SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 29, 1999 (December 2,
1998)
CAI WIRELESS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Connecticut 0-22888 06-1324691
<S> <C> <C> <C> <C>
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
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18 CORPORATE WOODS BLVD., ALBANY, NY 12211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (518) 462-2632
(Former name or former address, if changed since last report)
<PAGE>
Item 2 - ACQUISITION OR DISPOSITION OF ASSETS
On December 2, 1998, CAI Wireless Systems, Inc. increased its ownership
interest in CS Wireless Systems, Inc., a Delaware corporation, from
approximately 60% to 94% by acquiring 3,836,035 shares of CS Wireless common
stock from Nucentrix Broadband Networks, Inc. (f/k/a Heartland Wireless
Communications, Inc.) for $1,534,000 in cash. Subsequently, CS Wireless
acquired the 3,836,035 shares of CS Wireless common stock from CAI for
$1,534,000. CS Wireless holds such shares as treasury stock. Concurrently
with the purchase by CAI, CAI, CS Wireless and Nucentrix mutually agreed to
terminate that certain Stockholders' Agreement dated as of February 23, 1996,
among CAI, CS Wireless and Nucentrix. The Stockholders' Agreement (and bylaws
of CS Wireless) required the affirmative vote of a supermajority of members of
the CS Wireless board of directors or CS Wireless stockholders, as the case may
be, for certain actions to be acted upon by the CS Wireless board or
stockholders. Consequently, percentage ownership of CS Wireless common stock
was not indicative of control of CS Wireless in all instances, so long as the
Stockholders' Agreement continued. As a result of the increased ownership in
CS Wireless and the termination of the Stockholders' Agreement, CAI may be
deemed to control CS Wireless from and after December 2, 1998. Accordingly,
the subsequent results of CS Wireless will be consolidated with the results of
CAI.
In prior periods, as a result of the effect that the Stockholders'
Agreement had on the control of CS Wireless, CAI accounted for its investment
in CS Wireless under the equity method of accounting, and the difference
between CAI's cost and the value of its pro rata ownership of the underlying CS
Wireless equity was amortized over 15 years, commensurate with the amortization
periods of goodwill and wireless channel rights, to which CAI's investment in
CS Wireless primarily related.
The purchase of the CS Wireless common stock was governed by the terms of
that certain Master Agreement dated as of December 2, 1998 among CAI, CS
Wireless and Nucentrix, a copy of which is attached hereto as Exhibit 10.1.
The Master Agreement contemplates certain other transactions between CS
Wireless and Nucentrix, including the termination of Nucentrix's rights in, and
claims against, CS Wireless. The Master Agreement is to be performed in two
steps. Stage I, which has been consummated, required the lease by CS Wireless
to Nucentrix of certain assets related to CS Wireless' Story City, Iowa market,
the sale by CS Wireless to Nucentrix of certain consumer premises equipment at
agreed upon prices and the payment by CS Wireless to Nucentrix of $366,000. In
consideration, Nucentrix leased to CS Wireless certain assets related to the
Portsmouth, New Hampshire market, effected a partial satisfaction of the so-
called Heartland Long-Term Note and agreed to various mutual cooperation
obligations relative to developmental applications filed by Nucentrix or CS
Wireless for two-way authority in adjacent and overlapping markets, including
Dallas-Ft. Worth. At the Stage II Closing, which is to occur following receipt
of certain necessary governmental approvals, CS Wireless and Nucentrix will
transfer to one another their respective ownership interests in the Story City,
Iowa and Portsmouth, New Hampshire markets, the Heartland Long-Term Note shall
be canceled and CS Wireless shall pay Nucentrix $100,000; additionally, CS
Wireless agreed to transfer certain inventory to Nucentrix. In connection with
the Master Agreement, the three Nucentrix designees to the CS Wireless board
resigned.
Item 7 - FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
a. FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The financial statements of CS Wireless Systems, Inc. set forth on pages
F-1 through F-27 of CS Wireless Systems, Inc.'s Annual Report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), on Form 10-K for the fiscal year ended December 31, 1998 filed
with the Securities and Exchange Commission on April 15, 1999 are filed as
Exhibit 99.1 hereto pursuant to Rule 12b-23(a)(3) of the Exchange Act.
The financial statements of CS Wireless Systems, Inc. set forth on pages
3 through 7 of CS Wireless Systems, Inc.'s Quarterly Report pursuant to Section
13 or 15(d) of the Exchange Act on Form 10-Q for the fiscal quarter ended March
31, 1999 filed with the Securities and Exchange Commission on May 13, 1999 are
filed as Exhibit 99.2 hereto pursuant to Rule 12b-23(a)(3) of the Exchange Act.
b. PRO FORMA FINANCIAL INFORMATION.
The Unaudited Pro Forma Condensed Combined Financial Statements of CAI
and CS Wireless for the year ended March 31, 1999 and the six months ended
September 30, 1998 are included herein beginning on page F-1.
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c. EXHIBITS.
<S> <C>
10.1 Master Agreement dated as of December 2, 1998 among CAI, CS
Wireless and Nucentrix (f/k/a Heartland Wireless
Communications, Inc.)
99.1 Audited Financial Statements of CS Wireless for the year ended
December 31, 1998
99.2 Unaudited Financial Statements of CS Wireless for the quarter
ended March 31, 1999
99.3 Press Release dated December 3, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
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<
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ Vice President and Controller June 28, 1999
Arthur J. Miller
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CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
We have provided unaudited combined financial statements of CAI after
giving effect to CAI's bankruptcy case and the December 2, 1998 increase in
percentage ownership by CAI in CS, which are collectively referred to as the
"pro forma" information. In presenting the unaudited pro forma combined
balance sheet, we treated CAI, CS and TelQuest Satellite Services LLC, a
subsidiary of each of CAI and CS, (i) as if these entities had been consolidated
for accounting and financial reporting purposes and (ii) as if CAI had emerged
from bankruptcy on September 30, 1998. We have presented the unaudited pro
forma combined statements of operations for three periods: the fiscal years
ended March 31, 1999 and 1998 and the six-month period ended September 30, 1998.
In presenting the unaudited pro forma combined statements of operations, we
treated CAI, CS and TelQuest (i) as if these entities had been consolidated for
accounting and financial reporting purposes, (ii) as if CAI had emerged from
bankruptcy at the beginning of each of the periods presented, and (iii) as if
CAI's percentage ownership in CS had increased at the beginning of each of the
periods presented.
The presentation of the unaudited pro forma combined financial statements
is in conformity with the so-called fresh-start accounting and financial
reporting requirements set forth in the American Institute of Certified Public
Accountants' Statement of Position 90-7 with respect to adjustments made as a
result of CAI's bankruptcy case, and the use of purchase method of accounting
and financial reporting for the increase in percentage ownership by CAI of CS
as a result of the December 2, 1998 step acquisition. You should be aware that
these unaudited pro forma combined financial statements are presented for
illustrative purposes only and may not be indicative of the operating results
or financial position that would have occurred if the bankruptcy and acquisition
had occurred as of the dates and for the periods indicated or that will occur in
the future.
THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS FOR ALL PERIODS PRESENTED
EXCLUDE ANY POSITIVE EFFECTS OF POTENTIAL COST SAVINGS THAT THE COMPANIES MAY
ACHIEVE AS A RESULT OF THE INCREASED PERCENTAGE OWNERSHIP. THE PRO FORMA
ADJUSTMENTS ARE BASED ON INFORMATION CURRENTLY AVAILABLE AND UPON CERTAIN
ASSUMPTIONS THAT THE MANAGEMENT OF CAI BELIEVES ARE REASONABLE UNDER THE
CIRCUMSTANCES. WE STRONGLY URGE YOU TO READ THE NOTES ACCOMPANYING THE
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS FOR A DESCRIPTION OF THE
ASSUMPTIONS MADE BY CAI MANAGEMENT. THERE CAN BE NO ASSURANCE THAT THE ACTUAL
ADJUSTMENTS WILL NOT DIFFER SIGNIFICANTLY FROM THE ADJUSTMENTS REFLECTED IN THE
PRO FORMA STATEMENTS. FURTHER, THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS PRESENTED SHOULD BE READ IN CONJUNCTION WITH THE HISTORICAL
FINANCIAL STATEMENTS OF CAI AND CS.
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CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Pro Forma Combined Balance Sheet
September 30, 1998
(UNAUDITED)
(amounts in thousands)
PROFORMA ADJUSTMENTS
-----------------------------------------------------------------------
CAI CS
Historical ELIMINATIONS REORGANIZATION FAIR VALUE Pro Forma
CAI CS TELQUEST [A] [B] [C] COMBINED CAI
---------- ------- -------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,339 $ 45,394 $ 3 $ - $ - $ - $ 46,736
Restricted cash and cash
equivalents 11,204 4,222 - - 15,953 - 31,379
Debt service escrow 16,914 - - - (16,914) - -
Subscriber accounts
receivables, net 702 1,295 - - - - 1,997
Prepaid expenses 549 929 - - - - 1,478
Property and equipment,
net 41,459 54,905 87 - 264 (818) 95,897
Wireless channel rights,
net 187,730 168,247 - - 17,113 (25,639) 347,451
Investment in TelQuest
Satellite Services LLC 1,220 2,250 - (1,220) - - 2,250
Goodwill, net 22,067 - - - - (22,067) -
Debt financing costs, net 5,838 7,656 - - (5,781) (2,555) 5,158
Reorganization value in
excess of amounts
allocable to identifiable
assets - - - - 18,298 - 18,298
Other assets 3,060 5,686 91 - (394) - 8,443
-------- -------- ------ -------- ------- ------- -------
Total Assets $ 292,082 $ 290,584 $ 181 $ (1,220) $ 28,539 $ (51,079) $ 559,087
======== ======== ===== ======== ======= ======== ========
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LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES NOT SUBJECT
TO COMPROMISE
Accounts payable $ 3,125 $ 515 $ 2,409 $ - $ (600) $ - $ 5,449
Accrued expenses 22,738 6,441 318 - (12,999) - 16,498
Wireless channel rights
obligations 2,922 - - - - - 2,922
Interim debt financing 60,000 - - - 2,074 - 62,074
Long-term notes 3,765 312,161 3,175 - 100,000 (87,904) 331,197
------- -------- ------ ----- ------- ------- -------
92,550 319,117 5,902 - 88,475 (87,904) 418,140
------- -------- ------ ----- ------- ------- -------
LIABILITIES SUBJECT
TO COMPROMISE 307,793 - - - (307,793) - -
STOCKHOLDERS' EQUITY
(DEFICIT)
Preferred stock - - - - - - -
Common stock 275,771 11 - (11) (275,599) - 172
Additional paid-in
capital 101,712 154,517 5,796 (160,313) 2,238 36,825 140,775
Accumulated deficit (485,744) (183,061) (11,517) 159,104 521,218 - -
-------- -------- ------- -------- -------- ------- -------
Total Equity (108,261) (28,533) (5,721) (1,220) 247,857 36,825 140,947
-------- -------- ------- -------- -------- ------- -------
Total Liabilities and
Shareholders' Equity $ 292,082 $ 290,584 $ 181 $ (1,220) $ 28,539 $ (51,079) $ 559,087
======== ======== ====== ======== ======== ======== ========
</TABLE>
See notes to Pro Forma Combined Balance Sheet.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Pro Forma Combined Balance Sheet
September 30, 1998
(unaudited)
A. ELIMINATIONS
Eliminate the investments in CS and TelQuest. Any losses attributable to
those subsidiaries in excess of the associated investments are reflected
as goodwill.
B. CAI REORGANIZATION
The reorganization pro forma entries include a) the application of fresh-
start accounting to CAI for the emergence from bankruptcy by adjusting
the assets and liabilities to their respective estimated fair values; b)
the issuance of $100 million of aggregate original principal amount of
13% senior notes and the extinguishment of long-term notes totaling
approximately $308 million, including the interest accrued thereon and
associated issuance costs; c) recording the cancellation of 40.5 million
shares of CAI common stock, no par value and the issuance of 15 million
shares of new CAI common stock, $.01 par value per share, and d)
recording the $80 million exit facility, generating net proceeds of
approximately $15.9 million after repaying all amounts outstanding under
the $60 million DIP facility and the payment of certain commitment fees
associated therewith. CAI issued 2.2 million shares of its common stock
to MLGAF as additional consideration to MLGAF for providing the exit
facility. The value of this stock is reflected as a discount to the exit
facility to be amortized over the term of the exit facility.
C. CS FAIR VALUE
Adjust the value of the CS assets and liabilities to their respective
estimated fair values pursuant to the purchase method of accounting on a
step acquisition basis.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Pro Forma Combined Statement of Operations
For the Fiscal Year Ended March 31, 1999
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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PROFORMA ADJUSTMENTS
-------------------------------------------------------------------
CAI CS
Historical ELIMINATIONS REORGANIZATION FAIR VALUE Pro Forma
CAI CS TELQUEST [D] [E] [F] COMBINED CAI
---------- ------- -------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 18,909 $ 25,376 $ 2 $ - $ - $ - $ 44,287
-------- -------- ------- ---------- ----------- -------- --------
Costs and expenses:
Programming and
license fees 14,658 16,682 - - - - 31,340
General and
administrative 27,522 20,249 9,131 - - - 56,902
Goodwill writedown - 63,907 - - - - 63,907
Depreciation and
amortization 30,611 27,503 - 375 2,425 (1,824) 59,090
-------- -------- ------ ---------- ---------- -------- --------
72,791 128,341 9,131 375 2,425 (1,824) 211,239
-------- -------- ------ ---------- ---------- -------- --------
Operating loss (53,882) (102,965) (9,129) (375) (2,425) 1,824 (166,952)
-------- -------- ------ ---------- ---------- -------- --------
Other Income (Expense)
Interest expense (33,484) (35,547) (252) - (595) (6,695) (76,573)
Equity in losses of
affiliates (83,857) (1,717) - 84,700 - - (874)
Reorganization expense (17,101) - - - - - (17,101)
Interest and other
income 4,760 1,379 5 - - - 6,144
------- ------- ------ ---------- ---------- -------- --------
(129,682) (35,885) (247) 84,700 (595) (6,695) (88,404)
------- ------- ------ ---------- ---------- -------- --------
Net loss $(183,564) $(138,850) $ (9,376) $ 84,325 $ (3,020) $ (4,871) $ (255,356)
======== ======== ======= ========== ========== ======== =========
Basic and diluted loss
per new common share $ (10.65) $ (14.81)
======== =========
Weighted new common
shares outstanding 17,241,379 17,241,379
========== ==========
</TABLE>
SEE NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Pro Forma Combined Statement of Operations
For the Fiscal Year Ended March 31, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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PROFORMA ADJUSTMENTS
-------------------------------------------------------------------
CAI CS
Historical ELIMINATIONS REORGANIZATION FAIR VALUE Pro Forma
CAI CS TELQUEST [D] [E] [F] COMBINED CAI
---------- ------- -------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 28,622 $ 27,065 $ - $ - $ - $ - $ 55,687
--------- -------- ------- ---------- ----------- -------- ---------
Costs and expenses:
Programming and
license fees 15,460 15,189 - - - - 30,649
General and
administrative 38,123 16,153 7,025 - - - 61,301
Goodwill writedown 73,500 - - - - - 73,500
Depreciation and
amortization 34,714 27,497 - - 4,476 (2,736) 63,951
--------- ------- ------ ---------- --------- --------- ---------
161,797 58,839 7,025 - 4,476 (2,736) 229,401
--------- ------- ------ ---------- --------- --------- ---------
Operating loss (133,175) (31,774) (7,025) - (4,476) 2,736 (173,714)
--------- ------- ------ ---------- --------- --------- ---------
Other Income (Expense)
Interest expense (47,227) (32,270) (45) - 11,717 (10,141) (77,966)
Equity in losses
of affiliates (31,747) (2,335) - 33,781 - - (301)
Write down of equity
investment (23,570) - - 23,570 - - -
Interest and other
income 4,459 5,680 6 (117) - - 10,028
--------- ------- ------ ---------- --------- --------- ---------
(98,085) (28,925) (39) 57,234 11,717 (10,141) (68,239)
--------- ------- ------ ---------- --------- --------- ---------
Net loss $(231,260) $(60,699) $(7,064) $ 57,234 $ 7,241 $ (7,405) $ (241,953)
========= ======= ====== ========== ========= ========= =========
Basic and diluted loss
per common share $ (5.70) $ (14.03)
========= =========
Weighted average common
shares outstanding 40,543,039 17,241,379
========== ==========
</TABLE>
SEE NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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PROFORMA ADJUSTMENTS
-------------------------------------------------------------------
CAI CS
Historical ELIMINATIONS REORGANIZATION FAIR VALUE Pro Forma
CAI CS TELQUEST [D] [E] [F] COMBINED CAI
---------- ------- -------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 10,852 $ 13,253 $ - $ - $ - $ - $ 24,105
--------- ------- ------- ---------- ----------- ------- ---------
Expenses
Programming and
licensing 7,606 8,111 - - - - 15,717
General and
administrative 11,019 9,483 6,104 - - - 26,606
Goodwill writedown - 46,378 - - - - 46,378
Depreciation and
amortization 13,637 14,779 - - 2,238 (1,368) 29,286
--------- ------- ------- ---------- ----------- ------- ---------
32,262 78,751 6,104 - 2,238 (1,368) 117,987
--------- ------- ------- ---------- ----------- ------- ---------
Operating loss (21,410) (65,498) (6,104) - (2,238) 1,368 (93,882)
--------- ------- ------- ---------- ----------- ------- ---------
Other Income (Expense)
Interest expense (18,059) (17,386) (113) - 8,131 (4,994) (32,421)
Equity in losses
affiliates of (45,292) (1,071) - 46,008 - - (355)
Reorganization expense (3,955) - - - - - (3,955)
Interest and
other income 3,857 1,729 5 - - - 5,591
--------- ------- ------- ---------- ----------- ------- ---------
(63,449) (16,728) (108) 46,008 8,131 (4,994) (31,140)
--------- ------- ------- ---------- ----------- ------- ---------
Net loss $ (84,859) $(82,226) $(6,212) $ 46,008 $ 5,893 $ (3,626) $ (125,022)
========= ======== ======= ========== =========== ======== =========
Basic and diluted loss
per common share $ (2.09) $ (7.25)
========= =========
Weighted average common
shares outstanding 40,543,039 17,241,379
========== ==========
</TABLE>
SEE NOTES TO PRO FORMA COMBINED STATEMENTS OF
OPERATIONS.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Six Months Ended September 30, 1998 and the Years Ended
March 31, 1999 and 1998
(unaudited)
D. ELIMINATIONS
Eliminate the a) equity in losses of CS and TelQuest
and b) intercompany income and/or expenses that do not
offset in the consolidated statements of operations.
E. CAI REORGANIZATION
The CAI reorganization pro forma adjustments reflect a)
the increased depreciation and amortization relative to
the fresh-start adjustments made to the CAI assets upon
the emergence from bankruptcy; b) the increase in
interest expense on the $100 million of CAI senior
discounted notes and the $80 million exit facility,
offset in part by the interest eliminated on the $304
million of debt subject to compromise and the interim
debt and by the elimination of amortization of debt
financing costs that were written off.
F. CS FAIR VALUE
The adjustments reflect the decreased depreciation and
amortization and the increased interest expense
relative to the fair value adjustments made to the
assets and liabilities pursuant to valuations made
under the purchase method of accounting.
Exhibit 10.1
MASTER AGREEMENT
AMONG
HEARTLAND WIRELESS COMMUNICATIONS, INC.,
CS WIRELESS SYSTEMS, INC.
AND
CAI WIRELESS SYSTEMS, INC.
