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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1996
REGISTRATION NO. 33-91930
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HEARTLAND WIRELESS COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 4841 73-1435149
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
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903 NORTH BOWSER, SUITE 140
RICHARDSON, TEXAS 75081
(214) 479-9244
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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JOHN R. BAILEY
SENIOR VICE PRESIDENT-FINANCE,
CHIEF FINANCIAL OFFICER, TREASURER
AND SECRETARY
HEARTLAND WIRELESS COMMUNICATIONS, INC.
903 NORTH BOWSER, SUITE 140
RICHARDSON, TEXAS 75081
(214) 479-9244
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------
With a copy to:
JULIE M. ALLEN, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 408-2400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 7, 1996
HEARTLAND WIRELESS COMMUNICATIONS, INC.
OFFER TO EXCHANGE UP TO $100,000,000 OF ITS
13% SERIES B SENIOR NOTES DUE 2003
FOR ANY AND ALL OF ITS OUTSTANDING
13% SENIOR NOTES DUE 2003
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH ,
1996, UNLESS EXTENDED.
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Heartland Wireless Communications, Inc. (the "Company") hereby offers, upon
the terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange $1,000 principal amount of 13% Series B Senior Notes due
2003 (the "New Notes") of the Company for each $1,000 principal amount of the
issued and outstanding 13% Senior Notes due 2003 (the "Old Notes" and the Old
Notes and the New Notes, collectively, the "Notes") of the Company from the
Holders (as defined herein) thereof. As of the date of this Prospectus, there
is $100,000,000 aggregate principal amount of the Old Notes outstanding. The
terms of the New Notes are identical in all material respects to the Old Notes,
except that the New Notes have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing
for an increase in the interest rate on the Old Notes under certain
circumstances relating to the Registration Rights Agreement (as defined
herein), which provisions will terminate as to all of the Notes upon the
consummation of the Exchange Offer.
Interest on the New Notes will accrue from October 15, 1995 and will be
payable semi-annually on April 15 and October 15 of each year, commencing April
15, 1996. No interest will be payable on the Old Notes accepted for exchange.
The New Notes will be senior obligations of the Company ranking pari passu in
right of payment to all existing and future indebtedness of the Company, other
than indebtedness that is expressly subordinated to the New Notes. The Company
has no senior indebtedness, other than the Notes. However, subject to certain
limitations set forth in the Indenture (as defined herein), the Company and its
subsidiaries may incur additional indebtedness which is secured by assets of
the Company and its subsidiaries. In addition, the Company is a holding company
that conducts substantially all of its business through its subsidiaries. The
Old Notes are, and the New Notes will be, therefore, effectively subordinated
to all liabilities of the Company's subsidiaries, including trade payables. As
of September 30, 1995, on a pro forma basis after giving effect to the
consummation of the Transactions (as defined herein) the outstanding
liabilities of the Company's consolidated subsidiaries, including all
liabilities of consolidated subsidiaries that are not wholly-owned by the
Company, were approximately $12.1 million. The Indenture permits the Company's
subsidiaries to incur additional indebtedness.
The Old Notes were not registered under the Securities Act in reliance upon
an exemption from the registration requirements thereof. In general, the Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act. The New Notes are being offered hereby in order to satisfy
certain obligations of the Company contained in the Registration Rights
Agreement. Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by any holder thereof (other than any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 promulgated under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business, such holder has no
arrangement with any person to participate in the distribution of such New
Notes and neither such holder nor any such other person is engaging in or
intends to engage in a distribution of such New Notes. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for such Old Notes where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of 120 days after
the date of this Prospectus, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale.
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the New Notes. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. Tenders of
Old Notes pursuant to the Exchange Offer may be withdrawn as provided herein at
any time prior to the Expiration Date (as defined herein). The Exchange Offer
is subject to certain customary conditions.
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING OLD NOTES IN THE
EXCHANGE OFFER.
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THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(b),
SHOWING LOCATION OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
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<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus....... Facing Page of Registration Statement;
Cross-Reference Sheet; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front and Outside Back Cover Pages
of Prospectus; Available Information
3. Risk Factors, Ratio of Earnings
to Fixed Charges, and Other
Information.................... Prospectus Summary; Risk Factors; Selected
Historical Financial Data
4. Terms of the Transaction....... Prospectus Summary; The Exchange Offer;
Description of Notes; Certain Federal
Income Tax Considerations
5. Pro Forma Financial
Information.................... Prospectus Summary; Pro Forma Financial
Information Relative to the Transactions;
Consolidated Financial Statements and
Unaudited Pro Forma Financial Information
6. Material Contacts with the
Company Being
Acquired....................... *
7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters................... Plan of Distribution
8. Interests of Named Experts and
Counsel........................ *
9. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities..... *
10. Information With Respect to S-3
Registrants.................... *
11. Incorporation of Certain
Information by
Reference...................... *
12. Information With Respect to S-2
or S-3
Registrants.................... *
13. Incorporation of Certain
Information by
Reference...................... *
14. Information With Respect to
Registrants Other Than S-2 or
S-3 Registrants................ Prospectus Summary; Risk Factors; Pro Forma
Financial Information Relative to the
Transactions; Selected Historical Financial
Data; Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Wireless Cable
Industry; Recent Developments; The
Transactions and Planned Divestitures;
Description of Certain Indebtedness;
Consolidated Financial Statements and
Unaudited Pro Forma Financial Information
15. Information With Respect to S-3
Companies...................... *
</TABLE>
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<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
----------------------- ---------------------
<S> <C>
16. Information With Respect to S-2
or S-3
Companies...................... *
17. Information With Respect to
Companies Other Than S-2 or S-3
Companies...................... *
18. Information if Proxies,
Consents or
Authorizations Are to be
Solicited...................... *
19. Information if Proxies,
Consents or Authorizations Are
Not to be Solicited, or in an Management; Certain Transactions; Principal
Exchange Offer................. Stockholders
</TABLE>
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*Not applicable or answer is in the negative.
2
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements
thereto, the "Registration Statement") under the Securities Act with respect
to the New Notes being offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain portions of
which have been omitted pursuant to the rules and regulations promulgated by
the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With
respect to each such contract, agreement or other document filed or
incorporated by reference as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the
matter involved, and each such statement is qualified in its entirety by such
reference.
The Registration Statement may be inspected by anyone without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549, and at the regional offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may also be obtained at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such material filed by the Company with the
Commission may be inspected, and copies thereof obtained, at the places, and
in the manner, set forth above.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Company has agreed that, so
long as the Notes remain outstanding, it will file with the Commission and
distribute to holders of the Notes copies of the financial information that
would have been contained in annual reports and quarterly reports, including
management's discussion and analysis of financial condition and results of
operations, that the Company would have been required to file with the
Commission pursuant to the Exchange Act. Such financial information shall
include annual reports containing consolidated financial statements and notes
thereto, together with an opinion thereon expressed by an independent public
accounting firm, as well as quarterly reports containing unaudited condensed
consolidated financial statements for the first three quarters of each fiscal
year. The Company will also make such reports available to prospective
purchasers of the Notes, securities analysts and broker-dealers upon their
request.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
(i) all references in this Prospectus to the Company refer collectively to
Heartland Wireless Communications, Inc., its predecessors and its majority-
owned subsidiaries, and (ii) all information in this Prospectus concerning the
Company's business and markets assumes that all of the Transactions have been
consummated and excludes the Disposition Assets (as defined herein). See "The
Transactions and Planned Divestitures."
THE COMPANY
Heartland Wireless Communications, Inc. develops, owns and operates wireless
cable television systems, primarily in small to mid-size markets located in the
central United States. As of November 30, 1995, the Company has wireless cable
channel rights in 79 markets representing approximately 8.2 million households,
approximately 6.8 million of which the Company believes can be served by line-
of-sight ("LOS") transmissions (which generally require a direct, unobstructed
transmission path from the central transmitting antenna to the antenna located
on the subscriber's premises).
The Company targets small to mid-size markets with significant numbers of LOS
households that are unpassed by traditional hard-wire cable. Many of these
households, particularly in rural areas, have limited access to local off-air
VHF/UHF channels (such as ABC, NBC, CBS and Fox), and typically do not have
access to pay television service except via satellite receivers. As a result,
the Company believes that its wireless cable television service is an
attractive alternative to existing choices for such households. The Company
estimates that, within its 79 wireless cable markets, approximately 2.4 million
LOS households, or approximately 36% of the Company's total LOS households, are
unpassed by traditional hardwire cable systems, as compared to the 20 largest
hard-wire cable markets in the United States, in which only approximately 2% of
all households are unpassed by traditional hard-wire cable. The Company
believes that it will ultimately achieve a penetration rate of the unpassed LOS
households in its markets that is comparable to the average penetration rate
achieved by traditional hard-wire cable operators nationally, which Paul Kagan
Associates, Inc. estimates to be approximately 63% as of December 31, 1994.
The Company's 79 markets include (i) 33 markets in which the Company has
systems in operation (the "Existing Systems"), (ii) nine markets in which the
Company's system is under construction, (iii) 21 near-term launch markets in
which the Company has aggregated sufficient wireless cable channel rights to
commence construction of a system and (iv) 16 long-term launch markets,
including 11 in which the Company has aggregated sufficient wireless cable
channel rights to commence construction of a system and 5 in which the Company
has leases with or options from applicants for channel licenses that the
Company expects to be granted by the Federal Communications Commission (the
"FCC"). As of November 30, 1995, the 33 Existing Systems were providing
wireless cable service to approximately 117,000 subscribers.
The executive offices of the Company are located at 903 North Bowser, Suite
140, Richardson, Texas 75081, and the telephone number of the executive offices
is (214) 479-9244. The Company's operations are based in Durant, Oklahoma.
WIRELESS CABLE INDUSTRY
In 1983, the FCC allocated a portion of the radio spectrum from 2500 to 2700
megahertz ("MHz"), which had previously been allocated entirely for educational
use, to commercial wireless cable operation. Simultaneously, the FCC also
modified its rules on the usage of the remaining portion of such spectrum
allocated
1
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for educational use. Nevertheless, regulatory and other obstacles impeded the
growth of the wireless cable industry through the remainder of the 1980s. The
FCC maintained burdensome restrictions on the commercial use of educational
channel capacity and many program suppliers were unwilling to provide
programming to wireless cable operators on terms comparable to those offered to
traditional hard-wire cable operators, if at all. During the 1990s, several
factors have contributed to the growth of the wireless cable industry,
including (i) Congressional scrutiny of the rates and practices of the
traditional hard-wire cable industry, (ii) improved technology, particularly
signal encryption, (iii) regulatory reforms by the FCC to facilitate the growth
and competitive impact of the wireless cable industry, including permitting
channel aggregation, and (iv) increased availability of programming for
wireless cable systems.
In each of the Company's markets, 32 channels of spectrum are available for
wireless cable transmission. Of these, 12 wireless cable channels can be owned
by for-profit entities ("MDS" channels) and the other 20 channels generally
must be owned by qualified non-profit educational organizations ("ITFS"
channels). ITFS channels must be used at least 20 hours per week for
educational programming, while the remaining "excess air time" may be leased to
wireless cable operators for commercial use. Certain commercially available
programs, such as The Discovery Channel and A&E, qualify as educational and
thereby facilitate full-time usage of an ITFS channel by commercial wireless
cable operators.
Wireless cable programming is transmitted through the air via microwave
frequencies from a transmission facility ("head-end") to a small receiving
antenna at each subscriber's location. To a subscriber, wireless cable provides
a high quality picture and a reliable signal. The Company can offer its
subscribers HBO, Showtime, Disney, ESPN, CNN, USA, WGN, WTBS, Discovery, the
Nashville Network, A&E and other programming services and pay-per-view, as well
as local off-air VHF/UHF channels.
BUSINESS STRATEGY
The Company's primary business objective is to develop, own and operate
wireless cable television systems in markets in which the Company believes it
can achieve positive cash flow and operating income rapidly after system launch
and then expand such system while increasing such system's operating income.
Rural Market Focus. The Company aggregates wireless cable channel rights and
locates operations in geographic clusters of small to mid-size markets that
have a substantial number of households not currently passed by traditional
hard-wire cable. The Company believes that this size market typically has a
stable economic base, less competition from alternative forms of entertainment
and terrain and other conditions conducive to wireless cable transmissions.
Managed Subscriber Penetration. The Company attempts to manage system launch
and subscriber growth in order to contain system launch costs and to achieve
positive cash flow rapidly. Typically, the Company's operating systems achieve
positive monthly operating cash flow upon obtaining an average of approximately
1,500 subscribers. Within a system, the Company initially directs its marketing
at unpassed households, which typically have limited access to local off-air
VHF/UHF broadcast channels. Accordingly, the Company believes it can launch
service successfully in most of its markets with only 12 channels of
programming, allowing it to contain system launch costs and achieve positive
cash flow with a lower number of subscribers. Generally, once a system achieves
positive operating cash flow, the Company will expand the channel offering and
add subscribers while increasing such system's positive operating cash flow. As
of November 30, 1995, 17 of the Company's operating systems were generating
positive monthly operating cash flow. The remaining operating systems that were
not generating positive monthly operating cash flow had not reached an average
of 1,500 subscribers.
Low Cost Structure. Wireless cable systems typically cost significantly less
to build and operate than traditional hard-wire cable systems for several
reasons. First, while both traditional hard-wire cable operators
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and wireless cable operators must construct a head-end, traditional hard-wire
cable operators must also install an extensive network of coaxial cable and
amplifiers in order to transmit signals from the head-end to subscribers. Once
the head-end is constructed, the Company estimates that each additional
wireless cable subscriber currently requires an incremental capital expenditure
by the Company of approximately $395 to $435, consisting of, on average, $275
to $300 of material, $95 to $105 of installation labor and overhead charges and
$25 to $30 of direct commission. Such incremental capital expenditures are
variable costs and are partially offset by installation fees paid by
subscribers. Second, without an extensive cable network, wireless cable
operators typically incur lower system maintenance costs and depreciation
expense. Third, programming is generally available to traditional hard-wire and
wireless cable operators on comparable terms, although operators that have a
smaller number of subscribers often are required to pay higher per-subscriber
fees. Fourth, the Company currently experiences a low rate of subscriber
turnover of on average approximately 1.5% per month, as compared to the "churn"
rate of approximately 3% per month typically experienced by traditional hard-
wire cable operators. Reduced subscriber turnover reduces installation and
marketing expenses. Finally, by locating its operations in geographic clusters,
the Company can further contain costs by taking advantage of economies of scale
in management, sales and customer service.
Acquisition of ITFS Channel Rights. Because the Company believes it can
launch service successfully in its markets with as few as 12 channels of
programming, the Company focuses on development of the 20 available ITFS
channels. In most of the Company's markets, few, if any, licenses for ITFS
channels had been granted by the FCC to any non-profit educational
organizations prior to the Company's initial development of such markets. The
Company cooperates with many non-profit educational organizations in obtaining
ITFS licenses from the FCC. Once the Company has secured rights to at least 12
ITFS channels in a market, the Company believes it can launch a commercially
viable system in such market. The Company believes that its strategy of first
developing the ITFS channels, in lieu of the MDS channels, has resulted in
aggregate leased license expense in its systems in operation that is less than
the industry-wide average leased license expense.
COMPANY HISTORY
The Company's founders, David E. Webb, the President and Chief Executive
Officer, and L. Allen Wheeler, a member of the Board of Directors, began
acquiring licenses, leases and options to wireless cable channels in 1989, both
individually and through various controlled entities. In September 1990,
Messrs. Webb and Wheeler formed Wireless Communications, Inc., an Oklahoma
corporation ("WCI"), and contributed to it certain of their direct and indirect
wireless cable assets and liabilities. In October 1993, Hunt Capital, a
principal stockholder of the Company and affiliate of J.R. Holland, Jr., the
Chairman of the Board of the Company, acquired a $988,000 10% promissory note
due September 14, 1994 payable by WCI (the "Hunt Note") from an affiliate of
Hunt Capital, which had entered into a loan agreement with WCI in September
1993.
The Company was incorporated in Delaware in October 1993 to succeed to the
wireless cable businesses previously conducted by Messrs. Webb and Wheeler,
directly and indirectly through various controlled entities, including WCI.
Messrs. Webb and Wheeler contributed all capital stock of entities engaged in
the wireless cable businesses owned by them to the Company for a 50% equity
interest. Hunt Capital contributed the Hunt Note, including accrued interest,
and $2.0 million to the Company for the remaining 50% equity interest. In
addition, Messrs. Webb and Wheeler leased all other wireless cable channel
license rights controlled, directly and indirectly, by them to the Company and
granted the Company an option to purchase such license rights at a nominal
price.
In April and June 1994, the Company sold 2.4 million shares of common stock,
$.001 par value per share (the "Common Stock"), representing 23% of its then
outstanding Common Stock, in its initial public offering (the "Initial Public
Offering"). The aggregate net proceeds to the Company from the Initial Public
Offering were approximately $22.3 million. In November 1994, the Company
consummated a private placement (the "Sale of
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Convertible Notes") of $40.2 million in gross proceeds of 9% Convertible
Subordinated Discount Notes due 2004 (the "Convertible Notes") to Jupiter
Partners L.P. ("Jupiter") and an accredited individual. See "Principal
Stockholders" and "Description of Certain Indebtedness."
THE TRANSACTIONS
Upon the consummation of the Transactions, Heartland, directly or through one
or more subsidiaries, will acquire all the assets and liabilities and succeed
to the businesses of American Wireless Systems, Inc. ("AWS") and CableMaxx,
Inc. ("CMAX") and acquire substantially all of the assets and certain of the
liabilities and succeed to all of the businesses of the Fort Worth Wireless
Cable T.V. Associates (the "FTW Partnership"), Wireless Cable TV Associates #38
(the "Minneapolis Partnership") and Three Sixty Corp. ("TSC"), the successor to
Technivision, Inc. ("Technivision"). The Transactions are described under the
caption "The Transactions and Planned Divestitures" herein.
AWS. American Wireless Systems, Inc., a Delaware corporation, currently owns
a minority interest in and manages the operations of wireless cable systems in
Minneapolis, Minnesota and Fort Worth, Texas and owns certain wireless cable
rights in Dallas, Texas, Los Angeles, California and Memphis, Tennessee. The
Minneapolis and Fort Worth markets combined have approximately 1,500,000
households, of which AWS estimates approximately 1,325,000 are serviceable by
LOS transmissions.
AWS owns a 25% membership interest in American Wireless System of
Minneapolis, LLC, a Delaware limited liability company ("Minneapolis LLC"),
that owns and operates the Minneapolis system, which system was launched in
March 1993. The Minneapolis system provides 29 channels of service, including
eight local off-air VHF/UHF channels, to approximately 2,740 subscribers as of
November 30, 1995. AWS owns an interest in and manages the operations of the
Minneapolis system pursuant to joint venture and management agreements with
Minneapolis LLC and its joint venture partner, the Minneapolis Partnership, the
owner of a 75% membership interest in the Minneapolis LLC. In connection with
these agreements, AWS has loaned to the Minneapolis Partnership $2,000,000, the
proceeds of which have been contributed to the Minneapolis LLC and used to fund
operating expenses and the costs of subscriber growth.
AWS owns a 20.01% beneficial interest in a joint venture that owns and
operates the Fort Worth system (the "FTW Venture"), which system was launched
in November 1992. The Fort Worth system provides 27 channels of services,
including 13 local off-air VHF/UHF channels, to approximately 1,550 subscribers
as of November 30, 1995. AWS also has acquired the rights to eight additional
wireless cable channels that AWS anticipates will be added to the Fort Worth
system.
AWS directly owns the rights to 16 wireless cable channels in Dallas, nine
wireless cable channels in Los Angeles and 22 wireless cable channels in
Memphis. In Dallas, AWS is negotiating to acquire additional wireless cable
channel rights. On November 7, 1995, AWS entered into a contract with TruVision
Cable, Inc. ("TruVision") to sell all of AWS's assets in Memphis for $3,900,000
in cash. Pursuant to the Amended and Restated Agreement and Plan of Merger
dated as of September 11, 1995 (the "AWS Merger Agreement"), among the Company,
AWS and Heartland Merger Sub, Inc., a wholly-owned subsidiary of the Company
("AWS Merger Sub"), at least $750,000 of the proceeds of such transaction will
be held in a deposit account for the benefit of the Company pending the
consummation of the merger of AWS Merger Sub with and into AWS (the "AWS
Merger") and the remaining proceeds will be used to offset the permitted
liabilities of AWS. AWS anticipates that this transaction will close by
February 29, 1996.
FTW Partnership. Fort Worth Wireless Cable T.V. Associates, a California
general partnership, owns as its principal asset a 79.99% interest (the "FTW
Interest") in the FTW Venture. AWS owns the remaining 20.01% beneficial
interest in the FTW Venture.
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Minneapolis Partnership. Wireless Cable TV Associates #38, a California
general partnership, owns as its principal asset a 75% membership interest (the
"Minneapolis Interest") in the Minneapolis LLC, the owner and operator of the
Minneapolis system. AWS owns the remaining 25% membership interest in the
Minneapolis LLC.
CableMaxx. CableMaxx, Inc., a Delaware corporation, owns, develops and
operates wireless cable television systems and, as of November 30, 1995,
provided subscription television services to approximately 34,300 subscribers
in a cluster of wireless cable television systems located in Texas (the "Texas
Cluster"). The Texas Cluster provides service to customers in a 250-mile long
and 70-mile wide area encompassing the cities of San Antonio, Austin,
Temple/Killeen and Waco through the utilization of four separate head-
end/transmission facilities. CMAX also presently holds wireless cable channel
rights in Sherman/Denison, Lubbock, Athens and Amarillo, Texas (the "Additional
Texas Systems") and Salt Lake City, Utah (the "Salt Lake City System"). In
connection with the Amended and Restated Agreement and Plan of Merger, dated as
of September 11, 1995 (the "CMAX Merger Agreement"), among the Company, CMAX
and Heartland Merger Sub 2, Inc., a wholly-owned subsidiary of the Company (the
"CMAX Merger Sub"), CMAX entered into a Sublease and Purchase Agreement with
the Company pursuant to which CMAX subleased to the Company all of its wireless
cable channel rights in the Additional Texas Systems. CMAX estimates that the
Texas Cluster, the Additional Texas Systems and the Salt Lake City System
collectively representing approximately 1,614,000 households which can be
served by LOS transmissions. CMAX also estimates that approximately 233,000
households in these markets are not passed by traditional hard-wire systems.
Three Sixty Corp. Three Sixty Corp., a New Jersey corporation, is the former
parent of Technivision, Inc., a Texas corporation. Technivision was merged into
TSC in January 1996 in order to facilitate the acquisition of certain of the
assets of TSC by the Company (the "TSC Transaction").
Prior to its merger into TSC, Technivision developed, owned and operated
wireless cable television systems in Corpus Christi, Texas and Dayton, Ohio. In
addition, Technivision owned the rights to develop and operate a wireless cable
television system with 27 channels in El Paso, Texas (collectively with the
Corpus Christi system and the Dayton system, the "TSC Systems"). Technivision
management estimates that the Corpus Christi, El Paso and Dayton markets have
approximately 795,000 households of which 588,000 are serviceable by LOS
transmissions. The Corpus Christi system, which was launched in April 1990,
provides 31 channels of service, including six local VHF/UHF off-air channels,
to approximately 15,468 subscribers as of November 30, 1995. The Dayton system,
which was launched in November 1993, provides 31 channels of services,
including five local VHF/UHF off-air channels, to approximately 3,242
subscribers as of November 30, 1995.
5
<PAGE>
Markets. The following table sets forth certain information with respect to
the markets to be acquired by Heartland in the Transactions:
<TABLE>
<CAPTION>
CURRENT
ESTIMATED CHANNELS NUMBER OF
ESTIMATED LINE-OF- (INCLUDING SUBSCRIBERS AT
TOTAL SIGHT OFF-AIR NOVEMBER 30,
TRANSACTION MARKET HOUSEHOLDS HOUSEHOLDS CHANNELS) 1995
----------- ------ ---------- ---------- ---------- --------------
<C> <S> <C> <C> <C> <C>
AWS/FTW Los Angeles, CA* ....... 3,029,500 2,726,500 9(1) --
Partnership/ Minneapolis, MN(2)* .... 958,900 882,200 29 2,744
Minneapolis Fort Worth, TX(2)* ..... 539,700 442,500 35(3) 1,554
Partnership Dallas, TX* ............ 981,500 872,400 16(1) --
Memphis, TN* ........... 376,900 350,600 22(1) --
--------- --------- ------
5,886,500 5,274,200 4,298
--------- --------- ------
CMAX Salt Lake City, UT* .... 454,000 434,000 27(4) --
Amarillo, TX(5)(6) ..... 90,000 80,000 9(7) --
Athens, TX(5)(6) ....... 90,000 60,000 7(7) --
Austin, TX ............. 360,000 250,000 31 12,299
Lubbock, TX(5)(6) ...... 110,000 100,000 12(8) --
San Antonio, TX* ....... 550,000 440,000 37 11,805
Sherman/Denison, TX .... 100,000 90,000 31(9) --
Temple/Killeen, TX ..... 110,000 80,000 35 6,312
Waco, TX ............... 100,000 80,000 35 3,860
--------- --------- ------
1,964,000 1,614,000 34,276
--------- --------- ------
TSC Dayton, OH* ............ 460,000 300,000 31 3,242
Corpus Christi, TX ..... 135,000 108,000 31 15,468
El Paso, TX ............ 200,000 180,000 27 --
--------- --------- ------
795,000 588,000 18,710
--------- --------- ------
8,645,500 7,476,200 57,284
========= ========= ======
</TABLE>
- --------
* Constitutes part of the Disposition Assets.
(1) These systems are not in operation and current channels do not include off-
air channels.
(2) Includes acquisition of assets from the FTW Partnership and the Minneapolis
Partnership.
(3) Includes eight channels that must be co-located at AWS's headend
transmission facility before programming may be effected on these channels.
(4) Of these channels, seven are the subject of pending applications.
(5) The Company currently has an operating system in Lubbock, Texas and certain
wireless cable channel rights in the Amarillo and Corsicana/Athens, Texas
markets.
(6) Currently subleased by the Company pursuant to the Sublease Agreement with
CMAX.
(7) Of these channels, an application relating to four channels has been
dismissed and is the subject of a reinstatement petition.
(8) Of these channels, four are the subject of an appeal by an unsuccessful
applicant for the frequencies.
(9) Of these channels, eight are the subject of uncontested application
proceedings.
Planned Divestitures. The Board of Directors of the Company has identified
the Maysville and Sweet Springs, Missouri, Grand Rapids/Moline, Michigan, Bloom
Center/Napoleon, Indiana and Flippin, Tennessee markets currently owned by the
Company, and the Los Angeles, California, Dallas, Fort Worth and San Antonio,
Texas, Memphis, Tennessee, Dayton, Ohio, Salt Lake City, Utah and Minneapolis,
Minnesota markets to be acquired in the Transactions (collectively, the
"Disposition Assets") as being markets for which the Company should seek one or
more disposition opportunities for cash, promissory notes, retained equity
interests or a combination thereof. Notwithstanding its determination to seek
the sale, exchange or other disposition of the Disposition Assets, the Company
believes that some or all of such markets, properly developed and operated,
offer attractive opportunities to participate in the wireless cable television
industry.
The Company is currently a party to an agreement relating to the disposition
of the Memphis and Flippin, Tennessee markets. The Company expects to sell the
Flippin market to TruVision for $1.5 million contemporaneously
6
<PAGE>
with the sale to TruVision by AWS of the Memphis market for $3.9 million
(collectively, the "Memphis Transaction"). The Company will not retain a direct
or indirect interest in these markets.
Effective December 12, 1995, the Company, CAI Wireless Systems, Inc., a
Connecticut corporation ("CAI"), and CS Wireless Systems, Inc., a Delaware
corporation and a wholly-owned subsidiary of CAI ("Newco"), entered into a
Participation Agreement (the "Participation Agreement"), pursuant to which the
Company or its subsidiaries will contribute or sell to Newco the wireless cable
assets and all related liabilities comprising the Disposition Assets, other
than the assets to be sold to TruVision as part of the Memphis Transaction and
the Los Angeles, California channel rights of AWS (which the Company will seek
to sell directly to a third party). Simultaneous with the Company's
contribution and sale of such assets to Newco, CAI or its subsidiaries will
contribute to Newco all of the outstanding capital stock of certain
subsidiaries of CAI, which will retain all of their assets and liabilities
related to the wireless cable markets of Bakersfield, California, Charlotte,
North Carolina, Cleveland, Ohio and Stockton/Modesto, California. Subject to
certain conditions, the Company or CAI may sell certain of these assets prior
to the closing or contribute cash to Newco in lieu thereof (such transactions
collectively being referred to as the "Newco Transaction"). The Company
contemplates that the Newco Transaction will close contemporaneously with or
immediately following consummation of the Transactions. The Newco Transaction
will create a company with approximately 5.7 million LOS households and 54,700
subscribers.
In connection with the Newco Transaction, the Company (or its contributing
subsidiaries) will receive (i) shares of Newco common stock (the "Newco Common
Stock") constituting approximately 39.76% of the shares of Newco Common Stock
outstanding immediately after the closing of the Newco Transaction, (ii)
approximately $28.3 million in cash payable by Newco at the closing, (iii) a
promissory note in the principal sum of $25.0 million payable nine months from
the closing and secured by proceeds of a contemplated issuance by Newco of
$150.0 million of senior discount notes (the "Newco Financing") and (iv) a
promissory note in the sum of $15.0 million payable 10 years from the closing,
and prepayable upon asset sales and certain other events. Within six months of
closing, CAI and the Company will complete certain so-called post-closing net
working capital calculations. Components of such calculations include the
relative accounts payable, accounts receivable and related working capital
assets of the contributed systems, the number of granted channels represented
and actually contributed to Newco for each market, increase or decrease in the
number of subscribers in each contributed system from the number of subscribers
stated in the Participation Agreement and related factors. Following the
completion of these calculations, an increase or decrease will occur in the
principal amounts of the promissory notes received by the Company from Newco,
and CAI will either contribute to or be entitled to a distribution of cash from
Newco, depending upon such calculations. See "The Transactions and Planned
Divestitures."
