
Telecasting, Inc. (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1996).
10.17 -- American Telecasting, Inc. 1990 Stock Option Program, As
Amended (Effective April 25, 1996) (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1996).*
10.18 -- Form of Registration Rights Agreement between American
Telecasting, Inc. and Stockholder (incorporated by
reference to Exhibit 10.40 to the Company's Form S-1
Registration Statement filed on October 8, 1993).
10.19 -- Asset Purchase Agreement dated as of March 18, 1997 by
and among BellSouth Corporation, BellSouth Wireless
Cable, Inc., American Telecasting of Central Florida,
Inc., American Telecasting Development, Inc., American
Telecasting of Fort Meyers, Inc., American Telecasting of
Jacksonville, Inc., American Telecasting of Louisville,
Inc., and American Telecasting of Yuba City, Inc.
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10Q for the period ended March
31, 1997).
10.20 -- Employment Agreement as of April 28, 1997 between
American Telecasting, Inc. and Terry J. Holmes
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10Q for the period
ended June 30, 1997).*
10.21 -- Employment Agreement as of April 28, 1997 between
American Telecasting, Inc. and John B. Suranyi
(incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10Q for the period
ended June 30, 1997).*
11.1 -- Statement regarding computation of per share earnings.
21.1 -- Subsidiaries of American Telecasting, Inc. (incorporated
by reference to Exhibit 21.1 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
23.1 -- Consent of Independent Public Accountants.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management agreement or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 11.1
AMERICAN TELECASTING, INC. AND SUBSIDIARIES
EARNINGS PER SHARE
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Loss before extraordinary charge and cumulative effect
of accounting change, net of income taxes $ (55,696) $ (98,380) $ (52,471)
Extraordinary charge on early retirement of debt (11,541) -- --
Cumulative effect of accounting change, net of
income taxes 602 -- --
------------ ------------ ------------
Net Loss (66,635) (98,380) (52,471)
Dividend embedded in conversion of Series B
Convertible Preferred Stock -- (6,250) --
------------ ------------ ------------
Net loss applicable to Class A Common Stock $ (66,635) $ (104,630) $ (52,471)
============ ============ ============
Weighted average number of shares outstanding 15,977,377 18,095,961 25,458,297
============ ============ ============
Loss per share applicable to Class A Common Stock
before extraordinary charge and cumulative effect
of accounting change $ (3.49) $ (5.78) $ (2.06)
Loss per share from extraordinary charge (.72) -- --
Income per share from cumulative effect of accounting change .04 -- --
------------ ------------ ------------
Basic and diluted net loss per share applicable to
Class A Common Stock $ (4.17) $ (5.78) $ (2.06)
============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 26, 1998, included in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8, File No. 33-86010 and Form
S-8, File No. 333-05385.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,125
<SECURITIES> 0
<RECEIVABLES> 1,091
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,289
<PP&E> 60,166
<DEPRECIATION> 0
<TOTAL-ASSETS> 261,598
<CURRENT-LIABILITIES> 16,261
<BONDS> 292,034
0
0
<COMMON> 189,670
<OTHER-SE> (238,894)
<TOTAL-LIABILITY-AND-EQUITY> 261,598
<SALES> 0
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<INCOME-PRETAX> (53,655)
<INCOME-TAX> (1,184)
<INCOME-CONTINUING> (52,471)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,471)
<EPS-PRIMARY> (2.06)
<EPS-DILUTED> (2.06)
</TABLE>