DATED AS OF DECEMBER 2, 1998
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TABLE OF CONTENTS
<S> <C> <C>
PAGE
Preamble 1
Section 1 - Defined Terms 2
Section 2 - CS Wireless Common Stock 4
Section 3 - Transfers of Assets and Leases of Spectrum Rights
at the Stage I Closing 5
Section 4 - Cancellation of Heartland Long-Term Note and
Related Transactions at the Stage II Closing 7
Section 5 - Stage I and Stage II Closing Dates 7
Section 6 - FCC Cooperation and Related Spectrum Matters 8
Section 7 - Conditions to All of the Parties' Obligations 9
Section 8 - Representations and Warranties of the Parties 13
Section 9 - Covenants of All of the Parties 20
Section 10 - Covenants of Heartland 21
Section 11 - Covenants of CS Wireless 23
Section 12 - Releases and Indemnification 24
Section 13 - Termination 26
Section 14 - Further Assurances 27
Section 15 - No Waiver 27
Section 16 - Miscellaneous 27
</TABLE>
<PAGE>
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EXHIBITS
<S> <C>
Exhibit A - Resignation of Heartland Directors and Heartland Independent
Director
Exhibit B - CS Wireless FCC Assets Spectrum Lease
Exhibit C - Heartland FCC Assets Spectrum Lease
Exhibit D - Amendment to BTA Lease and Option Agreement
Exhibit E - BTA Lease and Option Agreement
Exhibit F - Form of CS Wireless Senior Noteholder Consent
</TABLE>
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SCHEDULES
<S> <C>
3(a)(i) - Customer Premises Equipment
3(a)(ii) - CS Wireless FCC Assets
3(b) - Heartland FCC Assets
4(a)(i) - CS Leases
4(a)(ii) - Radcliffe Non-FCC Assets
4(b)(i) -- Condition of Portsmouth Non-FCC Assets
8(b)(ii) - Heartland Leases
4(b)(ii) - Portsmouth Non-FCC Assets
8(a)(ii) - Title to Heartland Assets
8(a)(v) - Heartland Compliance with Laws
8(a)(vi) - Heartland leased FCC Assets
8(a)(vii) - Heartland Litigation
8(a)(x)) - Title to CS Wireless Assets and Leases
8(b)(v) - CS Compliance with Laws
8(b)(vi) - Construction Completion Dates
8(b)(vii) - CS Wireless Litigation
8(b)(x) - Condition of CPE and Radcliffe Non-FCC Assets
8(c)(iii) - CAI Litigation
</TABLE>
<PAGE>
MASTER AGREEMENT
Master Agreement dated as of the 2nd day of December, 1998 (this
"Agreement") by and among Heartland Wireless Communications, Inc., a
Delaware corporation having its principal place of business located at 200
Chisholm Place, Suite 200, Plano, Texas 75075 ("Heartland"), CAI Wireless
Systems, Inc., a Connecticut corporation having its principal place of
business located at 18 Corporate Woods Boulevard, Third Floor, Albany, New
York 12211 ("CAI") and CS Wireless Systems, Inc., a Delaware corporation
having its principal place of business located at 1101 Summit Avenue,
Plano, Texas 75074 ("CS Wireless").
R E C I T A L S
WHEREAS, the parties hereto are parties to that certain Participation
Agreement (as defined herein), pursuant to which each of Heartland and CAI
contributed wireless cable assets or the stock of entities owning wireless
cable assets to CS Wireless in exchange for CS Common Stock (as defined
herein); and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Participation Agreement, Heartland received 3,578,834
shares of CS Wireless Common Stock, which amount was subsequently increased
to 3,836,035 shares of CS Wireless Common Stock as a result of the issuance
by CS Wireless to Heartland of an additional 257,201 shares of CS Wireless
Common Stock in satisfaction of that certain true-up obligation owed to
Heartland under Section 9.6(a) of the Participation Agreement; and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Participation Agreement, CS Wireless issued to
Heartland the Heartland Long-Term Note (as defined herein) in the principal
amount of $15,000,000, which promissory note matures on February 21, 2006;
and
WHEREAS, there is $2,335,276.00 outstanding on the Heartland Long-Term
Note as of November 30, 1998; and
WHEREAS, simultaneously with the consummation of the transactions
contemplated by the Participation Agreement, the parties hereto entered
into that certain Stockholders' Agreement (as defined herein), which
agreement requires, among other things, that Heartland and CAI vote their
shares of CS Wireless Common Stock in favor of a board of directors
comprised of four members designated by CAI and three members designated by
Heartland, and that significant decisions affecting CS Wireless requires
the approval of at least 70% of the directors of CS Wireless so that
neither CAI nor Heartland can unilaterally make significant decisions
affecting CS Wireless; and
WHEREAS, the parties have disagreed about various matters regarding
the operations, valuation, governance and future of CS Wireless; and
WHEREAS, with due regard to their respective fiduciary duties to
various constituencies including the respective stockholders and creditors
of CS Wireless, CAI and Heartland, the parties wish to terminate
Heartland's ongoing participation in the governance of CS Wireless on a
basis that after prolonged negotiation, investigation and consultation with
advisors, the parties believe to be fair and in the best interests of the
parties and their respective constituents while ensuring that the future
operations of Heartland and CS Wireless and their respective successors can
be separated without unnecessary disruption to either party; and
WHEREAS, CAI desires to purchase from Heartland and Heartland desires
to sell to CAI all of the 3,836,035 shares of CS Wireless Common Stock
owned by Heartland, on and subject to the terms and conditions set forth
herein; and
WHEREAS, CS Wireless desires to assign and transfer to Heartland
certain MDS-1 channels, all assets relating to the Radcliffe, Iowa market,
WCS Spectrum in 19 markets and certain other equipment, and Heartland
desires to assign and transfer to CS Wireless any and all ownership and
leasehold interests in MMDS and MDS channels in the Portsmouth, New
Hampshire market, including, but not limited to, the MMDS E Group and MDS
H1 - 3 channels, together with any and all assets used by Heartland in the
Portsmouth market; and
WHEREAS, the parties hereto desire to cooperate with each other with
respect to proposed two-way use of their MMDS, MDS and ITFS spectrum in
contiguous and adjacent markets, including, but not limited to, reaching an
agreement with respect to a comprehensive two-way frequency utilization
plan, cooperation with respect to the implementation of such, timely
provision of requisite interference consent agreements and such other
actions as may be consistent with supporting each other's necessary or
desirable filings at the FCC (as defined herein) in connection with two-way
applications; and
WHEREAS, the parties hereto desire to settle certain claims they have
against each other; and
WHEREAS, the parties shall continue to own and lease spectrum rights
in contiguous and adjacent markets, the value of which rights would be
materially adversely affected absent agreement with respect to interference
and related uses arising out of the contemplated two-way applications of
such spectrum.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, each of the parties hereto agree as follows.
Section 1. DEFINED TERMS. As used in this Agreement, the following
terms shall have the respective meanings set forth below:
"Bankruptcy Code" means the United States Bankruptcy Code, as
heretofore and hereafter amended, and as codified as 11 U.S.C.
<section><section> 101 ET SEQ.
"BTA" means Basic Trading Area, as such term is used by the FCC to
denote geographic areas in connection with the public auction of available
spectrum in the Multipoint and/or Multichannel Distribution Service.
"BTA Lease and Option Agreement" means that certain BTA Lease and
Option Agreement dated October 31, 1997 by and between CS Wireless and
Heartland.
"CPE" means Customer Premises Equipment listed on SCHEDULE 3(a)(i)
attached hereto.
"Communications Act" means the Communications Act of 1934, as amended,
47 U.S.C. <section><section> 151 ET SEQ.
"CS Leases" means the spectrum leases listed on SCHEDULE 4(a)(i)
attached hereto.
"CS Senior Notes" means $400,000,000 aggregate principal amount of
Series B 11-3/8% Senior Notes due 2006 of CS Wireless Systems, Inc.
"CS Wireless Common Stock" means the common stock, par value $.001 per
share, of CS Wireless.
"CS Wireless FCC Assets" means the FCC licenses owned by CS Wireless
and listed on SCHEDULE 3(a)(ii) attached hereto.
"Encumbrance" shall have the meaning given to such term in Section
8(a)(i).
"FCC Approvals" shall have the meaning given to such term in Section
3(b).
"Governmental Authority" means (a) the government of (i) the United
States of America or any State or other political subdivision thereof, or
(ii) any jurisdiction in which any party hereto or any of such party's
subsidiaries conducts all or any part of its business, or which has
jurisdiction over any properties of any party hereto, as the case may be,
or (b) any entity exercising executive, legislative, judicial, regulatory
or administrative functions of, or pertaining to, any such government.
"Heartland FCC Assets" means the FCC licenses owned by Heartland and
listed on SCHEDULE 3(b) attached hereto.
"Heartland Leases" means the spectrum leases listed on SCHEDULE 4(b)(i)
attached hereto.
"Heartland Long-Term Note" means that certain Subordinated Promissory
Note dated February 23, 1996 and issued by CS Wireless to Heartland in the
principal amount of $15,000,000.
"Hosea" means Frank H. Hosea.
"Participation Agreement" means the Participation Agreement dated as
of December 12, 1995 by and among CAI, Heartland and CS Wireless, as
amended by Amendment No.1 to the Participation Agreement dated as of
February 23, 1996 among the parties thereto.
"Portsmouth Non-FCC Assets" means all assets owned by Heartland and
used in connection with the operation of the channels pursuant to the
Heartland FCC Assets and Heartland Leases, including, without limitation,
the assets listed on SCHEDULE 4(b)(ii) attached hereto.
"Radcliffe Non-FCC Assets" means all assets owned by CS Wireless and
used in connection with the Radcliffe, IA wireless cable system, including,
without limitation, the assets listed on SCHEDULE 4(a)(ii) attached hereto.
"Securities Act" means the Securities Act of 1933, as amended.
"Services Agreement" means that certain Administrative Services
Agreement dated as of February 23, 1996 by and between Heartland and CS
Wireless.
"Stage I Closing" shall have the meaning given to such term in Section
5(a).
"Stage I Closing Date" shall have the meaning given to such term in
Section 5(a).
"Stage I Transactions" shall have the meaning given to such term in
Section 5(a).
"Stage II Closing" shall have the meaning given to such term in
Section 5(b).
"Stage II Closing Date" shall have the meaning given to such term in
Section 5(b).
"Stage II Transactions" shall have the meaning given to such term in
Section 5(b).
"Stockholders' Agreement" means that certain Stockholders' Agreement
dated as of February 23, 1996 by and among CS Wireless, CAI and Heartland.
Section 2. CS WIRELESS COMMON STOCK.
(a) At the Stage I Closing (as defined below), Heartland shall sell,
assign, transfer, convey and deliver to CAI, and CAI shall purchase, accept
and assume from Heartland, all of Heartland's right, title and interest in
and to 3,836,035 shares of CS Wireless Common Stock owned by Heartland,
which shares represent the entire equity interest in CS Wireless owned by
Heartland as of the date hereof.
(b) The parties hereto agree that upon the consummation of the Stage
I Transactions (as defined below), Heartland shall cease to have any equity
interest in CS Wireless and the Stockholders' Agreement shall, without
further action by the parties, permanently and irrevocably lapse and
terminate with no further force or effect, and each of the parties thereto
shall be relieved of their obligations thereunder, with the same force and
effect and as if the parties had never entered into such agreement. Upon
such Stage I Closing, the resignation of each of the Heartland Directors
and the Heartland Independent Director (as such terms are defined in the
Stockholders' Agreement) from the Board of Directors of CS Wireless, in the
form attached hereto as EXHIBIT A, shall become immediately effective
without further action by the parties; PROVIDED, HOWEVER, that any
indemnification obligations of CS Wireless to each of the Heartland
Directors, the Heartland Independent Directors and Hosea under CS Wireless'
certificate of incorporation, by-laws, contracts, insurance policies (to
the extent applicable) or otherwise existing as of the date hereof shall
survive such resignation, and CS Wireless expressly agrees to assume any
such indemnification obligation in any bankruptcy proceeding filed by or
against CS Wireless.
Section 3. TRANSFERS OF ASSETS AND LEASES OF SPECTRUM RIGHTS AT THE
STAGE I CLOSING.
At the Stage I Closing:
(a) CS Wireless shall, in partial satisfaction of the Heartland Long-
Term Note, which shall cease to accrue interest from and after the Stage I
Closing Date:
(i) sell, assign, transfer, convey and deliver to Heartland, and
Heartland shall purchase, accept and assume from CS Wireless, all of
CS Wireless' right, title and interest in and to the CPE listed on
SCHEDULE 3(a)(i);
(ii) lease to Heartland, and Heartland shall lease from CS
Wireless all of CS Wireless' right, title and interest in and to the
CS Wireless FCC Assets. The CS Wireless FCC Assets shall be leased
pursuant to the Lease Agreement set forth as EXHIBIT B attached
hereto. Within ten (10) business days of the signing of this
Agreement, CS Wireless and Heartland together shall file with the FCC
the necessary applications for the consent of the assignment of the CS
Wireless FCC Assets; and
(iii) pay Heartland Three Hundred Sixty-six Thousand and 00/100
Dollars ($366,000.00), payable in immediately available funds by wire
transfer in accordance with written wire transfer instructions
previously delivered by Heartland to CS Wireless;
(b) Heartland shall lease to CS Wireless, and CS Wireless shall
lease from Heartland all of Heartland's right, title and interest in and to
the Heartland FCC Assets. The Heartland FCC Assets shall be leased
pursuant to the Lease Agreement set forth as EXHIBIT C attached hereto.
Within ten (10) business days of the signing of this Agreement, CS
Wireless and Heartland together shall file with the FCC the necessary
applications for the consent of the assignment of the Heartland FCC Assets
(such consent, together with the consent of the FCC contemplated by Section
3(a)(ii) above, the "FCC Approvals");
(c) CAI shall pay Heartland One Million Five Hundred Thirty-four
Thousand and 00/100 Dollars ($1,534,000.00), payable in immediately
available funds by wire transfer in accordance with written wire transfer
instructions previously delivered by Heartland to CAI; and
(d) Heartland and CS Wireless shall execute and deliver an amendment
to the BTA Lease and Option Agreement in the form attached hereto as
Exhibit D, which amendment shall correct certain ground elevation
parameters of Heartland's Sherman, Texas market to reflect a previously
proposed or licensed facility and correct certain operating parameter of CS
Wireless' Fort Worth, Texas market.
The parties acknowledge that it is impracticable for Heartland to inspect,
test and select the CPE before the Stage I Closing. Accordingly, CS
Wireless shall make the CPE available for inspection by Heartland
representatives during normal business hours and Heartland shall inspect,
test and select the CPE on or before the Stage II Closing. CS Wireless
shall make available for inspection at CS Wireless' offices or warehouse
facilities the CPE listed on SCHEDULE 3(A)(I) at the following locations:
(Model 8607 BN55) Scientific Atlanta San Antonio
converter boxes (with remote)
(Model 5508 W or WP) Tocom converter boxes Dallas
(with remote)
(Cal Amp 2040\011 or PacMono 3191i Dallas
or 3192i) Dipoles, PCS filtered and tested
In the event that CS Wireless does not make available for delivery to
Heartland on or before the Stage II Closing the CPE listed on SCHEDULE
3(A)(I), CS Wireless shall immediately pay to Heartland cash in an amount
equal to the difference between $354,000 and the value (as established
pursuant to SCHEDULE 3(A)(I)) of the CPE made available for delivery at the
Stage II Closing.
For a period of One Hundred Eighty (180) days following the earlier of the
(i) Stage II Closing or (ii) the date on which Heartland accepts a unit of
CPE made available by CS Wireless, Heartland shall have the right to
return such unit of CPE which is not in good working order for the purpose
for which it was intended. Upon timely receipt of any returned unit, CS
Wireless shall immediately (i) pay to Heartland cash in an amount equal to
the value of such item as established in SCHEDULE 3(A)(I) or (ii) repair or
replace such unit. If CS Wireless elects to repair or replace such unit,
Heartland shall have a period of Forty-five (45) days to determine whether
such repaired or replacement unit is in good working order for the purpose
for which it was intended. Except as provided herein, CS Wireless hereby
disclaims all warranties, express or implied, including without limitation
any warranties under the UCC or otherwise implied by law. CS Wireless shall
use all reasonable commercial efforts to assist Heartland in enforcing the
terms of any manufacturer's warranty applicable to any unit of CPE
delivered to Heartland pursuant to the terms hereof.
Section 4. CANCELLATION OF HEARTLAND LONG-TERM NOTE AND RELATED
TRANSACTIONS AT THE STAGE II CLOSING.
At the Stage II Closing:
(a) CS Wireless shall sell, assign, transfer, convey and deliver to
Heartland, and Heartland shall purchase, accept and assume from CS
Wireless, all of CS Wireless' right, title and interest in and to the CS
Wireless FCC Assets, the lessee's interest under the CS Leases and the
Radcliffe Non-FCC Assets;
(b) Heartland shall sell, assign, transfer, convey and deliver to CS
Wireless, and CS Wireless shall purchase, accept and assume from Heartland,
all of Heartland's right, title and interest in and to the Heartland FCC
Assets, the lessee's interest under the Heartland Leases and the Portsmouth
Non-FCC Assets;
(c) CS Wireless shall pay Heartland One Hundred Thousand and 00/100
Dollars ($100,000.00), payable by wire transfer in immediately available
funds in accordance with written wire instructions previously delivered by
Heartland to CS Wireless; and
(d) Heartland shall cancel the Heartland Long-Term Note and deliver
such cancelled promissory note to CS Wireless.
CS Wireless acknowledges and agrees that Heartland shall not assume
any liabilities, obligations or commitments of CS Wireless or any
affiliates thereof relating to or arising out of the operation of the CS
Wireless FCC Assets, the CS Leases or Radcliffe Non-FCC Assets prior to the
Stage II Closing Date including, without limitation, any liabilities
associated with employees arising prior to the Stage II Closing Date who
are hired by Heartland from and after the Stage II Closing Date.
Heartland acknowledges and agrees that CS Wireless shall not assume
any liabilities, obligations or commitments of Heartland or any affiliate
thereof relating to or arising out of the operation of the Heartland FCC
Assets, Heartland Leases or Portsmouth Non-FCC Assets prior to the Stage II
Closing Date.
Section 5. STAGE I AND STAGE II CLOSING DATES.
(a) The sale and transfer of the CS Wireless Common Stock by
Heartland to CAI, and the sale and transfer of the CPE, the cash payments
by each of CS Wireless and CAI to Heartland contemplated under Section 3,
the lease from CS Wireless to Heartland of the CS Wireless FCC Assets and
the lease from Heartland to CS Wireless of the Heartland FCC Assets
(collectively, the "Stage I Transactions") shall occur at the offices of
Heartland, 200 Chisholm Place, Suite 200, Plano, Texas 75075, at 11:30
a.m., at a closing (the "Stage I Closing") on December 2, 1998, or at such
other time as the parties hereto may agree (the "Stage I Closing Date").
(b) The sale and transfer of the CS Wireless FCC Assets, the CS
Leases, the Radcliffe Non-FCC Assets, the Heartland FCC Assets, the
Heartland Leases and the Portsmouth Non-FCC Assets, the cash payment by CS
Wireless to Heartland contemplated under Section 4 and the cancellation and
delivery of the Heartland Long-Term Note (collectively, the "Stage II
Transactions") shall occur at the offices of Heartland, 200 Chisholm Place,
Suite 200, Plano, Texas 75075, at 11:30 a.m., at a closing (the "Stage II
Closing") on January 30, 1999 or, if later, 3 business days after receipt
of the final FCC Approvals, or at such other time as the parties hereto may
agree (the "Stage II Closing Date").
Section 6. FCC COOPERATION AND RELATED SPECTRUM MATTERS. As a
material inducement to each of the parties to enter into this Agreement and
as additional consideration for the transactions contemplated by Sections
2, 3 and 4 above, the parties hereto agree as follows:
(a) The parties hereto will cooperate with each other to the maximum
extent possible in agreeing to enter into interference agreements requested
by the other party that are necessary to facilitate the FCC's grant of
applications filed or sponsored by the other party, as more fully described
in Article V of the BTA Lease and Option Agreement, dated October 31, 1997
by and between Heartland and CS Wireless and their affiliates (hereinafter
the "BTA Lease and Option Agreement"), which agreement is attached hereto
as EXHIBIT D and incorporated herein by this reference. Heartland and CS
Wireless hereby expressly agree to abide by the BTA Lease and Option
Agreement, and that the BTA Lease and Option Agreement, together with this
Agreement, supersedes any other agreements to the contrary; provided,
however, that neither Heartland nor CS Wireless shall be required to breach
any pre-existing agreements with third parties as a result of this
Agreement, or pay monetary or other consideration not otherwise due.