THE EXCHANGE OFFER
Registration Rights The Old Notes were sold by the Company on April
Agreement................... 26, 1995 to BT Securities Corporation and Lazard
Freres & Co. (the "Initial Purchasers"), who
placed the Old Notes with institutional
investors. In connection therewith, the Company
and the Initial Purchasers executed and delivered
for the benefit of the holders of the Old Notes a
registration rights agreement (the "Registration
Rights Agreement") providing, among other things,
for the Exchange Offer.
The Exchange Offer.......... New Notes are being offered in exchange for a
like principal amount of Old Notes. As of the
date hereof, $100,000,000 aggregate
7
<PAGE>
principal amount of Old Notes are outstanding.
The Company will issue the New Notes to Holders
promptly following the Expiration Date. See "Risk
Factors -- Consequences of Failure to Exchange."
Expiration Date.............
5:00 p.m., New York City time, on March , 1996,
unless the Exchange Offer is extended as provided
herein, in which case the term "Expiration Date"
means the latest date and time to which the
Exchange Offer is extended.
Interest....................
Each New Note will bear interest from October 15,
1995, the date of the last interest payment on
the Old Notes. No interest will be paid on the
Old Notes accepted for exchange.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer....................... customary conditions, which may be waived by the
Company. The Company reserves the right to amend,
terminate or extend the Exchange Offer at any
time prior to the Expiration Date upon the
occurrence of any such condition. See "The
Exchange Offer -- Conditions."
Procedures for Tendering
Old Notes................... Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, or an
Agent's Message (as defined herein), together
with the Old Notes and any other required
documentation to the exchange agent (the
"Exchange Agent") at the address set forth
herein. By executing the Letter of Transmittal or
delivering an Agent's Message, each Holder will
represent to the Company, among other things,
that (i) the New Notes acquired pursuant to the
Exchange Offer by the Holder and any beneficial
owners of Old Notes are being obtained in the
ordinary course of business of the person
receiving such New Notes, (ii) neither the Holder
nor such beneficial owner has an arrangement with
any person to participate in the distribution of
such New Notes, (iii) neither the Holder nor such
beneficial owner nor any such other person is
engaging in or intends to engage in a
distribution of such New Notes and (iv) neither
the Holder nor such beneficial owner is an
"affiliate," as defined under Rule 405
promulgated under the Securities Act, of the
Company. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities (other
than Old Notes acquired directly from the
Company), may participate in the Exchange Offer
but may be deemed an "underwriter" under the
Securities Act and, therefore, must acknowledge
in the Letter of Transmittal that it will deliver
a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. See "The Exchange
Offer -- Procedures for Tendering" and "Plan of
Distribution."
8
<PAGE>
Special Procedures for
Beneficial Owners..........
Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered Holder promptly and instruct such
registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such beneficial owner's own behalf,
such beneficial owner must, prior to completing
and executing the Letter of Transmittal or
delivering an Agent's Message and delivering his
Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in such
beneficial owner's name or obtain a properly
completed bond power from the registered Holder.
The transfer of registered ownership may take
considerable time. See "The Exchange Offer --
Procedures for Tendering."
Guaranteed Delivery
Procedures.................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or an Agent's Message
or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn as provided herein at
any time prior to 5:00 p.m., New York City time,
on the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of New Notes...... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer -- Terms of the Exchange
Offer."
Exchange Agent.............. Bankers Trust Company is serving as Exchange
Agent in connection with the Exchange Offer. See
"The Exchange Offer -- Exchange Agent."
Use of Proceeds............. There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange Offer.
Federal Income Tax The exchange of Old Notes for New Notes will not
Consequences............... be a taxable exchange for Federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Consequences of Failure to Holders of Old Notes who do not exchange their
Exchange................... Old Notes for New Notes pursuant to the Exchange
Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set
forth in the legend thereon as a consequence of
the issuance of the Old Notes
9
<PAGE>
pursuant to exemptions from, or in transactions
not subject to, the registration requirements of
the Securities Act and applicable state
securities laws. In general, Old Notes may not be
offered or sold unless registered under the
Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the
Securities Act and applicable state securities
laws. No increased cash interest will be payable
on the Old Notes from and after the Expiration
Date.
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $100,000,000 aggregate principal amount of Old
Notes. The terms of the New Notes are identical in all material respects to the
Old Notes, except that the New Notes have been registered under the Securities
Act and, therefore, will not bear legends restricting their transfer and will
not contain certain provisions providing for an increase in the interest rate
on the Old Notes under certain circumstances relating to the Registration
Rights Agreement, which provisions will terminate as to all of the Notes upon
the consummation of the Exchange Offer. The New Notes will evidence the same
debt as the Old Notes and, except as set forth in the immediately preceding
sentence, will be entitled to the benefits of the Indenture, under which both
the Old Notes were, and the New Notes will be, issued. See "Description of
Notes."
The New Notes............... $100,000,000 aggregate principal amount of 13%
Series B Senior Notes due 2003.
Maturity Date............... April 15, 2003.
Interest Rate and Payment
Dates....................... The New Notes will bear interest at the rate of
13% per annum. Interest will be payable semi-
annually on April 15 and October 15 of each year,
commencing on April 15, 1996.
Escrow and Disbursement
Agreement.................. The Company has placed approximately $24.1
million of the net proceeds realized from the
sale of 100,000 units (the "Units") consisting of
the Old Notes and 600,000 warrants (the
"Warrants") to purchase an equal number of shares
of Common Stock (the "Warrant Shares") to the
Initial Purchasers, representing funds sufficient
to pay two years' interest on the Notes, into an
Escrow Account (as defined herein) to be held by
the Escrow Agent (as defined herein) for the
benefit of the holders of the Notes. Until
disbursed in accordance with the Escrow and
Disbursement Agreement (as defined herein), the
Escrow Account is designed to secure a portion of
the Company's obligations under the Notes. Funds
will be disbursed from the Escrow Account only to
pay interest on the Notes and, upon certain
repurchases or redemptions of the Notes, to pay
principal of and premium, if any, thereon.
Pending such disbursement, all funds contained in
the Escrow Account will be invested in Marketable
Securities (as defined herein). See "Description
of Notes -- Disbursement of Funds -- Escrow
Account" and "Description of Notes -- Security."
10
<PAGE>
Optional Redemption......... The New Notes will be redeemable, in whole or in
part, at the option of the Company at any time on
or after April 15, 1999 at the redemption prices
set forth herein plus accrued and unpaid interest
thereon, if any, to the redemption date. See
"Description of Notes -- Optional Redemption."
Repurchase Upon Sale of
Capital
Stock to Strategic Equity In the event of a sale by the Company prior to
Investor.................... April 15, 1998 of at least $25.0 million of its
Capital Stock (as defined herein) (other than
Disqualified Stock (as defined herein)) to a
Strategic Equity Investor (as defined herein) in
a single transaction, up to 25% of the Notes may
be redeemed at the election of the Company upon
not less than 30 nor more than 45 days' prior
notice given within 30 days after such sale from
the net cash proceeds thereof at the redemption
price set forth herein plus accrued and unpaid
interest thereon, if any, to the date of
redemption, provided that at least 75% in
aggregate principal amount of the Notes
originally issued remains outstanding immediately
after the occurrence of such redemption. See
"Description of Notes -- Optional Redemption."
Change of Control........... In the event of a Change of Control (as defined
herein), the Company will be required, subject to
certain conditions, to make an offer to
repurchase all of the Notes at 101% of the
principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of
repurchase. There can be no assurance that the
Company will have the financial resources
necessary to repurchase the Notes upon a Change
of Control. See "Description of Notes -- Offer
to Purchase Upon Change of Control."
Ranking.....................
The New Notes will be senior obligations of the
Company ranking pari passu in right of payment to
all existing and future indebtedness of the
Company, other than indebtedness that is
expressly subordinated to the New Notes. The
Company has no senior indebtedness, other than
the Notes. The Notes are senior in right of
payment to the Convertible Notes, which are
expressly subordinated to the Notes. However,
subject to certain limitations set forth in the
Indenture, the Company and its subsidiaries may
incur additional indebtedness which is secured by
assets of the Company and its subsidiaries. In
addition, the Company is a holding company that
conducts substantially all of its business
through its subsidiaries and, therefore, the
Notes are effectively subordinated to all
liabilities of the Company's subsidiaries,
including trade payables. As of September 30,
1995, on a pro forma basis after giving effect to
the consummation of the Transactions, the
Company's consolidated subsidiaries had
approximately $12.1 million of liabilities. The
Indenture permits the Company's subsidiaries to
incur additional indebtedness. See "Description
of Notes -- General" and "Description of Notes --
Certain Covenants -- Limitation on Indebtedness."
11
<PAGE>
Certain Covenants........... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to make restricted
payments, to incur indebtedness, to create liens,
to issue preferred or other capital stock of
subsidiaries, to sell assets, to permit
restrictions on dividends and other payments by
subsidiaries to the Company, to consolidate,
merge or sell all or substantially all of its
assets, to engage in transactions with affiliates
or to engage in certain businesses. These
covenants are subject to important exceptions and
qualifications. See "Description of Notes --
Certain Covenants."
For additional information regarding the Notes, see "Description of Notes."
RISK FACTORS
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY HOLDERS PRIOR TO TENDERING OLD NOTES IN THE EXCHANGE OFFER.
12
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial and operating
data of the Company. The summary historical statement of operations presented
below for the years ended December 31, 1992, 1993 and 1994 were derived from
the consolidated financial statements of the Company, which were audited by
KPMG Peat Marwick LLP, independent certified public accountants. The summary
consolidated statement of operations and balance sheet data presented below as
of September 30, 1995 and for the nine months ended September 30, 1994 and 1995
were derived from the unaudited consolidated financial statements of the
Company, which are included elsewhere in this Prospectus and which, in the
opinion of management of the Company, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of such unaudited interim periods. The statement of operations data for
interim periods are not necessarily indicative of results for subsequent
periods or for the full year. The information contained in this table should be
read in conjunction with "Selected Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements (including the notes thereto) appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1992 1993 1994 1994 1995
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues........ $ 205,382 $ 868,765 $ 2,229,494 $ 1,289,526 $ 9,292,837
Total operating
expenses............. 218,888 1,105,982 6,043,476 3,016,138 14,309,893
Operating loss........ (13,506) (237,217) (3,813,982) (1,726,612) (5,017,056)
Interest expense,
net(/1/)............. (207) (73,306) (210,113) 60,519 (6,864,367)
Income tax benefit.... -- -- 1,594,963 649,510 1,307,137
Net loss.............. (50,822) (406,101) (3,043,321) (1,213,894) (11,178,095)
OTHER DATA:
EBITDA(/2/)........... $ 21,413 $ (98,657) $(2,716,314) $(1,307,652) $(1,050,936)
Capital
expenditures(/3/).... 1,401,737 5,141,021 44,500,351 18,126,653 44,016,522
Deficiency of earnings
to fixed
charges(/4/)......... 50,822 406,101 4,638,284 1,863,404 12,485,232
OPERATING DATA (END OF
PERIOD):
Number of systems in
operation............ 1 5 13 8 30
Estimated total LOS
households in systems
in operation......... 24,319 371,652 1,108,230 843,904 2,723,365
Subscribers........... 1,076 2,731 19,838 8,040 64,357
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, excluding restricted investments..... $ 37,155,064
Restricted investments.......................................... 24,747,214
Total assets.................................................... 200,150,474
Long-term debt, including current portion....................... 140,045,039
Total stockholders' equity...................................... 48,293,817
</TABLE>
- --------
(1) Interest income was $1,185, $9,610, $379,654, $189,308 and $2,044,092 for
each of the years ended December 31, 1992, 1993 and 1994 and the nine
months ended September 30, 1994 and 1995, respectively.
(2) "EBITDA" represents operating income (loss) before depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness.
However, EBITDA is not a financial measure determined under generally
accepted accounting principles and should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of funds available for discretionary or other liquidity
purposes.
13
<PAGE>
(3) Capital expenditures for the period from September 1, 1990 (inception) to
December 31, 1990 were comprised of $10,000 for purchases of systems and
equipment and $32,065 for expenditures for leased licenses; for the year
ended December 31, 1991, $25,000 for purchases of systems and equipment and
$281,484 for expenditures for leased licenses; for the year ended December
31, 1992, $604,082 for purchases of systems and equipment and $797,655 of
expenditures for leased licenses; for the year ended December 31, 1993,
$2,072,937 for purchases of systems and equipment and $3,068,084 for
expenditures for leased licenses; for the year ended December 31, 1994,
$12,414,501 for purchases of systems and equipment, $3,354,471 for
expenditures for leased licenses, $12,431,379 for the investment in Rural
Vision Joint Venture and $16,300,000 for the purchase of certain assets
from Rural Vision Joint Venture and the acquisition of the Lindsay system;
for the nine months ended September 30, 1994, $4,011,480 for systems and
equipment, $2,465,265 for leased licenses and $11,649,908 for the
investment in Rural Vision Joint Venture; and for the nine months ended
September 30, 1995, $25,575,252 for purchases of systems and equipment,
$1,592,024 of expenditures for leased licenses, $5,426,432 for the
investment in Rural Vision Joint Venture and $11,422,814 for the
acquisition of wireless cable television systems in Lubbock, Texas and
Tulsa, Oklahoma and the acquisition of certain additional assets from Rural
Vision Joint Venture.
(4) In calculating the deficiency of earnings to fixed charges, earnings
consists of net losses prior to income tax benefit and fixed charges. Fixed
charges consists of interest expense, amortization of debt issuance costs
and one-third of rental payments on operating leases (such amount having
been deemed by the Company to represent the interest portion of such
payments).
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following table sets forth summary pro forma financial data of the
Company. The summary unaudited pro forma statement of operations data gives
effect to (i) the Transactions and (ii) various other transactions previously
consummated by the Company subsequent to January 1, 1994, as if such events had
occurred on January 1, 1994. The summary unaudited balance sheet data gives
effect to (i) the Transactions and (ii) various other transactions previously
consummated by the Company subsequent to September 30, 1995, as if such events
had occurred on September 30, 1995. The information contained in this table
should be read in conjunction with "Pro Forma Financial Information Relative to
the Transactions" and "Pro Forma Financial Information for Consummated Events"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................... $ 20,091,635 $ 20,757,529
Total operating expenses......................... 34,716,226 33,264,971
Operating loss................................... (14,624,591) (12,507,442)
Interest expense, net............................ 5,303,165 8,789,219
Income tax benefit............................... 7,282,895 7,839,079
Net loss......................................... (13,649,455) (14,253,813)
OTHER DATA:
EBITDA(1)........................................ $ (3,449,980) $ (783,996)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30,
1995
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, excluding restricted investments..... $ 68,613,369
Restricted investments.......................................... 24,747,214
Total assets.................................................... 428,093,782
Long-term debt, including current portion....................... 141,407,486
Total stockholders' equity...................................... 244,133,989
</TABLE>
- --------
(1) "EBITDA" represents operating income (loss) before depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness.
However, EBITDA is not a financial measure determined under generally
accepted accounting principles and should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of funds available for discretionary or other liquidity
purposes.
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RISK FACTORS
Holders should carefully consider the following risk factors, as well as the
other information included in this Prospectus, prior to making a decision to
tender their Old Notes in the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange the Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by any holder thereof
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 promulgated under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement with any person to
participate in the distribution of such New Notes and neither such holder nor
any such other person is engaging in or intends to engage in a distribution of
such New Notes. Notwithstanding the foregoing, each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with any resale of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities
(other than Old Notes acquired directly from the Company). The Company has
agreed that, for a period of 120 days from the date of this Prospectus, it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution." However, the ability of any
Holder to resell the New Notes is subject to applicable state securities laws
as described in "Risk Factors -- Blue Sky Restrictions on Resale of New
Notes." Holders of Old Notes who do not exchange the Old Notes for New Notes
pursuant to the Exchange Offer will not be entitled to receive increased cash
interest on the Old Notes from and after the Expiration Date.
NECESSITY TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and to avoid the restrictions on
transfer of the Old Notes, Holders of Old Notes must transmit a properly
completed Letter of Transmittal or an Agent's Message, including all other
documents required by such Letter of Transmittal, to the Exchange Agent at one
of the addresses set forth below under "The Exchange Offer -- Exchange Agent"
on or prior to the Expiration Date. In addition, either (i) certificates for
such Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal or (ii) a timely confirmation of a book-entry transfer of such Old
Notes, if such procedure is available, into the Exchange Agent's account at
The Depository Trust Company pursuant to the procedure for book-entry transfer
described herein, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the Holder must comply with the guaranteed delivery
procedures described herein. See "The Exchange Offer."
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption
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from registration or qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to
register or qualify the resale of the New Notes in any such jurisdictions.
However, an exemption is generally available for sales to registered broker-
dealers and certain institutional buyers. Other exemptions under applicable
state securities laws may also be available.
SUBSTANTIAL INDEBTEDNESS OF THE COMPANY; INSUFFICIENCY OF EARNINGS TO COVER
FIXED CHARGES
The Company has a substantial amount of indebtedness. As of September 30,
1995, on a pro forma basis after giving effect to the consummation of the
Transactions, the Company would have had approximately $143.2 million of
Indebtedness (as defined herein) and the Company's consolidated subsidiaries
would have had approximately $12.1 million of total liabilities. The Indenture
limits, but does not prohibit, the incurrence of additional indebtedness,
secured or unsecured, by the Company and its subsidiaries. As a result,
although funds sufficient to pay two years' interest on the Notes have been
placed into the Escrow Account, thereafter a substantial portion of the
Company's cash flow will be devoted to debt service. In addition, although the
Convertible Notes accrete to face value and no cash interest is payable
thereunder prior to the earlier of November 30, 1999 and the occurrence of
certain events of default (the "Applicable Date"), a substantial portion of
the Company's earnings will be reduced by non-cash debt service. The debt
service requirements of any additional indebtedness could make it more
difficult for the Company to make principal and interest payments on the
Notes. For the years ended December 31, 1992, 1993 and 1994 and for the nine
months ended September 30, 1994 and 1995, earnings were insufficient to cover
fixed charges by $50,822, $406,101, $4,638,284, $1,863,404 and $12,485,232,
respectively. The ability of the Company to make payments of principal and
interest will be largely dependent upon its future financial performance. Many
factors, some of which will be beyond the Company's control (such as
prevailing economic conditions), will affect its financial performance. There
can be no assurance that the Company will be able to generate sufficient cash
flow to cover required interest and principal payments. If the Company is
unable to meet interest and principal payments in the future, it may,
depending upon the circumstances which then exist, seek additional equity or
debt financing, attempt to refinance its existing indebtedness or sell all or
part of its business or assets to raise funds to repay its indebtedness. There
can be no assurance that sufficient equity or debt financing will be
available, or, if available, that it will be on terms acceptable to the
Company, that the Company will be able to refinance its existing indebtedness
or that sufficient funds could be raised through asset sales. The Company's
high level of indebtedness has several important consequences, including, but
not limited to: (i) significant interest expense and principal repayment
obligations resulting in substantial annual fixed charges; (ii) significant
limitations on the Company's ability to obtain financing, make capital
expenditures and acquisitions and take advantage of other business
opportunities that may arise; and (iii) increased vulnerability to adverse
general economic and industry conditions. There can be no assurance that the
Company will be profitable in the future. See "Risk Factors -- Holding Company
Structure; Dependence of Company on Subsidiaries for Repayment of New Notes,"
"Risk Factors -- Ranking of New Notes," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Notes."
HOLDING COMPANY STRUCTURE; DEPENDENCE OF COMPANY ON SUBSIDIARIES FOR REPAYMENT
OF NEW NOTES
The New Notes will be obligations of the Company exclusively. Substantially
all of the operations of the Company are conducted through direct and indirect
subsidiaries. The Company's cash flow and, consequently, its ability to
service debt, including the New Notes, is dependent upon the cash flow of its
subsidiaries and the payment of funds by those subsidiaries to the Company in
the form of loans, dividends or otherwise. The subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts due pursuant to the New Notes or to make any funds available
therefor, whether in the form of loans, dividends or otherwise. In addition,
certain of the Company's subsidiaries may become parties to credit agreements,
which may contain limitations on the ability of such subsidiaries to pay
dividends or to make loans or advances to the Company. The Indenture limits
the ability of the Company to create or permit restrictions on dividends and
other payments by its subsidiaries. See "Description of Notes -- Certain
Covenants -- Dividend and Other Payment Restrictions Affecting Subsidiaries."
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Because the Company is a holding company that conducts its business through
its subsidiaries, all existing and future liabilities of the Company's
subsidiaries, including trade payables, will be effectively senior to the New
Notes. As of September 30, 1995, on a pro forma basis after giving effect to
the consummation of the Transactions, the Company's consolidated subsidiaries,
including those that are not wholly-owned by the Company, had aggregate
liabilities of approximately $12.1 million. The Indenture limits, but does not
prohibit, the incurrence of additional indebtedness by the Company and its
subsidiaries. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Description
of Notes -- Certain Covenants -- Limitation on Indebtedness."
RANKING OF NEW NOTES
The New Notes will not be secured by any of the assets of the Company except
to the limited extent provided for by the Escrow and Disbursement Agreement
and will become general unsecured obligations of the Company upon disbursement
in full of the funds in the Escrow Account. The Company and its subsidiaries
are permitted to incur secured indebtedness. See "Description of Notes --
Disbursement of Funds -- Escrow Account" and "Description of Notes -- Certain
Covenants -- Limitation on Indebtedness." Any holders of secured indebtedness
of the Company would be entitled to payment of their indebtedness out of the
proceeds of their collateral prior to the holders of any general unsecured
obligations of the Company, including the New Notes.
The New Notes will be senior obligations of the Company ranking pari passu
in right of payment as to all existing and future indebtedness of the Company,
other than indebtedness that is expressly subordinated to the New Notes. The
Company has no senior indebtedness, other than the Notes. The New Notes will
be senior in right of payment to the Convertible Notes, which are expressly
subordinated to the New Notes. However, the Company and its subsidiaries may
incur additional indebtedness which is secured by assets of the Company and
its subsidiaries. In the event of any distribution or payment of the assets of
the Company in any foreclosure, dissolution, winding-up, liquidation or
reorganization, holders of secured indebtedness will have a secured prior
claim to the assets of the Company that constitute their collateral. In the
event of bankruptcy, liquidation or reorganization of the Company, except to
the extent assets are available to holders of the Notes under the Escrow and
Disbursement Agreement, holders of the Notes will participate ratably with all
holders of indebtedness of the Company which is unsecured and all other
general creditors of the Company, based upon the respective amounts owed to
each holder or creditor, in the remaining assets of the Company, and there is
no assurance that there will be sufficient assets to pay amounts due on the
New Notes.
MANAGEMENT OF GROWTH; INTEGRATION OF ACQUIRED BUSINESSES
The Company has experienced rapid growth in the number of its employees and
the scope of its operating and financial systems. This growth has resulted in
an increased level of responsibility for both existing and new management
personnel. The consummation of the Transactions will result in additional
significant growth of the Company's operations, particularly if the planned
divestitures of assets by the Company are not consummated. To manage its
growth effectively, the Company will be required to implement and improve its
operating and financial systems and controls and to expand, train and manage
its employee base. In addition, the Company may be required to integrate into
its business one or more of the businesses acquired from CMAX, AWS, the FTW
Venture, the Minneapolis LLC and TSC, although the Company anticipates
disposing of all of the businesses acquired from AWS, the FTW Venture and the
Minneapolis LLC. The Company currently has no plans to retain any of the
executive officers of AWS, CMAX or TSC, other than Steven G. Johnson, the
President of AWS, with whom the Company has entered into a consulting and non-
competition agreement. As a result, the Company will be dependent upon
existing management to assume and perform the management functions formerly
performed by management of each of the parties to the Transactions. To the
extent that the Company's existing management is unable to assume or perform
these combined duties, the Company could be adversely affected. There can be
no assurance that the management, systems and controls currently in place or
any steps taken to improve such management, systems and controls will be
adequate in the future, whether or not the Company consummates one or more of
the Transactions.
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In addition, promptly following the consummation of the Transactions,
management of the Company will be required to make and implement a number of
strategic and operational decisions regarding the integration of the entity's
various operations and the exploitation of its assets and businesses. The
timing and manner of the implementation of decisions made with respect to the
ongoing business of the Company following the consummation of the Transactions
will materially affect the operations of the Company. Given the range of
potential outcomes arising from such decisions, and the interrelationships
among decisions to be made, it is difficult to quantify with precision the
composition of the Company. There can also be no assurance that any acquired
businesses will be integrated successfully into the Company's business.
NEED FOR ADDITIONAL FINANCING FOR GROWTH
The growth of the Company's business requires substantial investment on a
continuing basis to finance capital expenditures and expenses related to
subscriber growth and system development. Although the Company believes that
its cash and cash equivalent assets will be sufficient to fund the Company's
operations and expansion through at least the end of 1996, there is no
assurance that additional funds will not be necessary to complete the launch,
build-out and expansion of all of the Company's wireless cable systems and to
bring such systems to a mature state or that any such required additional
funds would be available on satisfactory terms and conditions, if at all. In
addition, the Company's capital needs will depend in part upon the success of
the Company's efforts to sell or otherwise dispose of the Disposition Assets
and the nature of any consideration received as a result of such dispositions.
To the extent assets and markets designated for disposition are not sold, or
are not sold for cash, the Company's requirements for additional funds will be
increased. There is also no assurance that, subject to certain limitations set
forth in the Indenture, the Company will not pursue, from time to time, 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, if any, will depend upon a number of factors, including
programming costs, equipment costs, marketing expenses, staffing levels,
subscriber growth and competitive conditions, many of which are not within the
Company's control. Failure to obtain any required additional financing could
materially adversely affect the growth, cash flow or earnings of the Company.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
POTENTIAL SIGNIFICANT INDUSTRY TRANSACTIONS
Significant industry transactions such as acquisitions and dispositions of
channel rights, joint ventures and other business transactions between and
among participants in the wireless cable television industry have occurred
with some frequency in the past, and the Company's management expects this
trend to continue in the foreseeable future. Although the Company regularly
engages in discussions concerning such industry transactions with other
industry participants, the Company is not currently subject to any material
definitive agreements in such regard except as disclosed herein. Whether the
Company proceeds with any of these discussions and whether the Company
ultimately negotiates and/or consummates any additional significant industry
transactions will depend, among other things, upon the business and prospects
of the Company, industry conditions, investment and growth opportunities
available to the Company, stock market conditions, availability and
suitability of financing for such transactions, regulatory and legal
considerations and other plans and requirements of the Company. No assurance
can be given that, if consummated, any such significant industry transaction
could be successfully integrated into the Company's business.
INVESTMENT IN NEWCO
Pursuant to the Newco Transaction, the Company shall contribute or sell the
Disposition Assets, other than the Memphis and Flippin, Tennessee markets to
be disposed of in the Memphis Transaction and the Los Angeles channel rights
(which the Company will seek to sell directly to a third party), to Newco in
exchange for cash, promissory notes and a retained equity interest. The
Stockholders Agreement (as defined herein) provides that the Company will have
the right to appoint less than a majority of the directors of Newco.
Therefore, the
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Company will not control the management of Newco, and it will be dependent
upon the skill, expertise and managerial efforts of the management of Newco to
achieve a return on this proposed substantial investment. To the extent that
Newco proves unsuccessful in its business, the value of the Company's
investment therein will be adversely affected. Further, consummation of the
Newco Transaction is subject to significant customary closing conditions. No
assurance can be given that such conditions will be satisfied. See "The
Transactions and Planned Divestitures."
LIMITED OPERATING HISTORY; NET LOSSES SINCE INCEPTION
Although the Company's business commenced in 1990, it did not generate any
revenues until April 1992. Holders, therefore, have limited historical
financial information about the Company upon which to base an evaluation of
the Company's performance and a decision to tender Old Notes in the Exchange
Offer. As of September 30, 1995, the Company had recorded net losses of
approximately $14.8 million since inception, due primarily to start-up costs,
interest expense and charges for depreciation and amortization of capital
expenditures to develop its wireless cable systems. Until such time as the
Company substantially increases its subscriber base, resulting in higher
subscription fee revenues, it will continue to experience losses. Because of
the costs associated with launching a wireless cable television system and
expanding its subscriber base, continued growth by the Company will tend to
reduce net income, if any, or increase net losses. As a result, the Company
expects to continue to experience net losses whether or not the Transactions
are consummated for an indefinite period while it develops and expands its
wireless cable systems even if mature individual systems of the Company are
profitable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON EXISTING MANAGEMENT; KEY EMPLOYEES
The Company is dependent in large part on the experience and knowledge of
existing management. The Company has not entered into any employment
agreements with, or obtained key-man life insurance for, any of its executive
officers. Thomas W. Dixon, the Company's Senior Vice President -- Operations,
intends to resign upon the consummation of the Newco Transaction and to join
Newco as its Senior Vice President -- Operations. In addition, upon
consummation of the Newco Transaction, John R. Bailey, the Senior Vice
President -- Finance, Chief Financial Officer, Treasurer and Secretary of the
Company, will serve as Acting Chief Financial Officer of Newco until Newco
names a full-time Chief Financial Officer, in addition to performing his
duties as an officer and employee of the Company. The Company's success is
also dependent upon its ability to attract and retain qualified employees to
develop and operate its wireless cable systems.
COMPETITION
The pay television industry is highly competitive. Wireless cable television
systems face or may face competition from several sources, such as traditional
hard-wire cable companies, Satellite Master Antenna Television ("SMATV")
systems, Direct Broadcast Satellites ("DBS") and other alternative methods of
distributing and receiving television transmissions. Further, premium movie
services offered by cable television systems have encountered significant
competition from the home video cassette recorder ("VCR") industry. In areas
where several local off-air VHF/UHF broadcast signals can be received without
the benefit of subscription television, cable television systems also have
experienced competition from the availability of broadcast signals generally
and have found market penetration to be more difficult. In addition, within
each market, the Company initially must compete with others to acquire, from
the limited number of channel licenses issued, rights to a minimum number of
channels needed to establish a viable system. Legislative, regulatory and
technological developments may result in additional and significant
competition, including competition from local telephone companies, from a
proposed new wireless service known as local multi-point distribution and from
emerging trends and technologies. In the Existing Systems, the Company has
targeted its marketing to households that are unpassed by traditional hard-
wire cable and that have limited access to local off-air VHF/UHF broadcast
channels. Accordingly, to date, the Company has not encountered significant
direct competition from traditional hard-wire cable companies. It is likely,
given the markets involved in the Transactions, that the Company will face
significant direct competition from traditional hard-wire cable companies in
the future, especially in the urban markets acquired in the Transactions if
the planned divestiture of such markets described herein is not consummated.
The basic programming package offered in each of the Existing Systems is
comparable to that offered by the local traditional hard-wire cable operators.
However, certain of such local traditional hard-wire
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cable operators currently offer more premium, pay-per-view and public access
channels than the Company. In addition, as the telecommunications industry
continues to evolve, the Company may face additional competition from new
providers of entertainment and data services. In particular, there are a
rapidly growing number of information and data service providers serving
consumers via informal communications networks, such as the Internet and World
Wide Web. Although the Company is unaware of any such provider delivering
programming like that available on wireless cable television, there can be no
assurance that continuing advances in technology will not make such delivery
possible. Even if such direct competition does not exist in the future,
however, the Company's services will compete, indirectly, with entertainment
services generally, including those provided by operators using evolving
technology. Many actual and potential competitors have greater financial,
marketing and other resources than the Company. No assurance can be given that
the Company will compete successfully. See "Wireless Cable Industry --
Competition."
GOVERNMENT REGULATION
The right to transmit on wireless cable channels is regulated by the FCC and
the copyright for the retransmission of local off-air VHF/UHF broadcasts is
regulated by the United States Copyright Office (the "U.S. Copyright Office")
pursuant to the Copyright Act of 1976, as amended (the "Copyright Act").
Federal Legislation. Pursuant to the Cable Television Consumer Protection
and Competition Act of 1992, as amended (the "Cable Act"), the FCC adopted
rate regulations exclusively for traditional hard-wire cable systems. Both
Houses of Congress recently passed the "Telecommunications Act of 1996." The
President has announced his intention to sign the legislation into law.
Pursuant to the Telecommunications Act of 1996, all cable rate regulation will
be eliminated after three years, and for "small systems" as defined in the
Act, and under certain other circumstances, rate regulation will be eliminated
immediately. The Company cannot predict precisely what effect these
regulations or other governmental regulations may have on traditional hard-
wire cable operators as to price and service. While current FCC regulations
are intended to promote the development of a competitive pay television
industry, the rules and regulations affecting the wireless cable industry may
change, and any future changes in FCC rules, regulations, policies and
procedures could have an adverse effect on the industry as a whole and on the
Company in particular.
Copyright Act. Secondary transmission of a broadcast signal is permissible
only if approved by the copyright holder or if subject to compulsory licensing
under the Copyright Act. The United States Congress has adopted legislation
extending the compulsory copyright licensing system to include wireless cable
systems. As a result of this action, wireless cable operators may engage in
secondary transmissions of distant programming without the copyright holder's
approval, provided that such operators file certain reports and pay certain
fees set by the Copyright Royalty Tribunal.
Regulation of Retransmission. Effective October 6, 1993, pursuant to the
Cable Act, local broadcasters may require that cable operators obtain their
consent before retransmitting local off-air VHF/UHF broadcasts. The FCC has
exempted wireless cable operators from the retransmission consent rules if the
receive-site antenna is either owned by the subscriber or within the
subscriber's control and available for purchase by the subscriber upon the
termination of service. In all other cases, wireless cable operators must
obtain consent to retransmit local broadcast signals. The Company has obtained
such consents in each of its Existing Systems where the Company is
retransmitting on a wireless cable channel. Such consents will be required in
the Company's other markets. There can be no assurance that the Company will
be able to obtain such consents on terms satisfactory to the Company.
Other Regulations. Wireless cable operators are also subject to regulation
by the Federal Aviation Administration (the "FAA") with respect to the
construction of transmission towers and to certain local zoning regulations
affecting construction of towers and other facilities. There may also be
restrictions imposed by local authorities. There can be no assurance that the
Company will not be required to incur additional costs in complying with such
regulations and restrictions. No assurance can be given that new regulations
will not be imposed or that existing regulations will not be changed. Any such
new or modified regulations could have a material adverse effect on the
wireless cable industry as a whole and on the Company in particular. See
"Wireless Cable Industry -- Regulatory Environment."
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DEPENDENCE ON CHANNEL LEASES; LOSS OF LICENSES BY LESSORS
The Company is dependent on leases with unaffiliated third parties for most
of its wireless cable channel rights. The Company has entered into leases for
substantially all of its wireless cable channel rights with channel license
holders, applicants for channel licenses and applicants that have had
previously-filed applications returned without prejudice by the FCC and which
will be refiled. The Company's channel leases typically cover four ITFS and
one to four MDS channels each. Generally, ITFS channels may only be owned by
qualified non-profit educational organizations and in general must use a
minimum of 20 hours per week per channel for educational programming. The
remaining excess ITFS channel air time may be leased to wireless cable
operators for commercial use without further restriction. MDS channels may be
owned by commercial entities and allow full-time usage without programming
restrictions. See "Wireless Cable Industry -- Regulatory Environment." Under
the rules of the FCC, the term of an ITFS channel lease cannot exceed ten
years. There is no such restriction for MDS channel leases. ITFS licenses
generally are granted for a term of ten years and are subject to renewal by
the FCC. MDS licenses generally will expire on May 1, 2001, unless renewed.
The use of such channels by the license holders is subject to regulation by
the FCC and the Company's ability to continue to enjoy the benefits of its
leases with channel license holders is dependent upon the continuing
compliance by the channel license holders with applicable regulations
including the requirement that ITFS license holders must meet certain
educational use requirements in order to lease transmission capacity to
wireless cable operators. The remaining initial terms of most of the Company's
channel leases are approximately 5 to 10 years, although certain of the
Company's channel leases have initial terms expiring during the next several
years. Most of the Company's leases grant the Company a right of first refusal
to purchase the channels after the expiration of the lease if FCC rules and
regulations so permit, provide for automatic renewal of the lease term upon
FCC renewal of the license and/or require the parties to negotiate lease
renewals in good faith. The termination of or failure to renew a channel lease
or termination of the channel license, or the failure to grant an application
for an extension of time to construct an authorized station, would result in
the Company being unable to deliver television programming on such channel(s).
Although the Company does not believe that the termination of or failure to
renew a single channel lease or license 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.
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.
Certain of the Company's channel rights are subject to pending extension
requests and it is anticipated that additional extensions will be required.
There can be no assurance that the FCC will grant any particular extension
request or license renewal request.
UNCERTAINTY OF GRANT OF PENDING APPLICATIONS
Applications for wireless cable licenses are subject to approval by the FCC.
Applicants with whom the Company has entered into leases have filed a series
of applications with the FCC for a number of wireless cable channels and the
Company has entered into leases for additional channels with applicants that
have had previously-filed applications returned without prejudice by the FCC
and which will be refiled. The vast majority of such leases are in the form of
lease agreements with qualified non-profit educational organizations for ITFS
channels. These ITFS applications are expected to undergo review by the FCC's
engineers and staff attorneys over the next several months. There is no limit
on the time that may elapse between filing an application with the FCC for a
modification or new license and action thereon by the FCC. Once the FCC staff
determines that the applications meet certain basic technical and legal
qualifications, the staff will then determine whether each application is
proximate to the transmit and receive-site locations of other applications.
Those applications that would result in signal interference to other pending
applications ("Competing Applications") must then undergo a comparative
selection process. The FCC's ITFS application selection process is based on a
set of objective criteria that includes whether an applicant is located in the
community to be served and the number of students that will receive the
applicant's educational programming. Thus, the outcome of the selection
process when two or more qualified applicants are competing for the same
channels lends itself to a degree of predictability that varies according to
the circumstances. Most of the Company's lease agreements with applicants for
channel licenses involve channel licenses for which Competing Applications
have been filed. In each market, the
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Company has carefully considered the FCC's selection criteria in choosing the
educational entities with which it has entered into lease agreements. However,
because the FCC's application review process does not lend itself to complete
certainty, and given the considerable number of applications involved, no
assurance can be given as to the precise number of applications that will be
granted. A number of competing applicants for channel licenses have filed with
the FCC petitions to deny the applications in which the Company has acquired
channel rights, based upon alleged substantive defects in the applicant or in
technical or other aspects of the application. The Company anticipates that
the FCC will deny most of the current petitions to deny the applications in
which the Company has acquired channel rights. However, no assurance can be
given as to the precise number of such petitions that will be denied. Although
the Company does not believe that any single award of a channel license to an
applicant that has filed a Competing Application or the granting of any single
petition to deny an application in which the Company has acquired channel
rights would adversely affect the Company, several of such awards or grants
could have a material adverse effect on the Company. See "Risk Factors --
Dependence on Channel Leases."
UNCERTAINTY OF ABILITY TO OBTAIN FCC AUTHORIZATIONS
Wireless cable systems transmit programming over wireless cable channels
that are licensed by the FCC. Generally, the Company believes that a minimum
of 12 wireless cable channels is necessary to offer a commercially viable
wireless cable system in most rural markets and that more channels are
required in more competitive markets, such as those well served by traditional
cable television systems. In some of its long-term launch markets, the Company
does not currently have the right to operate 12 channels from the same
transmitter site. In those markets, the Company is dependent upon (i) the
grant of pending applications for modification of existing licenses for
unbuilt ITFS stations, (ii) the grant of such license modification
applications which have not been filed and/or (iii) the grant of applications
for new ITFS licenses, some of which have not been filed. There can be no
assurance that any or all of the modification applications and new license
applications actually made or anticipated to be made by the Company will be
granted by the FCC. Although the Company does not believe that the denial of
any single modification or new license application will adversely affect it,
the denial of several such applications, particularly if concentrated in one
or a few of the Company's markets, could have a material adverse effect on its
growth. See "Wireless Cable Industry -- Cable Industry Overview" and "Wireless
Cable Industry -- Regulatory Environment."
INTERFERENCE ISSUES
Under current FCC regulations, a wireless cable operator may install
receive-site equipment and serve any point where its signal can be received,
subject to the interference protection rights of certain other wireless cable
systems. Interference from other wireless cable systems can limit the ability
of a wireless cable system to serve particular points, in the same manner that
interference from one television station limits the ability of a viewer to
receive another television station broadcasting on the same frequency. In
licensing ITFS and MDS stations, a primary concern of the FCC is avoiding
situations where proposed stations are predicted to cause interference to the
reception of existing station signals. Pursuant to current FCC regulations, a
wireless cable license holder is generally protected from interference within
35 miles of the transmission site. The Company's business plan involves moving
the authorized transmitter site of various of its MDS and ITFS licensed
stations and obtaining the grant of licenses to new stations that the Company
will use in its wireless cable systems. The FCC interference protection
standards may make one or more of those proposed relocations or new grants
unavailable. In any such event, it may be necessary to negotiate interference
agreements with the licensees of stations which would otherwise block such
relocations or new grants. There can be no assurance that the Company will be
able to negotiate any required interference agreements on terms acceptable to
it. In the event that the Company cannot obtain interference agreements
required to implement its plans for a given market, the Company may have to
curtail or modify operations in that market. Any substantial modification or
curtailment of the Company's operations in its markets could have a material
adverse effect on its growth or financial performance. In addition, the
Company's leases with MDS and ITFS licensees require their cooperation, it is
possible that one or more of the Company's channel lessors may hinder or delay
the Company's efforts to use the channels in accordance with its plans for a
particular market.
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AUCTION OF BASIC TRADING AREAS
As a result of legislation authorizing the FCC to utilize competitive
bidding (auctions) for the award of initial licenses or construction permits
for certain commercial services when mutually exclusive applications have been
filed, on June 15, 1995, the FCC adopted new rules replacing lottery
procedures with auctions for the awarding of commercial licenses where two or
more parties have filed applications for the same frequencies. Auctions under
the new rules began November 13, 1995 for the award of initial commercial
licenses for "Basic Trading Areas" or "BTA's" (as defined by Rand McNally);
however, the new auction rules do not apply when a license is to be renewed.
The new rules are effective although pleadings have been filed which might
result in changes in the rules, and any auctions conducted pursuant thereto.
License holders that obtain an MDS license via an auction must provide
interference protection to the 35-mile protected service area of existing
license holders. Under the statutory auction authority enacted in 1993, ITFS
licenses are exempt from the auction process and applications for ITFS
licenses are expected to continue to be awarded according to the FCC's
objective criteria.
DEPENDENCE ON PROGRAM MATERIAL AGREEMENTS
In connection with its distribution of television programming, the Company
is dependent on fixed-term contracts with various program suppliers.
Generally, the terms of such contracts are for periods of one to five years
and began to expire in 1995. Although the Company has no reason to believe
that any such contracts will be cancelled or will not be renewed upon
expiration, if such contracts are cancelled or not renewed, the Company will
have to seek program material from other sources. There is no assurance that
other program material will be available to the Company on acceptable terms or
at all or, if so available, that such material will be acceptable to the
Company's subscribers. The likelihood that program material will be
unavailable to the Company is significantly mitigated by the Cable Act and
various FCC regulations issued thereunder, which, among other things, impose
limits on exclusive programming contracts and generally prohibit cable
programmers in which a cable operator has an attributable interest from
discriminating against cable competitors with respect to the price and terms
and conditions of sale of programming. Only a few of the major cable
television programming services carried by the Company are not currently
directly owned by a vertically integrated cable operator, and the Company
historically has not had difficulty in arranging satisfactory contracts for
these services. The Cable Act is the subject of various legal challenges and
if it were found to be unconstitutional, program suppliers might raise their
prices or make their program material unavailable to the Company. See
"Wireless Cable Industry -- Availability of Programming."
PHYSICAL LIMITATIONS OF WIRELESS CABLE TRANSMISSION
Wireless cable programming is transmitted through the air via microwave
frequencies from a transmission facility to a small receiving antenna at each
subscriber's location, which generally requires a direct, unobstructed line-
of-sight from the transmission facility to the subscriber's receiving antenna.
Therefore, in communities with tall trees, hilly terrain, tall buildings or
other obstructions in the transmission path, wireless cable transmission can
be difficult or impossible to receive at certain locations without the use of
signal boosters. Consequently, the Company may not be able to supply services
to certain potential subscribers. In addition, in limited circumstances,
extremely adverse weather can damage transmission and receiving antennas as
well as transmit site equipment.
DIFFICULTIES AND UNCERTAINTIES OF A NEW INDUSTRY
While wireless cable television is not a new technology, it is a relatively
new industry with a short operating history. Holders should be aware of the
difficulties and uncertainties that are normally associated with new
industries, such as lack of consumer acceptance, difficulty in obtaining
financing, increasing competition, advances in technology and changes in laws
and regulations. There can be no assurance that the wireless cable industry
will develop or continue as a viable or profitable industry.
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POSSIBLE ADDITIONAL CAPITAL EXPENDITURES FOR DISPOSITION ASSETS
No assurance can be given that the planned disposition of the Disposition
Assets will be consummated. Consummation of such planned disposition may
require, among other items, consents of CAI's lenders to the Newco
Transaction, financing secured by Newco on terms acceptable to CAI and the
Company and consents of the licensees to the assignment of channel leases to
Newco and of the Flippin and Memphis channel rights to TruVision. Accordingly,
the Company may be required to expend a substantial amount of additional
capital to maintain certain assets and/or fund lease payments attributable to
the Disposition Assets. Further, no assurance can be given that the
disposition of the Disposition Assets will have the desired impact on the
Company's business or financial affairs.
POSSIBLE ADVERSE TAX CONSEQUENCES ATTRIBUTABLE TO DISPOSITION ASSETS
The cash and promissory note portion of the consideration received by the
Company and/or its subsidiaries from consummation of the Memphis Transaction
and Newco Transaction may result in the recognition of gain for Federal income
tax purposes. The amount of any tax liability attributable thereto will depend
upon numerous factors, including the tax basis of the assets conveyed, the net
operating losses available to the Company and other factors. Certain of these
factors will depend upon the tax attributes of CMAX, AWS and TCS as of the
closing of the Transactions. There can be no assurance that sufficient tax
bases and net operating losses will exist to defray a material amount of any
such gain, thereby requiring the Company to pay certain tax liabilities to
Federal and/or state authorities. Any such payments would negatively impact
the Company's cash flow.
ASSIGNABILITY OF DISPOSITION ASSETS CHANNEL LEASES
Substantially all of the channel leases associated with the Disposition
Assets require the consents of the licensees prior to the assignment thereof.
No assurance can be given that such consents will be obtained to the
assignment of such channel leases to Newco in the Newco Transaction. The
failure to obtain any such consents may prevent the Newco Transaction from
being consummated, which could have a material adverse effect on the Company's
business or financial affairs. See "Risk Factors -- Possible Additional
Capital Expenditures for Disposition Assets." Further, the consent of the FCC
is required prior to the assignment of any MDS channels associated with the
Disposition Assets. The Company will take appropriate action to obtain such
consents with respect to such MDS channels to be acquired by the Company and
thereafter conveyed to Newco as part of any Newco Transaction. Such consents
are generally received three to five months after application is made to the
FCC. Although the Company expects to lease any acquired MDS channels to Newco
as part of any Newco Transaction pending receipt of such consents, there can
be no assurance that the FCC will consent to the assignment of such licenses
to the Company or Newco.
CERTAIN SUBSIDIARIES NOT WHOLLY-OWNED
The Company generally conducts its business through subsidiaries. The
Company's subsidiaries include non-operating subsidiaries that hold interests
in channels, subsidiaries that operate systems and subsidiaries that do both.
The Company also has an operating subsidiary that installs wireless cable
systems in various markets served by the Company and its subsidiaries. Certain
of the Company's subsidiaries are not wholly-owned and most subsidiaries are
indirectly owned by the Company as a result of its majority ownership of other
entities. Although the Company has a sufficient interest in its subsidiaries
to be able to exercise control over them, the Company may owe a fiduciary duty
to the holders of various minority interests in its subsidiaries. Accordingly,
the Company may not exercise unfettered control over such subsidiaries and may
be required to deal with such subsidiaries on terms no less favorable to such
subsidiaries than could be obtained from unaffiliated third parties. The
Company believes that all of its dealings with its subsidiaries have been on
such terms. In addition, dividends or other distributions paid or made by such
subsidiaries must be paid or made on a pro rata basis to all stockholders.
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WIRELESS ONE AND NEWCO MINORITY INVESTMENTS
The Company owns approximately 27% of the outstanding common stock of
Wireless One, Inc., a Delaware corporation ("Wireless One"). Although David E.
Webb and J. R. Holland, Jr., directors of the Company, serve as directors of
Wireless One, the Company cannot exercise unfettered control over this
substantial investment. Similarly, upon consummation of the Newco Transaction,
the Company will own approximately 39.76% (prior to dilution) of the
outstanding common stock of Newco. Although David E. Webb and J. R. Holland,
Jr., directors of the Company, are expected to serve as directors of Newco,
and John R. Bailey, an executive officer of the Company, is expected to serve
as Acting Chief Financial Officer of Newco until Newco names a full-time Chief
Financial Officer, the Company will not be able to exercise unfettered control
over this proposed substantial investment.
CONTROL BY PRINCIPAL STOCKHOLDERS; AGREEMENT TO VOTE FOR BOARD DESIGNEE OF
JUPITER; CO-SALE RIGHT
David E. Webb, the President and Chief Executive Officer of the Company, L.
Allen Wheeler, a member of the Board of Directors of the Company, and Hunt
Capital Group ("Hunt Capital"), a principal stockholder of the Company and
affiliate of J. R. Holland, Jr., the Chairman of the Board of the Company,
collectively own approximately 62.7% of the outstanding Common Stock and, if
they act together, will be able to control the election of the members of the
Company's Board of Directors and generally to exercise control over the
Company's affairs. Assuming consummation of each of the Transactions and an
average closing price of the Common Stock of $28, such parties will own
approximately 40.8% (33.9% if the maximum number of shares is issued) of the
outstanding Common Stock of the Company. Accordingly, following consummation
of the Transactions, such persons acting together will not be able to control
the election of the members of the Company's Board of Directors. See
"Management" and "Principal Stockholders." Pursuant to the terms of a
Stockholders' Agreement (the "Stockholders' Agreement"), for so long as
Jupiter, the purchaser of $40.0 million gross proceeds of the Convertible
Notes, retains a 25% interest in the Convertible Notes originally purchased by
it and/or the shares of Common Stock issued or issuable upon conversion
thereof (the "Conversion Shares") originally issuable to it, each of Hunt
Capital, David E. Webb and L. Allen Wheeler, have agreed to vote their shares
(i) in favor of the election to the Company's Board of Directors of one
designee of Jupiter and (ii) in favor of the Company's Board of Directors
consisting of at least three and not more than seven members. The agreement of
such stockholders to elect Jupiter's designee to the Board of Directors may
restrict the ability of such stockholders to elect their preferred slate of
directors to manage the Company, which may result in a member of the Board of
Directors having interests that conflict with those of the other stockholders
of the Company. In addition, under the terms of the Stockholders' Agreement,
each of Hunt Capital, David E. Webb and L. Allen Wheeler have agreed that, for
so long as Jupiter holds such 25% interest, in the event of any proposed sale
or series of sales of Common Stock by any such stockholder to a non-affiliate
for aggregate consideration greater than $15.0 million or representing in
excess of 5% of the outstanding Common Stock at such time, such stockholder
shall not effect such sale unless Jupiter is permitted to participate in such
sale on a pro rata basis with such stockholder. The co-sale right may reduce
the likelihood of a change in control of the Company, because any potential
purchaser of stock held by the controlling stockholders may also be required
to purchase shares owned by Jupiter.
POSSIBLE FUTURE ACQUISITIONS
The Company has in the past and is in the process of making a number of
acquisitions and may in the future make additional acquisitions. The Company
can be expected to seek to acquire additional channel rights, both in its
existing markets and in other markets, both directly and indirectly by
acquiring other wireless cable television providers. Such acquisitions may be
in geographic areas or markets outside of the Company's traditional focus of
small to mid-sized markets in the central United States. In addition, it is
possible that the Company might make one or more acquisitions outside of the
business of providing wireless cable television services. Any such
acquisitions may be made for cash, securities, including Common Stock, or
combinations thereof. Under applicable law and regulations, in many
circumstances, approval by the Company's stockholders of any such acquisitions
may not be required. The Company may pay for such acquisitions in cash or by
issuing
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equity or debt securities. The issuance of equity to effect or finance such
acquisitions would have the effect of reducing the percentage ownership of the
Company held by each pre-acquisition stockholder and the incurrence of
indebtedness in connection with such acquisitions could adversely affect the
liquidity, results of operations and financial condition of the Company.
RESCISSION RIGHTS OF PARTNERS OF MINNEAPOLIS PARTNERSHIP AND FTW PARTNERSHIP
Prior to the date hereof, a predecessor of AWS, through an affiliate,
participated in the offer and sale of approximately $29 million of general
partnership interests in three general partnerships, including the FTW
Partnership and the Minneapolis Partnership, without registration under any
federal or state securities laws. Following an investigation by the
Commission, AWS, Steven G. Johnson, a director and officer of AWS, Jeffrey D.
Howes, formerly a director and officer of AWS, and Dexter S. Cohen and Kevin
C. King, each of whom own greater than five percent of AWS Common Stock,
without admitting or denying any wrongdoing, consented to a Commission order
to cease and desist from committing or causing any violation and any future
violations of the securities registration provisions of the Securities Act and
the broker-dealer registration provisions of the Exchange Act. In addition,
securities administrators in 22 states have also investigated or are presently
investigating the activities related to the unregistered sale of the general
partnership interests described above. The actions taken by the various state
securities administrators range from no action taken to the issuance of 15
cease and desist orders and consent orders pursuant to which AWS, the issuing
general partnerships and Messrs. Johnson and Howes, as officers of AWS, were
required to cease selling general partnership interests without registration,
to offer rescission to individuals who purchased general partnership interests
and, in certain cases, to pay administrative penalties. In certain cases, such
parties have entered into consent decrees with state regulatory authorities,
including an order in Arizona requiring AWS to offer to purchase such general
partnership interests sold to residents of Arizona or to pay the Arizona
Corporation Commission an amount equal to the amount of the investment made by
all general partners who are Arizona residents, or approximately $566,000,
plus interest from the time of investment. AWS has advised the Arizona
Corporation Commission that it does not intend to make such offer to purchase
pending consummation of the Transactions described herein.
On September 29, 1995, AWS and the third general partnership in which
interests were sold (the "Pittsburgh Partnership") jointly sold (the
"Pittsburgh Sale") their respective interest in the joint venture operating
the wireless cable television system in Pittsburgh, Pennsylvania to CAI.
General partners holding approximately 72% of the general partnership
interests in the Pittsburgh Partnership (the "Pittsburgh Partners") executed
and delivered written consents to such sale, each of which included a release
of AWS and certain related parties from certain contingent claims including
claims arising from the offer and sale of the general partnership interests to
the Pittsburgh Partners. There can be no assurance that the Minneapolis
Partners and the FTW Partners who do not vote in favor of the Minneapolis
Transaction or the FTW Transaction, respectively, or the Pittsburgh Partners
who did not vote in favor of the Pittsburgh Sale, or any governmental agency
will not institute proceedings against AWS or the Company, as the successor to
AWS, based on a failure to register the general partnership interests in
connection with a public offering or for damages based on alleged omissions or
misrepresentations of material information in connection with the sale of such
interests. No assurance can be given that a successful claim against the
predecessors of AWS could not be asserted against the Company based on a
number of theories involving successor liability. The institution of legal
action against the Company arising out of the offer and sale of general
partnership interests by AWS's predecessors could result in substantial
defense costs to the Company and the diversion of efforts by the Company's
management, and the imposition of liabilities against the Company could have
an adverse effect on the Company.
LACK OF PUBLIC MARKET FOR THE NEW NOTES
The Old Notes are designated for trading in the PORTAL market. There is no
established trading market for the New Notes. Although the Initial Purchasers
have advised the Company that they currently intend to make a market in the
New Notes, they are not obligated to do so and they may discontinue such
market-making at any time without notice. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval
for quotation through any automated quotation system. Accordingly, there can
be no assurance
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as to the development of any market or the liquidity of any market that may
develop for the New Notes. If such a market were to exist, no assurance can be
given as to the trading prices of the New Notes. Future trading prices of the
New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on April 26, 1995 to the Initial
Purchasers, who placed the Old Notes with institutional investors. In
connection therewith, the Company and the Initial Purchasers entered into the
Registration Rights Agreement, pursuant to which the Company agreed, for the
benefit of the Holders of the Old Notes, that the Company would, at its sole
cost, (i) within 30 days following the original issuance of the Old Notes,
file with the Commission the Registration Statement (of which this Prospectus
is a part) under the Securities Act with respect to an issue of a series of
new notes of the Company identical in all material respects to the series of
Old Notes (except that such new notes would not contain terms with respect to
transfer restrictions) and (ii) cause such Registration Statement to be
declared effective under the Securities Act within 120 days following the
original issuance of the Old Notes. Upon the effectiveness of the Registration
Statement, the Company will offer, pursuant to this Prospectus, to the Holders
of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, to be issued without a restrictive legend and
which may, generally, be reoffered and resold by the holder without
restrictions or limitations under the Securities Act. The term "Holder" with
respect to the Exchange Offer means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may
be offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Instead, based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by any
holder of such New Notes (other than any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 promulgated under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business, such Holder has no arrangement
or understanding with any person to participate in the distribution of such
New Notes and neither such Holder nor any other such person is engaging in or
intends to engage in a distribution of such New Notes. Since the Commission
has not considered the Exchange Offer in the context of a no-action letter,
there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer. Any Holder who is an
affiliate of the Company or who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes cannot rely on such
interpretations by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of 120 days after the date of this
Prospectus, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
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If (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company is not permitted
to effect the Exchange Offer, (ii) the Exchange Offer is not consummated
within 150 days of the date of original issuance of the Old Notes, (iii) in
certain circumstances, any Initial Purchaser or any Holder that is not
entitled to participate in the Exchange Offer so requests within 120 days
after the consummation of the Exchange Offer or (iv) in the case of any Holder
that participates in the Exchange Offer, such Holder does not receive New
Notes on the date of the exchange that may be sold without restriction under
state and Federal securities laws (other than due solely to the status of such
Holder as an affiliate of the Company within the meaning of the Securities
Act) and so notifies the Company within 60 days after such Holder first
becomes aware of any such restriction and provides the Company with a
reasonable basis for its conclusion, in the case of each of clauses (i)
through (iv) of this sentence, then the Company shall promptly deliver to the
Holders and the Trustee written notice thereof and the Company shall, at its
cost, (a) as promptly as practicable, file a shelf registration statement
covering resales of the Old Notes (the "Shelf Registration Statement"), (b)
use all reasonable efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act by the 150th day after the
original issuance of the Old Notes and (c) use all reasonable efforts to keep
effective the Shelf Registration Statement until three years after its
effective date, or such shorter period ending when (i) all of the Old Notes
covered by such Shelf Registration Statement have been sold in the manner set
forth and as contemplated therein or (ii) a subsequent Shelf Registration
Statement covering all unregistered Old Notes has been declared effective
under the Securities Act. The Company will, in the event of a Shelf
Registration Statement, provide to each Holder of the Old Notes copies of the
prospectus, which is a part of the Shelf Registration Statement, notify each
such Holder when the Shelf Registration Statement for the Old Notes has become
effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A Holder of Old Notes that sells such
Old Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales
and will be bound by the provisions of the Registration Rights Agreement which
are applicable to such a Holder (including certain indemnification
obligations).