(b)(i) With respect to markets in which Heartland and CS Wireless
have contiguous or adjacent interests, including, without limitation,
Dallas and Fort Worth, Texas, Heartland and CS Wireless agree to give
high priority to resolving issues surrounding CS Wireless'
developmental application for two-way authority in Dallas/Fort Worth,
Texas and to cooperate in an expeditious manner so as to permit the
other party to file two-way transmission applications in such markets
during the first FCC filing window (with priority given to CS
Wireless' Dallas/Fort Worth market) to (A) agree on a comprehensive
two-way frequency utilization plan, (B) implement such plan and (C)
provide the other party with requisite interference consent agreements
in support of such party's two-way applications, as long as such
applications meet each party's mutually agreed upon technical
parameters, consistent with FCC rules.
(ii) Notwithstanding anything to the contrary, CS Wireless and
Heartland agree that the preferred use of the MDS-1 and MDS-2
channels, as well as the WCS Spectrum, shall be for upstream
transmissions, and that both parties will take all reasonable and
appropriate steps to accommodate the other party's applications for
and the use of such spectrum so long as such applications meet the
mutually agreed upon technical parameters, consistent with FCC rules.
(c) Notwithstanding anything in the FCC's rules to the contrary, for
purposes of this Agreement, the interference protection criteria applicable
to the WCS Spectrum shall be governed by the FCC rules in 47 C.F.R. Part
21, as such rules are amended from time to time, applicable to MMDS
spectrum licensed pursuant to BTA authorizations. For example, the maximum
power flux density application to the WCS Spectrum shall be equal to or
less than -73 dbw/m{2} at the BTA or partitioned service area
boundary(ies), or as otherwise provided in any successor rule or regulation
of the FCC for MMDS spectrum licensed pursuant to BTA authorizations.
(d) Heartland hereby acknowledges its obligation to cooperate with CS
Wireless in resolving a dispute with the licensee of the G group channels
in Grand Rapids, Michigan, Call Sign WLS-950, including, but not limited
to, assigning the lease to CS Wireless on an expeditious basis and
permitting CS Wireless to negotiate and execute an excess capacity lease
agreement directly with the licensee. Notwithstanding anything to the
contrary, nothing in this Section 6(d) shall require Heartland to pay any
amount of consideration to the licensor of such channels or to CS Wireless,
or to expend any other amounts related to such channels, including, without
limitation, construction, tower lease, engineering, legal or other fees .
Section 7. CONDITIONS TO ALL OF THE PARTIES' OBLIGATIONS.
(a) The respective obligations of Heartland, CAI and CS Wireless to
consummate the Stage I Transactions, as appropriate, are subject to the
fulfillment prior to or on the Stage I Closing Date of the following
conditions (each of which may be waived in whole or in part by the party
being benefitted thereby in its sole discretion):
(i) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Heartland, CAI and CS Wireless contained in this
Agreement shall be complete and correct in all material respects when
made and at the Stage I Closing Date.
(ii) COMPLIANCE. Each of Heartland, CAI and CS Wireless shall
have performed and complied in all material respects with all
agreements and conditions contained in this Agreement required to be
performed or complied with by each of them prior to or on the Stage I
Closing Date.
(iii) COMPLIANCE CERTIFICATES. Each of Heartland, CAI and CS
Wireless shall have delivered to the other an Officer's Certificate
dated the Stage I Closing Date, certifying (A) that the conditions
specified in subsections (i) and (ii) of this Section 7(a), solely as
such conditions relate to the certifying party, have been fulfilled,
(B) as to resolutions adopted by the Board of Directors of Heartland,
CAI and CS Wireless, as the case may be, which certificate shall have
attached thereto a copy of such resolutions, and (C) as to such other
corporate proceedings relating to the authorization, execution and
performance of the transactions contemplated hereby.
(iv) BOARD AUTHORIZATIONS. The Board of Directors of each of
Heartland, CAI and CS Wireless shall have approved this Agreement and
the transactions contemplated hereby, and shall have authorized,
empowered and directed any or all of their corporate officers to
execute and deliver this Agreement and such agreements, certificates,
instruments and other documents and to take any and all other actions
that may be deemed necessary or desirable by the officer taking such
action to give effect to this Agreement and the transactions
contemplated hereby.
(v) TRANSACTIONS PERMITTED UNDER APPLICABLE LAW. On the Stage I
Closing Date, the Stage I Transactions contemplated by this Agreement
shall (A) be permitted by the laws and regulations of each
jurisdiction or Governmental Authority, including, without limitation,
the FCC, to which Heartland, CAI or CS Wireless or any of their
respective affiliates, as the case may be, is subject, and (B) not
violate any applicable law or regulation.
(vi) CERTAIN PROCEEDINGS AND REGULATORY MATTERS. At the Stage I
Closing, none of the parties hereto shall be subject to any judgment,
writ, order, decree or injunction of any court of competent
jurisdiction which restrains, enjoins or otherwise prohibits the
consummation of the Stage I Transactions, nor shall there be pending
any suit, action, investigation, inquiry or other proceeding by any
person (including, without limitation, any Governmental Authority)
that (A) seeks injunctive or other relief or remedies in connection
with such transactions or that makes consummation of the Stage I
Transactions subject to significant uncertainty, (B) could prevent or
make illegal the consummation of the Stage I Transactions contemplated
hereby, or (C) imposes or would be reasonably expected to impose any
remedy, condition or restriction on a party hereto which, in its
reasonable judgment, is material and adverse to such party.
(vii) THIRD PARTY AUTHORIZATION, CONSENT, ETC. All required
authorizations, consents, approvals or waivers of any third party,
including, without limitation, consents of Governmental Authorities,
if any, and any lender to any of the parties hereto, in connection
with the transactions contemplated hereby shall have been obtained,
including, without limitation, the consent of the holders of at least
a majority of aggregate principal amount of the CS Senior Notes, which
consent shall be in substantially the form of EXHIBIT F attached
hereto.
(viii) BANKRUPTCY PROCEEDINGS. In the event that Heartland or CS
Wireless shall have commenced a case under title 11 of the United
States Code (the "Bankruptcy Code"), the court(s) having jurisdiction
over such case(s) shall have entered an order (or orders, if both
Heartland and CS Wireless are debtors under the Bankruptcy Code) (a)
authorizing the assumption of this Agreement and the BTA Lease
Agreement and (b) approving the transactions contemplated herein, and
such order(s) shall become final and non-appealable; PROVIDED,
HOWEVER, nothing herein shall preclude the parties from consummating
the transactions contemplated herein if the parties, in their
discretion, waive the requirement that such order(s) be final and non-
appealable. No notice of such waiver of this or any other condition
to CAI's obligations to consummate the transactions contemplated
hereby need be given except to Heartland, as explicitly required in
this Agreement, it being the intention of the parties hereto that CAI
shall be entitled to, and is not waiving, the protections of Section
363(m) of the Bankruptcy Code, the mootness doctrine, and any similar
statute or body of law if either or both of the Stage I and Stage II
Closings occurs in the absence of a final and non-appealable order.
(ix) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the Stage I Transactions contemplated
by this Agreement and all documents and instruments incident to such
transactions shall be reasonably satisfactory to Heartland, CAI and CS
Wireless, as the case may be, and each party hereto shall have
received all such counterpart originals or certified or other copies
of such documents as it may reasonably request.
(b) The obligations of Heartland and CS Wireless to consummate the
Stage II Transactions are subject to the fulfillment prior to or on the
Stage II Closing Date of the following conditions (each of which may be
waived in whole or in part by the party being benefitted thereby in its
sole discretion):
(i) CONSUMMATION OF STAGE I TRANSACTIONS. The Stage I
Transactions shall have been consummated.
(ii) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Heartland and CS Wireless contained in this Agreement
shall be complete and correct in all material respects when made and
at the Stage II Closing Date (except to the extent that such
representations and warranties relate specifically to an earlier
date).
(iii) COMPLIANCE. Each of Heartland and CS Wireless shall have
performed and complied in all material respects with all agreements
and conditions contained in this Agreement required to be performed or
complied with by each of them prior to or on the Stage II Closing
Date.
(iv) COMPLIANCE CERTIFICATES. Each of Heartland and CS Wireless
shall have delivered to the other an Officer's Certificate dated the
Stage II Closing Date, certifying that (A) the conditions specified in
subsections (i) through (iii) of this Section 7(b), solely as such
conditions relate to the certifying party, have been fulfilled, (B)(1)
resolutions adopted by the Board of Directors of Heartland and CS
Wireless delivered at the Stage I Closing, and (2) such other
corporate proceedings relating to the authorization, execution and
performance of the transactions contemplated hereby are still in full
force and effect and have not been rescinded, modified or amended.
(v) TRANSACTIONS PERMITTED UNDER APPLICABLE LAW. On the Stage
II Closing Date, the Stage II Transactions shall (A) be permitted by
the laws and regulations of each jurisdiction or Governmental
Authority, including, without limitation, the FCC, to which Heartland
or CS Wireless or any of their respective affiliates, as the case may
be, is subject, and (B) not violate any applicable law or regulation.
(vi) CERTAIN PROCEEDINGS AND REGULATORY MATTERS. At the Stage
II Closing, none of the parties hereto shall be subject to any
judgment, writ, order, decree or injunction of any court of competent
jurisdiction which restrains, enjoins or prohibits the consummation of
the Stage II Transactions contemplated by this Agreement, nor shall
there be pending any suit, action, investigation, inquiry or other
proceeding by any person (including, without limitation, any
Governmental Authority) that (A) seeks injunctive or other relief or
remedies in connection with such transactions or that makes
consummation of the Stage II Transactions subject to significant
uncertainty, (B) could prevent or make illegal the consummation of the
Stage II Transactions contemplated hereby, of (C) imposes or would be
reasonably expected to impose any remedy, condition or restriction on
a party hereto which, in its reasonable judgment, is material and
adverse to such party.
(vii) THIRD PARTY AUTHORIZATION, CONSENT, ETC. All required
authorizations, consents, approvals or waivers of any third party,
including, without limitation, consents of Governmental Authorities,
if any, and any lender to any of the parties hereto, in connection
with the Stage II Transactions contemplated hereby shall have been
obtained.
(viii) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the Stage II Transactions contemplated
by this Agreement and all documents and instruments incident to such
transactions shall be reasonably satisfactory to Heartland, CAI and CS
Wireless, as the case may be, and each party hereto shall have
received all such counterpart originals or certified or other copies
of such documents as it may reasonably request.
(ix) DUE DILIGENCE COMPLETE. Each of Heartland and CS Wireless
shall have completed their business and legal due diligence
investigation of the assets to be transferred under Section 4, the
results of which shall be reasonably acceptable to the party
performing such investigation.
(c) The obligations of CAI and CS Wireless to consummate the Stage I
Transactions are subject to the fulfillment prior to or on the Stage I
Closing Date, of the following condition (which may be waived in whole or
in part by the party being benefitted thereby in its sole discretion):
(i) RESIGNATION OF HEARTLAND DIRECTORS. The Heartland
Directors and the Heartland Independent Director shall have resigned
from the Board of Directors of CS Wireless, and all committees thereof
effective as of the Stage I Closing Date.
Section 8. REPRESENTATIONS AND WARRANTIES OF THE PARTIES.
(a) HEARTLAND REPRESENTATIONS AND WARRANTIES. As a material
inducement to CAI and CS Wireless to enter into this Agreement and effect
the transactions contemplated hereby, Heartland hereby represents and
warrants that:
(i) TITLE TO CS WIRELESS COMMON STOCK HELD BY HEARTLAND.
Heartland has and, subject to the terms and conditions of this
Agreement, will sell, assign, transfer, convey and deliver, good and
indefeasible title to 3,836,035 shares of CS Wireless Common Stock,
which shares comprise Heartland's entire equity interest in CS
Wireless, free and clear of any security interest, claim, lien,
pledge, option, encumbrance, charge, agreement, voting trust, proxy or
other restriction (each, an "Encumbrance"), other than those
Encumbrances created or existing by virtue of the Stockholders'
Agreement.
(ii) TITLE TO HEARTLAND ASSETS TRANSFERRED HEREUNDER. Except as
set forth on SCHEDULE 8(a)(ii) attached hereto, Heartland has and,
subject to the terms and conditions of this Agreement, will sell,
assign, transfer, convey and deliver, good and indefeasible title to
(or a valid leasehold interest in) all of the Heartland FCC Assets,
the Heartland Leases and the Portsmouth Non-FCC Assets transferred
hereunder, free and clear of any and all Encumbrances.
(iii) ORGANIZATION AND QUALIFICATION. Heartland is a
corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and is duly
qualified as a foreign corporation and in good standing in each other
jurisdiction in which the ownership, lease or operation of its
property and assets or the conduct of its business requires such
qualification. Heartland has all corporate and other necessary power
and authority, and the legal right, to own or to hold under lease the
properties it purports to own or hold under lease and to transact the
business it transacts and proposes to transact. Heartland has all
corporate and other necessary power and authority, and the legal
right, to execute and deliver this Agreement, and each of the other
documents contemplated hereby to which it is or is to be a party, and
to perform its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby.
(iv) AUTHORIZATION. The execution, delivery and performance of
this Agreement by Heartland does not and will not (A) conflict with or
result in a breach of the terms, conditions or provisions of, (B)
constitute a default under, (C) result in the creation of any
Encumbrance upon any of the Heartland FCC Assets or Heartland Leases
pursuant to, (D) give any third party the right to modify, terminate
or accelerate any obligation under, (E) result in a violation of, or
(F) require any authorization, consent, approval, exemption or other
action by or notice or declaration or filing with any Governmental
Authority or any other Person (other than as has been duly made or
obtained) pursuant to, the charter or bylaws of Heartland, or any law,
statute, rule or regulation to which Heartland or any of its assets is
subject, or any agreement, instrument, order, judgment or decree to
which Heartland or any of its assets is subject.
(v) COMPLIANCE WITH LAWS. Except as set forth on SCHEDULE
8(a)(v), Heartland is in compliance in all material respects with all
laws, rules and regulations applicable to the Portsmouth Non-FCC
Assets, the Heartland FCC Assets and Heartland Leases (including
obtaining all authorizations, consents, approvals, orders, licenses,
exemptions from, and making all filings or registrations or
qualifications with, any Governmental Authority), the noncompliance
with which reasonably could have a material adverse effect on such
assets or the use thereof, and Heartland is in compliance in all
material respects with all provisions of applicable FCC licenses
including, without limitation, any build-out requirements and other
obligations, and with all leases, subleases and sublicenses to it of
MMDS or MDS channels comprising the Heartland FCC Assets or the
Heartland Leases, as the case may be. The FCC licenses and channel
leases comprising the Heartland FCC Assets and Heartland Leases
conform in all material respects to all applicable laws, ordinances,
codes, licensing requirements, rules and regulations, and Heartland
has not received any notice to the contrary. Except as set forth on
SCHEDULE 8(a)(v), there are no proceedings or complaints or, to the
best of Heartland's knowledge, investigations pending before or by any
Governmental Authority which could reasonably be expected to have a
material adverse effect on any FCC license or channel lease comprising
the Heartland FCC Assets or Heartland Leases. All applications,
reports, fees, filings and other submissions required under the
Communications Act relating to the Heartland FCC Assets and Heartland
Leases have been made or paid in a timely fashion.
(vi) FCC LICENSES. Schedule 3(b) attached hereto correctly sets
forth all of the FCC licenses comprising the Heartland FCC Assets and
correctly sets forth the termination date of each such FCC license,
and SCHEDULE 4(b)(i) attached hereto identifies all FCC licenses and
the owner thereof with respect to each of the leased channels
comprising the Heartland Leases. Each FCC license comprising the
Heartland FCC Assets or the Heartland Leases allowing the construction
or the operation of radio station facilities by a lessor of channel
capacity who is obligated to lease the capacity of the radio station
(in whole or in part) under a lease agreement or management/option
agreement listed on SCHEDULES 3(b) or 4(b)(i) attached hereto is in
full force and effect, and, to the best of Heartland's knowledge,
neither the licensee of such FCC license nor the FCC license is
subject to any complaint, investigation or proceeding by or before the
FCC, or on appeal from the FCC, which looks toward or would result in
the revocation, modification or non-renewal of the FCC license.
Except as set forth on SCHEDULE 8(a)(vi), each of such FCC licenses
for an MMDS or MDS station has a construction completion date which
has not elapsed or, if such date has elapsed, a request to the FCC to
extend that date for at least six (6) months has been properly filed
and is pending, or an application for certification or completion of
construction has been properly filed. Except as set forth on SCHEDULE
8(a)(vi), the FCC has granted one or more FCC licenses to each lessor
of the channel capacity subject to the lease and lease/option
agreements comprising the Heartland FCC Assets or the Heartland Leases
allowing that lessor to construct and/or operate each radio station
required for the lessor to provide to lessee under each such agreement
executed by such lessor the channel capacity subject to that
agreement.
(vii) LITIGATION. Except as set forth on SCHEDULE 8(a)(vii),
there is no action, suit, proceeding, arbitration, litigation or
government proceeding (including, without limitation, those related to
FCC, environmental or similar matters), or inquiry or investigation by
any Governmental Authority known to Heartland, in each case domestic
or foreign, pending against, or involving the Heartland FCC Assets,
the Heartland Leases or the Portsmouth Non-FCC Assets or the use
thereof which (A) questions the validity of this Agreement or any
action taken or to be taken by Heartland pursuant to or in connection
with this Agreement, (B) is required to be, and has not been, so
disclosed in the filings with the SEC by Heartland (and such
proceedings as are summarized in such SEC filings are accurately
described in all material respects), or (C) could reasonably be
expected to materially adversely affect the FCC licenses or channel
leases comprising the Heartland FCC Assets and the Heartland Leases or
the operation of the channels and transmission facilities relating
thereto.
(viii) NO VIOLATION, ETC. Heartland has not violated any law or
any governmental regulation or requirement which violation has had or
would reasonably be expected to have a material adverse effect upon
the financial condition, operating results, assets, operations or
business prospects of Heartland relating to the Heartland FCC Assets,
the Heartland Leases or the Portsmouth Non-FCC Assets, and Heartland
has not received notice of any such violation. Heartland is not
subject to, or has reason to believe it may become subject to, any
material liability (contingent or otherwise) or corrective or remedial
obligation arising under any environmental law, rule or regulation
relating to the Heartland FCC Assets, the Heartland Leases or the
Portsmouth Non-FCC Assets.
(ix) COPYRIGHT MATTERS. Heartland has submitted all requisite
notices (if any are required) under the Copyright Act for the carriage
of all Broadcast Stations as currently carried over any of the
Heartland FCC Assets. Heartland has filed in a timely manner with the
Copyright Office all required documents, instruments and statements of
account and have remitted payments of all required royalty fees with
respect to compulsory licenses provided for in Section III of the
Copyright Act for the carriage of broadcast signals in connection with
the Heartland FCC Assets. Heartland is not liable to any Person for
copyright infringement under the Copyright Act as a result of its
business operations relating to the Heartland FCC Assets and the
Heartland Leases. There have been no inquiries received from the
Copyright Office or any other party, which questioned such statements
of account or any copyright royalty payments made by Heartland with
respect to the Heartland FCC Assets or Heartland Leases, and no claim,
action or demand for copyright infringement or for non-payment of
royalties is pending or, to the knowledge of Heartland, threatened
against Heartland with respect to the Heartland FCC Assets or
Heartland Leases.
(x) CONDITION OF PORTSMOUTH NON-FCC ASSETS. Except as set forth
on SCHEDULE 8(a)(x) and except for ordinary wear and tear, the
Portsmouth Non-FCC Assets are in good working order for the purpose
for which they were intended. All transmitters included in the
Portsmouth Non-FCC Assets used in the Portsmouth market meet all
material applicable FCC acceptance and frequency stability
requirements.
(xi) NO INTERFERENCE CAUSED BY PORTSMOUTH MARKET. With respect
to its Portsmouth market, Heartland has not received any written
complaint that it, or any channels used in its Portsmouth market, is
causing interference to any reception, transmission or detection
system.
(b) CS WIRELESS REPRESENTATIONS AND WARRANTIES. As a material
inducement to Heartland and CAI to enter into this Agreement and effect the
transactions contemplated hereby, CS Wireless hereby represents and
warrants that :
(i) TITLE TO CPE AND RADCLIFFE NON-FCC ASSETS. CS Wireless has
and, subject to the terms and conditions of this Agreement, will sell,
assign, transfer, convey and deliver, good and indefeasible title to
the CPE and Radcliffe Non-FCC Assets, free and clear of any and all
Encumbrances.