In the event that either (i) the Registration Statement is not filed with
the Commission on or prior to the 30th calendar day following the date of
original issuance of the Old Notes, (ii) the Registration Statement is not
declared effective on or prior to the 120th calendar day following the date of
original issuance of the Old Notes or (iii) the Exchange Offer is not
consummated or the Shelf Registration Statement is not declared effective on
or prior to the 150th calendar day following the date of original issuance of
the Old Notes or the Shelf Registration Statement ceases to be effective (each
such event referred to in clauses (i) through (iii), a "Registration
Default"), the Company has agreed to pay increased cash interest to each
Holder of the Old Notes during the first 90-day period immediately following
the occurrence of such Registration Default in an amount equal to 0.50% per
annum. The amount of the additional cash interest will increase by an
additional 0.50% per annum for each subsequent 90-day period until the
Registration Statement is filed, the Registration Statement is declared
effective, the Exchange Offer is consummated or the Shelf Registration
Statement is declared effective or again becomes effective, as the case may
be, up to a maximum amount of additional cash interest of 2.00% per annum. All
accrued cash interest shall be paid to record holders of the Old Notes by wire
transfer of immediately available funds or by Federal funds check by the
Company on each interest payment date for the Old Notes. Upon (x) the filing
of the Registration Statement in the case of clause (i) above, (y) the
effectiveness of the Registration Statement in the case of clause (ii) above
or (z) the consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be, in the case of clause (iii) above,
and provided that none of the conditions set forth in clauses (i), (ii) and
(iii) above continues to exist, such additional interest shall cease to accrue
on the Old Notes from the date of such filing, effectiveness or consummation.
No increased cash interest will be payable on the Old Notes from and after the
Expiration Date.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all of the provisions of the Registration Rights
Agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
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The Old Notes are designated for trading in the PORTAL market. To the extent
Old Notes are tendered and accepted in the Exchange Offer, the principal
amount of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, Holders of Old Notes who were eligible to participate in the Exchange
Offer but who did not tender their Old Notes will not be entitled to certain
rights under the Registration Rights Agreement and such Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of New Notes in exchange for each $1,000 principal amount of outstanding Old
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes
have been registered under the Securities Act and therefore will not bear
legends restricting their transfer and will not contain certain provisions
providing for an increase in the interest rate on the Old Notes under certain
circumstances relating to the Registration Rights Agreement, which provisions
will terminate upon the consummation of the Exchange Offer. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits
of the Indenture under which the Old Notes were, and the New Notes will be,
issued.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Old Notes are outstanding. The Company has fixed the close of business
on February , 1996 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus, together with the Letter of
Transmittal, will initially be sent. As of such date, there were
registered Holders of the Old Notes.
Holders of the Old Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law (the "DGCL") or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral notice (confirmed in writing) oral
or written notice thereof to the Exchange Agent. The Exchange Agent will act
as agent for the tendering Holders for the purpose of the exchange of Old
Notes.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Notes will be returned, without expense, to
the tendering Holder thereof as promptly as practicable after the Expiration
Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "The Exchange Offer -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
March , 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
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<PAGE>
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral notice (confirmed in writing) or written notice
and will make a public announcement thereof prior to 9:00 a.m., New York City
time, on the next business day after each previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under "The Exchange Offer -- Conditions" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral notice
(confirmed in writing) or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
thereof. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered Holders, and the Company will extend the Exchange Offer for a
period of five to 10 business days, depending upon the significance of the
amendment and the manner of disclosure to the registered Holders, if the
Exchange Offer would otherwise expire during such five- to 10-business-day
period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from October 15, 1995, the date of the last
interest payment on the Old Notes. No interest will be paid on the Old Notes
accepted for exchange.
PROCEDURES FOR TENDERING
The tender of Old Notes by a Holder thereof pursuant to one of the
procedures set forth below and the acceptance thereof by the Company will
constitute a binding agreement between such Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal. This Prospectus, together with the Letter of
Transmittal, will first be sent on or about February , 1996, to all Holders
of Old Notes known to the Company and the Exchange Agent.
Only a Holder of the Old Notes may tender such Old Notes in the Exchange
Offer. A Holder who wishes to tender any Old Notes for exchange pursuant to
the Exchange Offer must transmit a properly completed and duly executed Letter
of Transmittal, or a facsimile thereof, or an Agent's Message, including any
other required documents, to the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date. In addition, either (i) certificates for
such Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal or (ii) a timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation") of such Old Notes, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the Holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Old Notes, Letter
of Transmittal or Agent's Message and other required documents must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part
of a Book-Entry Confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering Old Notes which are the subject of such
Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against such participant.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS
30
<PAGE>
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IF SENT BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE
USED AND PROPER INSURANCE BE OBTAINED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing the Letter of
Transmittal or delivering an Agent's Message and delivering such beneficial
owner's Old Notes, either make appropriate arrangements to register ownership
of the Old Notes in such beneficial owner's name or obtain a properly
completed bond power from the registered Holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 promulgated under the Exchange Act (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that the Company determines are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
By tendering, each Holder will represent to the Company, among other things,
that (i) the New Notes acquired by the Holder and any beneficial owners of Old
Notes pursuant to the Exchange Offer are being obtained in the ordinary course
of business of the person receiving such New Notes, (ii) neither the Holder
nor such beneficial owner has an arrangement with any person to participate in
the distribution of such New Notes, (iii) neither the Holder nor such
beneficial owner nor any such other person is engaging in or intends to engage
in a distribution of such New Notes and (iv) neither the Holder nor any such
other person is an "affiliate," as defined under Rule 405 promulgated under
the Securities Act, of the Company. Each broker-dealer that receives
31
<PAGE>
New Notes for its own account in exchange for Old Notes, where such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities (other than Old Notes acquired directly from the
Company), may participate in the Exchange Offer but may be deemed an
"underwriter" under the Securities Act and, therefore, must acknowledge in the
Letter of Transmittal that it will deliver a prospectus in connection with any
resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, or an
Agent's Message, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "The Exchange Offer --
Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) or an Agent's Message, together with
the certificate(s) representing the Old Notes, or a Book-Entry
Confirmation, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) or an Agent's Message, as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer, or a Book-
Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within three
New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii)
be signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to
32
<PAGE>
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the persons withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. If certificates for Old Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing Holder must also submit the serial numbers of
the particular certificates to be withdrawn and a signed notice of withdrawal
with signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, which determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Properly withdrawn Old Notes may be retendered by following one of
the procedures described above under "The Exchange Offer -- Procedures for
Tendering" at any time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable to the Holder thereof without
cost to such Holder (or, in the case of Old Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described above, such Old Notes
will be credited to an account maintained with such Book-Entry Transfer
Facility for the Old Notes).
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance
of such Old Notes, if:
(a) the Exchange Offer shall violate applicable law or any applicable
interpretation of the staff of the Commission; or
(b) any action or proceeding is instituted or threatened in any court or
by any governmental agency that might materially impair the ability of the
Company to proceed with the Exchange Offer or any material adverse
development has occurred in any existing action or proceeding with respect
to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and
return all tendered Old Notes to the tendering Holders (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility), (ii) extend the Exchange Offer and retain
all Old Notes tendered prior to the expiration of the Exchange Offer, subject,
however, to the rights of Holders to withdraw such Old Notes (see "The
Exchange Offer -- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver
by means of a prospectus supplement that will be distributed to the registered
Holders, and the Company will extend the Exchange Offer for a period of five
to 10 business days, depending upon the significance of the waiver and the
manner of disclosure to the registered Holders, if the Exchange Offer would
otherwise expire during such five- to 10-business-day period.
33
<PAGE>
EXCHANGE AGENT
Bankers Trust Company has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C> <C>
Mail: By Facsimile: Hand/Overnight Delivery:
Bankers Trust Company (212) 250-6961 Bankers Trust Company
Corporate Trust and Agency Group (212) 250-6392 Corporate Trust and Agency Group
Reorganization Dept. Receipt & Delivery Window
P.O. Box 1458 123 Washington Street, 1st Floor
Church Street Station New York, New York 10006
New York, New York 10008-1458
</TABLE>
Confirm by Telephone:
(212) 250-6270
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value less accrued original issue discount, as reflected in the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. The expenses of the
Exchange Offer and the unamortized expenses related to the issuance of the Old
Notes will be amortized over the term of the New Notes.
34
<PAGE>
PRO FORMA FINANCIAL INFORMATION
RELATIVE TO THE TRANSACTIONS
The following unaudited pro forma condensed consolidated financial
information presents pro forma financial information of the Company in three
sets of pro forma financial statements. The pro forma financial information
consists of (1) an Unaudited Pro Forma Condensed Combined Balance Sheet for
the Transactions as of September 30, 1995 and the related Unaudited Pro Forma
Condensed Combined Statements of Operations for the Transactions for the year
ended December 31, 1994 and the nine months ended September 30, 1995
(collectively, the "Combined Pro Forma Statements for the Transactions"), (2)
an Unaudited Pro Forma Condensed Balance Sheet for each of the Transactions as
of September 30, 1995 and the related Unaudited Pro Forma Condensed
Consolidated Statements of Operations for each of the Transactions for the
year ended December 31, 1994 and the nine months ended September 30, 1995
(collectively, the "Individual Pro Forma Statements for the Transactions") and
(3) an Unaudited Pro Forma Condensed Consolidated Balance Sheet for
Consummated Events as of September 30, 1995 and the related Unaudited Pro
Forma Condensed Consolidated Statements of Operations for Consummated Events
for the year ended December 31, 1994 and the nine months ended September 30,
1995 (collectively, the "Pro Forma Statements for Consummated Events") (all
such pro forma financial information together, the "Pro Forma Statements").
The Pro Forma Statements for the Transactions and the Individual Pro Forma
Statements for the Transactions follow on pages 36 to 60 of this Prospectus.
The Pro Forma Statements for Consummated Events have been included on pages F-
85 to F-90 of this Prospectus.
The Pro Forma Statements for the Transactions adjust the Pro Forma
Statements for Consummated Events to give effect to the Transactions as if the
Transactions had occurred on September 30, 1995 for balance sheet information
and January 1, 1994 for statement of operations information. The Pro Forma
Statements for the Transactions assume that all the Transactions and the
proposed disposition of the Disposition Assets will be consummated by the
Company. However, because there can be no certainty regarding which of the
Transactions, if any, will be consummated and because, correspondingly, it is
impossible to precisely determine the ultimate plan of disposition (some
assets from each of the Transactions will potentially be disposed of by the
Company or its predecessors), a large number of other potential pro forma
outcomes are possible. As a result, the Company has presented the Individual
Pro Forma Statements for the Transactions which include pro forma adjustments
related to each separate Transaction and associated disposition. This method
of presentation provides readers with all of the information necessary to
recalculate, should they so desire, the Company's pro forma financial
information under any possible scenario that might arise from the acquisition
and disposition plans described in this Prospectus.
The Transactions will be accounted for by the purchase method of accounting.
With respect to the Transactions, the purchase price has been allocated on a
preliminary basis to the assets and liabilities acquired based on the
estimated fair values of such assets and liabilities.
The Pro Forma Statements and accompanying notes should be read in
conjunction with the Company's consolidated financial statements (including
notes thereto) appearing elsewhere in this Prospectus. The Pro Forma
Statements do not purport to represent what the Company's results of
operations or financial position actually would have been had such
transactions or events occurred on the dates specified, or to project the
Company's results of operations or financial position for any future period or
date. The pro forma adjustments are based upon available information and
certain adjustments that the Company's management believes are reasonable. In
the opinion of the Company's management, all adjustments have been made that
are necessary to present fairly the Pro Forma Statements.
35
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET FOR THE TRANSACTIONS
SEPTEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
FTW MINNEAPOLIS
HEARTLAND CMAX AWS PARTNERSHIP PARTNERSHIP TECHNIVISION
PRO PRO PRO PRO PRO PRO PRO FORMA
FORMA(A) FORMA(B) FORMA(C) FORMA(D) FORMA(E) FORMA(F) ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents..... $ 47,155,064 $ 786,392 $ 5,082,653 $ -- $ -- $ 56,297 $ (10,807,500)(G) $ 68,613,369
(2,000,000)(H)
28,340,463 (I)
Restricted
investments..... 11,669,874 -- -- -- -- -- 11,669,874
Net assets held
for cash sale or
exchange........ 2,200,000 -- 7,250,000 -- -- -- 9,450,000
Note receivable.. -- -- -- -- -- -- 25,000,000 (I) 25,000,000
Other current
assets.......... 3,035,281 673,913 89,724 -- -- 281,895 (74,316)(I) 4,006,497
------------ ------------ ----------- ----------- ----------- ----------- ------------- ------------
Total current
assets......... 64,060,219 1,460,305 12,422,377 -- -- 338,192 40,458,647 118,739,740
Systems and
equipment, net.. 43,368,952 17,035,351 218,404 -- -- 6,151,964 (2,038,608)(I) 64,736,063
Leased license
investment,
net............. 60,482,276 32,556,597 -- -- -- 18,687,753 (2,482,706)(I) 109,243,920
Investment in
Wireless One.... 14,602,442 -- -- -- -- -- 14,602,442
Investment in CS
Wireless........ -- -- -- -- -- -- 55,875,666 (I) 55,875,666
Excess of cost
over fair value
of net assets
acquired........ 4,470,286 8,549,540 9,015,248 -- -- 6,066,024 28,101,098
Net assets held
for exchange.... -- 43,610,341 27,498,434 16,191,304 21,913,052 10,720,791 (119,933,922)(I) --
Restricted
investments..... 13,077,340 -- -- -- -- -- 13,077,340
Note receivable.. -- -- -- -- -- -- 15,000,000 (I) 15,000,000
Other assets,
net............. 10,435,034 -- 77,179 -- -- 5,300 (1,800,000)(G) 8,717,513
------------ ------------ ----------- ----------- ----------- ----------- ------------- ------------
$210,496,549 $103,212,134 $49,231,642 $16,191,304 $21,913,052 $41,970,024 $ (14,920,923) $428,093,782
============ ============ =========== =========== =========== =========== ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion
of long-term
debt............ $ 616,610 $ 787,500 $ 99,442 $ -- $ -- $ 1,263,005 $ (787,500)(G) $ 1,979,057
Other current
liabilities..... 10,130,631 3,042,950 1,468,523 -- -- 2,890,995 (313,423)(I) 17,219,676
------------ ------------ ----------- ----------- ----------- ----------- ------------- ------------
Total current
liabilities.... 10,747,241 3,830,450 1,567,965 -- -- 4,154,000 (1,100,923) 19,198,733
Long-term debt,
less current
portion......... 139,428,429 10,020,000 1,800,000 -- -- -- (11,820,000)(G) 139,428,429
Deferred income
taxes........... 1,189,080 8,549,540 9,015,248 -- -- 6,066,024 -- 24,819,892
Other
liabilities..... 279,695 -- 233,044 -- -- -- -- 512,739
Stockholders'
equity.......... 58,852,104 80,812,144 36,615,385 16,191,304 21,913,052 31,750,000 (2,000,000)(H) 244,133,989
------------ ------------ ----------- ----------- ----------- ----------- ------------- ------------
$210,496,549 $103,212,134 $49,231,642 $16,191,304 $21,913,052 $41,970,024 $ (14,920,923) $428,093,782
============ ============ =========== =========== =========== =========== ============= ============
</TABLE>
See accompanying notes to Pro Forma Statements
36
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TRANSACTIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
FTW MINNEAPOLIS
HEARTLAND CMAX AWS PARTNERSHIP PARTNERSHIP TECHNIVISION PRO
PRO PRO PRO PRO PRO PRO FORMA PRO
FORMA(A) FORMA(B) FORMA(C) FORMA(D) FORMA(E) FORMA(F) ADJUSTMENTS FORMA
------------ ----------- ---------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.... $ 7,590,823 $ 6,765,741 $ -- $ -- $ -- $ 5,735,071 $ -- $ 20,091,635
------------ ----------- ---------- -------- -------- ----------- ---------- ------------
Operating
expenses:
Systems
operations...... 4,188,612 3,270,598 -- -- -- 2,662,495 10,121,705
Selling, general
and
administrative.. 6,377,969 5,229,087 -- -- -- 1,812,854 13,419,910
Depreciation and
amortization.... 3,263,717 4,934,844 -- -- -- 2,976,050 11,174,611
------------ ----------- ---------- -------- -------- ----------- ---------- ------------
Total operating
expenses........ 13,830,298 13,434,529 -- -- -- 7,451,399 -- 34,716,226
------------ ----------- ---------- -------- -------- ----------- ---------- ------------
Operating loss.. (6,239,475) (6,668,788) -- -- -- (1,716,328) (14,624,591)
Interest expense.. (4,185,033) (459,536) -- -- -- (1,388,263) (6,032,832)
Equity in losses
of investment.... (1,004,594) -- -- -- -- -- (1,004,594)
Interest income
and other........ 152,450 577,217 -- -- -- -- 729,667
------------ ----------- ---------- -------- -------- ----------- ---------- ------------
Loss before
income taxes.... (11,276,652) (6,551,107) -- -- -- (3,104,591) -- (20,932,350)
Income tax
benefit.......... 2,458,812 2,265,743 -- -- -- 1,148,699 1,409,641(J) 7,282,895
------------ ----------- ---------- -------- -------- ----------- ---------- ------------
Net loss......... $ (8,817,840) $(4,285,364) $ -- $ -- $ -- $(1,955,892) $1,409,641 $(13,649,455)
============ =========== ========== ======== ======== =========== ========== ============
Net loss per
share............ $ (0.70) $ -- $ -- $ -- $ -- $ -- $ -- $ (0.71)
============ =========== ========== ======== ======== =========== ========== ============
Weighted average
shares
outstanding...... 12,541,444 2,886,148 1,307,692 578,261 782,609 1,133,929 -- 19,230,083
============ =========== ========== ======== ======== =========== ========== ============
</TABLE>
See accompanying notes to Pro Forma Statements
37
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TRANSACTIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FTW MINNEAPOLIS
HEARTLAND CMAX AWS PARTNERSHIP PARTNERSHIP TECHNIVISION
PRO PRO PRO PRO PRO PRO PRO FORMA
FORMA(A) FORMA(B) FORMA(C) FORMA(D) FORMA(E) FORMA(F) ADJUSTMENTS PRO FORMA
------------ ----------- --------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues..... $ 9,944,209 $ 6,674,530 $ -- $ -- $ -- $ 4,138,790 $ -- $ 20,757,529
------------ ----------- --------- ------- ------- ----------- ---------- ------------
Operating expenses:
Systems
operations....... 3,371,531 2,973,011 -- -- -- 2,056,387 8,400,929
Selling, general
and
administrative... 7,689,026 4,294,351 -- -- -- 1,157,219 13,140,596
Depreciation and
amortization..... 4,396,920 5,210,043 -- -- -- 2,116,483 11,723,446
------------ ----------- --------- ------- ------- ----------- ---------- ------------
Total operating
expenses......... 15,457,477 12,477,405 -- -- -- 5,330,089 -- 33,264,971
------------ ----------- --------- ------- ------- ----------- ---------- ------------
Operating loss... (5,513,268) (5,802,875) -- -- -- (1,191,299) -- (12,507,442)
Interest expense... (8,908,459) (945,475) -- -- -- (625,728) (10,479,662)
Equity in losses of
investees......... (1,049,583) -- -- -- -- -- (1,049,583)
Interest income and
other............. 1,568,946 121,497 -- -- -- 253,352 1,943,795
------------ ----------- --------- ------- ------- ----------- ---------- ------------
Loss before income
taxes............ (13,902,364) (6,626,853) -- -- -- (1,563,675) -- (22,092,892)
Income tax
benefit........... -- 2,333,311 -- -- -- 494,394 5,011,374(J) 7,839,079
------------ ----------- --------- ------- ------- ----------- ---------- ------------
Net loss.......... $(13,902,364) $(4,293,542) $ -- $ -- $ -- $(1,069,281) $5,011,374 $(14,253,813)
============ =========== ========= ======= ======= =========== ========== ============
Net loss per
share............. $ (1.10) $ -- $ -- $ -- $ -- $ -- $ -- $ (0.74)
============ =========== ========= ======= ======= =========== ========== ============
Weighted average
shares
outstanding....... 12,591,927 2,886,148 1,307,692 578,261 782,609 1,133,929 -- 19,280,566
============ =========== ========= ======= ======= =========== ========== ============
</TABLE>
See accompanying notes to Pro Forma Statements
38
<PAGE>
NOTES TO COMBINED PRO FORMA STATEMENTS FOR THE TRANSACTIONS
(A) Reflects pro forma information for events previously consummated by the
Company. See pages F-85 to F-90 for detailed pro forma adjustments related
to events previously consummated by the Company.
(B) Reflects pro forma information for the CMAX Merger (as defined herein).
See pages 40 to 43 for detailed pro forma adjustments relating to the CMAX
Merger.
(C) Reflects pro forma information for the AWS Merger. See pages 44 to 47 for
detailed pro forma adjustments relating to the AWS Merger.
(D) Reflects pro forma information for the FTW Transaction (as defined
herein). See pages 48 to 51 for detailed pro forma adjustments relating to
the FTW Transaction.
(E) Reflects pro forma information for the Minneapolis Transaction (as defined
herein). See pages 52 to 55 for detailed pro forma adjustments relating to
the Minneapolis Transaction.
(F) Reflects pro forma information for the TSC Transaction. See pages 56 to 59
for detailed pro forma adjustments relating to the TSC Transaction.
(G) Reflects the repayment of certain indebtedness of CMAX by the Company upon
consummation of the CMAX Merger and the elimination of the Company's $1.8
million note receivable from AWS. Any differences between historical
interest expense recognized by CMAX on the retired indebtedness and
interest expense which would be recognized by the Company on a pro forma
basis is not material.
(H) Reflects estimated costs to be incurred in connection with the issuance of
the Company's Common Stock upon consummation of the Transactions.
(I) Reflects the Company's contribution to Newco of the Disposition Assets and
the receipt by the Company of (i) 39.76% of the outstanding common shares
of Newco, (ii) approximately $28.3 million in cash payable by Newco at the
closing, (iii) a $25 million promissory note payable nine months from
closing and (iv) a $15 million promissory note payable 10 years from the
closing of the Participation Agreement.
(J) Reflects the adjustment to income tax benefit related to the pro forma
adjustments. Income tax benefit reflects the recognition of deferred tax
assets to the extent such assets can be realized through reversals of
existing taxable temporary differences.
39
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
CMAX UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION CMAX
CMAX ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 786,392 $ $ 786,392 $ $ 786,392
Other current assets.... 938,437 938,437 (264,524)(D) 673,913
----------- ------------ ------------ ----------- ------------
Total current assets... 1,724,829 -- 1,724,829 (264,524) 1,460,305
Systems and equipment,
net.................... 26,447,933 26,447,933 (9,412,582)(D) 17,035,351
Leased license
investment, net........ 21,271,892 45,899,604 (B) 67,171,496 (34,614,899)(D) 32,556,597
Excess of cost over fair
value of net assets
acquired............... -- 8,549,540 (C) 8,549,540 8,549,540
Net assets held for
exchange............... -- -- 43,610,341 (D) 43,610,341
----------- ------------ ------------ ----------- ------------
$49,444,654 $ 54,449,144 $103,893,798 $ (681,664) $103,212,134
=========== ============ ============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-
term debt.............. $ 787,500 $ $ 787,500 $ $ 787,500
Other current
liabilities............ 3,724,614 3,724,614 (681,664)(D) 3,042,950
----------- ------------ ------------ ----------- ------------
Total current
liabilities........... 4,512,114 -- 4,512,114 (681,664) 3,830,450
Long-term debt, less
current portion........ 10,020,000 10,020,000 10,020,000
Deferred income taxes... -- 8,549,540 (C) 8,549,540 8,549,540
Stockholders' equity.... 34,912,540 80,812,144 (A) 80,812,144 80,812,144
(34,912,540)(A)
----------- ------------ ------------ ----------- ------------
$49,444,654 $ 54,449,144 $103,893,798 $ (681,664) $103,212,134
=========== ============ ============ =========== ============
</TABLE>
See accompanying notes to Pro Forma Statements
40
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
CMAX UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION CMAX
CMAX ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $11,283,709 $ -- $11,283,709 $(4,517,968)(D) $ 6,765,741
----------- ---------- ----------- ----------- -----------
Operating expenses:
Systems operations..... 5,310,478 5,310,478 (2,039,880)(D) 3,270,598
Selling, general and
administrative........ 9,027,094 (1,382,000)(E) 7,645,094 (2,416,007)(D) 5,229,087
Depreciation and
amortization.......... 6,106,007 1,385,643 (F) 7,919,127 (2,984,283)(D) 4,934,844
427,477 (G)
----------- ---------- ----------- ----------- -----------
Total operating
expenses.............. 20,443,579 431,120 20,874,699 (7,440,170) 13,434,529
----------- ---------- ----------- ----------- -----------
Operating loss........ (9,159,870) (431,120) (9,590,990) 2,922,202 (6,668,788)
Interest expense........ (459,536) (459,536) (459,536)
Interest income and
other.................. 577,217 577,217 577,217
----------- ---------- ----------- ----------- -----------
Loss before income
taxes................. (9,042,189) (431,120) (9,473,309) 2,922,202 (6,551,107)
Income tax benefit...... -- 3,346,958 (H) 3,346,958 (1,081,215)(D) 2,265,743
----------- ---------- ----------- ----------- -----------
Net loss............... $(9,042,189) $2,915,838 $(6,126,351) $ 1,840,987 $(4,285,364)
=========== ========== =========== =========== ===========
Net loss per share...... $ (2.12) $ (1.48)
=========== ===========
Weighted average shares
outstanding............ 2,886,148 (A) 2,886,148 2,886,148
========== =========== ===========
</TABLE>
See accompanying notes to Pro Forma Statements
41
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
CMAX UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION CMAX
CMAX ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $10,621,647 $ -- $10,621,647 $(3,947,117)(D) $ 6,674,530
----------- ---------- ----------- ----------- -----------
Operating expenses:
Systems operations..... 4,937,148 4,937,148 (1,964,137)(D) 2,973,011
Selling, general and
administrative........ 6,829,999 (1,364,926)(E) 5,465,073 (1,170,722)(D) 4,294,351
Depreciation and
amortization.......... 7,251,068 607,918 (F) 8,179,594 (2,969,551)(D) 5,210,043
320,608 (G)
----------- ---------- ----------- ----------- -----------
Total operating
expenses.............. 19,018,215 (436,400) 18,581,815 (6,104,410) 12,477,405
----------- ---------- ----------- ----------- -----------
Operating loss........ (8,396,568) 436,400 (7,960,168) 2,157,293 (5,802,875)
Interest expense........ (945,475) (945,475) (945,475)
Interest income and
other.................. 121,497 121,497 121,497
----------- ---------- ----------- ----------- -----------
Loss before income
taxes................. (9,220,546) 436,400 (8,784,146) 2,157,293 (6,626,853)
Income tax benefit...... -- 3,131,509 (H) 3,131,509 (798,198)(D) 2,333,311
----------- ---------- ----------- ----------- -----------
Net loss............... $(9,220,546) $3,567,909 $(5,652,637) $ 1,359,095 $(4,293,542)
=========== ========== =========== =========== ===========
Net loss per share...... $ (1.96) $ (1.49)
=========== ===========
Weighted average shares
outstanding............ 2,886,148 (A) 2,886,148 2,886,148
========== =========== ===========
</TABLE>
See accompanying notes to Pro Forma Statements
42
<PAGE>
NOTES TO PRO FORMA STATEMENTS FOR THE CMAX MERGER
The CMAX historical statement of operations for the year ended December 31,
1994 has been derived utilizing CMAX's historical audited statement of
operations for the year ended June 30, 1994 and unaudited statements of
operations for the six months ended December 31, 1993 and 1994. The CMAX
historical statement of operations for the nine months ended September 30,
1995 has been derived utilizing CMAX's historical audited statement of
operations for the year ended June 30, 1995 and unaudited statements of
operations for the six months ended December 31, 1994 and three months ended
September 30, 1995. No material adjustments were recorded in determining such
amounts.
(A) Reflects the elimination of CMAX's historical equity and the issuance of
2,886,148 shares of Company Common Stock at an estimated average closing
price of $28 per share in exchange for all outstanding shares of CMAX
Common Stock. In addition, subsequent to September 30, 1995, the Company
paid CMAX a $2.4 million deposit with respect to the sublease of certain
wireless cable channel rights in various Texas markets and agreed to loan
CMAX up to $1,000,000. With respect to the $1,000,000 loan, $500,000 was
advanced on December 29, 1995 to be used for working capital purposes and
$500,000 may be used for subscriber growth.
(B) Reflects the fair value of approximately $67.2 million assigned to leased
license investment for the acquisition of CMAX, net of historical leased
license investment. Historical balances of working capital are assumed to
approximate their fair values. The Company has evaluated the propriety of
the carrying amounts of leased license investment with respect to each
market based on management's estimate of the fair value of each market and
expected future operating cash flows from subscribers in an individual
market, and believes such amounts to be recoverable.
(C) Reflects the recognition of deferred income taxes at an estimated 37%
effective tax rate on excess book value over tax basis relating to the
CMAX net assets acquired. The related increase in excess purchase price
over the fair value of net identifiable assets acquired will be amortized
over an estimated useful life of 20 years. The Company has evaluated the
propriety of the carrying amount of excess cost over fair value of net
assets acquired based on management's estimate of the fair value of the
Company's markets and expected future operating cash flows from
subscribers, and believes such amount to be recoverable.