(ii) TITLE TO CS WIRELESS FCC ASSETS AND CS LEASES TRANSFERRED
HEREUNDER. Except as set forth on SCHEDULE 8(b)(ii) attached hereto,
CS Wireless has and, subject to the terms and conditions of this
Agreement, will sell, assign, transfer, convey and deliver, good and
indefeasible title to (or a valid leasehold interest in) all of the CS
Wireless FCC Assets and CS Leases transferred hereunder, free and
clear of any and all Encumbrances.
(iii) ORGANIZATION AND QUALIFICATION. CS Wireless is a
corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and is duly
qualified as a foreign corporation and in good standing in each other
jurisdiction in which the ownership, lease or operation of its
property and assets or the conduct of its business requires such
qualification. CS Wireless has all corporate and other necessary
power and authority, and the legal right, to own or to hold under
lease the properties it purports to own or hold under lease and to
transact the business it transacts and proposes to transact. CS
Wireless has all corporate and other necessary power and authority,
and the legal right, to execute and deliver this Agreement, and each
of the other documents contemplated hereby to which it is or is to be
a party, and to perform its obligations hereunder and thereunder and
to consummate the transactions contemplated hereby and thereby.
(iv) AUTHORIZATION. The execution, delivery and performance of
this Agreement by CS Wireless does not and will not (A) conflict with
or result in a breach of the terms, conditions or provisions of, (B)
constitute a default under, (C) result in the creation of any
Encumbrance upon any of the CPE, the Radcliffe Non-FCC Assets, the CS
Leases or the CS Wireless FCC Assets pursuant to, (D) give any third
party the right to modify, terminate or accelerate any obligation
under, (E) result in a violation of, or (F) require any authorization,
consent, approval, exemption or other action by or notice or
declaration or filing with any Governmental Authority or any other
Person (other than as has been duly made or obtained) pursuant to, the
charter or bylaws of CS Wireless, or any law, statute, rule or
regulation to which CS Wireless or any of its assets is subject, or
any agreement, instrument, order, judgment or decree to which CS
Wireless or any of its assets is subject.
(v) COMPLIANCE WITH LAW. Except as set forth on SCHEDULE
8(b)(v), CS Wireless is in compliance in all material respects with
all laws, rules and regulations applicable to the CPE, the Radcliffe
Non-FCC Assets, the CS Leases and the CS Wireless FCC Assets
(including obtaining all authorizations, consents, approvals, orders,
licenses, exemptions from, and making all filings or registrations or
qualifications with, any Governmental Authority), the noncompliance
with which reasonably could have a material adverse effect on such
assets or the use thereof, and CS Wireless is in compliance in all
material respects with all provisions of applicable FCC licenses
including, without limitation, any build-out requirements and other
obligations, and with all leases, subleases and sublicenses to it of
MMDS, MDS, or ITFS channels comprising the CS Wireless FCC Assets and
CS Leases, as the case may be. The FCC licenses and channel leases
comprising the CS Wireless FCC Assets and CS Leases conform in all
material respects to all applicable laws, ordinances, codes, licensing
requirements, rules and regulations, and CS Wireless has not received
any notice to the contrary. Except as set forth on SCHEDULE 8(b)(v),
there are no proceedings or complaints or, to the best of CS Wireless'
knowledge, investigations pending before or by any Governmental
Authority which could reasonably be expected to have a material
adverse effect on any FCC license or channel lease comprising the CS
Wireless FCC Assets or CS Leases. All applications, reports, fees,
filings and other submissions required under the Communications Act
relating to the CS Wireless FCC Assets and CS Leases have been made or
paid in a timely fashion.
(vi) FCC LICENSES. SCHEDULE 3(a)(ii) attached hereto correctly
sets forth all of the FCC licenses comprising any portion of the CS
Wireless FCC Assets and correctly sets forth the termination date of
each such FCC license, and SCHEDULE 4(a)(i) identifies all FCC
licenses and the owner thereof with respect to each of the leased
channels comprising the CS Leases. Each FCC license comprising the CS
Wireless FCC Assets or CS Leases allowing the construction or the
operation of radio station facilities by a lessor of channel capacity
who is obligated to lease the capacity of the radio station (in whole
or in part) under a lease agreement or management/option agreement
listed on SCHEDULES 3(a)(ii) or 4(a)(i) attached hereto is in full
force and effect, and, to the best of CS Wireless' knowledge, neither
the licensee of such FCC license nor the FCC license is subject to any
complaint, investigation or proceeding by or before the FCC, or on
appeal from the FCC, which looks toward or would result in the
revocation, modification or non-renewal of the FCC license. Except as
set forth on SCHEDULE 8(b)(vi), each of such FCC licenses for an ITFS,
MMDS or MDS station has a construction completion date which has not
elapsed or, if such date has elapsed, a request to the FCC to extend
that date for at least six (6) months has been properly filed and is
pending, or an application for certification of completion of
construction has been properly filed. Except as set forth on SCHEDULE
8(b)(vi), the FCC has granted one or more FCC licenses to each lessor
of the channel capacity subject to the lease and lease/option
agreements comprising the CS Wireless FCC Assets or the CS Leases
allowing that lessor to construct and/or operate each radio station
required for the lessor to provide to lessee under each such agreement
executed by such lessor the channel capacity subject to that
agreement.
(vii) LITIGATION. Except as set forth on SCHEDULE 8(b)(vii),
there is no action, suit, proceeding, arbitration, litigation or
government proceeding (including, without limitation, those related to
FCC, environmental or similar matters), or inquiry or investigation by
any Governmental Authority known to CS Wireless, in each case domestic
or foreign, pending against (or circumstances that may give rise to
the same), or involving the CPE, the CS Wireless FCC Assets, the CS
Leases or the Radcliffe Non-FCC Assets or the use thereof which (A)
questions the validity of this Agreement or any action taken or to be
taken by CS Wireless pursuant to or in connection with this Agreement,
(B) is required to be, and has not been, so disclosed in the filings
with the SEC by CS Wireless (and such proceedings as are summarized in
such SEC filings are accurately described in all material respects),
or (C) could reasonably be expected to materially adversely affect the
FCC licenses or channel leases comprising the CS Wireless FCC Assets
or CS Leases or the operation of the channels and transmission
facilities relating thereto.
(viii) NO VIOLATION, ETC. CS Wireless has not violated any law
or any governmental regulation or requirement which violation has had
or would reasonably be expected to have a material adverse effect upon
the financial condition, operating results, assets, operations or
business prospects of CS Wireless relating to the CPE, the CS Wireless
FCC Assets, the CS Leases or the Radcliffe Non-FCC Assets, and CS
Wireless has not received notice of any such violation. CS Wireless
is not subject to, or has reason to believe it may become subject to,
any material liability (contingent or otherwise) or corrective or
remedial obligation arising under any environmental law, rule or
regulation relating to the CPE, the CS Wireless FCC Assets, the CS
Leases or the Radcliffe Non-FCC Assets.
(ix) COPYRIGHT MATTERS. CS Wireless has submitted all requisite
notices (if any are required) under the Copyright Act for the carriage
of all Broadcast Stations as currently carried over any of the CS
Wireless FCC Assets. CS Wireless has filed in a timely manner with
the Copyright Office all required documents, instruments and
statements of account and have remitted payments of all required
royalty fees with respect to compulsory licenses provided for in
Section III of the Copyright Act for the carriage of broadcast signals
in connection with the CS Wireless FCC Assets. CS Wireless is not
liable to any Person for copyright infringement under the Copyright
Act as a result of its business operations relating to the CS Wireless
FCC Assets and CS Leases. There have been no inquiries received from
the Copyright Office or any other party, which questioned such
statements of account or any copyright royalty payments made by CS
Wireless with respect to the CS Wireless FCC Assets or CS Leases, and
no claim, action or demand for copyright infringement or for non-
payment of royalties is pending or, to the knowledge of CS Wireless,
threatened against CS Wireless with respect to the CS Wireless FCC
Assets or CS Leases.
(x) CONDITION OF CPE AND RADCLIFFE NON-FCC ASSETS. Except as
set forth on SCHEDULE 8(b)(x) and except for ordinary wear and tear,
the CPE and the Radcliffe Non-FCC Assets are in good working order for
the purpose for which they were intended. All transmitters included
in the Radcliffe Non-FCC Assets used in the Radcliffe market meet all
material applicable FCC acceptance and frequency stability
requirements.
(xi) NO INTERFERENCE CAUSED BY RADCLIFFE MARKET, CS WIRELESS FCC
ASSETS OR CS LEASES. With respect to its Radcliffe market, CS
Wireless has not received any written complaint that it, or any
channels used in its Radcliffe market or otherwise comprising CS
Wireless FCC Assets and CS Leases, is causing interference to any
reception, transmission or detection system.
(c) As a material inducement to Heartland and CS Wireless to enter
into this Agreement and effect the transactions contemplated hereby, CAI
hereby represents and warrants that as of the date hereof:
(i) ORGANIZATION AND QUALIFICATION. CAI is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in each other jurisdiction in which
the ownership, lease or operation of its property and assets or the
conduct of its business requires such qualification. CAI has all
corporate and other necessary power and authority, and the legal
right, to own or to hold under lease the properties it purports to own
or hold under lease and to transact the business it transacts and
proposes to transact. CAI has all corporate and other necessary power
and authority, and the legal right, to execute and deliver this
Agreement, and each of the other documents contemplated hereby to
which it is or is to be a party, and to perform its obligations
hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby.
(ii) AUTHORIZATION. The execution, delivery and performance of
this Agreement by CAI does not and will not (A) conflict with or
result in a breach of the terms, conditions or provisions of, (B)
constitute a default under, (C) give any third party the right to
modify, terminate or accelerate any obligation under, (D) result in a
violation of, of (E) require any authorization, consent, approval,
exemption or other action by or notice or declaration or filing with
any Governmental Authority or any other Person (other than as has been
duly made or obtained) pursuant to, the charter or bylaws of CAI, or
any law, statute, rule or regulation to which CAI or any of its assets
in subject, or any agreement, instrument, order, judgment or decree to
which CAI or any of its assets is subject.
(iii) Litigation. Except as set forth on SCHEDULE 8(c)(iii),
there is no action, suit, proceeding, arbitration, litigation or
government proceeding (including, without limitation, those related to
FCC, environmental or similar matters), or inquiry or investigation by
any Governmental Authority known to CAI, in each case domestic or
foreign, pending against or involving CAI which (A) questions the
validity of this Agreement or any action taken or to be taken by CAI
pursuant to or in connection with this Agreement or (B) is required to
be, and has not been, so disclosed in the filings with the SEC by CAI
(and such proceedings as are summarized in such SEC filings are
accurately described in all material respects).
(iv) NO VIOLATION, ETC. CAI has not violated any law or any
governmental regulation or requirement which violation has had or
would reasonably be expected to have a material adverse effect upon
the financial condition, operating results, assets, operations or
business prospects of CAI, and CAI has not received notice of any such
violation. CAI is not subject to, or has reason to believe it may
become subject to, any material liability (contingent or otherwise) or
corrective or remedial obligation arising under any environmental law,
rule or regulation.
(v) INVESTMENT REPRESENTATION. CAI is purchasing the CS
Wireless Common Stock for its own account and not with a view to the
public distribution thereof. CAI acknowledges that the CS Wireless
Common Stock has not been registered under the Securities Act , and
that such shares may be resold only if registered pursuant to the
provisions of the Securities Act, or if an exemption from registration
is available.
Section 9. COVENANTS OF ALL OF THE PARTIES.
(a) Unless otherwise indicated:
(i) Each of the parties hereto agrees to use commercially
reasonable efforts to bring about the fulfillment of the conditions
precedent to the Stage I Closing.
(ii) Subject to the terms and conditions provided herein, each
of the parties hereto agrees to (A) use commercially reasonable
efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable
law and regulation to consummate and make effective the Stage I
Transactions in accordance with the terms of this Agreement, perform
each of its obligations hereunder, including without limitation, the
obligations of the parties set forth in Section 6 hereof, and (B)
cooperate following the Stage I Closing in the taking of any actions
necessary or desirable in order to effect the purposes of this
Agreement with respect to the Stage I Transactions.
(iii) Each party hereto shall promptly inform each of the other
parties hereto of any circumstance or set of circumstances which could
reasonably be expected to impair such party's ability to perform any
of its obligations under this Agreement.
(b) Unless otherwise indicated:
(i) Each of the parties hereto agrees to use commercially
reasonable efforts to bring about the fulfillment of the conditions
precedent to the Stage II Closing.
(ii) Subject to the terms and conditions provided herein, each
of the parties hereto agrees to (A) use commercially reasonable
efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable
law and regulation to consummate and make effective the Stage II
Transactions in accordance with the terms of this Agreement and (B)
cooperate following the Stage II Closing in the taking of any actions
necessary or desirable in order to effect the purposes of this
Agreement with respect to the Stage II Transactions.
(iii) Each party hereto shall promptly inform each of the other
parties hereto of any circumstance or set of circumstances which could
reasonably be expected to impair such party's ability to perform any
of its obligations under this Agreement.
Section 10. COVENANTS OF HEARTLAND. In addition to the covenants set
forth in Section 9 above:
(a) Between the date hereof and the Stage I Closing, Heartland shall:
(i) Retain and safeguard the CS Wireless Common Stock held by
it, and maintain such CS Wireless Common Stock free and clear of any
and all Encumbrances and shall not allow, permit or suffer to exist
any Encumbrance, sale, assignment, lease, waiver of rights or granting
of a proxy with respect to, voting agreement or trust affecting other
than the Stockholders' Agreement, or otherwise transfer or dispose of
the CS Wireless Common Stock held by Heartland.
(ii) Within three business days of its commencement of a case
under the Bankruptcy Code, if prior thereto the Stage I Closing has
not occurred, (a) file with the bankruptcy court a motion (together
with appropriate supporting papers) requesting the bankruptcy court to
enter, an order in form and substance reasonably acceptable to CAI and
CS Wireless (1) authorizing Heartland to assume this Agreement, (2)
approving the transactions contemplated herein, and (3) authorizing
Heartland to assume the BTA Lease Agreement, and (b) seek a hearing on
such motion to be held within 20 days of the date of the filing
thereof.
(b) Between the date hereof and the Stage II Closing, Heartland
shall:
(i) Use its reasonable efforts (A) to cause to be maintained in
full force and effect, and (B) to cause the holders to renew when
required to prevent the lapse of, all FCC-issued licenses, conditional
licenses and authorizations comprising any portion of the Heartland
FCC Assets or Heartland Leases.
(ii) Use reasonable efforts to perform each and every obligation
of the lessee under any and all excess channel capacity lease
agreements or MDS transmission capacity lease agreements comprising
any portion of the Heartland FCC Assets or Heartland Leases.
(iii) Use reasonable efforts to cause each of its lessors to
prosecute in good faith and diligently pursue each MDS application and
ITFS application for facilities subject to a lease agreement with
Heartland that comprise any portion of the Heartland FCC Assets or
Heartland Leases.
(iv) Operate the Heartland FCC Assets in the ordinary course of
business in accordance with past practices for such operation (except
where such conduct would conflict with any covenant or other
obligation of Heartland under this Agreement).
(v) Promptly notify CAI and CS Wireless in writing of any
unusual or material developments with respect to the business or
operations of any of the Heartland FCC Assets or Heartland Leases and
of any material changes in any of the information contained in
Heartland's representation and warranties contained in this Agreement.
(vi) Subsequent to its commencement of a case under the
Bankruptcy Code, seek bankruptcy court approval of, and use its best
efforts to obtain, an order in form and substance reasonably
acceptable to CAI and CS Wireless (1) authorizing the assumption of
this Agreement, (2) approving the transactions contemplated herein,
and (3) authorizing Heartland to assume the BTA Lease and Option
Agreement.
(c) Between the date hereof and the Stage II Closing, Heartland
shall not allow, permit or suffer to exist:
(i) The creation, assumption or permitting to exist of any
Encumbrance, other than the lien for taxes not yet due and payable, on
any of the Heartland FCC Assets or Heartland Leases.
(ii) The sale, assignment, lease, waiver of rights with respect
to, sublease or other transfer or disposal of any and all FCC-issued
licenses, conditional licenses and authorizations, or the lessee's
leasehold interest in any excess channel capacity lease agreements or
MDS transmission capacity lease agreements comprising any portion of
the Heartland FCC Assets or Heartland Leases.
(iii) Any material action, or material failure to act under
excess channel capacity lease agreements or MDS transmission capacity
lease agreements comprising any portion of the Heartland FCC Assets or
Heartland Leases, which would constitute a default or a potential
default thereunder (assuming that any requirements of notice or lapse
of time have occurred).
Section 11. COVENANTS OF CS WIRELESS. In addition to the covenants
set forth in Section 9 above:
(a) Between the date hereof and the Stage I Closing,
(i) CS Wireless shall retain and safeguard the CS Wireless Non-
FCC Assets and the CS Wireless FCC Assets held by it, and maintain
such CS Wireless Non-FCC Assets free and clear of all Encumbrances and
shall not allow, permit or suffer to exist any Encumbrance, sale,
assignment, lease, waiver of rights with respect to, or otherwise
transfer or dispose of the CS Wireless Non-FCC Assets and the CS
Wireless FCC Assets held by CS Wireless; and
(ii) Within three business days of its commencement of a case
under the Bankruptcy Code, if prior thereto the Stage I Closing has
not occurred, (a) file with the bankruptcy court a motion (together
with appropriate supporting papers) requesting the bankruptcy court to
enter, an order in form and substance reasonably acceptable to
Heartland and CAI (1) authorizing CS Wireless to assume this
Agreement, (2) approving the transactions contemplated herein, and (3)
authorizing CS Wireless to assume the BTA Lease Agreement, and (b)
seek a hearing on such motion to be held within 20 days of the date of
the filing thereof.
(b) Between the date hereof and the Stage II Closing, CS Wireless
shall:
(i) Use its reasonable efforts (A) to cause to be maintained in
full force and effect, and (B) to cause the holders to renew when
required to prevent the lapse of, all FCC-issued licenses, conditional
licenses and authorizations comprising any portion of the CS Wireless
FCC Assets or CS Leases.
(ii) Use reasonable efforts to perform each and every obligation
of the lessee under any and all excess channel capacity lease
agreements or MDS transmission capacity lease agreements comprising
any portion of the CS Wireless FCC Assets or CS Leases.
(iii) Use reasonable efforts to cause each of its lessors to
prosecute in good faith and diligently pursue each MDS application and
ITFS application for facilities subject to a lease agreement with CS
Wireless that comprise any portion of the CS Wireless FCC Assets or CS
Leases.
(iv) Operate the CS Wireless FCC Assets in the ordinary course
of business in accordance with past practices for such operation
(except where such conduct would conflict with any covenant or other
obligation of CS Wireless under this Agreement).
(v) Promptly notify Heartland and CAI in writing of any unusual
or material developments with respect to the business or operations of
any of the CS Wireless FCC Assets or CS Leases and of any material
changes in any of the information contained in CS Wireless'
representation and warranties contained in this Agreement.
(vi) Subsequent to its commencement of a case under the
Bankruptcy Code, seek bankruptcy court approval of, and use its best
efforts to obtain, an order in form and substance reasonably
acceptable to Heartland (1) authorizing the assumption of this
Agreement, (2) approving the transactions contemplated herein, and (3)
authorizing CS Wireless to assume the BTA Lease and Option Agreement.
(c) Between the date hereof and the Stage II Closing, CS Wireless
shall not allow, permit or suffer to exist:
(i) The creation, assumption or permitting to exist of any
Encumbrance, other than the lien for taxes not yet due and payable, on
any of the CS Wireless FCC Assets or CS Leases.
(ii) The sale, assignment, lease, waiver of rights with respect
to, sublease or other transfer or disposal of any and all FCC-issued
licenses, conditional licenses and authorizations, or the lessee's
leasehold interest in any excess channel capacity lease agreements or
MDS transmission capacity lease agreements comprising any portion of
the CS Wireless FCC Assets or CS Leases.
(iii) Any material action, or material failure to act under
excess channel capacity lease agreements or MDS transmission capacity
lease agreements comprising any portion of the CS Wireless FCC Assets
or CS Leases, which would constitute a default or a potential default
of the lessee thereunder (assuming that any requirements of notice or
lapse of time have occurred).