(D) Reflects the reclassification of certain assets and liabilities acquired
in the CMAX Merger to net assets held for exchange based on management's
expectations with respect to such net assets. Accordingly, historical
operating results relating to such net assets have been eliminated from
the pro forma statements of operations.
(E) Reflects the elimination of certain historical corporate general and
administrative expenses of CMAX that, in the opinion of Company
management, will not be incurred by the Company. Such expenses consist
primarily of management fees, salaries of officers and other duplicative
corporate personnel and professional fees.
(F) Reflects incremental depreciation and amortization of leased license
investment associated with the CMAX Merger. Amortization of leased license
investment is calculated beginning with inception of service in each
respective market over an estimated useful life of 20 years. For purposes
of the Pro Forma Statements for the CMAX Merger, additional amortization
of leased license investment has been calculated from January 1, 1994
since all current operating systems (except for the Waco and
Temple/Kileen, Texas systems) began service prior to such date.
(G) Reflects incremental amortization of excess purchase price over the fair
value of net identifiable assets acquired in the CMAX Merger.
(H) Reflects the adjustment to income tax benefit related to the pro forma
adjustments. Income tax benefit reflects the recognition of deferred tax
assets to the extent such assets can be realized through reversals of
existing taxable temporary differences.
43
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
AWS UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION AWS
AWS ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equiva-
lents.................. $1,182,653 $ 3,900,000 (B) $ 5,082,653 $ $ 5,082,653
Net assets held for cash
sale or exchange....... 7,250,000 (E) 7,250,000
Other current assets.... 89,724 89,724 89,724
---------- ----------- ----------- ------------ -----------
Total current assets... 1,272,377 3,900,000 5,172,377 7,250,000 12,422,377
Systems and equipment,
net.................... 218,404 218,404 218,404
Leased license invest-
ment, net.............. 2,987,940 23,478,317 (B) 23,396,257 (23,396,257)(E) --
(3,900,000)(B)
830,000 (D)
Investment in joint ven-
tures.................. 2,998,398 8,353,779 (B) 11,352,177 (11,352,177)(E) --
Excess of cost over fair
value of net assets
acquired............... -- 9,015,248 (C) 9,015,248 9,015,248
Net assets held for ex-
change................. -- 27,498,434 (E) 27,498,434
Other assets, net....... 77,179 77,179 77,179
---------- ----------- ----------- ------------ -----------
$7,554,298 $41,677,344 $49,231,642 $ -- $49,231,642
========== =========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-
term debt.............. $ 99,442 $ $ 99,442 $ $ 99,442
Other current liabili-
ties................... 638,523 830,000 (D) 1,468,523 1,468,523
---------- ----------- ----------- ------------ -----------
Total current liabili-
ties.................. 737,965 830,000 1,567,965 -- 1,567,965
Long-term debt, less
current portion........ 1,800,000 1,800,000 1,800,000
Deferred income taxes... -- 9,015,248 (C) 9,015,248 9,015,248
Other liabilities....... 233,044 233,044 233,044
Stockholders' equity.... 4,783,289 36,615,385 (A) 36,615,385 36,615,385
(4,783,289)(A)
---------- ----------- ----------- ------------ -----------
$7,554,298 $41,677,344 $49,231,642 $ -- $49,231,642
========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to Pro Forma Statements
44
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
AWS UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION AWS
AWS ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 83,333 $ -- $ 83,333 $ (83,333)(E) $ --
----------- ---------- ----------- ----------- ----------
Operating expenses:
Systems operations..... --
Selling, general and
administrative........ 3,521,413 (960,001)(F) 2,911,412 (2,911,412)(E) --
350,000 (G)
Depreciation and amor-
tization.............. 637,049 450,762 (I) 1,087,811 (1,087,811)(E) --
----------- ---------- ----------- ----------- ----------
Total operating ex-
penses................ 4,158,462 (159,239) 3,999,223 (3,999,223) --
----------- ---------- ----------- ----------- ----------
Operating loss........ (4,075,129) 159,239 (3,915,890) 3,915,890 --
Interest expense........ (976,867) (976,867) 976,867 (E) --
Equity in losses of
investees.............. (200,436) (281,439)(H) (481,875) 481,875 (E) --
Interest income and oth-
er..................... (474,348) (474,348) 474,348 (E) --
----------- ---------- ----------- ----------- ----------
Loss before income tax-
es.................... (5,726,780) (122,200) (5,848,980) 5,848,980 --
Income tax benefit...... -- 1,997,341 (J) 1,997,341 (1,997,341)(E) --
----------- ---------- ----------- ----------- ----------
Net loss............... $(5,726,780) $1,875,141 $(3,851,639) $ 3,851,639 --
=========== ========== =========== =========== ==========
Net loss per share...... $ (2.95) $ --
=========== ==========
Weighted average shares
outstanding............ 1,307,692 (A) 1,307,692 1,307,692
========== =========== ==========
</TABLE>
See accompanying notes to Pro Forma Statements
45
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
AWS UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION AWS
AWS ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 75,000 $ -- $ 75,000 $ (75,000)(E) $ --
----------- ---------- ----------- ----------- ----------
Operating expenses:
Systems operations.....
Selling, general and
administrative........ 1,533,152 (315,035)(F) 1,480,617 (1,480,617)(E) --
262,500 (G)
Depreciation and amor-
tization.............. 66,079 338,072 (I) 404,151 (404,151)(E) --
----------- ---------- ----------- ----------- ----------
Total operating ex-
penses................ 1,599,231 285,537 1,884,768 (1,884,768) --
----------- ---------- ----------- ----------- ----------
Operating loss........ (1,524,231) (285,537) (1,809,768) 1,809,768 --
Interest expense........ (126,119) (126,119) 126,119 (E) --
Equity in losses of
investees.............. (136,298) (196,338)(H) (332,636) 332,636 (E) --
Interest income and oth-
er..................... 802,078 802,078 (802,078)(E) --
----------- ---------- ----------- -----------
Loss before income tax-
es.................... (984,570) (481,875) (1,466,445) 1,466,455 --
Income tax benefit...... -- 417,498 (J) 417,498 (417,498)(E) --
----------- ---------- ----------- ----------- ----------
Net loss............... $ (984,570) $ (64,377) $(1,048,947) $ 1,048,947 $ --
=========== ========== =========== =========== ==========
Net loss per share...... $ (0.80) $ --
=========== ==========
Weighted average shares
outstanding............ 1,307,692 (A) 1,307,692 1,307,692
========== =========== ==========
</TABLE>
See accompanying notes to Pro Forma Statements
46
<PAGE>
NOTES TO PRO FORMA STATEMENTS FOR THE AWS MERGER
(A) Reflects the elimination of AWS's historical equity and the issuance of
1,307,692 shares of Company Common Stock at an estimated market price of
$28 per share in exchange for all outstanding shares of AWS Common Stock.
Pursuant to the terms of the AWS Merger Agreement and AWS Escrow Agreement
(as defined herein), shares of Company Common Stock having an aggregate
exchange value of $3.25 million ($2.75 million if certain litigation
pending against AWS is resolved prior to the AWS Effective Time (as
defined herein)) will be placed in escrow for approximately one year to
satisfy certain indemnification obligations of AWS to the Company.
(B) Reflects the fair values of approximately $23.4 million and $11.4 million
assigned to leased license investment and investment in the Fort Worth and
Minneapolis joint ventures, respectively, net of historical balances. The
sale by AWS of the Memphis market for cash of $3.9 million has also been
reflected in the pro forma balance sheet. Historical balances of working
capital are assumed to approximate their fair values. The Company has
evaluated the propriety of the carrying amounts of leased license
investment with respect to each market based on management's estimate of
the fair value of each market and expected future operating cash flows
from subscribers in an individual market, and believes such amounts to be
recoverable.
(C) Reflects the recognition of deferred income taxes at an estimated 37%
effective tax rate on excess book value over tax basis relating to the AWS
net assets acquired. The related increase in excess purchase price over
the fair value of net identifiable assets acquired will be amortized over
an estimated useful life of 20 years. The Company has evaluated the
propriety of the carrying amount of excess cost over fair value of net
assets acquired based on management's estimate of the fair value of the
Company's markets and expected future operating cash flows from
subscribers, and believes such amount to be recoverable.
(D) Reflects the recognition of liabilities for severance payments to certain
executive officers of AWS.
(E) Reflects the reclassification of certain assets and liabilities acquired
in the AWS Merger to net assets held for exchange based on management's
expectations with respect to such net assets. Accordingly, historical
operating results relating to such net assets have been eliminated from
the pro forma statements of operations.
(F) Reflects the elimination of certain historical corporate general and
administrative expenses of AWS that, in the opinion of Company management,
will not be incurred by the Company. Such expenses consist primarily of
management fees, salaries of officers and other duplicative corporate
personnel, directors and officers insurance and professional fees.
(G) Reflects the additional expense from the non-competition and consulting
agreement with an AWS executive officer.
(H) Reflects AWS's portion of the additional losses of the Fort Worth and
Minneapolis joint ventures.
(I) Reflects incremental amortization of excess purchase price over the fair
value of net identifiable assets acquired in the AWS Merger.
(J) Reflects the adjustment to income tax benefit related to the pro forma
adjustments. Income tax benefit reflects the recognition of deferred tax
assets to the extent such assets can be realized through reversals of
existing taxable temporary differences.
47
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
FTW PARTNERSHIP UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PURCHASE FTW
FTW ACCOUNTING DISPOSITION PARTNERSHIP
PARTNERSHIP ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 25,014 $ $ 25,014 $ (25,014)(C) $ --
Other current assets.... 62,456 62,456 (62,456)(C) --
---------- ----------- ----------- ------------ -----------
Total current assets... 87,470 -- 87,470 (87,470) --
Systems and equipment,
net.................... 1,001,027 1,001,027 (1,001,027)(C) --
Leased license invest-
ment, net.............. 2,178,002 17,542,631 (B) 19,720,633 (19,720,633)(C) --
Net assets held for ex-
change................. -- 16,191,304 (C) 16,191,304
---------- ----------- ----------- ------------ -----------
$3,266,499 $17,542,631 $20,809,130 $ (4,617,826) $16,191,304
========== =========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-
term debt.............. $ -- $ $ -- $ $ --
Other current liabili-
ties................... 1,207,311 (637,311)(B) 570,000 (570,000)(C) --
---------- ----------- ----------- ------------ -----------
Total current liabili-
ties.................. 1,207,311 (637,311) 570,000 (570,000) --
Minority interest....... 99,742 3,948,084 (B) 4,047,826 (4,047,826)(C) --
Stockholders' equity.... 1,959,446 16,191,304 (A) 16,191,304 16,191,304
(1,959,446)(A)
---------- ----------- ----------- ------------ -----------
$3,266,499 $17,542,631 $20,809,130 $ (4,617,826) $16,191,304
========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to Pro Forma Statements
48
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
FTW PARTNERSHIP UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
HISTORICAL PURCHASE FTW
FTW ACCOUNTING DISPOSITION PARTNERSHIP
PARTNERSHIP ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 667,260 $ -- $ 667,260 $ (667,260)(C) $ --
----------- --------- ----------- ---------- --------
Operating expenses:
Systems operations..... 567,461 567,461 (567,461)(C) --
Selling, general and
administrative........ 695,990 (100,000)(D) 595,990 (595,990)(C) --
Depreciation and amor-
tization.............. 786,572 535,809 (E) 1,322,381 (1,322,381)(C) --
----------- --------- ----------- ---------- --------
Total operating ex-
penses................ 2,050,023 435,809 2,485,832 (2,485,832) --
----------- --------- ----------- ---------- --------
Operating loss........ (1,382,763) (435,809) (1,818,572) 1,818,572 --
Interest income and oth-
er..................... 62,281 87,161 (F) 149,442 (149,442)(C) --
----------- --------- ----------- ---------- --------
Loss before income tax-
es.................... (1,320,482) (348,648) (1,669,130) 1,669,130 --
Income tax benefit...... -- -- --
----------- --------- ----------- ---------- --------
Net loss............... $(1,320,482) $(348,648) $(1,669,130) $1,669,130 $ --
=========== ========= =========== ========== ========
Net loss per share...... $ (2.89) $ --
=========== ========
Weighted average shares
outstanding............ 578,261 (A) 578,261 578,261
========= =========== ========
</TABLE>
See accompanying notes to Pro Forma Statements
49
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
FTW PARTNERSHIP UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
HISTORICAL PURCHASE FTW
FTW ACCOUNTING DISPOSITION PARTNERSHIP
PARTNERSHIP ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 451,581 $ -- $ 451,581 $ (451,581)(C) $ --
----------- --------- ----------- ----------- --------
Operating expenses:
Systems operations..... 396,302 396,302 (396,302)(C) --
Selling, general and
administrative........ 503,910 (75,000)(D) 428,910 (428,910)(C) --
Depreciation and amor-
tization.............. 581,451 408,612 (E) 990,063 (990,063)(C) --
----------- --------- ----------- ----------- --------
Total operating ex-
penses................ 1,481,663 333,612 1,815,275 (1,815,275) --
----------- --------- ----------- ----------- --------
Operating loss........ (1,030,082) (333,612) (1,363,694) 1,363,694 --
Interest income and oth-
er..................... 44,048 66,722 (F) 110,770 (110,770)(C) --
----------- --------- ----------- ----------- --------
Loss before income tax-
es.................... (986,034) (266,890) (1,252,924) 1,252,924 --
Income tax benefit...... -- -- --
----------- --------- ----------- ----------- --------
Net loss............... $ (986,034) $(266,890) $(1,252,924) $ 1,252,924 $ --
=========== ========= =========== =========== ========
Net loss per share...... $ (2.17) $ --
=========== ========
Weighted average shares
outstanding............ 578,261 (A) 578,261 578,261
========= =========== ========
</TABLE>
See accompanying notes to Pro Forma Statements
50
<PAGE>
NOTES TO PRO FORMA STATEMENTS FOR THE FTW TRANSACTION
(A) Reflects the elimination of the FTW Partnership's historical equity and
the issuance of 578,261 shares of Company Common Stock at an estimated
market price of $28 per share to the FTW Partnership. In addition,
subsequent to September 30, 1995, the Company had deposited in escrow
$265,000 on behalf of the FTW Partnership and agreed to make cash loans of
$500,000 to the FTW Partnership.
(B) Reflects the fair values of approximately $19.7 million and $4.0 million
assigned to leased license investment and AWS's minority interest in the
Fort Worth and Minneapolis joint ventures, respectively, net of historical
balances. Historical balances of working capital are assumed to
approximate their fair values. Under terms of the FTW Agreement (as
defined herein), total liabilities to be assumed by the Company will not
exceed $570,000 of certain types of liabilities (including disputed
liabilities). The Company has evaluated the propriety of the carrying
amounts of leased license investment with respect to each market based on
management's estimate of the fair value of each market and expected future
operating cash flows from subscribers in an individual market, and
believes such amounts to be recoverable.
(C) Reflects the reclassification of certain assets and liabilities acquired
in the FTW Transaction to net assets held for exchange based on
management's expectations with respect to such net assets. Accordingly,
historical operating results relating to such net assets are eliminated
from the pro forma statements of operations.
(D) Reflects the elimination of certain historical corporate general and
administrative expenses of the FTW Partnership that, in the opinion of
Company management, will not be incurred by the Company. Such expenses
consist primarily of management fees.
(E) Reflects incremental depreciation and amortization of leased license
investment associated with the FTW Transaction. Amortization of leased
license investment is calculated beginning with inception of service in
each respective market over an estimated useful life of 20 years. For
purposes of the Pro Forma Statements for the FTW Transaction, additional
amortization of leased license investment has been calculated from January
1, 1994 since the Fort Worth system began service prior to such date.
(F) Reflects the adjustment of minority interest for AWS's portion of the
additional losses of the Fort Worth and Minneapolis joint ventures.
51
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
MINNEAPOLIS PARTNERSHIP UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PURCHASE MINNEAPOLIS
MINNEAPOLIS ACCOUNTING DISPOSITION PARTNERSHIP
PARTNERSHIP ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 177,941 $ $ 177,941 $ (177,941)(C) $ --
Other current assets.... 223,218 223,218 (223,218)(C) --
---------- ----------- ----------- ------------ -----------
Total current assets... 401,159 -- 401,159 (401,159) --
Systems and equipment,
net.................... 1,480,218 1,480,218 (1,480,218)(C) --
Leased license invest-
ment, net.............. 4,603,199 25,543,892 (B) 30,147,091 (30,147,091)(C) --
Net assets held for ex-
change................. 21,913,052 (C) 21,913,052
---------- ----------- ----------- ------------ -----------
$6,484,576 $25,543,892 $32,028,468 (10,115,416) $21,913,052
========== =========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-
term debt.............. $2,000,000 $ (B) $ 2,000,000 $ (2,000,000)(C) $ --
Other current liabili-
ties................... 811,065 811,065 (811,065)(C) --
---------- ----------- ----------- ------------ -----------
Total current liabili-
ties.................. 2,811,065 -- 2,811,065 (2,811,065) --
Minority interest....... 289,737 7,014,614 (B) 7,304,351 (7,304,351)(C) --
Stockholders' equity.... 3,383,774 21,913,052 (A) 21,913,052 21,913,052
(3,383,774)(A)
---------- ----------- ----------- ------------ -----------
$6,484,576 $25,543,892 $32,028,468 $(10,115,416) $21,913,052
========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to Pro Forma Statements
52
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
MINNEAPOLIS PARTNERSHIP UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
HISTORICAL PURCHASE MINNEAPOLIS
MINNEAPOLIS ACCOUNTING DISPOSITION PARTNERSHIP
PARTNERSHIP ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 535,046 $ -- $ 535,046 $ (535,046)(C) $ --
----------- --------- ----------- ----------- --------
Operating expenses:
Systems operations..... 1,187,795 1,187,795 (1,187,795)(C) --
Selling, general and
administrative........ 463,156 (83,333)(D) 379,823 (379,823)(C) --
Depreciation and
amortization.......... 977,471 860,445 (E) 1,837,916 (1,837,916)(C) --
----------- --------- ----------- ----------- --------
Total operating
expenses.............. 2,628,422 777,112 3,405,534 (3,405,534) --
----------- --------- ----------- ----------- --------
Operating loss........ (2,093,376) (777,112) (2,870,488) 2,870,488 --
Interest income and
other.................. 138,155 194,278 (F) 332,433 (332,433)(C) --
----------- --------- ----------- ----------- --------
Loss before income
taxes................. (1,955,221) (582,834) (2,538,055) 2,538,055 --
Income tax benefit...... -- -- -- --
----------- --------- ----------- ----------- --------
Net loss............... $(1,955,221) $(582,834) $(2,538,055) $ 2,538,055 $ --
=========== ========= =========== =========== ========
Net loss per share...... $ (3.24) $ --
=========== ========
Weighted average shares
outstanding............ 782,609 (A) 782,609 782,609
========= =========== ========
</TABLE>
See accompanying notes to Pro Forma Statements
53
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
MINNEAPOLIS PARTNERSHIP UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
HISTORICAL PURCHASE MINNEAPOLIS
MINNEAPOLIS ACCOUNTING DISPOSITION PARTNERSHIP
PARTNERSHIP ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 740,595 $ -- $ 740,595 $ (740,595)(C) $ --
----------- --------- ----------- ---------- -------
Operating expenses:
Systems operations..... 1,092,248 1,092,248 (1,092,248)(C) --
Selling, general and
administrative........ 373,069 (75,000)(D) 298,069 (298,069)(C) --
Depreciation and amor-
tization.............. 799,154 593,465 (E) 1,392,619 (1,392,619)(C) --
----------- --------- ----------- ---------- -------
Total operating ex-
penses................ 2,264,471 518,465 2,782,936 (2,782,936) --
----------- --------- ----------- ---------- -------
Operating loss........ (1,523,876) (518,465) (2,042,341) 2,042,341 --
Interest income and oth-
er..................... 90,628 129,616 (F) 220,244 (220,244)(C) --
----------- --------- ----------- ---------- -------
Loss before income tax-
es.................... (1,433,248) (388,849) (1,822,095) 1,822,095 --
Income tax benefit...... -- -- --
----------- --------- ----------- ---------- -------
Net loss............... $(1,433,248) $(388,849) $(1,822,095) $1,822,095 $ --
=========== ========= =========== ========== =======
Net loss per share...... $ (2.33) $ --
=========== =======
Weighted average shares
outstanding............ 782,609 (A) 782,609 782,609
========= =========== =======
</TABLE>
See accompanying notes to Pro Forma Statements
54
<PAGE>
NOTES TO PRO FORMA STATEMENTS FOR THE MINNEAPOLIS TRANSACTION
(A) Reflects the elimination of the Minneapolis Partnership historical equity
and the issuance of 782,609 shares of Company Common Stock at an estimated
market price of $28 per share to the Minneapolis Partnership. The Pro
Forma Statements for the Minneapolis Transaction do not assume the
issuance of any additional shares of Company Common Stock for additional
subscribers added by the Minneapolis Partnership. In addition, subsequent
to September 30, 1995, the Company made cash loans to the Minneapolis LLC
in the amount of $1,059,000.
(B) Reflects the fair values of approximately $30.1 million and $7.3 million
assigned to leased license investment and AWS's minority interest in the
Fort Worth and Minneapolis joint ventures, respectively, net of historical
balances. Historical balances of working capital are assumed to
approximate their fair values. The Company has evaluated the propriety of
the carrying amounts of leased license investment with respect to each
market based on management's estimate of the fair value of each market and
expected future operating cash flows from subscribers in an individual
market, and believes such amounts to be recoverable.
(C) Reflects the reclassification of certain assets and liabilities acquired
in the Minneapolis Transaction to net assets held for exchange based on
management's expectations with respect to such net assets. Accordingly,
historical operating results relating to such net assets are eliminated
from the pro forma statements of operations.
(D) Reflects the elimination of certain historical corporate general and
administrative expenses of the Minneapolis Partnership that, in the
opinion of Company management, will not be incurred by the Company. Such
expenses consist primarily of management fees.
(E) Reflects incremental amortization of leased license investment associated
with the Minneapolis Transaction. Amortization of leased license
investment is calculated beginning with inception of service in each
respective market over an estimated useful life of 20 years. For purposes
of the Pro Forma Statements for the Minneapolis Transaction, additional
amortization of leased license investment has been calculated from January
1, 1994 since the Minneapolis system began service prior to such date.
(F) Reflects the adjustment of minority interest for AWS's portion of the
additional losses of the Fort Worth and Minneapolis joint ventures.
55
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
TECHNIVISION UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION TECHNIVISION
TECHNIVISION ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 78,124 $ $ 78,124 $ (21,827)(D) $ 56,297
Other current assets.... 477,325 477,325 (195,430)(D) 281,895
----------- ------------ ----------- ---------- -----------
Total current assets... 555,449 -- 555,449 (217,257) 338,192
Systems and equipment,
net.................... 9,001,797 9,001,797 (2,849,833)(D) 6,151,964
Leased license
investment, net........ 3,552,846 23,634,608 (B) 27,187,454 (8,499,701)(D) 18,687,753
Excess of cost over fair
value of net assets
acquired............... -- 6,066,024 (C) 6,066,024 6,066,024
Net assets held for
exchange............... -- 10,720,791 (D) 10,720,791
Other assets, net....... 1,441,093 (1,435,793)(B) 5,300 5,300
----------- ------------ ----------- ---------- -----------
$14,551,185 $ 28,264,839 $42,816,024 $ (846,000) $41,970,024
=========== ============ =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-
term debt.............. $13,232,882 $(11,874,953)(B) $ 1,357,929 $ (94,924)(D) $ 1,263,005
Other current
liabilities............ 3,642,071 3,642,071 (751,076)(D) 2,890,995
----------- ------------ ----------- ---------- -----------
Total current
liabilities........... 16,874,953 (11,874,953) 5,000,000 (846,000) 4,154,000
Long-term debt, less
current portion........ 6,061,259 (6,061,259)(B) -- --
Deferred income taxes... -- 6,066,024 (C) 6,066,024 6,066,024
Stockholders' equity.... (8,385,027) 31,750,000 (A) 31,750,000 31,750,000
8,385,027 (A)
----------- ------------ ----------- ---------- -----------
$14,551,185 $ 28,264,839 $42,816,024 $ (846,000) $41,970,024
=========== ============ =========== ========== ===========
</TABLE>
See accompanying notes to Pro Forma Statements
56
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
TECHNIVISION UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION TECHNIVISION
TECHNIVISION ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 6,587,547 $ -- $ 6,587,547 $ (852,476)(D) $ 5,735,071
----------- ---------- ----------- ----------- -----------
Operating expenses:
Systems operations..... 3,726,212 3,726,212 (1,063,717)(D) 2,662,495
Selling, general and
administrative........ 2,977,792 (270,000)(E) 2,707,792 (894,938)(D) 1,812,854
Depreciation and amor-
tization.............. 2,552,134 864,668 (F) 3,718,634 (742,584)(D) 2,976,050
301,832 (G)
----------- ---------- ----------- ----------- -----------
Total operating ex-
penses................ 9,256,138 896,500 10,152,638 (2,701,239) 7,451,399
----------- ---------- ----------- ----------- -----------
Operating loss........ (2,668,591) (896,500) (3,565,091) 1,848,763 (1,716,328)
Interest expense........ (1,491,725) (1,491,725) 103,462 (D) (1,388,263)
----------- ---------- ----------- ----------- -----------
Loss before income tax-
es.................... (4,160,316) (896,500) (5,056,816) 1,952,225 (3,104,591)
Income tax benefit...... -- 1,759,344 (H) 1,759,344 (610,645)(D) 1,148,699
----------- ---------- ----------- ----------- -----------
Net loss............... $(4,160,316) $ 862,844 $(3,297,472) $ 1,341,580 $(1,955,892)
=========== ========== =========== =========== ===========
Net loss per share...... $ (2.91) $ (1.72)
=========== ===========
Weighted average shares
outstanding............ 1,133,929 (A) 1,133,929 1,133,929
========== =========== ===========
</TABLE>
See accompanying notes to Pro Forma Statements
57
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
TECHNIVISION UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL ACCOUNTING DISPOSITION TECHNIVISION
TECHNIVISION ADJUSTMENTS SUB-TOTAL ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 5,029,037 $ -- $ 5,029,037 $ (890,247)(D) $4,138,790
Operating expenses:
Systems operations..... 2,675,570 2,675,570 (619,183)(D) 2,056,387
Selling, general and
administrative........ 1,777,721 (202,500)(E) 1,575,221 (418,002)(D) 1,157,219
Depreciation and
amortization.......... 2,311,943 576,755 (F) 3,116,174 (999,691)(D) 2,116,483
227,476 (G)
----------- --------- ----------- ---------- -----------
Total operating
expenses.............. 6,765,234 601,731 7,366,965 (2,036,876) 5,330,089
----------- --------- ----------- ---------- -----------
Operating loss........ (1,736,197) (601,731) (2,337,928) 1,146,629 (1,191,299)
Interest expense........ (708,446) (708,446) 82,718 (D) (625,728)
Interest income and
other.................. 253,352 253,352 253,352
----------- --------- ----------- ---------- -----------
Income before income
taxes................. (2,191,291) (601,731) (2,793,022) 1,229,347 (1,563,675)
Income tax benefit...... -- 949,252 (H) 949,252 (H) (454,858) 494,394
----------- --------- ----------- ---------- -----------
Net income............. $(2,191,291) $(601,731) $(1,843,770) $ 774,489 $(1,069,281)
=========== ========= =========== ========== ===========
Net income per share.... $ (1.63) $ (.94)
=========== ===========
Weighted average shares
outstanding............ 1,133,929 (A) 1,133,929 1,133,929
========= =========== ===========
</TABLE>
See accompanying notes to Pro Forma Statements
58
<PAGE>
NOTES TO PRO FORMA STATEMENTS FOR THE TSC TRANSACTION
The Technivision Unaudited Pro Forma Condensed Balance Sheet as of September
30, 1995 and Unaudited Pro Forma Condensed Statements of Operations for the
year ended December 31, 1994 and nine months ended September 30, 1995 have
been determined utilizing the historical unaudited balance sheet of
Technivision as of November 30, 1995 and unaudited statements of operations
for the year ended November 30, 1994 and nine months ended November 30, 1995.
The Technivision historical statement of operations for the year ended
November 30, 1994 has been derived utilizing Technivision's historical audited
statement of operations for the year ended May 31, 1995 and unaudited
statements of operations for the six months ended May 31, 1994 and 1995. The
Technivision historical statement of operations for the nine months ended
November 30, 1995 has been derived utilizing Technivision's historical
statement of operations for the six months ended November 30, 1995 and three
months ended May 31, 1995. No material adjustments were recorded in
determining such amounts.
(A) Reflects the elimination of Technivision historical equity and the
issuance of 1,133,929 shares of Common Stock at an estimated market price
of $28 per share to TSC. The Pro Forma Statements for the TSC Transaction
do not assume the issuance of any additional shares of Common Stock for
additional subscribers added by TSC. Pursuant to the terms of the TSC
Agreement and the TSC Escrow Agreement (as such terms are defined herein),
shares having an aggregate exchange value of $5 million will be placed in
escrow for approximately 18 months to satisfy certain indemnification
obligations of TSC to the Company, and shares having an aggregate exchange
value of up to $3.6 million (currently estimated to be $1 million) will be
placed in escrow for up to six months (subject to extension) to satisfy
certain post-closing obligations of TSC to the Company regarding third
party consents to the transfer of certain assets to the Company.
(B) Reflects the fair value of approximately $27.2 million assigned to leased
license investment for the acquisition of TSC, net of historical leased
license investment. Historical balances of working capital are assumed to
approximate their fair values. In addition, under terms of the TSC
Agreement, certain marketable securities of TSC will not be acquired by
the Company and total liabilities to be assumed by the Company will not
exceed $5 million of liabilities of TSC. The Company has evaluated the
propriety of the carrying amounts of leased license investment with
respect to each market based on management's estimate of the fair value of
each market and expected future operating cash flows from subscribers in
an individual market, and believes such amounts to be recoverable.
(C) Reflects the recognition of deferred income taxes at an estimated 37%
effective tax rate on excess book value over tax basis relating to the TSC
net assets acquired. The related increase in excess purchase price over
the fair value of net identifiable assets acquired will be amortized over
an estimated useful life of 20 years. The Company has evaluated the
propriety of the carrying amount of excess cost over fair value of net
assets acquired based on management's estimate of the fair value of the
Company's markets and expected future operating cash flows from
subscribers, and believes such amount to be recoverable.
(D) Reflects the reclassification of certain assets and liabilities acquired
in the TSC Transaction to net assets held for exchange based on
management's expectations with respect to such net assets. Accordingly,
historical operating results relating to such net assets are eliminated
from the pro forma statements of operations.
(E) Reflects the elimination of certain historical corporate general and
administrative expenses of TSC that, in the opinion of Company management,
will not be incurred by the Company. Such expenses consist primarily of
management fees.
(F) Reflects incremental depreciation and amortization of leased license
investment associated with the TSC Transaction. Amortization of leased
license investment is calculated beginning with inception of service in
each respective market over an estimated useful life of 20 years. For
purposes of the Pro Forma Statements for the TSC Transaction, additional
amortization of leased license investment has been calculated from January
1, 1994 since the Corpus Christi and Dayton systems began service prior to
such date.
(G) Reflects incremental amortization of excess purchase price over the fair
value of net identifiable assets acquired in the TSC Transaction.
(H) Reflects the adjustment to income tax benefit related to the pro forma
adjustments. Income tax benefit reflects the recognition of deferred tax
assets to the extent such assets can be realized through reversals of
existing taxable temporary differences.
59
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical statement of operations and balance sheet data
presented below as of December 31, 1993 and 1994 and for the years ended
December 31, 1992, 1993 and 1994 were derived from the consolidated financial
statements of the Company, which were audited by KPMG Peat Marwick LLP,
independent certified public accountants, and which are included elsewhere in
this Prospectus. The selected consolidated statement of operations and balance
sheet data presented below as of December 31, 1990, 1991 and 1992 and for the
period from September 1, 1990 (inception) to December 31, 1990 and the year
ended December 31, 1991 were derived from consolidated financial statements of
the Company, which were audited by KPMG Peat Marwick LLP, but which are not
included in this Prospectus. The selected consolidated statement of operations
and balance sheet data presented below as of September 30, 1995 and for the
nine months ended September 30, 1994 and 1995 were derived from the unaudited
consolidated financial statements of the Company, which are included elsewhere
in this Prospectus and which, in the opinion of management of the Company,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of such unaudited interim
periods. The statement of operations data for interim periods are not
necessarily indicative of results for subsequent periods or for the full year.
This selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements (including the
notes thereto) included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 1,
1990 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------------------------------------- ---------------------------
1990 1991 1992 1993 1994 1994 1995
-------------- -------- ---------- ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ -- $ -- $ 205,382 $ 868,765 $ 2,229,494 $ 1,289,526 $ 9,292,837
-------- -------- ---------- ---------- ----------- ------------ ------------
Operating expenses:
Systems operations .... -- -- 36,042 118,649 527,476 320,029 2,894,074
Cost of goods sold .... -- -- -- 202,162 235,025 235,025 --
Selling, general and
administrative........ 21,026 64,158 147,927 646,611 4,183,307 2,042,124 7,449,699
Depreciation and amor-
tization.............. 1,000 2,000 34,919 138,560 1,097,668 418,960 3,966,120
-------- -------- ---------- ---------- ----------- ------------ ------------
Total operating ex-
penses.............. 22,026 66,158 218,888 1,105,982 6,043,476 3,016,138 14,309,893
-------- -------- ---------- ---------- ----------- ------------ ------------
Operating loss......... (22,026) (66,158) (13,506) (237,217) (3,813,982) (1,726,612) (5,017,056)
Interest income (ex-
pense), net .......... -- -- (207) (73,306) (210,113) 60,519 (6,864,367)
Equity in losses of
joint venture......... -- -- -- -- (386,985) (163,119) (128,663)
Other income (ex-
pense)................ -- -- (37,109) (95,578) (227,204) (34,192) (475,146)
Income tax benefit..... -- -- -- -- 1,594,963 649,510 1,307,137
-------- -------- ---------- ---------- ----------- ------------ ------------
Net loss............. (22,026) (66,158) (50,822) (406,101) (3,043,321) (1,213,894) (11,178,095)
======== ======== ========== ========== =========== ============ ============
OTHER DATA:
EBITDA(1).............. (21,026) (64,158) 21,413 (98,657) (2,716,314) (1,307,652) (1,050,936)
Capital expendi-
tures(2).............. 42,065 306,484 1,401,737 5,141,021 44,500,351 18,126,653 44,016,522
Deficiency of earnings
to fixed charges(3)... 22,026 66,158 50,822 406,101 4,638,284 1,863,404 12,485,232
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
SEPTEMBER 30,
1990 1991 1992 1993 1994 1995
-------------- -------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents, excluding
restricted
investments........... $ 8,399 $ 53,246 $ 164,971 $ 815,305 $11,985,953 $ 37,155,064
Restricted invest-
ments................. -- -- -- -- -- 24,747,214
Total assets........... 49,514 426,771 2,267,500 8,665,066 77,921,528 200,150,474
Long-term debt,
including current
portion............... -- -- -- 1,592,529 40,505,852 140,045,039
Total stockholders' eq-
uity.................. 6,357 173,409 1,003,882 4,492,568 30,080,885 48,293,817
</TABLE>
- --------
(1) "EBITDA" represents operating income (loss) before depreciation and
amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness. However, EBITDA is not a financial measure determined under
generally accepted accounting principles and should not be considered as
an alternative to net income as a measure of operating results or to cash
flows as a measure of funds available for discretionary or other liquidity
purposes.
(2) Capital expenditures for the period from September 1, 1990 (inception) to
December 31, 1990 were comprised of $10,000 for purchases of systems and
equipment and $32,065 for expenditures for leased licenses; for the year
ended December 31, 1991, $25,000 for purchases of systems and equipment
and $281,484 for expenditures for leased licenses; for the year ended
December 31, 1992, $604,082 for purchases of systems and equipment and
$797,655 of expenditures for leased licenses; for the year ended December
31, 1993, $2,072,937 for purchases of systems and equipment and $3,068,084
for expenditures for leased licenses; for the year ended December 31,
1994, $12,414,501 for purchases of systems and equipment, $3,354,471 for
expenditures for leased licenses, $12,431,379 for the investment in Rural
Vision Joint Venture and $16,300,000 for the purchase of certain assets
from Rural Vision Joint Venture and the acquisition of the Lindsay system;
for the nine months ended September 30, 1994, $4,011,480 for systems and
equipment, $2,465,265 for leased licenses and $11,649,908 for the
investment in Rural Vision Joint Venture; and for the nine months ended
September 30, 1995, $25,575,252 for purchases of systems and equipment,
$1,592,024 of expenditures for leased licenses, $5,426,432 for the
investment in Rural Vision Joint Venture and $11,422,814 for the
acquisition of wireless cable television systems in Lubbock, Texas and
Tulsa, Oklahoma and the acquisition of certain additional assets from
Rural Vision Joint Venture.
(3) In calculating the deficiency of earnings to fixed charges, earnings
consists of net losses prior to income tax benefit and fixed charges.
Fixed charges consists of interest expense, amortization of debt issuance
costs and one-third of rental payments on operating leases (such amount
having been deemed by the Company to represent the interest portion of
such payments).
60
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, owns and operates wireless cable television systems.
The Company has wireless cable channel rights in small to mid-size wireless
cable television markets, located principally in the central United States,
with a significant number of households not currently passed by traditional
hard-wire cable systems. The Company launched its first system, located in
Ada, Oklahoma, in April 1992. Subsequently, the Company also launched service
in Wichita Falls, Texas; Midland, Texas; Abilene, Texas; Lawton, Oklahoma;
Laredo, Texas; Enid, Oklahoma; Monroe, Louisiana; Ardmore, Oklahoma; Mt.
Pleasant, Texas; Lufkin, Texas; Texarkana, Texas; and Stillwater, Oklahoma. On
December 1, 1994, the Company purchased the Milano system from RuralVision
Joint Venture. On December 29, 1994, the Company acquired the Lindsay system,
for approximately $2.3 million. In addition, the Company received the
distribution of the Shaw system from RuralVision Joint Venture on January 27,
1995. On May 3, 1995, the Company acquired the Lubbock system for
approximately $5.4 million. The systems described in this paragraph are
referred to in this Management's Discussion as the "Existing Systems."
The Company was incorporated in Delaware in October 1993 to succeed to the
wireless cable businesses previously conducted by its founders, David E. Webb,
the President and Chief Executive Officer and a principal stockholder of the
Company, and L. Allen Wheeler, a director and principal stockholder of the
Company. The Company's primary business strategy is to develop, own and
operate wireless cable television systems in markets in which the Company
believes it can achieve positive cash flow and operating income in a
particular market rapidly after system launch and then expand such system
while increasing such system's operating income. The Company executes this
strategy by developing wireless cable channel rights and locating operations
in geographic clusters of small to mid-size markets with a significant number
of households not currently passed by traditional hard-wire cable. The
Company's strategy allows it to contain system launch costs because the
Company can launch its service with fewer channels of programming and
initially utilize lower power transmission equipment. In addition, by
developing wireless cable channel rights and locating its operations in
geographic clusters, the Company can further contain costs by taking advantage
of economies of scale in management, sales and customer service. Although the
Company has recorded net losses since inception, four operating systems had
positive cash flow in their first year of operations. None of the other
Existing Systems has achieved positive cash flow or generated operating
income, primarily as a result of their early stages of development and number
of subscribers.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1994
Management believes that period-to-period comparisons of the Company's
consolidated financial results to date are not necessarily meaningful and
should not be relied upon as an indication of future performance due to the
Company's historically high growth rate and system launches during the periods
presented.
61
<PAGE>
The table below sets forth for each of the Existing Systems the launch or
acquisition date, the current channel offering and the approximate number of
subscribers at December 31, 1994:
<TABLE>
<CAPTION>
APPROXIMATE
LAUNCH OR CURRENT SUBSCRIBERS AT
ACQUISITION CHANNEL DECEMBER 31,
MARKET DATE OFFERING(/1/) 1994
- ------------------------------------ -------------- ------------- --------------
<S> <C> <C> <C>
Ada, Oklahoma....................... April 1992 32 5,020
Wichita Falls, Texas................ October 1993 28 2,690
Midland, Texas...................... December 1993 26 1,420
Abilene, Texas ..................... February 1994 23 2,020
Lawton, Oklahoma.................... August 1994 27 3,150
Other Existing Systems:
Laredo, Texas..................... September 1994 27 1,110
Enid, Oklahoma(/2/)............... October 1994 21 970
Monroe, Louisiana(/3/)............ N/A 27 200
Lindsay, Oklahoma(/4/)............ December 1994 32 1,410
Ardmore, Oklahoma................. December 1994 20 170
Mt. Pleasant, Texas(/5/).......... December 1994 16 --
Lufkin, Texas(/6/)................ N/A 12 --
Milano, Texas(/7/)................ December 1994 26 1,680
Shaw, Kansas(/8/)................. January 1995 30 3,520
</TABLE>
- --------
(1) Includes local off-air VHF/UHF channels, some of which are retransmitted
by the Company over wireless cable channels.
(2) Construction of the Enid system was completed in February 1993. However,
the Company did not begin actively marketing its service in the Enid
system until October 1994 when it achieved an increase in its channel
offering.
(3) Construction of the Monroe system was completed in March 1993. The
Company is not actively marketing its service in the Monroe system
because it is awaiting action by the FCC to grant licenses, which would
increase the number of wireless cable channels available to the Company.
(4) The Company acquired the Lindsay system on December 29, 1994.
(5) The Company launched the Mt. Pleasant system in December 1994.
(6) The Company completed construction of the Lufkin system in December 1994.
The Company is not actively marketing its service in the Lufkin system
because it is awaiting action by the FCC to grant licenses, which would
increase the number of wireless channels available to the Company.
(7) The Company acquired the Milano system on December 1, 1994.
(8) The Company acquired the Shaw system on January 27, 1995.
62
<PAGE>
Revenues
The Company's first system, the Ada system, was launched in April 1992 and
the Company had no revenues prior to 1992. The Company's revenues were
generated from the following sources for the three years ended December 31,
1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1992 1993 1994
-------- -------- ----------
<S> <C> <C> <C>
Subscription revenues:
Ada System................................... $170,457 $591,741 $ 893,126
Wichita Falls System......................... -- 15,861 313,729
Midland System............................... -- 3,516 164,816
Abilene System............................... -- -- 171,830
Lawton System................................ -- -- 154,424
Other Existing Systems....................... -- 14,343 155,929
Installation and service revenues.............. 34,925 243,304 375,640
-------- -------- ----------
Total...................................... $205,382 $868,765 $2,229,494
======== ======== ==========
</TABLE>
The following table sets forth the number of subscribers in the Existing
Systems on the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1992 1992 1992 1993 1993 1993 1993 1994 1994 1994 1994
-------- --------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ada System...... 475 760 1,075 1,460 1,540 1,970 2,110 2,235 2,275 3,440 5,020
Wichita Falls
System......... -- -- -- -- -- -- 315 475 710 1,530 2,690
Midland System.. -- -- -- -- -- -- 130 370 450 690 1,420
Abilene System.. -- -- -- -- -- -- -- 140 330 1,230 2,020
Lawton System... -- -- -- -- -- -- -- -- -- 790 3,150
Other Existing
Systems........ -- -- -- -- 10 120 180 205 220 360 5,540
</TABLE>
Historically, the Company's subscribers have been located predominantly in
single-family homes. In the fiscal year ended December 31, 1994, the number of
subscribers located in multiple-dwelling units in the Existing Systems
(including the Shaw system) increased as a percentage of total subscribers to
approximately 9.6%. Multiple-dwelling unit subscribers typically generate
lower per-subscriber revenue than single-family units due to discounted
programs offered to these subscribers.
Subscription Revenues from Ada System. Revenues from the Ada system consist
principally of television subscription revenues. The increase in television
subscription revenues from $170,457 for 1992 to $591,741 for 1993 (a 247%
increase) and to $893,126 for 1994 (a 51% increase) is principally
attributable to an increase in the number of subscribers. The Ada system was
not yet operational on December 31, 1991. The Ada system had approximately
1,075 subscribers on December 31, 1992, approximately 2,110 subscribers on
December 31, 1993 and approximately 5,020 subscribers on December 31, 1994, of
which approximately 1,580 subscribers (or 46%) were added in the last quarter
of 1994.
Television subscription revenues consist of monthly fees paid by subscribers
for the Ada system's basic programming package, for premium programming
services and for equipment rental. The average monthly television subscription
revenue per Ada system subscriber in 1992, 1993 and 1994 was $27.90, $30.27 (a
9% increase) and $26.98 (a 10% decrease), respectively. The increase in
average monthly subscription revenue per subscriber in 1993 as compared to
1992 was primarily due to the increase in the percentage (from 61% to 80%,
respectively) of customers that rented, rather than purchased, the receive-
site equipment. The decrease in average monthly subscription revenue per
subscriber in 1994 as compared to 1993 was primarily due to the number of
subscribers added during the fourth quarter of 1994 who live in multiple-
dwelling units, which typically generate
63
<PAGE>
lower per-subscriber revenue than single-family units, and certain promotional
offerings of premium channel units. During 1994, the standard charge for the
basic Ada system programming package of 29 channels (including one local off-
air VHF/UHF channel) was $17.95 per month, $9.95 per month for each premium
programming service and $6.00 per month for rental of the basic receive-site
equipment package. The Ada system had approximately 5,020 subscribers on
December 31, 1994, in excess of 80% of whom rented, rather than purchased, the
receive-site equipment. The Company initiated pay-per-view programming in the
Ada system on April 1, 1995.
Subscription Revenues from Wichita Falls System. The Wichita Falls system
was launched in October 1993 with 24 channels (including four local off-air
VHF/UHF channels). The Wichita Falls system had approximately 315 subscribers
on December 31, 1993 and approximately 2,690 subscribers on December 31, 1994.
The Wichita Falls system currently offers 28 channels (including two local
off-air VHF/UHF channels which are being retransmitted). The average monthly
television subscription revenue per Wichita Falls system subscriber for 1994
was $26.46, which consisted of the standard charge of $17.95 per month for the
basic Wichita Falls system programming package, $9.95, $8.95 and $2.95 per
month, respectively, for certain premium programming services and $6.85 per
month for rental of the basic receive-site equipment package. Substantially
all subscribers rent the receive-site equipment in the Wichita Falls System.
Subscription Revenues from Midland System. The Midland system was launched
in December 1993 with 24 channels (including four local off-air VHF/UHF
channels). The Midland system had approximately 130 subscribers on December
31, 1993 and approximately 1,420 subscribers on December 31, 1994. The average
monthly television subscription revenue per Midland system subscriber for 1994
was $23.54, which consisted of the standard charge of $19.95 per month for the
basic Midland system programming package, $9.95 for premium programming
services and $9.85 per month for rental of the basic receive-site equipment
package. Substantially all subscribers rent the receive-site equipment in the
Midland system.
Subscription Revenues from Abilene System. The Abilene system was launched
in February 1994 with 23 channels (including three local off-air VHF/UHF
channels). The Abilene system had approximately 2,020 subscribers on December
31, 1994. The average monthly television subscription revenue for Abilene
system subscribers in 1994 was $23.20, which consisted of the standard charge
of $18.95 per month for the basic Abilene system programming package, $10.95
and $2.95 per month, respectively, for premium programming services and $8.90
per month for rental of the basic receive-site equipment package.
Substantially all subscribers rent the receive-site equipment in the Abilene
system.
Subscription Revenues from Lawton System. The Lawton system was launched in
August 1994 with 19 channels (including seven local off-air VHF/UHF channels).
The Lawton system had approximately 3,150 subscribers on December 31, 1994.
The average monthly television subscription revenue for Lawton system
subscribers was $26.65 in 1994, which consisted of the standard charge of
$17.95 per month for the basic Lawton system programming package, $9.95 per
month for a premium programming service and $8.00 per month for rental of the
basic receive-site equipment package. Substantially all single-family unit
subscribers in the Lawton system rent the receive-site equipment. Multiple-
dwelling unit subscribers in the Lawton system (approximately one-third of the
total number of subscribers) do not pay a fee to rent the receive-site
equipment.
Subscription Revenues from Other Existing Systems. Television subscription
revenues from Existing Systems other than the Ada System, the Wichita Falls
system, the Midland system, the Abilene system and the Lawton system were
$155,929 in 1994 compared to $14,343 in 1993. This increase is attributable to
the increase in subscriber base related to these systems, the number of
systems launched in 1994 and the acquisition in December 1994 of one of these
systems.
The Laredo system was launched in September 1994 with 23 channels (including
three local off-air VHF/UHF channels). The Laredo system had approximately
1,110 subscribers on December 31, 1994.
64
<PAGE>
The Company completed construction of the Enid system in February 1993 in
anticipation of action by the FCC to grant licenses which would increase the
number of wireless cable channel rights available to the Company. Initially,
subscribers were obtained without active marketing efforts by the Company. An
increase in the Enid system channel offering was achieved in September 1994
and the Company began actively marketing its service in the Enid system in
October 1994. The Enid system currently offers 21 channels (including two
local off-air VHF/UHF channels). The Enid system had approximately 970
subscribers on December 31, 1994.
The Company completed construction of the Monroe system in March 1993. The
Monroe system had approximately 160 subscribers on December 31, 1994. The
Monroe system was constructed in anticipation of action by the FCC to grant
licenses which would increase the number of wireless cable channel rights
available to the Company.
The Company acquired the Lindsay system on December 29, 1994. The Lindsay
system currently offers 32 channels (including 10 local off-air VHF/UHF
channels). The Lindsay system had approximately 1,410 subscribers on December
31, 1994.
The Ardmore system was launched in December 1994 with 20 channels (including
four local off-air VHF/UHF channels). The Ardmore system had approximately 170
subscribers on December 31, 1994.
The Mt. Pleasant system was launched in December 1994 with 14 channels
(including four local off-air VHF/UHF channels). The Mt. Pleasant system had
no subscribers on December 31, 1994.
The Company completed construction of the Lufkin system, which currently
offers 12 channels (including four local off-air VHF/UHF channels), in
December 1994. The Lufkin system was constructed in anticipation of action by
the FCC to grant licenses which would increase the number of wireless cable
channel rights available to the Company. However, such action has not yet been
taken by the FCC. Accordingly, the Company is not actively marketing, and does
not currently intend to actively market, its service in the Lufkin market
until an increase in its channel offering is achieved, which the Company
expects to occur within the next 12 months.
The Milano system was acquired on December 1, 1994 from RuralVision Joint
Venture. The Milano system currently offers 26 channels (including six local
off-air VHF/UHF channels). The Milano system had approximately 1,680
subscribers on December 31, 1994.
The Shaw system was acquired on January 27, 1995, in accordance with the
terms of the Venture Distribution Agreement (as defined herein). The Shaw
system currently offers 30 channels (including four local off-air VHF/UHF
channels). The Shaw system had approximately 3,520 subscribers on December 31,
1994.
Installation and Service Revenues. Installation and service revenues
represent installation fees charged by the Company to certain new subscribers,
sales of receive-site equipment to certain subscribers and service income.
Installation fees are recognized upon origination of service to a customer to
the extent of subscriber acquisition costs incurred to obtain subscribers.
Revenue from the sale of receive-site equipment to subscribers is recognized
upon delivery of such equipment to a subscriber. Installation revenues
included installation fees of $34,925 in 1992, $27,289 in 1993 and $107,803 in
1994. Installation fees declined as a percentage of revenues in 1994 due to
selected promotional campaigns in several of the Company's markets during the
period from August 1994 to December 1994 and a higher level of revenues. Sales
of receive-site equipment to subscribers were $213,005 for 1993 and $237,730
for 1994, respectively. Through September 1993, installations and sales of
receive-site equipment were performed by a formerly affiliated installation
company. Subsequent to this period, such installations and sales have been
conducted through two subsidiaries of the Company that were merged together in
December 1994. Additionally, the Company recorded service income of $30,107 in
1994, a 900% increase from $3,010 in 1993.
65
<PAGE>
In order to conserve its capital, upon system launch, the Company initially
required the purchase (rather than the rental) of its receive-site equipment
by subscribers. Upon system launch in 1992, a new Ada system subscriber was
required to purchase the receive-site equipment for approximately $325, but no
installation fee was charged. Since September 1992, the Company has offered
potential subscribers in the Ada system the option of purchasing the receive-
site equipment or renting such equipment for a monthly charge of approximately
$6. In the Ada system, an installation fee of $25 and a deposit of $25
(designed to encourage the return of receive-site equipment) is currently
charged to subscribers selecting the monthly rental option. Additional fees
are charged for various other installation services. The Company believes that
charging an up-front installation fee better qualifies potential subscribers,
reducing subscriber turnover. Reduced subscriber turnover reduces installation
and marketing expenses incurred by the Company. The Company currently
experiences a low rate of subscriber turnover of approximately 1.5% per month,
as compared to the rate of approximately 3% per month typically experienced by
traditional hard-wire cable operators. Currently, approximately 80% of the
subscribers in the Ada system rent the receive-site equipment. Through April
1994, the other Existing Systems required a new subscriber to purchase the
receive-site equipment. In order to accelerate system expansion subsequent to
the Initial Public Offering, the Company began offering new subscribers the
option to rent receive-site equipment. Typically, an installation fee of $50
is currently charged to subscribers selecting the monthly rental option in the
Existing Systems other than the Ada system. From time to time, the Company
offers no-fee installation on a promotional basis.
Systems Operations and Cost of Goods Sold. Systems operations include
programming costs, channel lease payments, transmitter site and tower rentals,
cost of program guides and certain repairs and maintenance expenditures.
Programming costs (with the exception of minimum payments), cost of program
guides and channel lease payments (with the exception of certain fixed
payments) are variable expenses which increase as the number of subscribers
increases. Prior to 1992, the Company had no operations and therefore no
systems operations expense. The Company incurred $36,042 of systems operations
expense in 1992 (all related to the Ada system). For 1993, the Company
incurred systems operations expense of $118,649 (a 229% increase). The
increase is attributable primarily to the 96% increase in the number of
subscribers during 1993 as compared to 1992. Systems operations for 1994
increased 345% to $527,476. The increase was attributable primarily to the
240% increase in the average number of subscribers for 1994 compared to 1993.
Cost of goods sold includes the cost of receive-site equipment sold to
subscribers. Such costs amounted to $202,162 in 1993 and $235,025 in 1994.
Through September 1993, receive-site equipment was sold to subscribers by a
formerly affiliated installation company. Subsequent to this period, such
sales have been conducted through two subsidiaries of the Company that were
merged together in December 1994. Subsequent to the Initial Public Offering,
sales of receive-site equipment have been nominal.
Selling, General and Administrative Expenses. The Company has experienced
increasing selling, general and administrative expenses ("SG&A") since its
inception as a result of its increasing wireless cable activities and
associated administrative costs, including costs related to opening and
maintaining additional offices, additional accounting and support costs and
additional sales commissions relating to the increasing number of subscribers
and additional compensation expense. SG&A increased from $147,927 for 1992 to
$646,611 for 1993 (a 337% increase). During 1992, the Ada system was launched
and SG&A increased significantly due to the expense incurred in launching such
system and additional accounting and support costs and sales commissions
relating to the increasing number of subscribers. These factors and the
expense incurred in launching two more systems and constructing two other
systems caused the increase in SG&A for 1993 as compared to 1992. SG&A
increased 547% to $4,183,307 in 1994 compared to $646,611 in 1993, principally
due to the commencement of the direct payment of compensation to certain of
the Company's executive officers who had previously served as consultants and
the addition of personnel, and, to a lesser extent, increased sales
commissions relating to the increasing number of subscribers, bonuses to
management and employees, implementation of a group health insurance plan and
the expenses of being a public company.
66
<PAGE>
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation of systems and equipment and amortization of channel
rights and the excess of cost over fair value of net assets acquired.
Depreciation and amortization relating to the Ada system equipment and channel
rights began in 1992 and totaled $34,920. The year ended December 31, 1993
included depreciation on the equipment in the Ada, Enid, Monroe and Midland
systems as well as amortization of channel rights for such systems and totaled
$138,560, a 297% increase over the same period in 1992 during which only the
Ada system was operational. Depreciation and amortization expense for 1994
increased 692% to $1,097,668 compared to $138,560 in 1993. The increase was
due to additional systems and equipment in connection with systems launched
throughout 1994, and increased amortization expense on leased license
investment of systems in operation and excess of cost over fair value of net
assets acquired related to the acquisition (the "U.S. Wireless Acquisition")
of minority interests in certain of the Company's subsidiaries held by United
States Wireless Cable, Inc. ("U.S. Wireless") and the acquisition of minority
interests in certain other subsidiaries of the Company. The Company
anticipates that depreciation and amortization expense will increase as a
result of such acquisition of minority interests and as additional systems are
launched and more subscribers continue to rent, rather than purchase, the
receive-site equipment.
Interest Expense. In 1993, the Company incurred interest expense of $82,916
compared to $1,392 in 1992 due to an increase in borrowed funds. In 1994, the
Company incurred interest expense of $589,767, which included non-cash
interest of $301,125 related to one month's interest on the Convertible Notes.
The remaining interest expense is principally related to (i) the portion of a
bridge loan that was used by RuralVision Joint Venture to acquire certain
assets that the Company expects to retain and (ii) interest expense on short-
term borrowings that were repaid in connection with the Initial Public
Offering in April 1994.
Interest Income. Interest income for the year ended December 31, 1994
relates to interest earned on the Company's cash equivalents since the Initial
Public Offering.
Other Expenses. Other expenses are comprised primarily of other non-
operating expenses. In 1992, the Company incurred $18,003 of other non-
operating expenses. For the year ended December 31, 1993, the Company incurred
$60,467 of other non-operating expenses, which included a charge of $57,163
relating to a settlement with a formerly affiliated installation company (see
Note 9 of Notes to Consolidated Financial Statements appearing elsewhere in
this Prospectus). In 1994, the Company incurred a recapitalization charge of
$205,575. This charge related to costs incurred in connection with a rescinded
offering of securities.
Minority Interests. In connection with the development of certain wireless
cable markets, the Company has sold stock in certain of its subsidiaries
principally for cash. In addition to providing a portion of the cash necessary
for market development, the sales of subsidiary stock were intended to provide
for local community involvement and ownership in such systems. Minority
ownership interests in such subsidiaries range from 5% to 49.9999% (other than
(i) Northern Oklahoma Wireless Cable, Inc., serving the Enid, Oklahoma area,
in which minority interest holders own 18% of the outstanding common stock and
100% of the outstanding preferred stock; and (ii) Central Oklahoma Wireless
Cable, Inc., serving the Ada, Oklahoma area, in which minority interest
holders own 50% of the outstanding preferred stock). Minority interests in
earnings of subsidiaries of $19,106 and $35,111 for the years ended December
31, 1992 and 1993, respectively, relate to the minority interest owners' share
of net earnings from the Ada system and net losses from the Enid system
subsidiaries and dividends on preferred stock of the Ada and Enid system
subsidiaries. The increase in the minority interests in earnings of
subsidiaries during these periods is related to increased earnings in the Ada
system, offset partially by losses during 1993 in the Enid system. Minority
interests in losses of subsidiaries of $20,108 for the year ended December 31,
1994 relate to the minority interest owners' share of net earnings from the
Ada system subsidiary through April 1994, losses of the Enid system subsidiary
and dividends on preferred stock issued by the Ada system ($16,715) and Enid
system ($19,600) subsidiaries. On March 15, 1995, the Company issued an
aggregate of 304,038 shares of Common Stock in exchange for minority interests
in 21 subsidiaries (the "Minority Interests Exchange").