Section 12. RELEASES AND INDEMNIFICATION. As further consideration
for the transactions contemplated hereby, the parties agree as follows:
(a) At the Stage I Closing, without further action by the parties, CS
Wireless shall release and forever discharge Heartland, its subsidiaries,
affiliates, stockholders, officers, directors, agents, employees,
successors and assigns from any and all actions claims, liabilities,
damages, demands, responsibility and accountability of every nature
whatsoever ("Claims"), whether known or unknown, which CS Wireless ever
had, then has or may have for, upon or by reason of any matter, cause or
thing whatsoever against Heartland arising out of that certain
Administrative Services Agreement dated as of February 23, 1996 (the
"Services Agreement") by and between Heartland and CS Wireless, including,
without limitation, CS WIRELESS SYSTEMS, INC. V. HEARTLAND WIRELESS
COMMUNICATIONS, INC.; CAUSE NO. 98-CI-15104; 225{TH} DISTRICT COURT, BEXAR
COUNTY, TEXAS, from the beginning of the world to the Stage I Closing Date,
or which CS Wireless may from and after the Stage I Closing Date have
against Heartland by reason of any matter, act, omission, cause or event
arising solely out of the Services Agreement, which has occurred or which
has been done or suffered to be done before the Stage I Closing Date. CS
Wireless hereby agrees to withdraw, with prejudice, CS WIRELESS SYSTEMS,
INC. V. HEARTLAND WIRELESS COMMUNICATIONS, INC.; CAUSE NO. 98-CI-15104;
225{TH} DISTRICT COURT, BEXAR COUNTY, TEXAS on or before the Stage I
Closing.
(b) At the Stage I Closing, without further action by the parties,
Heartland shall release and forever discharge CS Wireless, its
subsidiaries, affiliates, stockholders, officers, directors, agents,
employees, successors and assigns from any and all Claims, whether known or
unknown, which Heartland ever had, then has or may have for, upon or by
reason of any matter, cause or thing whatsoever against CS Wireless arising
out of the Services Agreement and any Claim capable of being asserted in
connection therewith from the beginning of the world to the Stage I Closing
Date, or which Heartland may hereafter have against CS Wireless by reason
of any matter, act, omission, cause or event arising solely out of the
Services Agreement, which has occurred or which has been done or suffered
to be done before the Stage I Closing Date.
(c) At the Stage I Closing, without further action by the parties,
each of the parties hereto shall release and forever discharges the other
parties hereto, their respective subsidiaries, affiliates, stockholders,
officers, directors, agents, employees, successors and assigns from any and
all Claims, whether known or unknown, which each such party ever had, then
has or may have for, upon or by reason of any matter, cause or thing
whatsoever against the other parties hereto arising solely out of the
Participation Agreement or the Stockholders' Agreement from the beginning
of the world to the Stage I Closing Date, or which each such party may
hereafter have against the other parties hereto by reason of any matter,
act, omission, cause or event arising solely out of the Participation
Agreement or the Stockholders' Agreement, which has occurred or which has
been done or suffered to be done before the date hereof.
(d) CS Wireless acknowledges and ratifies the terms and conditions of
that certain Separation Agreement dated as of October 19, 1998 (the
"Separation Agreement") by and between Frank H. Hosea ("Hosea") and CS
Wireless. CS Wireless acknowledges that (i) Hosea has been employed by
Heartland as Senior Vice President - Video Operations and (ii) Hosea's
employment by Heartland does not violate or breach the Non-Compete
Restrictions as defined and set forth in Section 5 of the Separation
Agreement or any non-disclosure covenants contained in Paragraph 9(a) of
the Employment Agreement dated as of April 2, 1997 or the Non-Disclosure
Agreement dated as of April 2, 1997 between Hosea and CS Wireless.
Notwithstanding anything to the contrary set forth in this Section 12(d),
CS Wireless' acknowledgment set forth herein shall not modify or constitute
a waiver of CS Wireless' rights to enforce Hosea's non-disclosure covenants
relating to any person or entity other than Heartland or its existing
wholly-owned subsidiaries set forth in Section 2 of the Separation
Agreement or Hosea's obligations relating to any person or entity other
than Heartland or its existing wholly-owned subsidiaries under the
Employment Agreement and Non-Disclosure Agreement referred to above CS
Wireless expressly agrees to assume the Separation Agreement described
above in any bankruptcy proceeding filed by or against CS Wireless.
(e) Notwithstanding anything to the contrary, CAI shall indemnify and
hold Heartland harmless from any and all Claims arising from or in
connection with CAI's purchase from Heartland of the CS Wireless Common
Stock at the Stage I Closing pursuant to Section 2 of this Agreement,
including any such Claims arising from, in connection with, or related to
any subsequent disposition or transfer of the CS Wireless Common Stock by
CAI; PROVIDED, HOWEVER, any liability of CAI to Heartland arising by
operation of this Section 12(e) arising from, in connection with, or
related to a subsequent disposition or transfer of the CS Wireless Common
Stock by CAI to CS Wireless shall be deemed fully satisfied by CAI with the
return to CS Wireless of any and all consideration received by CAI from CS
Wireless for such disposition or transfer, and thereafter, Heartland shall
no longer have any claim for indemnification against CAI under this Section
12(e).
(f) In the event CS Wireless commences a bankruptcy proceeding, CAI
shall use its best efforts in its capacity as a stockholder of CS Wireless,
and shall cause the CAI Directors and CAI Independent Directors (each as
defined in the Stockholders' Agreement) to use their best efforts,
recognizing and taking into consideration the various fiduciary duties owed
by such directors to various CS Wireless constituencies, to cause (i) CS
Wireless to fulfill its obligations to the Heartland Directors, the
Heartland Independent Directors and Hosea, and (ii) CS Wireless to treat
its indemnity obligations to the Heartland Directors, the Heartland
Independent Directors and Hosea no less favorably than CS Wireless treats
its indemnity obligations to any other person who has served, is serving or
may hereafter serve as a member of the board of directors of CS Wireless.
Section 13. TERMINATION.
(a) This Agreement may be terminated at any time prior to the Stage I
Closing by mutual written consent of the parties hereto.
(b) This Agreement shall terminate (without further action or notice
(in writing or otherwise) by any of the parties hereto), unless CAI and
Heartland shall have extended in writing date or the period set forth in
this Section 13 (or any of the extended dates or periods), if the Stage I
Closing shall not have occurred by December 4, 1998.
(c) In the event of a termination of this Agreement in accordance
with this Section 13, this Agreement shall forthwith become void and of no
further force and effect, and there shall be no liability hereunder on the
part of any party or its affiliates, directors, officers, shareholders,
agents or other representatives; PROVIDED, HOWEVER, that Sections 2(b), 13,
15 and 16, inclusive, shall survive any termination of this Agreement, and
(ii) nothing herein shall relieve any party from liability for any breach
of this Agreement; PROVIDED FURTHER, HOWEVER, that if the Stage I Closing
shall have occurred prior to the termination of this Agreement, Section 12
shall survive and nothing contained herein shall limit, abridge or
otherwise affect, or relieve any party from, the continuing rights and
obligations arising out of such Stage I Closing.
Section 14. FURTHER ASSURANCES. The parties hereto agree to take all
actions necessary or advisable, in the opinion of the party taking such
action, to effect the terms of the provisions hereof.
Section 15. NO WAIVER. Failure by any party hereto to insist on
strict performance or observance of any provision of this Agreement or to
exercise any right or remedy shall not be construed as a waiver of any
right or remedy with respect to any existing or subsequent breach or
default.
Section 16. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
attached hereto and the BTA Lease and Option Agreement, as amended,
constitute the entire agreement among the parties with respect to the
subject matter hereof and supersedes any and all previous agreements,
representations and understandings among the parties hereto with respect to
such matters whether oral or in writing.
(b) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the law of the State of Delaware, without regard to the
principles of conflicts of laws thereof.
(c) SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validly or enforceability
of any other provision of this Agreement, each of which shall remain in
full force and effect.
(d) NO THIRD PARTY BENEFICIARIES. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Except for the persons not parties to
this Agreement who are being released or indemnified pursuant to Section
12, nothing in this Agreement shall create or be deemed to create any third
party beneficiary rights in any person not party to this Agreement,
including, without limitation, (i) any receiver appointed for any party
hereto, or (ii) any trustee, responsible officer or other person or entity
appointed to manage business or property of any party hereto in such
party's case under any chapter of the Bankruptcy Code.
(e) AMENDMENTS. This Agreement may be amended, supplemented or
modified, and any provision hereof may be waived, only pursuant to a
written instrument making specific reference to this Agreement signed by
each of the parties hereto.
(f) EXPENSES. Each of the parties hereto shall be solely responsible
for its fees and expenses incurred in connection with the negotiation,
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
(g) COUNTERPARTS. This Agreement may be executed by facsimile and in
any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
(h) PUBLIC ANNOUNCEMENTS. The parties hereto will agree upon the
timing and content of an initial press release to be issued describing the
transactions contemplated by this Agreement, and will not make any public
announcement thereof prior to reaching such agreement unless required to do
so by applicable law or regulation.
(i) NAMES, CAPTIONS, ETC. The name assigned this Agreement and the
section captions used herein are for convenience or reference only and
shall not affect the interpretation or construction thereof.
(j) NO STRICT CONSTRUCTION. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event
an ambiguity or question of intent or interpretation arises, this Agreement
shall be construed as if drafted jointly by the parties hereto, and no
presumption or burden of proof shall arise favoring or disfavoring any
party by virtue of authorship of any of the provisions of this Agreement.
(k) ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any provision of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce the terms and provisions hereof in any state or
federal court in the State of Delaware, this being in addition to any other
remedy to which they are entitled at law or in equity.
[The balance of this page intentionally left blank.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
through their duly authorized representatives on the day and year first
above written.
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By:___________________________________
Name:
Title:
CS WIRELESS SYSTEMS, INC.
By:___________________________________
Name:
Title:
CAI WIRELESS SYSTEMS, INC.
By:___________________________________
Name:
Title:
EXHIBIT 99.1
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC.
ITEMS 8 AND 14(A)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C>
PAGE
CS Wireless Systems, Inc. and Subsidiaries:
Independent Auditors' Report F-2
Consolidated Balance Sheet as of December 31, 1998 and 1997 F-3
Consolidated Statement of Operations for the years ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statement of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996 F-6
Consolidated Statement of Cash Flows for the years ended December 31, 1998,
1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CS Wireless Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CS Wireless
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits{ }in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CS
Wireless Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
As discussed in note 1(f) to the consolidated financial statements, the
Company changed its method of accounting for the costs of start-up activities
in 1998 to adopt the provisions of Statement of Accounting Position 98-5,
"Reporting on the Costs of Start-up Activities."
KPMG LLP
Dallas, Texas
April 12, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(dollars in thousands, except share data)
<S> <C> <C> <C> <C>
ASSETS 1998 1997
----------- --------
Current assets:
Cash and cash equivalents $ 41,839 74,564
Restricted cash (note 4) - 5,030
Subscriber receivables, less allowance for doubtful accounts
of $339 and $257 in 1998 and 1997, respectively 1,542 1,026
Prepaid expenses and other 638 939
-------- -------
Total current assets 44,019 81,559
Property and equipment, net (note 5) 43,645 50,519
License and leased license investment, net of accumulated
amortization of $25,481 and $16,159 in 1998 and 1997,
respectively (notes 2 and 3) 157,269 170,689
Goodwill, net of accumulated amortization of $7,707 in 1997
(notes 2 and 3) - 48,243
Assets held for sale (note 3) 2,102 -
Investments in and loans to equity affiliates 3,884 8,503
Debt issuance costs, net of accumulated amortization of
$2,101 and $1,286 in 1998 and 1997, respectively 7,444 8,260
Other assets, net 454 2,930
-------- --------
$ 258,817 370,703
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1998 and 1997
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
---------- ----------
Current liabilities:
Accounts payable and accrued expenses, including payable
to affiliates of $282 in 1997 (note 6) $ 5,490 8,652
Current portion of long-term debt (note 7) 199 217
Current portion of BTA auction payable to affiliates including
accrued interest payable (note 7) 354 1,122
Deferred revenue 1,237 628
Other current liabilities - 895
Total current liabilities 7,280 11,514
Long-term debt, excluding current portion (note 7) 316,720 283,686
BTA auction payable to affiliates, excluding current portion
(note 7) 3,505 3,274
--------- --------
Total liabilities 327,505 298,474
Stockholders' equity (deficit) (notes 3 and 9):
Preferred stock, $.01 par value; authorized 5,000,000 shares
in 1997; none in 1998 - -
Common stock, $.001 par value; authorized 40,000,000
shares in 1997, 15,000,000 in 1998; issued and
outstanding 10,702,609 shares in 1998 and 1997 11 11
Treasury stock, at cost; 3,838,138 and 2,103 shares
in 1998 and 1997, respectively (1,574) (40)
Additional paid-in capital 154,557 154,557
Accumulated deficit (221,682) (82,299)
--------- --------
Total stockholders' equity (deficit) (68,688) 72,229
Commitments and contingencies (notes 8 and 13)
---------- --------
$ 258,817 370,703
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated statements of Operations
Years ended December 31, 1998, 1997 and 1996
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
1998 1997 1996
--------- ------- -------
Revenues $ 26,259 26,920 22,738
Operating expenses:
Systems operations 16,409 14,976 13,258
Selling, general and administrative 18,984 15,849 13,934
Depreciation and amortization 29,222 26,858 20,345
Impairment of long-lived assets (note 2) 63,907 - -
-------- -------- -------
Total operating expenses 128,522 57,683 47,537
-------- -------- -------
Operating loss (102,263) (30,763) (24,799)
-------- -------- -------
Other income (expense):
Interest expense (34,679) (31,995) (24,959)
Interest income 3,399 5,469 6,600
Equity in net losses of affiliates (note 4) (2,553) (1,349) -
Other (1,419) 644 -
-------- ------- -------
Other income (expense), net (35,252) (27,231) (18,359)
-------- ------- -------
Loss before income taxes and
cumulative effect of change in
accounting principle (137,515) (57,994) (43,158)
Income tax benefit (note 10) - 5,429 14,631
--------- -------- -------
Loss before cumulative effect of
change in accounting principle (137,515) (52,565) (28,527)
Cumulative effect of change in accounting
principle (1,868) - -
---------- -------- -------
Net loss $ (139,383) (52,565) (28,527)
========== ======== =======
Basic and diluted loss per common share
before cumulative effect of change in
accounting principle $ (13.23) (4.94) (3.06)
========= ========= =========
Basic and diluted loss per common share $ (13.41) (4.94) (3.06)
========= ========= =========
Weighted average basic and dilutive
shares outstanding $ 10,395,558 10,639,190 9,170,169
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998, 1997 and 1996
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL
COMMON STOCK PAID-IN DIVISION TREASURY ACCUMULATED
SHARES AMOUNT CAPITAL EQUITY STOCK DEFICIT TOTAL
------ ------ ---------- -------- -------- ----------- -------
Balance,
December 31,
1995 1,000 $ 1 $ 15,950 $ 45,572 $ - $ (1,207) $ 60,316
Contribution to
Company - true-
up adjustment
(note 3) 9,999,000 9 131,503 (45,572) - - 85,940
Issuance of
common stock
pursuant to
Unit offering 110,000 - 800 - - - 800
Issuance of
common stock
in acquistion 335,408 - 6,305 - - - 6,305
Net loss - - - - - (28,527) (28,527)
--------- ------ ------- -------- ------- ---------- -------
Balance,
December 31,
1996 10,445,408 10 154,558 - - (29,734) 124,834
Contribution to
Company -
true-up
adjustment
(note 3) 257,201 1 (1) - - - -
Treasury stock
purchases
(note 3) - - - - (40) - (40)
Net loss - - - - - (52,565) (52,565)
---------- ------ ------- ------- ------- -------- -------
Balance,
December 31,
1997 10,702,609 11 154,557 - (40) (82,299) 72,229
Treasury stock
purchases
(note 3) - - - - (1,534) - (1,534)
Net loss - - - - - (139,383) (139,383)
---------- ------ ------- ------- ------- -------- -------
Balance,
December 31,
1998 10,702,609 $ 11 $ 154,557 $ - $ (1,574) $ (221,682) $ (68,688)
========== ====== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net loss $ (139,383) (52,565) (28,527)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes - (5,429) (14,631)
Depreciation and amortization 29,222 26,858 20,345
Accretion on discount notes and amortization of debt
issuance costs 33,934 30,395 23,483
Non-cash interest expense on other long term debt 770 1,524 1,275
Impairment of long-lived assets (note 2) 63,907 - -
Discount and provision for long-term notes receivable (note 4) 1,770 - -
Write-off of start-up and organizational costs (note 1 (f)) 1,868 - -
Gain on sale of assets, net - (644) -
Equity in losses of affiliates 2,553 1,349 -
Changes in assets and liabilities, net of effects of contributions,
acquisitions and assets held for sale:
Subscriber receivables, net (516) 63 (115)
Prepaid expenses and other 301 41 (345)
Accounts payable, accrued expenses and other liabilities (2,485) 1,545 928
-------- ------- ------
Net cash provided by (used in) operating activities (8,059) 3,137 2,413
-------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (18,930) (22,685) (13,243)
Additions to intangible assets (4,853) (4,329) (3,816)
Subscriber acquisition, net of property and equipment - (448) -
Investment in assets held for sale (423) (943) (8,766)
Proceeds from sale of assets - 16,350 -
Issuance of notes receivable - - (1,510)
Utilization of (investment in) in restricted cash 5,030 (5,030) -
Investment in equity affiliates (1,257) (6,555) -
Other (895) (540) 81
-------- ------- -------
Net cash used in investing activities (21,328) (24,180) (27,254)
-------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt - 500 -
Payments of capital lease obligations (139) (95) (198)
Payments on BTA auction payable and other (1,665) (493) (20,125)
Payment in settlement of USA acquisition - (2,103) -
Payments on Heartland Short-Term Note - - (25,000)
Payments on Heartland Long-Term Note - (15,274) -
Purchase of shares into treasury (note 3(c)) (1,534) - -
Proceeds from Unit Offering - - 229,484
Debt issuance costs - - (9,793)
Cash distributed pursuant to Contributions (note 3) - - (36,639)
-------- ------- -------
Net cash provided by (used in) financing activities (3,338) (17,465) 137,729
-------- ------- -------
Increase (decrease) in cash and cash equivalents (32,725) (38,508) 112,888
Cash and cash equivalents at beginning of year 74,564 113,072 184
-------- ------- -------
Cash and cash equivalents at end of year $ 41,839 74,564 113,072
======== ======= =======
Cash paid for interest $ 446 263 114
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statement
F-7
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 1998, 1997 and 1996
(tables in thousands, except per share data)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
CS Wireless Systems, Inc. and subsidiaries (the "Company" or "CS
Wireless") develop, own and operate a network of wireless cable
television systems providing subscription television and high-speed
Internet access services. The Company has a portfolio of wireless
cable channel rights in various markets in the United States. The
Company currently has systems in operation in eleven markets, and it
owns or holds lease rights in several other markets.
Wireless cable television is a relatively new industry within the
highly competitive subscription television industry. The Company's
principal subscription television competitors in each of its markets
are traditional hard-wire cable companies, direct broadcast satellite,
private cable companies and other alternate methods of distributing
and receiving television transmissions. Hard-wire cable companies
generally are well-established and known to potential customers and
have significantly greater financial and other resources than the
Company. As the telecommunications industry continues to evolve, the
Company may face additional competition from new providers of
entertainment and data services. In addition, until the Company can
increase its channels offered through the deployment of digital
compression technology, the Company's existing competitors generally
have more channels to offer subscribers. There can be no assurance
that the Company will be able to compete successfully with existing or
potential competitors in the subscription television industry.
In addition to wireless cable television services, the Company intends
to expand the use of wireless channel rights spectrum to include
telecommunications services. These new services are expected to
include two-way data transmission services and telephony services,
possibly through the participation of a strategic partner.