67
<PAGE>
Income Tax Benefit. Income tax benefit of $1,594,963 for the year ended
December 31, 1994 represents the tax benefit related to the Company's net
operating losses incurred during the period April 28, 1994 through December
31, 1994. The Company has recognized such tax benefit to the extent of future
reversals of existing taxable temporary differences.
Net Loss. During 1991, the Company had no revenues and incurred a loss of
$66,158, primarily due to SG&A. During 1992, the Company's Ada System was
launched and generated operating income of $71,071 on total revenues of
$205,382, which substantially offset the Company's expenses. The Company
incurred a net loss of $50,822 for the year ended December 31, 1992, primarily
due to the increase in SG&A at the corporate level, the increase in other non-
operating expenses and accrued dividends on preferred stock of subsidiaries.
For 1993, the Company's Ada system generated operating income of $256,856 on
total revenues of $602,837. Nonetheless, due to increased SG&A related to the
development of the Company's other wireless cable markets and increased other
expenses (including a settlement charge of $57,163), the Company incurred a
net loss of $406,101. As a result of the above factors, for the year ended
December 31, 1994, the Company incurred a net loss of $3,043,321 as compared
to a net loss of $406,101 for the same period in 1993. The Company expects to
continue to incur net operating losses at least through the end of 1996.
RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30,
1995 COMPARED TO THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1994
Revenues consist principally of subscription revenues, installation fees
(for 1994 periods) and sales of receive-site equipment to subscribers.
Subscription revenues principally consist of monthly fees paid by subscribers
for the basic programming package and for premium programming services.
Subscription revenues for the nine-month period ended September 30, 1995
increased to $9,292,837 from $984,299 for the same period in 1994, an increase
of 944%. Subscription revenues for the three-month period ended September 30,
1995 increased to $4,176,855 from $359,595 for the same period in 1994, an
increase of 1,062%. The increase in subscription revenues is principally
attributable to a 891% increase in the average number of subscribers for the
first nine months of 1995 compared to the same period in 1994. The increase in
subscribers is due to the Company's launching two systems in the third quarter
of 1994 (Lawton, Oklahoma and Laredo, Texas) and two systems in the fourth
quarter of 1994 (Ardmore, Oklahoma and Mt. Pleasant, Texas); the acquisition
oftwo operating systems in the fourth quarter of 1994 (Lindsay, Oklahoma and
Milano, Texas); the acquisition of one system (Shaw, Kansas) in the first
quarter of 1995; the launching of the system in Texarkana, Texas in the first
quarter of 1995; the acquisition of one system (Lubbock, Texas) and the
launching of five systems (McLeansboro, Vandalia, Olney and Taylorville,
Illinois and Stillwater, Oklahoma) in the second quarter of 1995; the
launching of the systems in Peoria, Illinois, Manhattan, Kansas, Olton and
O'Donnell, Texas, Grand Rapids, Michigan and Monroe City, Missouri in the
third quarter of 1995; and the acquisition of the operating systems in
Bucyrus, Ohio, Paragould, Arkansas and Sikeston, Missouri in the third quarter
of 1995. The number of subscribers in the Company's wireless cable systems
increased to 64,350 at September 30, 1995 compared to 43,500 at June 30, 1995.
On a "same system" basis (comparing systems that were operational for all of
each of the three-month periods ended September 30, 1994 and 1995),
subscription revenues increased $1,102,038, or 301%, to $1,468,157 as compared
to $380,648 for the three-month period ended September 30, 1994. Same systems
during this period consisted of the Company's Ada, Wichita Falls, Midland,
Abilene and Enid systems. The average number of subscribers in these systems
increased approximately 331% during the three months ended September 30, 1995
as compared to the same period in 1994.
For the three and nine months ended September 30, 1994, revenues included
installation fees of $54,530 and $100,159, respectively. Installation fees for
the three and nine months ended September 30, 1995 of $63,355 and $452,853,
respectively, were offset against direct costs of subscriber installations
(see note 2 to consolidated condensed financial statements regarding change in
accounting method). Sales of receive-site equipment to subscribers were
$205,068 in 1994 (none in 1995). The increase in installation fees is due to
the increased
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number of installations during the three- and nine-month periods ended
September 30, 1995, partially offset by lower per subscriber installation
charges in certain systems, compared to the same period of 1994. Installation
fees vary widely by system based on local market conditions. Recently, the
Company has waived installation charges as part of selected promotional
campaigns. Since the Initial Public Offering, predominately all new
subscribers rent, rather than purchase, receive-site equipment, resulting in
decreased revenues from the sale of receive-site equipment during the nine-
month period ended September 30, 1995 compared to the nine-month period ended
September 30, 1994.
Systems operations expenses include programming costs, channel lease
payments, transmitter site and tower rentals, cost of program guides and
repairs and maintenance expenditures. Programming costs, cost of program
guides and channel lease payments (with the exception of minimum payments) are
variable expenses which increase as the number of subscribers increases.
Systems operations expenses for the three- and six-month periods ended
September 30, 1995 increased 775% to $1,326,358 from $151,499 and 804% to
$2,894,074 from $320,029 compared to the same periods in 1994. This increase
is attributable primarily to the 416% and 700% increases, respectively, in the
average number of subscribers for such periods in 1995 compared to such
periods in 1994 and rental expense under channel rights lease agreements of
$977,241 related to non-operational systems.
Costs of goods sold include the cost of receive-site equipment sold to
subscribers. The decrease in costs of goods sold of $65,808 and $235,025 for
the three- and nine-month periods ended September 30, 1995 from the same
periods in 1994 is related to the corresponding decrease in sales of receive-
site equipment.
SG&A increased 139% to $2,796,889 from $1,169,598 and 265% to $7,449,699
from $2,042,124, respectively, for the three- and nine-month periods ended
September 30, 1995 and 1994, respectively. The Company has experienced
increasing SG&A as a result of its increasing wireless cable activities and
associated administrative costs, including costs related to opening and
maintaining additional offices, additional accounting and support costs and
additional sales commissions relating to the increasing number of subscribers.
Additionally, SG&A increased during the first half of 1995 as compared to the
corresponding period in 1994 due to the implementation of a group health
insurance plan in August 1994 and investor relations expenses.
Depreciation and amortization expense for the nine-month period ended
September 30, 1995 increased 847% to $3,966,120 from $418,960 for the
corresponding period in 1994. Additionally, depreciation and amortization
expense for the three-month period ended September 30, 1995 increased 764% to
$1,948,576from $229,055 for the corresponding period in 1994. The increase is
due to additional systems and equipment related to systems launched and
acquired in 1994 and 1995 and additional amortization expense on leased
license investment of systems in operation and excess of costs over the fair
value of assets acquired due to acquisitions of minority interests. The
Company anticipates that depreciation and amortization expense will increase
as a result of the acquisition of minority interests in March 1995 and as
additional systems are launched and more subscribers continue to rent, rather
than purchase, the receive-site equipment.
Interest expense increased to $8,908,459 for the nine-month period ended
September 30, 1995 from $128,789 for the corresponding period in the preceding
year. Interest expense increased to $4,516,446 for the three-month period
ended September 30, 1995 from $72,089 for the corresponding period in the
preceding year. The increase is principally due to the accretion on the
Convertible Notes that were issued in the fourth quarter of 1994 and the
interest on the Old Notes that were issued on April 26, 1995.
Interest income increased to $1,034,441 from $91,130 and $2,044,092 from
$189,308, respectively, for the three- and nine-month periods ended September
30, 1995 compared to the same periods in 1994, principally due to interest
earned on the increase in the Company's cash equivalents since the Initial
Public Offering and the Company's debt offerings in November 1994 and April
1995.
Equity in losses of RuralVision Joint Venture for the nine-month period
ended September 30, 1995 relates to the Company's 50% share of losses related
to the joint venture for the period January 1, 1995 through January 27, 1995.
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Income tax benefit increased to $1,307,137 from $649,510 for the nine-month
period ended September 30, 1995 compared to the same period in 1994. Income
tax benefit has been recognized to the extent deferred tax assets can be
realized through future reversals of existing taxable temporary differences.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television business is a capital intensive business.
Since inception, the Company has expended funds to lease or otherwise acquire
channel rights in various markets and systems in operation, to construct or
acquire operating systems in more than 30 markets, to commence construction of
the systems under construction, to install equipment in new subscribers' homes
and to finance initial operating losses and other working capital
requirements. The Company intends to expand the Existing Systems and launch
additional wireless cable systems and may require funds therefor in excess of
the funds currently available to it. See "Risk Factors -- Need for Additional
Financing for Growth."
The Company's capital expenditures during the years ended December 31, 1992,
1993 and 1994 were approximately $1.4 million, $5.1 million and $44.5 million,
respectively. For the nine months ended September 30, 1994 and 1995, the
Company's capital expenditures were approximately $18.1 million and $44.0
million, respectively. Such expenditures were primarily for the construction
and expansion of the Company's wireless cable systems, installation of
equipment in new subscribers' homes and the acquisition of operating systems
and channel rights in other markets.
The Company estimates that a launch of a wireless cable system in a typical
market (assuming an initial programming package of 12 channels) will involve
the initial expenditure of approximately $350,000 to $500,000 for wireless
cable system transmission equipment and tower construction and incremental
installation costs of approximately $395 to $435 per subscriber for equipment,
labor and overhead charges and direct commission. Other launch costs include
the cost of securing adequate space for marketing and warehouse facilities, as
well as costs related to employees. As a result of these costs, operating
losses are likely to be incurred by a system during the start-up period.
Subsequent additions of transmission equipment to enhance the channel offering
of the system will approximate $400,000, but may vary depending upon the power
of the transmission equipment.
The Company expects that under its current plans it will have capital
expenditures of approximately $13.0 million during the fourth quarter of 1995
and $60.0 million in 1996 for system construction, development, launch and
expansion activities associated with its current operating systems, systems
under construction, near-term launch markets and certain long-term launch
markets. The Company currently expects to launch an aggregate of approximately
20, and as many as 25, systems during the period through the end of 1996. The
Company does not anticipate any other material capital requirements, except as
set forth below with regard to certain assets to be acquired in connection
with the Transactions. The Company expects to continue to incur significant
capital expenditures in 1997 and subsequent years in connection with system
construction, development, launch and expansion activities.
Under the Company's existing debt structure, no material principal or
interest payment obligations are required (other than interest due on the
Notes which has been escrowed through April 1997) until October 1997.
Commencing in October 1997 and every six months thereafter through April 2003,
semi-annual accrued interest of $6.5 million on the Notes is due and payable.
On April 26, 1995, the Company sold the Units to the Initial Purchasers. The
Company placed approximately $24.1 million of the approximately $96.0 million
net proceeds from the sale of the Units into the Escrow Account and used
approximately $3.0 million of such proceeds to repay indebtedness.
Additionally, the Company has used approximately $9.5 million in connection
with acquisitions for operating systems in Lubbock, Texas and wireless cable
channel rights in Tulsa, Oklahoma. During the second and third quarters of
1995, the Company sold certain wireless cable channel rights in 12 markets for
approximately $3.3 million in cash and a $562,500 note receivable, plus
additional contingent consideration of up to $280,000 in cash. Additionally,
the
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Company contributed other wireless cable markets for consideration consisting
of approximately 35% of the outstanding common stock of Wireless One and
approximately $10 million in notes which was paid upon consummation of an
equity and debt offering by Wireless One and in November 1995, the Company
entered into an agreement to sell its wireless cable channel rights in
Flippin, Tennessee for $1.5 million in cash. The Company intends to use the
balance of the net proceeds of the sale of the Units, together with cash on
hand and cash generated from operations or sales of assets, for system
construction, development, launch and expansion activities, to provide working
capital and for other general corporate purposes. Subject to certain
limitations set forth in the Indenture, the Company may use a portion of such
net proceeds to acquire additional wireless cable channel rights, including
the purchase of MDS and multichannel MDS ("MMDS") wireless cable channel
rights in the current BTA auction.
Upon consummation of the Transactions, the Company, directly or through its
ownership of AWS and CMAX, will be required to pay between $15 million and $20
million of liabilities associated with the assets acquired in the
Transactions. Such liabilities include bank indebtedness, payables, severance
obligations and similar liabilities which will be due and owing upon, or
shortly following, consummation of the Transactions. As a result of
consummating the Transactions, the Company expects that it will incur
additional capital expenditures of approximately $15.0 million in 1996 for
system construction, development, launch and expansion activities associated
with the acquired operating systems and other acquired markets that it expects
to launch in 1996. All of the operating markets to be acquired and retained
are currently generating positive monthly operating cash flow which will
supplement the Company's capital in 1996.
In connection with the Newco Transaction, the Company expects to receive
$28.3 million in cash payable by Newco at the closing and a promissory note in
the principal sum of $25.0 million payable nine months from the closing. The
Company expects that the remaining proceeds from the sale of the Units and the
proceeds from the Newco Transaction, together with cash on hand and cash
generated from operations, will be sufficient to satisfy the Company's capital
needs through at least the end of 1996. In order to accelerate its growth
rate, to respond to competitive pressures or regulatory changes and, subject
to certain limitations set forth in the Indenture and the note purchase
agreement relating to the Convertible Notes (the "Note Purchase Agreement"),
to finance the acquisition of additional wireless cable channel rights and
businesses, general corporate activities and the launch or build-out of
additional systems, the Company may, subject to the provisions of the Note
Purchase Agreement and the Indenture, supplement its existing sources of funds
with financing arrangements at the operating system level, or through
additional borrowings, the sale of debt or equity securities, joint ventures
or other arrangements. The Company is presently in the initial stages of
locating and negotiating for a suitable revolving credit facility consistent
with the terms of the Indenture and Note Purchase Agreement with one or more
third parties. Assuming such financing can be secured on acceptable terms,
management of the Company currently intends to draw down funds under such
facility upon consummation of the Transactions to repay certain of the
obligations incurred or assumed in the Transactions. No assurance can be given
that the Company will locate such an acceptable credit facility. As a further
capital resource, subject to the terms of the Note Purchase Agreement and the
Indenture, the Company may sell or lease certain wireless cable channel rights
as appropriate opportunities become available.
As an alternative source of financing, the Company believes that a primary
factor in obtaining debt financing at the operating system level is the
generation of positive operating cash flow. As of November 30, 1995, 17 of the
Existing Systems were generating positive monthly cash flow. The Company
expects that the other Existing Systems and the wireless cable systems
anticipated to be launched will generate positive operating cash flow,
typically within six months from commencement of operations and after
attaining 1,500 subscribers, thereby making further bank debt financing
available at the operating system level. There can be no assurance, however,
that such positive operating cash flow will be generated or will be maintained
or that debt financing will be available.
Although the Company believes that its cash and cash equivalent assets will
be sufficient to fund the Company's operations and expansion through at least
the end of 1996, there is no assurance that additional funds will not be
necessary to complete the launch, build-out and expansion of all of the
Company's wireless cable
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systems and to bring such systems to a mature state or that any such required
additional funds would be available on satisfactory terms and conditions, if
at all. In addition, the Company's capital needs will depend in part upon the
success of the Company's efforts to sell or otherwise dispose of the
Disposition Assets and the nature of any consideration received as a result of
such dispositions. To the extent assets and markets designated for disposition
are not sold, or are not sold for cash, the Company's requirements for
additional funds will be increased. There is also no assurance that the
Company will not pursue, from time to time, 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, if any, will depend
upon a number of factors, including programming costs, equipment costs,
marketing expenses, staffing levels, subscriber growth and competitive
conditions, and any purchases or dispositions of assets, many of which are not
within the Company's control. Failure to obtain any required additional
financing could materially adversely affect the growth, cash flow or earnings
of the Company.
INCOME TAX MATTERS
The Company and certain of its subsidiaries will file a consolidated Federal
tax return. Subsidiaries in which the Company owns less than 80% of the voting
stock will file separate Federal tax returns. The Company has had no material
state or Federal income tax expense since inception. As of December 31, 1994,
the Company had approximately $2.9 million in net operating losses for tax
purposes, expiring in years 2005 through 2009. The Internal Revenue Code of
1986, as amended (the "Code"), limits the amount of loss carryforwards that a
company can use to offset future income upon the occurrence of certain changes
in ownership. As a result of the investment in the Company by Hunt Capital and
the Initial Public Offering, the Company has undergone more than a 50% change
in ownership and will therefore be limited in its utilization of its tax loss
carryforwards.
INFLATION
Management does not believe that inflation has had or is likely to have any
significant impact on the Company's operations. Management believes that the
Company will be able to increase subscriber rates, if necessary, to keep pace
with inflationary increases in costs.
OTHER
The Company does not provide post-retirement or post-employment benefits
requiring charges under Statements of Financial Accounting Standards Nos. 106
and 112.
The Company currently intends to adopt Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation," in 1996 with
respect to its financial statement disclosure. The Company does not intend to
change its accounting method with regard to this statement.
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BUSINESS
OVERVIEW
The Company develops, owns and operates wireless cable television systems,
primarily in small to mid-size markets located in the central United States.
As of November 30, 1995, the Company has wireless cable channel rights in 79
markets representing approximately 8.2 million households, approximately 6.8
million of which the Company believes can be served by LOS transmissions
(which generally require a direct, unobstructed transmission path from the
central transmitting antenna to the antenna located on the subscriber's
premises).
The Company targets small to mid-size markets with significant numbers of
LOS households that are unpassed by traditional hard-wire cable. Many of these
households, particularly in rural areas, have limited access to local off-air
VHF/UHF channels (such as ABC, NBC, CBS and Fox), and typically do not have
access to pay television service except via satellite receivers. As a result,
the Company believes that its wireless cable television service is an
attractive alternative to existing choices for such households. The Company
estimates that within its 79 wireless cable markets, approximately 2.4 million
LOS households, or approximately 36% of the Company's total LOS households,
are unpassed by traditional hardwire cable systems, as compared to the 20
largest hard-wire cable markets in the United States, in which only
approximately 2% of all households are unpassed by traditional hard-wire
cable. The Company believes that it will ultimately achieve a penetration rate
of the unpassed LOS households in its markets that is comparable to the
average penetration rate achieved by traditional hard-wire cable operators
nationally, which Paul Kagan Associates, Inc. estimates to be approximately
63% as of December 31, 1994.
The Company's 79 markets include (i) 33 markets in which the Company has
systems in operation, (ii) nine markets in which the Company's system is under
construction, (iii) 21 near-term launch markets in which the Company has
aggregated sufficient wireless cable channel rights to commence construction
of a system and (iv) 16 long-term launch markets, including 11 in which the
Company has aggregated sufficient wireless cable channel rights to commence
construction of a system and five in which the Company has leases with or
options from applicants for channel licenses that the Company expects to be
granted by the FCC. As of November 30, 1995, the 33 Existing Systems were
providing wireless cable service to approximately 117,000 subscribers.
Wireless cable programming is transmitted through the air via microwave
frequencies from a transmission facility to a small receiving antenna at each
subscriber's location, which generally requires a direct, unobstructed line-
of-sight from the transmission facility to the subscriber's receiving antenna,
by utilizing up to 200 MHz of radio spectrum allocated by the FCC to wireless
cable operators. Traditional hard-wire cable systems also transmit signals
from a transmission facility, but deliver the signal to a subscriber's
location through an extensive network of coaxial cable and amplifiers. Since
wireless cable systems do not require such an extensive cable network,
wireless cable operators such as the Company can provide subscribers with a
high quality picture and a reliable signal resulting in fewer transmission
disruptions at a significantly lower system capital cost per installed
subscriber than traditional hard-wire cable systems. In addition, operating
costs of wireless cable systems are generally lower than those of comparable
traditional hard-wire systems due to lower network maintenance and
depreciation expense.
Like traditional hard-wire operators, the Company can offer its subscribers
local off-air VHF/UHF channels, as well as HBO, Showtime, Disney, ESPN, CNN,
USA, WGN, WTBS, Discovery, the Nashville Network, A&E and other programming
services. The Company currently offers a majority of such channels in the
markets served by the Existing Systems. The channels that the Company offers
in each market will vary depending upon the channel rights secured in such
market at the time of system launch. In addition, the available channels in a
market will typically change as the Company continues to acquire channel
rights.
Substantially all of the Company's subscribers have set-top converters that
are fully "impulse addressable," which will allow its subscribers to receive
impulse pay-per-view programming. Only approximately 35% of traditional hard-
wire cable operators use addressability and approximately 5% use impulse
addressability.
BUSINESS STRATEGY
The Company's primary business objective is to develop, own and operate
wireless cable television systems in markets in which the Company believes it
can achieve positive cash flow and operating income rapidly after system
launch and then expand such system while increasing such system's operating
income.
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Rural Market Focus. The Company aggregates wireless cable channel rights and
locates operations in geographic clusters of small to mid-size markets that
have a substantial number of households not currently passed by traditional
hard-wire cable. The Company believes that this size market typically has a
stable economic base, less competition from alternative forms of entertainment
and terrain and other conditions conducive to wireless cable transmissions.
Managed Subscriber Penetration. The Company attempts to manage system launch
and subscriber growth in order to contain system launch costs and to achieve
positive cash flow rapidly. Typically, the Company's operating systems achieve
positive monthly operating cash flow upon obtaining an average of
approximately 1,500 subscribers. Within a system, the Company initially
directs its marketing at unpassed households, which typically have limited
access to local off-air VHF/UHF broadcast channels. Accordingly, the Company
believes it can launch service successfully in most of its markets with only
12 channels of programming, allowing it to contain system launch costs and
achieve positive cash flow with a lower number of subscribers. Generally, once
a system achieves positive operating cash flow, the Company will expand the
channel offering and add subscribers while increasing such system's positive
operating cash flow. As of November 30, 1995, 17 of the Company's operating
systems were generating positive monthly operating cash flow. The remaining
operating systems that were not generating positive monthly operating cash
flow had not reached an average of 1,500 subscribers.
Low Cost Structure. Wireless cable systems typically cost significantly less
to build and operate than traditional hard-wire cable systems for several
reasons. First, while both traditional hard-wire cable operators and wireless
cable operators must construct a head-end, traditional hard-wire cable
operators must also install an extensive network of coaxial cable and
amplifiers in order to transmit signals from the head-end to subscribers. Once
the head-end is constructed, the Company estimates that each additional
wireless cable subscriber currently requires an incremental capital
expenditure by the Company of approximately $395 to $435, consisting of, on
average, $275 to $300 of material, $95 to $105 of installation labor and
overhead charges and $25 to $30 of direct commission. Such incremental capital
expenditures are variable costs and are partially offset by installation fees
paid by subscribers. Second, without an extensive cable network, wireless
cable operators typically incur lower system maintenance costs and
depreciation expense. Third, programming is generally available to traditional
hard-wire and wireless cable operators on comparable terms, although operators
that have a smaller number of subscribers often are required to pay higher per
subscriber fees. Fourth, the Company currently experiences a low rate of
subscriber turnover of on average approximately 1.5% per month, as compared to
the "churn" rate of approximately 3% per month typically experienced by
traditional hardwire cable operators. Reduced subscriber turnover reduces
installation and marketing expenses. Finally, by locating its operations in
geographic clusters, the Company can further contain costs by taking advantage
of economies of scale in management, sales and customer service.
Acquisition of ITFS Channel Rights. Because the Company believes it can
launch service successfully in its markets with as few as 12 channels of
programming, the Company focuses on development of the 20 available ITFS
channels. In most of the Company's markets, few, if any, licenses for ITFS
channels had been granted by the FCC to any non-profit educational
organizations prior to the Company's initial development of such markets. The
Company cooperates with many non-profit educational organizations in obtaining
ITFS licenses from the FCC. Once the Company has secured rights to at least 12
ITFS channels in a market, the Company believes it can launch a commercially
viable system in such market. The Company believes that its strategy of first
developing the ITFS channels, in lieu of the MDS channels, has resulted in
aggregate leased license expense in its systems in operation that is less than
the industry-wide average leased license expense.
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EXISTING SYSTEMS AND THE COMPANY'S MARKETS
The table below provides information regarding the 79 markets in which the
Company has wireless cable channel rights that it intends to retain and
develop (assuming consummation of the Transactions and excluding the
Disposition Assets).
<TABLE>
<CAPTION>
ESTIMATED NUMBER OF
ESTIMATED LINE-OF- SUBSCRIBERS AT
TOTAL SIGHT CURRENT NOVEMBER 30,
MARKET HOUSEHOLDS HOUSEHOLDS CHANNELS(/1/) 1995
- ------------------------ ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
EXISTING SYSTEMS
Ada, OK................ 30,399 24,319 32 6,508
Wichita Falls, TX...... 78,290 74,376 28 6,093
Midland, TX............ 120,037 114,035 26 5,017
Abilene, TX............ 86,676 82,344 23 4,020
Lawton, OK............. 97,023 92,172 27 6,334
Laredo, TX............. 313,406(/2/) 297,736(/2/) 27 5,420
Enid, OK............... 76,602 72,772 21 3,694
Lindsay, OK............ 51,041 40,833 32 3,267
Ardmore, OK............ 60,192 51,163 20 3,233
Mt. Pleasant, TX....... 33,589 26,871 16 1,684
Lufkin, TX............. 117,534 88,150 12 --(/3/)
Shaw, KS............... 47,223 42,763 30 3,961
Texarkana, TX.......... 118,204 94,563 20 1,997
Stillwater, OK......... 54,562 40,922 20 5,428
Lubbock, TX............ 123,934 105,323 34(/4/) 5,934
McLeansboro, IL........ 80,136 60,102 18 859
Vandalia, IL........... 73,593 55,195 20 1,365
Olney, IL.............. 67,812 50,859 20 1,195
Lykens, OH............. 210,800 168,640 24 700
Paragould, AR.......... 77,523 58,500 21 2,157
Sikeston, MO........... 69,837 52,378 24 2,163
Taylorville, IL........ 159,596 119,697 20 1,336
Peoria, IL............. 276,446 248,801 22 762
Manhattan, KS.......... 56,473 42,355 20 945
O'Donnell, TX.......... 68,940 65,493 20 1,053
Olton, TX.............. 32,548 30,921 20 933
Monroe City/Lakenan,
MO..................... 46,376 34,782 27 978
Paris, TX.............. 55,445 41,584 20 79
Champaign, IL(/5/)..... 164,992 148,493 23 2,120
Austin, TX(/6/)........ 360,000 250,000 31 12,299
Temple/Killeen,
TX(/6/)................ 110,000 80,000 35 6,312
Waco, TX(/6/).......... 100,000 80,000 35 3,860
Corpus Christi,
TX(/6/)................ 135,000 108,000 31 15,468
--------- --------- -------
Total -- Existing
Systems............... 3,554,229 2,944,142 117,174
--------- --------- -------
</TABLE>
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<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED LINE-OF- EXPECTED
TOTAL SIGHT CHANNELS AT
MARKET HOUSEHOLDS HOUSEHOLDS LAUNCH(/1/)(/7/)
------ ---------- ---------- ----------------
<S> <C> <C> <C>
SYSTEMS UNDER CONSTRUCTION(/8/)
Corsicana/Athens, TX.................. 69,161 62,245 23(/9/)
Hamilton, TX.......................... 28,551 21,413 20
Harper/Freeport, IL................... 125,269 93,952 20
Marion, KS............................ 53,881 40,411 19
Peaksville, MO........................ 48,157 36,118 15
Sherman/Denison, TX................... 100,000 90,000 31(/1//1/)
Sterling, KS.......................... 45,213 38,431 24
Strawn/Ranger, TX..................... 34,488 25,866 20
Walnut Grove, IL...................... 84,226 63,170 20
--------- ---------
Total -- Systems Under Construction
.................................. 588,946 471,606
--------- ---------
NEAR-TERM LAUNCH MARKETS(/1//2/)
Adairsville, GA(/1//0/)............... 205,662 154,247 16
Amarillo, TX.......................... 106,670 101,337 26(/1//3/)
Anthony, KS........................... 15,798 11,845 16
Bellflower, MO........................ 63,384 57,046 20
Bluffs, IL............................ 46,389 34,792 20
Columbia, MO.......................... 149,622 127,179 18
Forrest City, AR...................... 55,642 41,732 21
Holdenville, OK....................... 50,637 45,573 16
Kossuth, TX........................... 52,490 39,368 20
Lenapah, OK........................... 51,921 38,941 12
Mayfield, KY.......................... 175,948 155,972 21
Muskogee, OK.......................... 66,510 53,208 18
Powers Crossroads, GA(/1//0/)......... 135,037 101,278 20
Purdin, MO............................ 25,001 18,751 20
Rutledge, GA(/1//0/).................. 141,370 106,028 16
Shreveport, LA........................ 214,315 182,168 24
Springfield, MO....................... 139,706 118,750 16
Tulsa, OK............................. 321,922 273,634 16
Tyler, TX............................. 233,416 186,734 14
Weatherford, OK....................... 31,445 29,873 16
Wick, OH.............................. 336,098 268,878 21
--------- ---------
Total -- Near-Term Launch Markets.. 2,618,983 2,147,334
--------- ---------
LONG-TERM LAUNCH MARKETS(/1//4/)
Altus, OK............................. 30,653 29,120 16
Burnet, TX............................ 24,917 18,688 16
Charlotte, TX......................... 32,771 24,578 16
Crow, TX.............................. 71,421 57,137 12
Des Moines, IA........................ 267,279 240,551 16
El Dorado, AR......................... 54,727 38,310 16
El Paso, TX(/6/)...................... 200,000 180,000 27
Elk City, OK.......................... 26,379 21,103 16
Fischer, TX........................... 317,039 237,779 20
Henryetta, OK......................... 31,968 25,574 16
Ingram, TX............................ 26,235 19,676 20
McAlester, OK......................... 36,475 25,533 16
Miami, OK............................. 70,820 60,197 15
Sabinal, TX........................... 15,795 11,846 20
Seminole, OK.......................... 42,204 35,873 19
Topeka, KS............................ 211,762 190,586 16
--------- ---------
Total -- Long-Term Launch Markets.. 1,460,445 1,216,551
--------- ---------
Total -- All Company Markets.. 8,222,603 6,779,633
========= =========
</TABLE>
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- --------
(1) Includes local off-air VHF/UHF channels, some of which are retransmitted
by the Company over wireless cable channels.