The Company has incurred significant operating losses since inception
and has negative stockholders' equity at December 31, 1998. Losses
are expected for at least the next year as the Company continues to
develop its wireless communications businesses. The Company has
approximately $41,800,000 in cash and cash equivalents at December 31,
1998, and, based on its current operating plan, believes that it has
sufficient cash to fund its anticipated capital expenditures and
operating losses through at least the first quarter of 2000. However,
the growth of the Company's wireless communications businesses may
require substantial continuing investment to finance capital
expenditures related to the acquisition of channel rights and
infrastructure development of digital video programming, two-way
frequency utilization and telephony systems. Additionally,
significant debt service begins in September 2001. Without additional
funding through debt or equity offerings, joint ventures, the sale or
exchange of its wireless cable channel rights or the participation of
a strategic partner, or the restructuring of its
<PAGE>
debt agreements, the Company may not be able to meet its future debt
and interest payments. There can be no assurance that the Company
will achieve positive cash flow from operations, that the Company will
consummate the sale of any wireless cable channel rights or that
sufficient debt or equity financing will be available to the Company.
In addition, subject to restrictions under its outstanding debt, the
Company may pursue other opportunities to acquire additional wireless
cable channel rights and businesses that may utilize the capital
currently expected to be available for its current markets.
The amount and timing of the Company's future capital requirements
will depend upon a number of factors, including programming, equipment
costs and marketing costs, staffing levels, subscriber growth,
competitive conditions, and the presence of a strategic partner, many
of which are beyond the control of the Company. Failure to obtain any
required additional financing could materially affect the growth, cash
flow or operating results of the Company.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying consolidated financial information for the period
from January 1, 1996 through February 23, 1996 reflects the combined
financial position and results of operations for the Company's
wireless cable system serving the Cleveland, Ohio market, which is
comprised of the accounts of the Company and certain assets of
Atlantic Microsystems, Inc. For the period subsequent to February
23, 1996, the Company's consolidated financial statements include the
results of operations of the entities and assets contributed to the
Company on February 23, 1996 (see note 3).
On September 29, 1995, ACS Enterprises, Inc. (including ACS Ohio,
Inc., the predecessor of the Company and a wholly-owned subsidiary of
ACS Enterprises, Inc.) was acquired by CAI Wireless Systems, Inc.
("CAI") in a business combination accounted for as a purchase.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including all direct labor
costs of new customer installations. Depreciation and amortization of
property and equipment are computed using the straight-line method
over the estimated useful lives of the assets. Repairs and
maintenance costs are charged to expense when incurred; renewals and
betterments are capitalized.
(d) License and Leased License Investment
License and leased license investment includes costs incurred to
acquire and/or develop wireless cable channel rights. Costs incurred
to acquire channel rights issued by the Federal Communications
Commission ("FCC") are deferred and amortized ratably over estimated
useful lives of 15 years beginning with inception of service in each
respective market. As of December 31, 1998 and 1997, $17,900,000 and
$54,800,000, respectively, of the license and leased license
investment was not yet subject to amortization.
(E) GOODWILL
Goodwill represents excess purchase price of acquisitions over
identifiable net tangible and intangible assets. Goodwill is
amortized ratably over an estimated useful life of 15 years beginning
with the acquisition of the market.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured
based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved (note 2).
(F) OTHER ASSETS
Other assets includes a non-compete agreement with a former officer
and certain other intangible assets, including organizational costs at
December 31, 1997, totaling approximately $469,000 and $2,085,000 at
December 31, 1998 and 1997, respectively, net of accumulated
amortization of approximately $240,000 and $486,000, respectively.
These assets are being amortized over the respective lives of the
underlying agreements.
The Company adopted the provisions of Statement of Position 98-5 ("SOP
98-5"), REPORTING ON THE COSTS OF START-UP ACTIVITIES, effective
January 1, 1998. This pronouncement requires that costs of start-up
activities, including organizational costs, should be expensed as
incurred. As a result of adopting SOP 98-5, the Company recorded a
charge of $1,868,000 as a cumulative effect of the change in
accounting principle as of January 1, 1998.
(g) Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell or
otherwise dispose of (note 2).
(H) INCOME TAXES
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable
earnings. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the total of tax payable for the
period and the change in deferred tax assets and liabilities during
the period.
(I) REVENUE RECOGNITION
Revenues from subscribers are recognized in the period of service.
Amounts paid in advance are recorded as deferred revenue.
(J) SYSTEMS OPERATIONS
Systems operations expenses consist principally of programming fees,
channel lease costs, tower rental and other costs for providing
service.
The Company is party to several contract arrangements with related
parties to provide programming, installation and other services (see
note 11).
(K) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers
temporary cash investments purchased with original maturities of three
months or less and which are available for use in operations to be
cash equivalents. The Company had cash equivalents of $41,520,000 and
$75,352,000 at December 31, 1998 and 1997, respectively.
(l) Investments in Affiliates
Investments in affiliates are accounted for under the equity method as
the Company's investment in each of three companies represents greater
than 20% interest and the Company has the ability to exercise
significant influence over each of the entities. Under this method,
the investment originally recorded at cost is adjusted to recognize
the Company's share of net earnings or losses of the affiliate as they
occur. The Company's share of net earnings or losses of affiliates
includes the amortization of purchase adjustments.
(m) Net Loss Per Common Share
The Company adopted SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"),
in 1997. Accordingly, the Company has presented basic loss per share,
computed on the basis of the weighted average number of common shares
outstanding during the year, and diluted loss per share, computed on
the basis of the weighted average number of common shares and all
dilutive potential common shares outstanding during the year.
The potentially dilutive effect of the Company's stock options has not
been considered in the computation of diluted net loss per common
share since their effect would be antidilutive.
(N) ACCOUNTING FOR STOCK OPTIONS
On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS No. 123"), which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995
and future years as if the fair value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma
disclosures of SFAS No. 123. Under APB Opinion No. 25, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
(O) COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," in
the first quarter of 1998, which required companies to disclose
comprehensive income separately from net income. Comprehensive income
is defined as the change in equity during a period from transactions
and other events and circumstances from non-ownership sources. It
includes all changes in equity during a period, except those resulting
from investments by owners and distributions to owners. The adoption
of this statement had no effect on the Company at December 31, 1998,
because the Company has no elements of other comprehensive income.
Accordingly, compensation income and net income are the same amount for
each period presented.
(P) SEGMENT REPORTING
In January 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS No. 131").
SFAS No. 131 requires that public companies report operating segments
based upon how management allocates resources and assesses
performance. Based on the criteria outlined in SFAS No. 131, the
Company is comprised of a single reportable segment - distribution of
wireless cable television subscription services. No additional
disclosure is required by the Company to conform to the requirements
of SFAS No. 131.
(q) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(R) RECLASSIFICATIONS
Certain reclassifications have been made to prior year consolidated
financial statements to conform to the current year presentation.
(2) IMPAIRMENT OF LONG-LIVED ASSETS
During the second and third quarters of 1998, CAI and a wholly-owned
subsidiary announced their intention to file a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code and
Heartland Wireless Communications, Inc. ("Heartland") announced
its intent not to pay interest on certain of its bonds. As a
result of these negative industry events, combined with continuing
net losses, the Company reassessed its business strategy and evaluated its
long-lived assets for impairment based on these bankruptcy petitions
and determined that cash flows from operations would not be adequate
to fund the capital outlay required to build out non-operating markets
while continuing the build out of the digital market in Dallas,
Texas. Thus, in accordance with SFAS No. 121, the Company began the
process of estimating the fair values of the long-lived assets.
Although this process was not complete prior to filing the
June 30, 1998 Quarterly Report on Form 10-Q, the Company recorded a non-
cash impairment charge of $46,378,000 to write off the carrying value of
the Company's goodwill based on preliminary estimates of fair value.
During the third quarter, the Company engaged a third party to assist in
completing the recoverability analysis in conjunction with a Company-wide
valuation analysis. This process was completed during the fourth quarter
of 1998. In assessing the fair value of its long-lived assets, the
Company and the third party considered relevant cash flows, estimated
future operating results, trends, management's strategic plans,
competition and other available information including the fair value of
wireless channel rights owned and leased. Based on the results of this
internal analysis and the third-party valuation, the Company recorded
additional impairment charges to certain operating and non-operating
markets' long-lived assets in the fourth quarter of 1998. This impairment
charge, combined with the second quarter charge, totaled $63,907,000, as
follows:
<TABLE>
<CAPTION>
DESCRIPTION OF WRITE-DOWNS
<S> <C> <C>
Property and equipment $ 9,400
License and leased license investment 8,129
Goodwill 46,378
---------
$ 63,907
=========
</TABLE>
The Company's estimates of future gross revenues and operating cash flows,
the remaining estimated lives of long-lived assets, or both, could be
reduced in the future due to changes in, among other things, technology,
government regulation, available financing, interference issues or
competition. As result, the carrying amounts of long-lived assets could
be reduced by additional amounts which would be material to the
Company's financial position and results of operations.
(3) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS
(a) Contributions to Company
On February 23, 1996, CAI and Heartland contributed to the Company
(the "Contributions") certain wireless cable television assets
comprising various markets in the United States. In connection with
the Contributions, CAI and Heartland received approximately 5.4
million and 3.6 million shares, respectively, of the Company's newly-
issued common stock. In addition, CAI received approximately $750,000
in cash and Heartland received approximately $30.9 million in cash, a
nine-month note for $25 million (the "Heartland Short-Term Note") and
a 10-year note for $15 million (the "Heartland Long-Term Note"). The
Heartland Short-Term Note was repaid on March 1, 1996 with a portion
of the net proceeds from the Unit Offering (see note 7).
Additionally, in connection with the Contributions, MMDS Holdings II,
Inc., an affiliate of Bell Atlantic, and NYNEX MMDS Holding Company,
an affiliate of NYNEX, each received 500,000 shares of common stock of
the Company for certain non-cash consideration.
The consummation of the Contributions has been accounted for at CAI's
and Heartland's historical cost basis, reduced by the amount of cash
and notes distributed to CAI and Heartland in connection with the
Contributions. A substantial portion of the net assets contributed by
Heartland were purchased by Heartland on February 23, 1996.
Accordingly, Heartland's cost basis with respect to such net assets
was determined based on Heartland's allocation of the purchase price
to the net assets acquired and liabilities assumed. On November 8,
1996, the Company distributed an additional $5 million in cash to
Heartland as part of the equity true-up per the provisions of the
agreement governing the contributions. Effective March 31, 1997, an
additional 257,201 shares of common stock of the Company were issued
to Heartland in satisfaction of certain post-closing adjustments. The
net assets contributed to the Company consist primarily of plant and
equipment and various wireless cable channel rights. The following is
a summary of the net assets contributed to the Company on February 23,
1996 (in thousands):
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Working capital deficit $ (141)
Plant and equipment, net 25,755
License and leased license investment and goodwill 144,340
Deferred income taxes (6,982)
Other liabilities (393)
---------
162,579
Cash and notes distributed to CAI and Heartland 76,639
---------
Net assets contributed $ 85,940
=========
</TABLE>
(B) ACQUISITIONS
On October 11, 1996, the Company acquired all of the issued and
outstanding common stock ("USA Common Stock") of USA Wireless
Cable, Inc. ("USA") in a transaction (the "USA Wireless
Acquisition") accounted for under the purchase method. USA
provided wireless cable service in certain Midwest markets,
including but not limited to the Effingham and Wellsville, Kansas;
Radcliffe, Iowa; Scottsbluff, Nebraska; Kalispell, Montana; and
Rochester, Minnesota markets (the "USA Markets"). At the effective
time of the USA Wireless Acquisition, the outstanding shares of USA
Common Stock were converted into rights to receive an aggregate
$17,635,000 of which approximately $6,305,000 was paid in the form
of CS Wireless common stock and approximately $11,330,000 of
indebtedness and payables assumed by the Company. In connection
with this acquisition, the Company extended two notes receivable to
affiliates of USA. A note receivable for $1,260,000 with an
interest rate of 12% was settled in February 1997, and a note
receivable for $250,000 with an interest rate of 12% was July 1,
1998. However, the affiliates of USA defaulted on this note and
the Company wrote-off the balance as uncollectible during the year
ended December 31, 1998.
On July 17, 1996, the Company acquired from Heartland (i) leases
and licenses for wireless cable channel rights in Adairsville,
Powers Crossroads and Rutledge, Georgia (the "Atlanta (suburbs)
markets") and (ii) leases for four tower sites. The purchase price
was $7.2 million in cash.
The acquisitions discussed above were accounted for as purchases.
Accordingly, the accompanying consolidated financial statements
include the results of operations of the acquired entities from the
dates of acquisition. A summary of the net assets acquired
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Working capital deficit $ (1,155)
Property and equipment 1,354
Assets held for sale 11,800
Intangible assets 13,959
Deferred tax liability (2,333)
Notes payable assumed (10,120)
---------
Total purchase price $ 13,505
=========
</TABLE>
(C) DISPOSITION AND EXCHANGE
On December 2, 1998, the Company, CAI and Heartland entered into a
Master Agreement providing for, among other things, the termination
of Heartland's rights in, and claims against, the Company. As part
of the Master Agreement, in December 1998, CAI purchased from
Heartland Heartland's ownership in the Company, or 3,836,035 shares
of CS Wireless common stock, for $1,534,000. The Company
subsequently purchased those shares from for the same price. At
December 31, 1998, these shares are recorded as treasury stock.
Additionally, the Company agreed to lease certain channel rights
and sell the net operating assets of its Radcliffe, Iowa market to
Heartland primarily in exchange for the forgiveness by Heartland of
the outstanding balance owed by the Company of $2,335,000 under the
Heartland Long-Term Note (see note 7) and additional cash payments
by the Company to Heartland of $466,000. In December 1998, under
the terms of the Master Agreement, the Company made a deposit of
$366,000 to Heartland in anticipation of the exchange. This
deposit, along with the carrying value of the net assets of the
Radcliffe, Iowa market, are classified as assets held for sale at
December 31, 1998 in the accompanying consolidated balance sheet.
On September 3, 1997, pursuant to an agreement dated as of November
6, 1996, the Company consummated an exchange with Peoples Choice TV
Corp. of wireless cable channel rights and related assets in Salt
Lake City, Utah for wireless cable channel rights and related
assets in Kansas City, Missouri. This transaction was accounted
for as a non-monetary exchange and, accordingly, the recorded
amounts of the assets relinquished were allocated to the assets
acquired. In connection with this transaction, the Company
exchanged the rights to the BTA license in Salt Lake City with
related indebtedness of approximately $330,000 for the rights to a
BTA license in Kansas City with related indebtedness of
approximately $216,000.
On May 22, 1997 the Company sold to BellSouth Corporation, pursuant
to the July 25, 1996 purchase agreement, (i) certain leases and
licenses for wireless cable channel rights in Adairsville, Power
Crossroads and Rutledge, Georgia (Atlanta Suburbs markets) and
leases for four tower sites; (ii) the BTA license relating to
Atlanta, Georgia and (iii) certain other assets and reimbursable
expenses for approximately $16.4 million, resulting in a gain of
approximately $0.7 million.
(4) INVESTMENTS IN AND LOANS TO AFFILIATES
TelQuest Satellite Services LLC
ON AUGUST 4, 1997 THE COMPANY ACQUIRED A 25% OWNERSHIP INTEREST IN
TELQUEST SATELLITE SERVICES LLC ("TELQUEST"), FOR AN INITIAL
CONTRIBUTION OF $2.5 MILLION IN CASH (PAYABLE IN QUARTERLY INSTALLMENTS
BEGINNING AUGUST 1997) AND, $2.5 MILLION OF EQUIPMENT LEASED TO
TELQUEST UNDER A BARGAIN LEASE. THE COMPANY MADE QUARTERLY PAYMENTS OF
APPROXIMATELY $1,394,000 DURING 1997. AS PART OF THE CONTRIBUTIONS, THE
COMPANY CONVERTED A NOTE RECEIVABLE FROM TELQUEST ENTERED INTO DURING
MARCH 1997 IN THE AMOUNT OF $200,000 PRINCIPAL INTO AN INVESTMENT IN
TELQUEST OF $211,000. DURING 1998, THE COMPANY MADE PAYMENTS OF
$895,000 WHICH FULFILLED THE CASH CONTRIBUTION REQUIREMENT OF
$2,500,000. TELQUEST WAS FORMED TO PROVIDE DIGITAL VIDEO PROGRAMMING
SIGNALS THROUGH ITS HEADEND IN THE SKY SATELLITE SERVICE. THE COMPANY
ENTERED INTO A TEN-YEAR AFFILIATION AGREEMENT WITH TELQUEST THROUGH
WHICH THE COMPANY RECEIVED TELQUEST'S HEADEND IN THE SKY SERVICE AS
WELL AS OTHER SERVICES OFFERED BY TELQUEST. TELQUEST SATELLITE
SERVICES LLC'S OTHER MEMBERS ARE TELQUEST COMMUNICATIONS, INC. AND CAI.
BOTH CAI AND TELQUEST COMMUNICATIONS, INC. ARE AFFILIATED ENTITIES.
CAI ACQUIRED A 25% OWNERSHIP IN TELQUEST FOR THE SAME CONSIDERATION
GIVEN BY CS WIRELESS.
IN JULY 1998, THE COMPANY PURCHASED THE LEASEHOLD RIGHTS OF TELQUEST IN
CERTAIN HEADEND EQUIPMENT OWNED BY CAI FOR $1,900,000 AS PART OF A
CONTINGENCY PLAN TO ENSURE UNINTERRUPTED PROGRAMMING SERVICE. IN
OCTOBER 1998, THE COMPANY COMMENCED THE RELOCATION OF CERTAIN OF THE
LEASED HEADEND EQUIPMENT FROM THE TELQUEST FACILITIES AS TELQUEST
CEASED ITS HEADEND IN THE SKY SERVICE. ACCORDINGLY, THE COMPANY HAS
CLASSIFIED THE CARRYING VALUE OF THE PREVIOUSLY LEASED EQUIPMENT OF
$2,125,000 AND THE EQUIPMENT ACQUIRED THROUGH THE $1,900,000 LEASE
PAYMENT AS PROPERTY AND EQUIPMENT AT DECEMBER 31, 1998. SUCH AMOUNTS
WILL BE DEPRECIATED OVER THE ESTIMATED REMAINING USEFUL LIVES OF THE
RELATED EQUIPMENT.
DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY RECORDED
EQUITY IN LOSSES OF $1,719,000 AND $1,159,000, RESPECTIVELY, RELATED TO
ITS INVESTMENT IN TELQUEST. IN 1998 AND 1997, THESE LOSSES WERE
COMPRISED OF: (I) THE COMPANY'S EQUITY IN LOSSES OF TELQUEST OF
$146,000 AND $1,107,000; (II) AMORTIZATION OF THE COST IN EXCESS OF THE
COMPANY'S BASIS IN THE UNDERLYING ASSETS OF TELQUEST OF $1,198,000 AND
$52,000, RESPECTIVELY; AND (III) AMORTIZATION OF $375,000 AND $0,
RESPECTIVELY, RELATED TO THE COMPANY'S $2,500,000 INVESTMENT IN THE
LEASEHOLD RIGHTS IN CERTAIN HEADEND EQUIPMENT. THE CARRYING VALUE OF
THE COMPANY'S INVESTMENT IN AND ADVANCES TO TELQUEST WAS $0 AND
$3,842,000 AT DECEMBER 31, 1998 AND 1997, RESPECTIVELY.
Mexico Investments
ON SEPTEMBER 29, 1997, THE COMPANY ACQUIRED 39% OF THE VOTING COMMON
STOCK OF TELEVISION INTERACTIVA DEL NORTE, S.A. DE C.V. ("TELINOR")
FROM HEARTLAND FOR CASH PROCEEDS OF $915,000 AND ASSUMPTION OF A CASH
CALL OBLIGATION IN THE AMOUNT OF $145,000. THE COMPANY ALSO PURCHASED
FROM HEARTLAND TWO UNSECURED PROMISSORY NOTES PAYABLE BY TELINOR FOR
$2.56 MILLION, INCLUDING ACCRUED INTEREST. THE TWO NOTES WERE
IMMEDIATELY RESTRUCTURED INTO ONE UNSECURED NOTE ACCRUING INTEREST AT
12% AND MATURING ON SEPTEMBER 21, 2002. ADDITIONALLY, THE COMPANY
CONSUMMATED ANOTHER TRANSACTION WITH THE PRINCIPAL STOCKHOLDERS OF
TELINOR WHEREBY THE COMPANY PURCHASED 49% OF THE VOTING STOCK OF
TELEVISION INALAMBRICA, S.A. DE C.V. ("TELEVISION") FOR CASH IN THE
AMOUNT OF $1.0 MILLION AND COMMITTED TO (I) LOAN TELEVISION UP TO THE
SUM OF $5.0 MILLION IN CASH OR (II) FINANCE AN EQUIVALENT AMOUNT IN
SALES OF THE COMPANY'S EQUIPMENT TO TELEVISION. THE FUNDS COMMITTED
WERE DEPOSITED INTO ESCROW PENDING DISBURSEMENT OR REDUCTION OF THE
REQUIRED ESCROW AMOUNT THROUGH EQUIPMENT SALES TO TELEVISION. AS OF
DECEMBER 31, 1997, APPROXIMATELY $5.0 MILLION WAS HELD IN ESCROW
PURSUANT TO THIS AGREEMENT. DURING 1998, THE ESCROWED FUNDS WERE
RELEASED TO THE COMPANY.
TELINOR AND TELEVISION WERE FORMED TO DEVELOP WIRELESS CABLE TELEVISION
SYSTEMS PROVIDING SUBSCRIPTION TELEVISION SERVICES IN MEXICO. DURING
THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY INCURRED
REIMBURSABLE COSTS OF APPROXIMATELY $161,000 AND $405,000 ON BEHALF OF
TELINOR AND TELEVISION. FURTHER, THE COMPANY FUNDED $145,000 UNDER A
CASH CALL OBLIGATION AND ADVANCED ADDITIONAL FUNDS AND EQUIPMENT UNDER
THE NOTE RECEIVABLE OF $950,000.
DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY RECORDED
EQUITY IN LOSSES OF $833,000 AND $190,000, RESPECTIVELY, RELATED TO ITS
INVESTMENTS IN TELINOR AND TELEVISION (COLLECTIVELY, "TELINOR
INVESTMENTS"). IN 1998 AND 1997, THESE LOSSES WERE COMPRISED OF
$256,000 AND $173,000, RESPECTIVELY, OF THE COMPANY'S SHARE IN LOSSES
OF TELINOR INVESTMENTS, AND $577,000 AND $17,000, RESPECTIVELY, IN
AMORTIZATION OF THE COST IN EXCESS OF THE COMPANY'S BASIS IN THE
UNDERLYING ASSETS OF TELINOR INVESTMENTS. ADDITIONALLY, THE COMPANY
RECORDED AN ALLOWANCE OF $1,200,000 RELATED TO THE NOTE RECEIVABLE FROM
TELINOR DUE TO UNCERTAINTIES REGARDING ITS ULTIMATE COLLECTIBILITY.
THE CARRYING VALUE OF THE COMPANY'S INVESTMENTS IN AND ADVANCES TO
TELINOR INVESTMENTS WAS $3,844,000 AND $4,661,000 AT DECEMBER 31, 1998
AND 1997, RESPECTIVELY, INCLUDING THE COMPANY'S NOTE RECEIVABLE AT
DECEMBER 31, 1998 AND 1997 OF $2,311,000 AND $2,560,000, RESPECTIVELY,
<PAGE>
(5) PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING AT DECEMBER 31, 1998
AND 1997:
<TABLE>
<CAPTION>
Estimated
1998 1997 useful life
------ ------- -----------
<S> <C> <C> <C>
Subscriber premises equipment and
installation costs $ 39,003 52,656 1 - 7 years
Transmission equipment and system
construction costs 21,928 16,035 5 - 10 years
Office furniture and equipment 7,434 4,106 5 years
Leasehold improvements 1,156 1,016 5 years
-------- -------
69,521 73,813
Less accumulated depreciation and
amortization (25,876) (23,294)
-------- -------
$ 43,645 50,519
======== =======
</TABLE>
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES CONSIST OF THE FOLLOWING AT
DECEMBER 31, 1998 AND 1997:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C> <C>
Accounts payable $ 684 4,680
Accrued programming and licenses 1,158 1,319
Accrued personnel costs 806 1,247
Accrued taxes 943 528
Other 1,899 878
-------- ------
$ 5,490 8,652
======== ======
</TABLE>
<PAGE>
(7) LONG-TERM DEBT
LONG-TERM DEBT CONSISTS OF THE FOLLOWING AT DECEMBER 31, 1998 AND 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Senior Notes $ 314,385 281,266
Heartland Long-Term Note 2,335 2,069
BTA auction payable to affiliates 3,859 4,396
Capital leases and other 199 568
Total long-term debt 320,778 288,299
Less current portion of BTA auction payable 354 1,122
Less current portion of long term debt 199 217
------- -------
$ 320,225 286,960
======== =======
</TABLE>
Senior Notes
ON FEBRUARY 23, 1996, THE COMPANY CONSUMMATED A PRIVATE PLACEMENT OF
100,000 UNITS (THE "UNIT OFFERING" OR "UNITS") CONSISTING OF $400
MILLION AGGREGATE PRINCIPAL AMOUNT OF 11 3/8% SENIOR DISCOUNT NOTES DUE
2006 ("SENIOR NOTES") AND 110,000 SHARES OF COMMON STOCK OF THE
COMPANY. THE SENIOR NOTES WILL MATURE ON MARCH 1, 2006. THE ISSUE
PRICE OF THE SENIOR NOTES REPRESENTS A YIELD TO MATURITY OF 11 3/8% PER
ANNUM COMPUTED ON A SEMI-ANNUAL BOND EQUIVALENT BASIS. CASH INTEREST
ON THE SENIOR NOTES WILL NOT BE PAYABLE PRIOR TO MARCH 1, 2001.
COMMENCING SEPTEMBER 1, 2001, CASH INTEREST ON THE SENIOR NOTES WILL BE
PAYABLE ON MARCH 1 AND SEPTEMBER 1 OF EACH YEAR AT A RATE OF 11 3/8%
PER ANNUM. INCLUDING AMOUNTS ATTRIBUTABLE TO THE COMMON STOCK, THE
ISSUANCE OF THE UNITS RESULTED IN NET PROCEEDS TO THE COMPANY OF
APPROXIMATELY $219.7 MILLION AFTER UNDERWRITING DISCOUNTS AND OTHER
DEBT ISSUANCE COSTS AGGREGATING APPROXIMATELY $9.8 MILLION. FOR
FINANCIAL REPORTING PURPOSES, THE SHARES OF COMMON STOCK WERE VALUED AT
$800,000.
THE SENIOR NOTES WERE ISSUED PURSUANT TO AN INDENTURE WHICH CONTAINS
CERTAIN RESTRICTIVE COVENANTS AND LIMITATIONS. AMONG OTHER THINGS, THE
INDENTURE LIMITS THE INCURRENCE OF ADDITIONAL INDEBTEDNESS, LIMITS THE
MAKING OF RESTRICTED PAYMENTS (AS DEFINED) INCLUDING THE DECLARATION
AND/OR PAYMENT OF DIVIDENDS, PLACES LIMITATIONS ON DIVIDENDS AND OTHER
PAYMENTS BY THE COMPANY'S SUBSIDIARIES, PROHIBITS THE COMPANY AND ITS
SUBSIDIARIES FROM ENGAGING IN ANY BUSINESS OTHER THAN THE TRANSMISSION
OF VIDEO, VOICE AND DATA AND RELATED BUSINESSES AND SERVICES, AND
PLACES LIMITATIONS ON LIENS, CERTAIN ASSET DISPOSITIONS AND MERGER/SALE
OF ASSETS ACTIVITY.
HEARTLAND LONG-TERM NOTE
IN CONNECTION WITH THE CONTRIBUTIONS ON FEBRUARY 23, 1996, HEARTLAND
RECEIVED THE HEARTLAND LONG-TERM NOTE. THE HEARTLAND LONG-TERM NOTE
HAS A FINAL MATURITY DATE THAT IS 10 YEARS AND ONE DAY AFTER THE
CLOSING OF THE CONTRIBUTIONS. THE INTEREST RATE ON THE HEARTLAND LONG-
TERM NOTE INCREASES FROM 10% TO 15% IF THE HEARTLAND LONG-TERM NOTE IS
NOT REPAID WITHIN ONE YEAR OF ISSUANCE, WITH INTEREST ACCRUING AND
ADDED TO THE BALANCE ANNUALLY. NO CASH INTEREST WILL BE PAID ON THE
HEARTLAND LONG-TERM NOTE UNTIL AFTER THE SENIOR NOTES (SEE ABOVE) HAVE
BEEN PAID IN FULL. DURING 1997, THE COMPANY MADE A PRINCIPAL PAYMENT
OF APPROXIMATELY $15.3 MILLION WITH A PORTION OF THE PROCEEDS FROM THE
DISPOSITION OF ASSETS AND WIRELESS CHANNEL RIGHTS IN ATLANTA (SEE NOTE
3 (C)).
AS PART OF THE MASTER AGREEMENT (NOTE 3(C)), HEARTLAND AGREED TO
FORGIVE, DURING 1999, THE OUTSTANDING BALANCE OF THE HEARTLAND LONG-
TERM NOTE IN EXCHANGE FOR PRIMARILY CASH AND THE WIRELESS CABLE ASSETS
OF THE STORY CITY, IOWA MARKET. THE TRANSACTIONS ARE EXPECTED TO BE
CONSUMMATED IN LATE MAY 1999. AS AGREED, INTEREST ON THE HEARTLAND
LONG-TERM NOTE DOES NOT ACCRUE SUBSEQUENT TO NOVEMBER 30, 1998.
BTA Auction Payable to Affiliates
THE FCC CONCLUDED AUCTIONS IN 1997 FOR THE AWARD OF INITIAL COMMERCIAL
WIRELESS CABLE LICENSES FOR "BASIC TRADING AREAS" OR "BTAS" (THE "BTA
AUCTION"). PURSUANT TO AN AGREEMENT AMONG CAI, HEARTLAND AND THE
COMPANY, CAI AND HEARTLAND ARE OBLIGATED TO CONVEY TO THE COMPANY, AT
THEIR COST, AND THE COMPANY HAS AGREED TO PURCHASE, ANY RIGHTS ACQUIRED
IN THE BTA AUCTION RELATING TO THE COMPANY'S MARKETS, AS WELL AS
CERTAIN OTHER BTAS. CAI AND HEARTLAND WERE THE WINNING BIDDERS IN THE
AMOUNT OF APPROXIMATELY $17.9 MILLION WITH RESPECT TO BTAS THAT WILL BE
CONVEYED TO THE COMPANY. AS OF DECEMBER 31, 1998, THE ACCOMPANYING
CONSOLIDATED BALANCE SHEET REFLECTS A BTA AUCTION PAYABLE TO HEARTLAND
OF APPROXIMATELY $3,859,000 REPRESENTING THE REMAINING UNPAID BALANCES
WITH RESPECT TO BTAS TO BE CONVEYED TO THE COMPANY. AT DECEMBER 31,
1997, THE ACCOMPANYING CONSOLIDATED BALANCE SHEET REFLECTS A BTA
AUCTION PAYABLE TO CAI, HEARTLAND, AND OTHER AFFILIATED ENTITIES OF
APPROXIMATELY $643,000, $3,543,000, AND $210,000, RESPECTIVELY. THE
BTA AUCTION PAYABLE TO HEARTLAND BEARS INTEREST AT 9.5% AND IS BEING
PAID OVER A 10-YEAR PERIOD COMMENCING IN THE FOURTH QUARTER OF 1996.
THE COMPANY IS REQUIRED TO MAKE QUARTERLY INTEREST-ONLY PAYMENTS FOR
THE FIRST TWO YEARS AND QUARTERLY PAYMENTS OF PRINCIPAL AND INTEREST
OVER THE REMAINING EIGHT YEARS.
DURING 1997, THE COMPANY EXCHANGED AND RETURNED TO HEARTLAND CERTAIN OF
ITS RIGHTS TO BTA LICENSES RESULTING IN A DECREASE OF $614,000 IN
LICENSE COSTS AND THE CORRESPONDING BTA PAYABLE.
Aggregate maturities of long-term debt as of December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ 553
2000 386
2001 424
2002 465
2003 511
Thereafter 318,439
</TABLE>
(8) LEASES AND FCC LICENSES
THE COMPANY IS DEPENDENT ON LEASES WITH THIRD PARTIES FOR MOST OF ITS
WIRELESS CABLE CHANNEL RIGHTS. UNDER FCC RULES, THE BASE TERM OF EACH
LEASE CANNOT EXCEED THE TERM OF THE UNDERLYING FCC LICENSE. FCC
LICENSES FOR WIRELESS CABLE CHANNELS GENERALLY MUST BE RENEWED EVERY
TEN YEARS, AND THERE IS NO AUTOMATIC RENEWAL OF SUCH LICENSES. THE USE
OF SUCH CHANNELS BY THE LESSORS IS SUBJECT TO REGULATION BY THE FCC
AND, THEREFORE, THE COMPANY'S ABILITY TO CONTINUE TO ENJOY THE BENEFITS
OF THESE LEASES IS DEPENDENT UPON THE LESSORS' CONTINUING COMPLIANCE
WITH APPLICABLE REGULATIONS. THE REMAINING INITIAL TERMS OF MOST OF
THE COMPANY'S CHANNEL LEASES RANGE FROM 5 TO 10 YEARS, ALTHOUGH CERTAIN
OF THE COMPANY'S CHANNEL LEASES HAVE INITIAL TERMS EXPIRING IN THE NEXT
SEVERAL YEARS. MOST OF THE COMPANY'S LEASES PROVIDE THAT THE LESSOR
MAY NEGOTIATE LEASE RENEWALS WITH ONLY THE COMPANY AND, IF A RENEWAL
AGREEMENT IS NOT REACHED WITHIN A SPECIFIED TIME, GRANT THE COMPANY A
RIGHT OF FIRST REFUSAL TO MATCH ANY COMPETING OFFERS. ALTHOUGH THE
COMPANY DOES NOT BELIEVE THAT THE TERMINATION OF OR FAILURE TO RENEW A
SINGLE CHANNEL LEASE WOULD ADVERSELY AFFECT THE COMPANY, SEVERAL OF
SUCH TERMINATIONS OR FAILURES IN ONE OR MORE MARKETS THAT THE COMPANY
ACTIVELY SERVES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
CHANNEL RIGHTS LEASE AGREEMENTS GENERALLY REQUIRE PAYMENTS BASED ON THE
GREATER OF SPECIFIED MINIMUMS OR AMOUNTS BASED UPON VARIOUS SUBSCRIBER
LEVELS. ADDITIONALLY, FCC LICENSES ALSO SPECIFY CONSTRUCTION
DEADLINES, WHICH, IF NOT MET, COULD RESULT IN THE LOSS OF THE LICENSE.
REQUESTS FOR ADDITIONAL TIME TO CONSTRUCT MAY BE FILED AND ARE SUBJECT
TO REVIEW PURSUANT TO FCC RULES.
PAYMENTS UNDER THE CHANNEL RIGHTS LEASE AGREEMENTS GENERALLY BEGIN UPON
THE COMPLETION OF CONSTRUCTION OF THE TRANSMISSION EQUIPMENT AND
FACILITIES AND APPROVAL FOR OPERATION PURSUANT TO THE RULES AND
REGULATIONS OF THE FCC. HOWEVER, FOR CERTAIN LEASES, THE COMPANY IS
OBLIGATED TO BEGIN PAYMENTS UPON GRANT OF THE CHANNEL RIGHTS. CHANNEL
RIGHTS LEASE EXPENSE WAS APPROXIMATELY $1,911,000, $1,883,000 AND
$1,810,000 FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996,
RESPECTIVELY.
THE COMPANY ALSO HAS CERTAIN OPERATING LEASES FOR OFFICE SPACE,
EQUIPMENT AND TRANSMISSION TOWER SPACE. RENT EXPENSE INCURRED IN
CONNECTION WITH OTHER OPERATING LEASES WAS APPROXIMATELY $1,817,000,
$1,656,000 AND $1,405,000 FOR THE YEARS ENDED DECEMBER 31, 1998, 1997,
AND 1996 RESPECTIVELY.
FUTURE MINIMUM LEASE PAYMENTS DUE UNDER CHANNEL RIGHTS LEASES AND OTHER
NONCANCELLABLE OPERATING LEASES AT DECEMBER 31, 1998 ARE AS FOLLOWS:
<TABLE>
<CAPTION>
CHANNEL OTHER
YEAR ENDING RIGHTS OPERATING
DECEMBER 31, LEASES LEASES
------------- -------- ---------
<S> <C> <C>
1999 $ 1,998 1,567
2000 2,289 1,436
2001 2,321 1,309
2002 2,321 1,252
2003 2,321 1,262
</TABLE>
(9) Stockholders' Equity
(A) PREFERRED AND COMMON STOCK
At December 31, 1997, the Company had authorized 5,000,000 shares
of preferred stock which can be issued in series with varying
preferences and conversion features as determined by the Board of
Directors of the Company, with no shares issued. On August 21,
1998, the Company filed with the Secretary of State of Delaware a
Certificate of Amendment of Amended and Restated Certificate of
Incorporation reducing the number of authorized shares of common
stock from 40 million to 15 million and eliminating the authorized
preferred shares.
(B) TREASURY STOCK
As part of the Master Agreement (note 3(c)), the Company purchased
3,836,035 shares of its common stock from CAI for $1,534,000 on
December 3, 1998.
(c) Stock Options
In 1996, the Company established the CS Wireless Systems, Inc.
Incentive Stock Plan ("Stock Plan") which provides for the issuance
of stock options to officers and other key employees of the Company
and its subsidiaries. The Stock Plan makes available for issuance
1,500,000 shares of common stock. Options issued under the Stock
Plan have varying vesting periods as provided in separate stock
option agreements and generally carry an expiration date of ten
years subsequent to the date of issuance. Options issued are
required to have an exercise price of not less than fair market
value of the Company's common stock on the date of grant.
The Company applies APB Opinion No. 25 in accounting for its Stock
Plan and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Net loss: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
As reported $ (139,383) (52,565) (28,527)
Pro forma (139,217) (54,616) (29,404)
Basic and diluted loss per common
share:
As reported $ (13.41) (4.94) (3.06)
Pro forma (13.39) (5.11) (3.21)
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997 and
1996: dividend yield of 0%; risk-free interest rate of 6.0% and an
expected life of 5 years.
<PAGE>
Following is a summary of activity in the employee option plan
discussed above for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 898,861 $ 6.88 655,161 $ 9.40 --- $ ---
Granted --- --- 833,335 6.50 655,161 9.40
Exercised --- --- --- --- --- ---
Canceled (265,044) 6.55 (589,635) (9.14) --- ---
-------- ----- -------- ----- ------- -------
Options outstanding at
end of year 633,817 $ 7.01 898,861 $ 6.88 655,161 $ 9.40
======== ====== ======= ====== ======= ======
Options exercisable at
year end 444,150 536,818 367,049
======== ======= =======
Weighted average fair
value of options
granted during year $ --- $ 6.50 $ 9.40
======= ======== =======
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED NUMBER WEIGHTED
AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICE 1998 LIFE PRICE 1998 PRICE
-------- --------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6.50 521,291 7.8 years $ 6.50 331,624 $ 6.50
======== ======= ========= ========= ======= =========
$ 9.40 112,526 7.2 years $ 9.40 112,526 $ 9.40
======== ======= ========= ========= ======= =========
</TABLE>
(10) INCOME TAXES
AS THE COMPANY HAS FULLY OFFSET ITS DEFERRED TAX ASSETS BY A
VALUATION ALLOWANCE AT DECEMBER 31, 1998, NO INCOME TAX BENEFIT
HAS BEEN RECORDED FOR THE YEAR ENDED DECEMBER 31, 1998. FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1996, INCOME TAX BENEFIT OF
$5,429,000 AND $14,631,000, RESPECTIVELY, WERE COMPRISED OF
DEFERRED TAX BENEFITS.
TOTAL INCOME TAX BENEFIT FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 DIFFERED FROM THE AMOUNT COMPUTED BY APPLYING THE U.S.
FEDERAL STATUTORY INCOME TAX RATE OF 35% TO LOSS BEFORE INCOME
TAXES AS A RESULT OF THE FOLLOWING:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax benefit $ (48,784) (19,827) (15,105)
Amortization of goodwill 18,959 1,394 1,260
State income taxes (2,788) (1,133) (863)
Adjustment to prior year deferred
taxes 10,382 (2,019) ---
Increase in valuation allowance 22,220 16,082 ---
Other, net 11 74 77
--------- --------- ---------
$ --- (5,429) (14,631)
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
-------------- ----------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 18,702 14,596
Noncash interest 32,573 19,736
Investments in affiliates 0 499
Property and equipment 3,988 1,443
Other 806 ---
--------
Total gross deferred tax assets 56,069 36,274
Less valuation allowance (38,302) (16,082)
--------
17,767 20,192
========
Deferred tax liabilities:
License and leased license investment 17,767 20,143
Other 0 49
--------
Total deferred tax liabilities 17,767 20,192
--------
Net deferred tax liability $ --- ---
========
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES ARE COMPUTED BY APPLYING THE
U.S. FEDERAL INCOME TAX RATE IN EFFECT TO THE GROSS AMOUNTS OF
TEMPORARY DIFFERENCES AND OTHER TAX ATTRIBUTES, SUCH AS NET
OPERATING LOSS CARRYFORWARDS. DEFERRED TAX ASSETS AND
LIABILITIES RELATING TO STATE INCOME TAXES ARE NOT MATERIAL.
IN ASSESSING THE REALIZABILITY OF DEFERRED TAX ASSETS, THE
COMPANY CONSIDERS WHETHER IT IS MORE LIKELY THAN NOT THAT SOME
PORTION OR ALL OF THE DEFERRED TAX ASSETS WILL NOT BE REALIZED.
THE ULTIMATE REALIZATION OF DEFERRED TAX ASSETS IS DEPENDENT
UPON THE GENERATION OF FUTURE TAXABLE INCOME DURING THE PERIODS
IN WHICH THOSE TEMPORARY DIFFERENCES BECOME DEDUCTIBLE. THE
COMPANY CONSIDERS THE SCHEDULED REVERSAL OF DEFERRED TAX
LIABILITIES, PROJECTED FUTURE TAXABLE INCOME, AND TAX PLANNING
STRATEGIES IN MAKING THIS ASSESSMENT. BASED UPON THESE
CONSIDERATIONS, THE COMPANY HAS RECOGNIZED DEFERRED TAX ASSETS
TO THE EXTENT SUCH ASSETS CAN BE REALIZED THROUGH FUTURE
REVERSALS OF EXISTING TAXABLE TEMPORARY DIFFERENCES.
AT DECEMBER 31, 1998, THE COMPANY HAS NET OPERATING LOSS
CARRYFORWARDS AVAILABLE OF APPROXIMATELY $52,695,000 WHICH BEGIN
TO EXPIRE IN 2010. APPROXIMATELY $7,520,000 OF THE NET
OPERATING LOSS CARRYOVER IS SUBJECT TO AN ANNUAL LIMITATION AND
THE SEPARATE RETURN LIMITATION YEAR RULES.
(11) OTHER RELATED PARTY TRANSACTIONS
IN 1997, THE COMPANY, CAI AND HEARTLAND (SEE NOTE 3), AND A
THIRD PARTY WIRELESS CABLE PROVIDER FORMED WIRELESS ENTERPRISES,
LLC ("WIRELESS ENTERPRISES"). WIRELESS ENTERPRISES IS A
PROGRAMMING COOPERATIVE THAT NEGOTIATES PROGRAMMING AND
MARKETING SERVICES WITH SUPPLIERS OF PROGRAMMING. DURING THE
YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY PAID
$8,293,000 AND $5,578,000, RESPECTIVELY, TO WIRELESS ENTERPRISES
FOR PROGRAMMING AND OTHER ADMINISTRATIVE SERVICES.
DURING 1998 AND 1997, THE COMPANY PURCHASED EQUIPMENT FROM CAI
FOR $300,000 AND $3,400,000.
DURING 1998, THE COMPANY HAD AN ARRANGEMENT WITH CAI WHEREBY CAI
PERSONNEL PROVIDE ENGINEERING AND OTHER TECHNICAL CONSULTING
SERVICES IN CONNECTION WITH THE DIGITAL BUILD-OUT OF THE DALLAS,
TEXAS MARKET. UNDER THIS ARRANGEMENT, CAI RECEIVES $10,000 PER
MONTH PLUS REIMBURSEMENT FOR ALL REASONABLE EXPENSES INCURRED IN
THE PERFORMANCE OF SUCH SERVICES. THE COMPANY HAS RENEGOTIATED
THE TERMS OF THIS ARRANGEMENT AND ENTERED INTO AN ENGINEERING
AND SPECTRUM MANAGEMENT AGREEMENT WITH CAI AND A WHOLLY-OWNED
SUBSIDIARY WHEREBY EFFECTIVE MARCH 1, 1999, CAI ASSUMED
SUPERVISION AND DELIVERY OF ALL ENGINEERING AND TECHNICAL
MANAGEMENT SERVICES. THE COMPANY WILL PAY CAI A FEE EQUAL TO
40% OF THE WHOLLY-OWNED SUBSIDIARY'S COSTS PLUS AN
ADMINISTRATIVE FEE OF 20% OF SUCH AMOUNT. ADDITIONALLY, THE
COMPANY PAID CAI APPROXIMATELY $139,000 AND $472,000 FOR
SERVICES RENDERED, RENT, LICENSING AND OTHER FEES DURING 1998
AND 1997, RESPECTIVELY.
IN SEPTEMBER 1997, THE COMPANY ENTERED INTO AN TWO-YEAR
INSTALLATION CONTRACTOR AGREEMENT WITH ACS TELECOMMUNICATIONS
SYSTEMS, INC. ("ACS") WHEREBY FOR A FIXED MONTHLY FEE PER MARKET
PLUS ADDITIONAL VARIABLE COSTS, ACS AGREED TO PROVIDE
INSTALLATION CONTRACTOR SERVICES IN THE DALLAS, TEXAS AREA AND
OTHER MARKETS AS MUTUALLY AGREED UPON. DURING THE YEARS ENDED
DECEMBER 31, 1998 AND 1997, THE COMPANY PAID $4,400,000 AND
$988,000, RESPECTIVELY, TO ACS UNDER THIS AGREEMENT. THE
COMPANY AMENDED THIS AGREEMENT TO SHORTEN THE TERM AND DECREASE
THE FIXED MONTHLY PAYMENT. IN CONNECTION WITH THIS AMENDMENT,
THE COMPANY HAS AGREED TO MAKE PAYMENTS TOTALING $510,000 TO ACS
PURSUANT TO THE ORIGINAL AGREEMENT. A FORMER DIRECTOR OF THE
COMPANY, WHO RESIGNED IN DECEMBER 1998, IS THE PRINCIPAL
STOCKHOLDER OF ACS.
<PAGE>
(12) Fair Value of Financial Instruments
THE FAIR VALUE OF THE SENIOR NOTES AT DECEMBER 31, 1998 AND 1997 WAS
APPROXIMATELY $68.0 MILLION AND $96.0 MILLION, RESPECTIVELY (CARRYING
AMOUNTS OF $314.4 MILLION AND $281.2 MILLION, RESPECTIVELY) BASED ON
MARKET QUOTES OBTAINED FROM DEALERS. THE CARRYING AMOUNTS OF THE
HEARTLAND LONG-TERM NOTE, THE ACQUISITION NOTE AND THE BTA AUCTION
PAYABLES APPROXIMATE FAIR VALUE AS THESE NOTES BEAR INTEREST AT CURRENT
MARKET RATES.
THE CARRYING AMOUNT OF CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND
ACCOUNTS PAYABLE APPROXIMATE FAIR VALUE BECAUSE OF THE SHORT MATURITY OF
THESE INSTRUMENTS.
(13) COMMITMENTS AND CONTINGENCIES
THE COMPANY HAS ENTERED INTO A SERIES OF NONCANCELLABLE AGREEMENTS TO
PURCHASE ENTERTAINMENT PROGRAMMING FOR RETRANSMISSION WHICH EXPIRE THROUGH
2000. THE AGREEMENTS GENERALLY REQUIRE MONTHLY PAYMENTS BASED UPON THE
NUMBER OF SUBSCRIBERS TO THE COMPANY'S SYSTEMS, SUBJECT TO CERTAIN
MINIMUMS.
THE COMPANY IS A PARTY TO LEGAL PROCEEDINGS INCIDENTAL TO ITS BUSINESS
WHICH, IN THE OPINION OF MANAGEMENT, ARE NOT EXPECTED TO HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S CONSOLIDATED FINANCIAL POSITION, OPERATING
RESULTS OR LIQUIDITY.
Exhibit 99.2
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<S> <C> <C> <C>
MARCH 31, DECEMBER 31,
1999 1998
-------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 35,994 $ 41,839
Subscriber receivables, net 1,047 1,542
Prepaid expenses and other 606 638
--------- ---------
Total current assets 37,647 44,019
Plant and equipment, net 40,084 43,645
License and leased license investment, net 155,169 157,269
Assets held for sale 2,212 2,102
Investment in and loans to equity affiliates 4,315 3,884
Debt issuance costs and other assets, net 7,646 7,898
$ 247,073 $ 258,817
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 3,309 $ 5,490
Current portion of long-term debt 45 199
Current portion of BTA auction payable 392 354
Other current liabilities 1,081 1,237
--------- ---------
Total current liabilities 4,827 7,280
Long-term debt, less current portion 325,572 316,720
BTA auction payable, less current portion 3,365 3,505
Total liabilities 333,764 327,505
======= =======
Stockholders' deficit:
Common stock, $.001 par value; 15,000,000
shares authorized, 10,702,609 shares issued in
1999 and 1998, and 6,864,471 shares outstanding
in 1999 and 1998. 11 11
Treasury stock, at cost; 3,838,138 shares in
1999 and 1998 (1,574) (1,574)
Additional paid-in capital 154,557 154,557
Accumulated deficit (239,685) (221,682)
-------- --------
Total stockholders' deficit (86,691) (68,688)
-------- --------
$ 247,073 $ 258,817
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements
3
<PAGE>
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<S> <C> <C>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
Revenue $ 5,940 $ 6,823
Operating expenses:
Systems operations 4,181 3,908
Selling, general and administrative 5,384 4,119
Depreciation and amortization 5,505 7,224
------ ------
Total operating expenses 15,070 15,251
Operating loss (9,130) (8,428)
Other income (expense):
Interest income 461 1,017
Equity in losses of affiliates (150) (986)
Interest expense (9,139) (8,271)
Other (45) --
----- -----
Total other expense, net (8,873) (8,240)
----- -----
Loss before income taxes (18,003) (16,668)
Income tax benefit -- --
------ ------
Net loss $ (18,003) $ (16,668)
======= =======
Weighted average basic and diluted
loss per common share $ (2.62) $ (1.56)
====== ======
Basic and diluted weighted average
shares outstanding 6,864,471 10,700,506
========= ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements
4
<PAGE>
<TABLE>
<CAPTION>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<S> <C> <C>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $ (18,003) $ (16,668)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization 5,505 7,224
Accretion on discount notes and amortization
of debt issuance costs 9,048 8,100
Non-cash interest expense on other long-term debt 91 164
Equity in losses of affiliates 150 986
Other 45 --
Changes in assets and liabilities, net of effects
of contributions:
Subscriber receivables 495 (2)
Prepaid expenses and other 32 (246)
Accounts payable, accrued expenses and other
liabilities (474) (305)
------- ------
Net cash used in operating activities (3,111) (747)
------- ------
Cash flows from investing activities:
Purchases of plant and equipment (1,004) (5,964)
Additions to license and leased license investment (342) (956)
Investment in equity affiliates (953) (998)
Investment in assets held for sale (110) --
------- ------
Net cash used in investing activities (2,409) (7,918)
------- ------
Cash flows from financing activities:
Payments on notes payable (134) (156)
Payments on BTA auction payable (191) (733)
------- ------
Net cash used in financing activities (325) (889)
------- ------
Net decrease in cash and cash equivalents $ (5,845) $ (9,554)
Cash and cash equivalents at beginning of period 41,839 74,564
------- ------
Cash and cash equivalents at end of period $ 35,994 $ 65,010
======= =======
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
5
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
THE COMPANY. CS Wireless Systems, Inc. and its subsidiaries (the
"Company" or "CS Wireless") develop, own and operate a network of wireless
cable television systems providing subscription television and high speed
Internet access services. The Company has a portfolio of wireless cable
channel rights in various markets in the United States. The Company currently
has systems in operation in ten markets, and it owns, or holds rights to lease,
radio spectrum in its 21 primary markets and certain other markets. The
Company is approximately 94% owned by CAI Wireless Systems, Inc. ("CAI").
The subscription television industry is highly competitive. The
Company's principal subscription television competitors in each of its markets
are traditional hard-wire cable companies, direct broadcast satellite, private
cable companies and other alternate methods of distributing and receiving
television transmissions. Hard-wire cable companies generally are well-
established and known to potential customers and have significantly greater
financial and other resources than the Company. As the telecommunications
industry continues to evolve, the Company may face additional competition from
new providers of entertainment and data services. In addition, until the
Company can increase its channels offered in all of its operating markets
through the deployment of digital compression technology, the Company's
existing competitors generally continue to have more channels to offer
subscribers. There can be no assurance that the Company will be able to
compete successfully with existing or potential competitors in the subscription
television industry.
The Company has incurred significant operating losses since inception and
has negative stockholders' equity at March 31, 1999. Losses are expected for
at least the next year as the Company continues to develop its wireless
communications business. The Company has approximately $36 million in cash and
cash equivalents at March 31, 1999, and, based on its current operating plan,
believes that it has sufficient cash to fund its anticipated capital
expenditures and operating losses through at least the first quarter of 2000.
However, the growth of the Company's wireless communications business may
require substantial continuing investment to finance capital expenditures
related to the acquisition of channel rights and infrastructure development of
digital video programming, two-way frequency utilization and telephony systems.
Additionally, beginning in September 2001, the Company will be required to make
payments to the holders of its 11 3/8% Senior Discount Notes due 2006. Without
additional funding through debt or equity offerings, joint ventures, the sale
or exchange of its wireless cable channel rights or the participation of a
strategic partner, or the restructuring of its debt agreements, the Company may
not be able to meet its future debt and interest payments. There can be no
assurance that the Company will achieve positive cash flow from operations, or
consummate the sale of any wireless cable channel rights or that sufficient
debt or equity financing will be available to the Company. In addition,
subject to restrictions under its outstanding debt, the Company may pursue
other opportunities to acquire additional wireless cable channel rights and
businesses that may utilize the capital currently expected to be available for
its current markets.
CAI announced on April 26, 1999 that it executed a definitive Agreement
and Plan of Merger with MCI WorldCom, Inc. ("MCI WorldCom") providing for the
acquisition by MCI WorldCom of all of the outstanding shares of CAI. The
transaction is subject to customary conditions, including the receipt of
required regulatory approvals.
PRINCIPAL MARKETS OF THE COMPANY. On February 23, 1996, in exchange for
approximately 60% of the Company's Common Stock, CAI, directly or indirectly,
contributed to the Company the wireless cable television assets and all related
liabilities, or the stock of subsidiaries owning wireless cable television
assets associated with the wireless cable television markets of Bakersfield and
Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio.
Simultaneously, in exchange for approximately 40% of the Company's Common
Stock, cash, a short-term note and a long-term note (the "Heartland Long-Term
Note"), Heartland, directly or indirectly, contributed or sold to the Company
the wireless cable television assets and all related liabilities associated
with the wireless cable television markets of Grand Rapids, Michigan;
Minneapolis, Minnesota; Kansas City (suburbs), Missouri; Dayton, Ohio; Dallas,
Fort Worth and San Antonio, Texas; and Salt Lake City, Utah. The Company
subsequently acquired wireless cable television rights and related assets in
certain Midwest markets, including but not limited to, the Effingham and
Wellsville, Kansas; Story City, Iowa; Scottsbluff, Nebraska; Kalispell, Montana
and Rochester, Minnesota markets in connection with the Company's merger
acquisition of USA Wireless Cable, Inc. on October 11, 1996 ("USA Wireless
Acquisition"). The Company consummated on September 3, 1997 an exchange of its
wireless cable rights and related assets in Salt Lake City, Utah for wireless
cable rights and related assets in Kansas City, Missouri pursuant to an
agreement dated as of November 6, 1996 with People's Choice TV Corp.
On December 2, 1998, the Company, CAI and Heartland entered into a Master
Agreement ("Master Agreement") providing for, among other things, the
termination of Heartland's rights in, and claims against, the Company. As part
of the Master Agreement, in December 1998, CAI purchased Heartland's ownership
in the Company, or 3,836,035 shares of CS Wireless common stock, for
$1,534,000. The Company subsequently purchased those shares from CAI for the
same price. These shares are recorded as treasury stock for the periods
presented. Additionally, the Company agreed to lease certain channel rights
and sell the net operating assets of its Story City, Iowa market to Heartland
primarily in exchange for the forgiveness by Heartland of the outstanding
balance owed by the Company of $2,335,000 under the Heartland Long-Term Note
and additional cash payments by the Company to Heartland of $466,000. The
deposit, along with the carrying value of the net assets of the Story City,
Iowa market, are classified as assets held for sale at December 31, 1998 and
March 31, 1999 in the accompanying consolidated balance sheet.
(b) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of the Company contain all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of March 31, 1999, and the results
of operations and cash flows for the three months ended March 31, 1999 and
1998. These results are not necessarily indicative of the results to be
expected for the full fiscal year.
(d) COMMON SHARES OUTSTANDING AND NET LOSS PER COMMON SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share," in the fourth quarter of
1997, which required companies to present basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Potentially
dilutive securities have been excluded from the diluted loss per share
computation as their inclusion would be antidilutive
(5) CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
A discussion of certain of these legal proceedings is contained in Part II,
Item 1 "Legal Proceedings" of this Form 10-Q. The Company believes that the
ultimate resolution of the legal proceedings will not have a material adverse
effect on the Company's consolidated financial position, operating results or
liquidity.
Exhibit 99.3
MMDS COMPANIES REALIGN THEIR INTERESTS;
ANNOUNCE COOPERATION ON FLEXIBLE 2-WAY USE OF THEIR SPECTRUM
December 3, 1998. Dallas, Texas. CAI Wireless Systems, Inc. (OTC:
CCAI)("CAI"), Heartland Wireless Communications, Inc. (OTC:
HARTQ)("Heartland") and CS Wireless Systems, Inc. ("CS Wireless") jointly
announced today that they entered into a Master Agreement on December 2,
1998 under which, among other things, CAI acquired Heartland's
approximately 36% equity interest in CS Wireless. Additionally, CS Wireless
and Heartland agreed to exchange certain spectrum assets and equipment for
cash consideration, cancellation of CS Wireless' obligations on certain
outstanding CS Wireless indebtedness to Heartland and the mutual release of
certain other claims.
The parties also agreed to cooperate in a joint effort to permit
timely filing with the Federal Communications Commission ("FCC") of
developmental and permanent authority for 2-way use of the parties'
respective MMDS spectrum in contiguous and adjacent markets to allow full,
flexible 2-way use of this spectrum for telephony, high-speed Internet
access and other services. The parties have agreed to give priority to the
Dallas/Fort Worth, Texas market, where CS Wireless intends to file a
developmental application in the near future.
In connection with the transactions, a consent and waiver (the
"Consent") from the holders of a majority of the principal amount of CS
Wireless' outstanding 11-3/8% Series B Senior Notes due 2006 (the "Senior
Notes") was obtained, pursuant to which CS Wireless will pay a consent fee
of $3.125 per $1,000 principal amount to all holders of record on December
3, 1998. The Consent also contemplates that CS Wireless will redeem the CS
Wireless shares purchased by CAI for the same cash consideration paid
therefor by CAI. The consent fee is expected to be paid within the next
three months.
MMDS operators use FCC-licensed microwave frequencies in the 2.1-2.7
GHz range to deliver cable television programming and high-speed Internet
services. Heartland Wireless Communications, Inc. is America's largest MMDS
operator, servicing approximately 163,500 subscribers in 57 markets.
Heartland currently holds wireless cable channel rights in 90 small to mid-
size markets located in the central United States. CAI and CS Wireless are
among the largest MMDS operators servicing approximately 35,100 and 64,500
subscription video subscribers, respectively. CAI's markets are located in
the northeastern and mid-Atlantic United States. CS Wireless' markets are
located in the central and southwestern United States.
CAI Contact: James P. Ashman
Executive Vice President and CFO
518-462-2632
CS Wireless Contact: Albert G. McGrath, Jr.
General Counsel
972-398-5300
Heartland Contact: Marjean Henderson
Sr. Vice President and CFO
(972) 633-4035