(2) Includes households located in Mexico, to which the Company would be
permitted to provide service in conjunction with a Mexican-owned company.
(3) Construction of the Lufkin system was completed in December 1994. The
Company is not actively marketing its service in the Lufkin system because
it is awaiting action by the FCC to grant licenses, which would increase
the number of wireless cable channels available to the Company.
(4) Includes additional channels acquired pursuant to the Sublease Agreement
with CMAX. Channel capacity has been increased by 12 channels in the
Lubbock system, of which four are the subject of an appeal by an
unsuccessful applicant for the frequencies.
(5) The Company acquired the system in Champaign, Illinois on January 16,
1996.
(6) The Company will acquire the Austin, Temple/Killeen, Waco, Corpus Christi
and El Paso, Texas markets upon the consummation of the Transactions.
(7) The Company's business strategy is generally to launch a market with
approximately 12 wireless cable channels. Although the Company has no
current intention to launch any market with less than 12 channels, the
Company will launch certain markets with more than 12 channels and may, at
some point in the future, launch one or more markets with less than 12
channels due to FCC construction deadlines or competitive considerations in
such markets. Expected channels at launch includes channels with respect to
which the Company has a lease with or an option from a channel license
holder, an applicant for a channel license or an entity that has had an
application for a channel license returned without prejudice by the FCC and
which will be refiled. In certain markets, the Company has rights to
additional wireless cable channels but does not expect to utilize such
channels upon system launch.
(8) Systems in which the system head-end is under construction. Expected
channels at launch for such systems include channels with respect to which
the Company has a lease with or an option from a channel license holder or
an applicant for a channel license.
(9) Includes additional channels acquired pursuant to the Sublease Agreement
with CMAX. Channel capacity has been increased by seven channels, of which
an application relating to four channels has been dismissed and is the
subject of a reinstatement petition.
(10) Wireless One has the option to purchase these markets through February
28, 1996 for $7.2 million.
(11) Channels acquired pursuant to the Sublease Agreement with CMAX. Of these
channels, eight are the subject of uncontested application proceedings.
(12) The Company has aggregated sufficient wireless cable channel rights in
such markets to commence construction of a system.
(13) Includes additional channels acquired pursuant to the Sublease Agreement
with CMAX. Channel capacity has been increased by nine channels, of which
an application relating to four channels has been dismissed and is the
subject of a reinstatement petition.
(14) Such markets include seven markets with respect to which the Company has
aggregated sufficient wireless cable channel rights to commence
construction of a system and four markets with respect to which the Company
has a lease with or an option from an applicant for a channel license or an
entity that has had an application for a channel license returned without
prejudice by the FCC and which will be refiled. The Company expects a
substantial number of such licenses to be granted by the FCC.
Existing Systems. The Company has 33 Existing Systems. The Company generally
offers 16 to 24 basic wireless cable channels, one to three premium channels
(HBO, Showtime and Cinemax) and one pay-per-view channel. Local off-air
channels are received by the subscriber along with the Company's wireless
cable channels, thereby adding an average of three to six channels to the
basic channels offered, resulting in aggregate offerings of approximately 18
to 32 channels. Generally, the Company's Existing Systems lease all of their
wireless cable channels. The terms of such leases typically expire 10 years
from the license grant date, ranging from years 1998 to 2005, and such leases
provide for either a right of first refusal or two automatic five-year renewal
periods or one 10-year renewal period. The Existing Systems transmit at 10 to
50 watts of power from a transmission tower that generally has a signal
pattern covering a radius of 35 to 50 miles.
Systems Under Construction. The Company currently has nine additional
systems under construction, which are located in Corsicana/Athens, Texas
(certain channels of which were subleased from CMAX pursuant to the Sublease
Agreement), Hamilton, Texas, Harper/Freeport, Illinois, Marion, Kansas,
Peaksville, Missouri, Sherman/Denison, Texas (which was subleased from CMAX
pursuant to the Sublease Agreement), Sterling, Kansas, Strawn/Ranger, Texas
and Walnut Grove, Illinois. In each of the systems under construction, the
Company has ordered equipment to commence construction necessary to transmit
on its channels in such markets.
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Generally, the Company's systems under construction lease all of their
wireless cable channels. The terms of such leases typically expire 10 years
from the license grant date, ranging from 2001 to 2005, and such leases
provide for either a right of first refusal or two automatic five-year renewal
periods or one 10-year renewal period. The systems under construction will
transmit at 10 to 50 watts of power from a transmission tower that generally
will have a signal pattern covering a radius of 35 to 50 miles.
Near-term and Long-term Launch Markets. In these markets, the Company has
aggregated or is aggregating additional wireless cable channel rights. In the
near-term launch markets, the Company has aggregated sufficient wireless cable
channel rights to commence construction of a system. In eleven of the long-
term launch markets, the Company has aggregated sufficient wireless cable
channel rights to commence construction of a system and in five of such
markets, the Company has leases with or options from applicants for channel
licenses that the Company expects to be granted by the FCC. The vast majority
of the Company's channel rights in the long-term launch markets are in the
form of lease agreements with educational entities that have pending
applications for ITFS channels or that have had applications returned without
prejudice by the FCC which will be refiled. These ITFS applications are
expected to undergo review by the FCC's engineers and staff attorneys over the
next 24 months. Once the FCC staff determines that the applications meet
certain basic technical and legal qualifications, the staff will then
determine whether each application is proximate to the transmit and receive-
site locations of other applications. Those applications that would result in
signal interference to other pending applications must then undergo a
comparative selection process. The FCC's ITFS application selection process is
based on a set of objective criteria that includes whether an applicant is
located in the community to be served and the number of students that will
receive the applicant's educational programming. Thus, the outcome of the
selection process when two or more qualified applicants are competing for the
same channels lends itself to a degree of predictability that varies according
to the circumstances. Most of the Company's lease agreements with applicants
for channel licenses involve channel licenses for which Competing Applications
have been filed and Competing Applications may be filed with respect to the
applications to be refiled. In each market, the Company has carefully
considered the FCC's selection criteria in choosing the educational entities
with which it has entered into lease agreements. The Company therefore
anticipates that a substantial number of the pending applications and
applications to be refiled will be granted by the FCC. However, because the
FCC's application review process does not lend itself to complete certainty,
and given the considerable number of applications involved, no assurance can
be given as to the precise number of applications that will be granted. See
"Risk Factors -- Dependence on Channel Leases" and "Risk Factors --
Uncertainty of Grant of Pending Applications."
The Company currently plans to finish construction of all systems currently
under construction during the first quarter of 1996. In addition, the Company
currently expects to construct 20 to 25 additional systems through the end of
1996. Construction will entail the construction of a transmission building
near a transmission tower and the installation of transmission equipment and,
in certain cases, the construction of the transmission tower. The construction
of the transmission facility will enable the Company to launch wireless cable
service in such markets. The Company is analyzing the appropriate construction
schedule for its additional markets. This analysis is being performed based
upon multiple factors, including, but not limited to, the expiration dates of
leases and FCC construction permits, the number of potential subscribers in
each market, the availability of capital and the proximity of a market to the
Existing Systems or other markets ready for construction.
SYSTEM COSTS
Traditional hard-wire cable systems typically cost significantly more to
build than wireless cable systems. The Company estimates that the current cost
per market for transmission (or head-end) equipment for its wireless cable
systems will average approximately $750,000 to $900,000 depending upon the
type and sophistication of the equipment and whether the Company is required
to construct a transmission tower. Although traditional hard-wire cable
operators must also construct a transmission (or head-end) facility, hard-wire
systems must also install
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a network of coaxial cable and amplifiers in order to deliver signals to their
subscribers. This considerable cost is not incurred by wireless cable
operators and is only partially offset by the cost a wireless cable operator
incurs to purchase and install the wireless frequency receiving antenna and
related equipment necessary for each subscriber's location. The Company
estimates that each additional wireless cable subscriber currently requires an
incremental capital expenditure by the Company of approximately $395 to $435,
consisting of, on average, $275 to $300 of material, $95 to $105 of
installation labor and overhead charges and $25 to $30 of direct commission.
Such incremental capital expenditures are variable costs and are partially
offset by installation fees paid by subscribers.
The system operating costs for wireless cable systems also are generally
lower than those for comparable traditional hard-wire systems. This is
attributable to lower system network maintenance and depreciation expense.
Programming is generally available to traditional hard-wire and wireless cable
operators on comparable terms, although operators that have a smaller number
of subscribers often are required to pay higher per subscriber fees.
Accordingly, operators in the initial operating stage generally pay higher
programming fees on a per subscriber basis. The Company currently experiences
a low rate of subscriber turnover of approximately 1.5% per month, as compared
to the "churn" rate of approximately 3% per month typically experienced by
traditional hard-wire cable operators. Reduced subscriber turnover reduces
installation and marketing expenses. By locating its operations in geographic
clusters, the Company can further contain costs by taking advantage of
economies of scale in management, sales and customer service. Each of the
Company's operating systems or system clusters is managed by a general manager
who reports directly to a regional manager. General managers are responsible
for the day-to-day operations of their respective systems. Each operating
system is staffed with customer service and sales representatives and service
technicians. All other functions, including engineering, marketing, billing
and finance and administration, are centralized.
MARKETING AND CUSTOMER SERVICE
The Company markets its wireless cable service by highlighting four major
competitive advantages over traditional hard-wire cable services and other
pay-television alternatives: picture quality and reliability, customer
service, programming features and price.
Picture Quality and Reliability. The Company's transmission facilities use
the latest available technology. The Company believes that it is positioning
itself as a reliable alternative to traditional hard-wire cable by delivering
a high quality signal throughout the entire signal area of the Existing
Systems. Wireless cable subscribers enjoy substantially outage-free, highly
reliable picture quality because there is no coaxial cable, amplifiers or
processing and filtering equipment between the head-end and the subscriber's
household, as in the case of traditional hard-wire cable. Within the signal
range of the Existing Systems, the picture quality of the Company's service is
at least as good as that typically received by traditional hard-wire cable
subscribers because, absent any line-of-sight obstruction, there is less
opportunity for signal degradation between the Company's head-end and the
subscriber. See "Risk Factors -- Physical Limitations of Wireless Cable
Transmission."
Customer Service. The Company has established the goal of maintaining high
levels of customer satisfaction. In furtherance of that goal, the Company
emphasizes responsiveness and convenient installation scheduling. The Company
has established customer retention and referral programs in an effort to
obtain and retain new subscribers. The Company plans to expand its customer
service operations and management information systems as its systems in
operation expand. Because municipal franchises created virtual monopolies for
traditional hard-wire cable companies, in the past, few have had an incentive
to provide as high levels of customer service as the Company provides. The
regulations authorized under the Cable Act will require traditional hard-wire
cable companies to provide improved customer service which may decrease the
Company's competitive advantage in this area.
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Programming Features. In the Existing Systems (other than the Lufkin system)
and markets under construction, the Company believes that it has assembled
sufficient channel rights and programming agreements to provide a programming
package competitive with those offered by traditional hard-wire cable
operators. Additionally, the Company has the capacity to offer pay-per-view
programming and impulse addressability not currently widely offered by
traditional hard-wire cable operators. The Company's typical channel offering
includes between 16 and 24 basic cable channels, one to three premium channels
(HBO, Showtime or Cinemax) and one pay-per-view channel on an event-by-event
basis. Specific programming packages vary according to particular market
demand. Local off-air channels are received by the subscriber along with the
Company's wireless channels, thereby adding an average of three to six
channels to the basic channels offered and resulting in aggregate offerings of
approximately 18 to 32 channels.
Price. The Company offers its subscribers a programming package consisting
of basic service and premium programs. The Company can offer a price to its
subscribers for basic service that is competitive with traditional hard-wire
cable operators because of lower capital and operating costs. The Company
believes it will continue to be price competitive with traditional hard-wire
cable operators with respect to comparable programming. The Company's typical
pricing structure is $17.95 to $19.95 for basic service and $5.95 to $9.95 for
one premium service channel or $14.95 for a combination premium service.
Depending on market demand and competition, the Company offers a combination
package consisting of basic service, rental of the receive-site equipment and
two premium channels for $29.95 per month.
LEGAL PROCEEDINGS
On June 21, 1995, TruVision filed a lawsuit in the Circuit Court of Rankin
County, Mississippi naming the Company and AWS as defendants. TruVision
asserted in its original pleadings that it had an agreement to purchase from
AWS certain wireless cable assets in Memphis, Tennessee ("Memphis Market") for
approximately $2,200,000, which agreement the Company interfered with by
entering into negotiations and an alleged agreement with AWS. In its original
pleadings, TruVision alleged that the Company entered into an agreement to
acquire AWS, which agreement is alleged to have valued AWS's assets relating
to the Memphis Market at $7,000,000. As a result, TruVision sought actual
damages of $4,800,000. Subsequently, on June 29, 1995, TruVision filed its
First Amended Complaint asserting that, in addition to damages sought in its
original pleadings, TruVision was entitled to additional damages of an amount
as yet undetermined by TruVision, but estimated by TruVision to be
$28,196,642, in respect of diminution in the value of TruVision's assets
outside of the Memphis Market caused by the alleged agreement between AWS and
the Company and actions related thereto. TruVision is also seeking $20,000,000
in punitive damages. On July 26, 1995, the Company filed a Motion to Dismiss
this litigation for lack of personal jurisdiction. The Company intends to
vigorously defend this lawsuit. On November 7, 1995, the Company and TruVision
entered into an Asset Purchase Agreement providing for the sale by the Company
to TruVision of the Flippin, Tennessee wireless cable market for $1.5 million
in cash. On November 7, 1995, TruVision and AWS entered into an Asset Purchase
Agreement providing for the sale by AWS to TruVision of the Memphis, Tennessee
wireless cable market for $3,900,000 in cash, subject to adjustment.
Consummation of each such agreement is contingent upon the consummation of the
other agreement. Further, each agreement provides that, prior to closing, each
party agrees that the lawsuit would be stayed. Assuming consummation of each
transaction, TruVision agreed to dismiss such lawsuit with prejudice within
five days of the closing, and each party agreed to enter into a Settlement
Agreement and Release in form satisfactory to the other parties. If such
closings do not occur, TruVision shall have the right to prosecute the
lawsuit, and AWS and the Company shall have the right to raise all defenses
and counterclaims associated therewith.
Certain subsidiaries of the Company are named as defendants in a lawsuit in
the United States District Court, Western Division of Louisiana, Monroe
Division, commenced on May 15, 1995 by TCG of Monroe, Inc. On May 18, 1995, a
subsidiary of the Company acquired for $100,000 cash all of the outstanding
capital stock of Cotton Country Cable, Inc. ("Cotton Country") which held
certain wireless cable channel rights in the Monroe, Louisiana market. Cotton
Country owes its former shareholders $500,000, which sum is subject to offset
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for any damages suffered by Cotton Country or the Company as a result of this
lawsuit. These former shareholders are also named as defendants in the
lawsuit. The plaintiff has requested, among other items, declaratory relief
and specific performance to enforce an alleged prior contract of sale of these
cable rights to it from Cotton Country. Further, the plaintiff sought
injunctive relief, which was denied on August 8, 1995. The Company believes
all claims against its subsidiaries are without merit and intends to
vigorously defend the lawsuit. In addition, the Company believes that an
adverse outcome, if any, would not have a material adverse effect on the
Company. In connection with consummation of the Wireless One Transaction (as
defined herein), the Company conveyed its rights in the Monroe, Louisiana
wireless cable market to Wireless One, and agreed to indemnify, defend and
hold harmless Wireless One from and against this lawsuit.
The Company is a party, from time to time, to routine litigation or
employment litigation incident to its business. No provision has been
reflected in the Company financial statements for any litigation. It is the
opinion of management that no pending litigation matter will have a material
adverse effect on the Company's financial condition, results of operations or
properties.
EMPLOYEES
As of December 31, 1995, the Company had approximately 790 employees. None
of the Company's employees is subject to a collective bargaining agreement.
The Company has experienced no work stoppages and believes that it has good
relations with its employees. The Company also presently utilizes the services
of independent contractors to build and install its wireless cable systems and
market its services.
PROPERTIES
The Company leases approximately 5,500 square feet of office space for its
executive offices in Richardson, Texas, under a lease that expires September
30, 1998. The Company pays approximately $35,000 per annum rent for such
space. The Company leases from an affiliate of Messrs. Webb and Wheeler
approximately 2,400 square feet for its operating offices in Durant, Oklahoma
under a lease that expires May 31, 2000. The Company pays $18,000 per annum
rent for such space and the utilities are provided by the owner of the
building. The Company leases approximately an additional 5,000 square feet of
office space in Durant, Oklahoma from an affiliate of Messrs. Webb and Wheeler
under a lease that expires March 1, 2000 subject to a five-year renewal
option. The Company pays $29,004 per annum rent for such space. The Company
leases approximately an additional 1,126 square feet from an affiliate of
Messrs. Webb and Wheeler under a lease that expires on May 31, 2000. The
Company pays $8,448 per annum rent for such space and the utilities are
provided by the owner of the building. The Company leases approximately an
additional 1,987 square feet from an affiliate of Messrs. Webb and Wheeler
under a lease that expires on May 31, 2000. The Company pays $23,844 per annum
rent for such space and the utilities are provided by the owner of the
building. The Company leases approximately an additional 10,000 square feet of
warehouse space in Durant, Oklahoma from an affiliate of Messrs. Webb and
Wheeler under a lease that expires on August 1, 2000. The Company pays $16,000
per annum rent for such space. See "Certain Transactions." The Company
believes that these facilities are adequate for the foreseeable future.
The principal physical assets of a wireless cable system consist of
satellite signal reception equipment, radio transmitters and transmission
antennae, as well as office space and transmission tower space. The Company
leases office space for the Existing Systems and will, in the future, purchase
or lease additional office space in other locations where it launches other
wireless cable systems. The Company also owns transmission towers or leases
space on transmission towers located in its markets. The current capacity
range of the Company's transmission facilities is from 10 to 50 watts, capable
of generating a signal over a 35 to 50 mile range. The Company believes that
office space and space on transmission towers currently is readily available
on acceptable terms in the markets where the Company intends to operate
wireless cable systems.
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WIRELESS CABLE INDUSTRY
CABLE INDUSTRY OVERVIEW
The cable television industry began in the late 1940s and 1950s to serve the
needs of residents in predominantly rural areas with limited access to local
off-air VHF/UHF broadcasts. The cable television industry expanded to
metropolitan areas due to, among other things, better reception and more
programming. Today, cable television systems offer various types of
programming, which generally include basic service, premium service and, in
some instances, pay-per-view service.
WIRELESS CABLE TECHNOLOGY
Initially, most cable systems were hard-wire systems, using coaxial cable
and amplifiers to transmit television signals. In 1983, the FCC allocated a
portion of the radio spectrum from 2500 to 2700 MHz, which had previously been
allocated entirely for educational use, to commercial wireless cable
operation. Simultaneously, the FCC also modified its rules on the usage of the
remaining portion of such spectrum allocated for educational use.
Nevertheless, regulatory and other obstacles impeded the growth of the
wireless cable industry through the remainder of the 1980s. The FCC maintained
burdensome restrictions on the commercial use of educational channel capacity.
In addition, before the Cable Act became effective, many program suppliers
were unwilling to provide programming to wireless cable operators on terms
comparable to those offered to traditional hard-wire cable operators, if at
all. During the 1990s, several factors have contributed to the growth of the
wireless cable industry, including (i) Congressional scrutiny of the rates and
practices of the traditional hard-wire cable industry, (ii) improved
technology, particularly signal encryption, (iii) regulatory reforms by the
FCC to facilitate the growth and competitive impact of the wireless cable
industry, including permitting channel aggregation, (iv) increased
availability of programming for wireless cable systems, (v) consumer demand
for alternatives to traditional hard-wire cable service and (vi) increased
availability of capital to wireless cable operators in the public and private
markets.
Like a traditional hard-wire cable system, wireless cable operates from a
head-end, consisting of satellite reception and other equipment necessary to
receive the desired programming. Programming is then transmitted by microwave
transmitters from an antenna located on a tower to a small receiving antenna
located on a subscriber's rooftop. At the subscriber's location, the microwave
signals are converted to frequencies that can pass through conventional
coaxial cable into an addressable descrambling converter located on top of a
television set. Wireless cable requires a clear line-of-sight, because the
microwave frequencies used will not pass through large trees, hills, tall
buildings or other obstructions. However, many signal blockages can be
overcome with the use of signal boosters which retransmit an otherwise blocked
signal over a limited area. The Company believes that its coverage will be
further enhanced upon the implementation of digital technology and/or
cellularization. Because wireless cable systems do not require an extensive
network of coaxial cable and amplifiers, wireless cable operators can provide
subscribers with a high quality picture and a reliable signal resulting in
fewer transmission disruptions at a significantly lower system capital cost
per installed subscriber than traditional hard-wire cable systems.
TRADITIONAL HARD-WIRE CABLE TECHNOLOGY
Traditional hard-wire cable operators transmit signals from a head-end,
delivering local and satellite-delivered programming via a distribution
network consisting of coaxial cable, amplifiers and other components to
subscribers. As a direct result of the use of coaxial cable to deliver signals
throughout a service area, traditional hard-wire cable systems are susceptible
to signal problems. Signals can only be transmitted via coaxial cable a fixed
distance without amplification. Each time a television signal passes through
an amplifier, some measure of noise is added. A series of amplifiers between
the head-end and the viewer leads to progressively greater noise and,
accordingly, for some viewers a grainier picture. Also, an amplifier must be
properly balanced or the signal may be improperly amplified. Failure of any
one amplifier in the chain will black out all of the system drawing signal
from that point. Regular system maintenance is required due to water ingress,
temperature changes and
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other equipment problems, all of which may affect the quality of signals
delivered to subscribers. Some traditional hard-wire cable companies have
begun installing fiber optic cable networks. While this technology will
substantially improve the transmission and reception problems currently
experienced by traditional hard-wire cable systems, the high costs associated
with such technology may slow the conversion to all fiber optic systems and
further enhance the typical cost advantages of wireless cable.
REGULATORY ENVIRONMENT
General. The wireless cable industry is subject to regulation by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act empowers the FCC, among other things, to issue,
revoke, modify and renew licenses within the spectrum available to wireless
cable; to approve the assignment and/or transfer of control of such licenses;
to approve the location of wireless cable systems; to regulate the kind,
configuration and operation of equipment used by wireless cable systems; and
to impose certain equal employment opportunity and other reporting
requirements on wireless cable operators.
In the 50 largest markets, 33 channels are available for wireless cable (in
addition to local off-air VHF/UHF broadcast channels that are not
retransmitted over the microwave channels). In the Company's markets, 32
channels are available for wireless cable (in addition to local off-air
VHF/UHF broadcast channels that are not retransmitted over the microwave
channels), 12 of which can be owned by for-profit entities for full-time usage
without programming restrictions (MDS channels). Except in limited
circumstances, the other 20 wireless cable channels can generally only be
owned by qualified non-profit educational organizations, and, in general, each
must be used a minimum of 20 hours per week for educational programming (ITFS
channels). The remaining excess air time on an ITFS channel may be leased to
wireless cable operators for commercial use, without further restrictions
(other than the right of the ITFS license holder, at its option, to recapture
up to an additional 20 hours of air time per week for educational
programming). Certain programs (e.g., The Discovery Channel and A&E) qualify
as educational and thereby facilitate full-time usage of an ITFS channel by
commercial wireless cable operators. Additionally, a technique known as
"channel mapping" permits ITFS licensees to meet their minimum educational
programming requirements by transmitting educational programming over several
ITFS channels at different times, but the viewer sees the transmission as one
channel. In addition, lessees of ITFS excess air time, including the Company,
generally have the right to transmit to their subscribers the educational
programming provided by the lessor at no incremental cost. The remaining 12
wireless cable channels (commonly referred to as MDS or commercial channels)
available in most of the Company's operating and targeted markets are made
available by the FCC for full-time commercial usage without programming
restrictions. The FCC recently amended its rules to permit "channel loading."
Channel loading permits ITFS license holders to consolidate their educational
programming on one or more of their ITFS channels thereby providing wireless
cable operators leasing such channels, including the Company, with greater
flexibility in their use of ITFS channels. The FCC's allocation of frequencies
to wireless cable is subject to change and in the future the FCC might propose
to alter the present wireless cable allocation to provide a portion of the
spectrum for other emerging technologies. Recently, the FCC formally inquired
as to whether certain wireless cable frequencies should be reallocated for new
computer-based communications services. This inquiry is at a preliminary
stage, and it is uncertain whether any definitive action will be taken with
respect to this inquiry. The Company believes that if any such action were
taken to reallocate these channels, the FCC would allocate substitute
frequency rights to the wireless cable industry or provide other concessions.
See "Wireless Cable Industry -- Competition -- Local Multi-Point Distribution
Service."
In 1985, the FCC established a lottery procedure for awarding MDS licenses.
In 1990, the FCC established a filing "window" system for new multichannel MDS
("MMDS") applications. The FCC's selection among more than one acceptable MMDS
application filed during the same filing window was determined by a lottery.
Generally, once an MMDS application is selected by the FCC and the applicant
resolves any deficiencies identified by the FCC, a conditional license is
issued, allowing construction of the station to commence. Construction
generally must be completed within one year of the date of grant of the
conditional license, in the case of MMDS channels, or 18 months, in the case
of ITFS channels. ITFS and MMDS licenses generally have
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terms of 10 years. Licenses must be renewed and may be revoked for cause in a
manner similar to other FCC licenses. FCC rules prohibit the sale for profit
of an MMDS conditional license or of a controlling interest in the conditional
license holder prior to construction of the station or, in certain instances,
prior to the completion of one year of operation. The FCC, however, does
permit the leasing of 100% of an MMDS license holder's spectrum capacity to a
third party and the granting of options to purchase a controlling interest in
a license once the required license holding period has lapsed and certain
other conditions are met.
In April 1992, the FCC imposed a freeze on the filing of applications and
amendments to applications for new MMDS channel licenses. In February 1993,
the FCC imposed a similar freeze on the filing of applications for new ITFS
licenses and for major ITFS modifications. The freezes were intended to allow
time for the FCC to update its wireless cable data base and to allow the FCC
to review and possibly modify its application rules related to these services.
The FCC subsequently lifted the freeze on the filing of applications for major
ITFS modifications, but indicated that it would accept such applications only
until September 15, 1995. Subsequent to the September 15, 1995 deadline, the
FCC announced that it would accept new ITFS station applications, and major
ITFS modification applications not filed on or before September 15, 1995, from
October 16 through October 20, 1995. Competing applications filed in the same
window would be processed under existing comparative criteria.
Recently the FCC adopted a competitive bidding (auction) mechanism for the
award of initial licenses for MDS channels to replace the lottery procedure.
Auctions to award initial MDS licenses began on November 13, 1995. Successful
bidders will receive a blanket authorization to serve entire "Basic Trading
Areas" or "BTAs" (as defined by Rand McNally) on all MDS channels. The blanket
authorization will be subject to the submission of applications for MDS
channels demonstrating interference protection to the 35-mile-radius protected
service areas of MDS and ITFS stations licensed, or for which there is an
application for a license pending as of September 15, 1995. A BTA license
holder must show coverage of at least two-thirds of the BTA within five years
of receiving the BTA authorization. Auctions for each of the 493 BTAs
commenced on November 13, 1995 for qualified bidders that had filed initial
"short-form" applications and submitted appropriate upfront payments by
specified deadlines. Under the statutory auction authority enacted in 1993,
ITFS licenses are exempt from the auction process and applications for ITFS
licenses are expected to continue to be awarded according to the FCC's
existing comparative criteria.
Application for renewal of MDS and ITFS licenses must be filed within a
certain period prior to expiration of the license term, and petitions to deny
applications for renewal may be filed during certain periods following the
filing of such applications. Licenses are subject to revocation or
cancellation for violations of the Communications Act or the FCC's rules and
policies. Conviction of certain criminal offenses may also render a licensee
or applicant unqualified to hold a license. The Company's lease agreements
with license holders typically require the license holders, at the Company's
expense, to use their best efforts, in cooperation with the Company, to make
various required filings with the FCC in connection with the maintenance and
renewal of licenses. The Company believes this reduces the likelihood that a
license will be revoked, cancelled or not renewed by the FCC.
Wireless cable transmissions are governed by FCC regulations governing
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (i.e.,
analog or digital). Current FCC regulations require wireless cable systems to
transmit only analog signals.
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the collocation of a
commercially viable number of channels operating with common technical
characteristics. In order to commence operations in many of the Company's
unlaunched markets, the Company has filed or will be required to file
applications with the FCC to modify licenses for unbuilt stations. In applying
for these modifications, the Company must demonstrate that its proposed signal
does not violate interference standards in the FCC-protected area of another
wireless cable channel license holder. A wireless cable license holder
generally is protected from interference within 35 miles of the transmission
site. An ITFS license holder has protection to all of its receive sites, but
only a 35 mile protected service area during excess capacity use by a
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wireless cable operator. If such changes would cause the Company's signal to
cause interference in the FCC-protected area of another wireless cable channel
license holder, the Company would be required to obtain the consent of such
other license holder; however, there can be no assurance that such consent
would be received and the failure to receive such consent could adversely
affect the Company's ability to serve the affected market.
When the FCC implements competitive bidding in the awarding of initial MMDS
licenses, the Company cannot predict whether any increase in costs of renewing
its leases will result from increased license costs to the initial licensee.
However, the Company does not believe that any such increased costs would
materially affect the Company's operations or financial condition.
The Cable Act. On October 5, 1992, Congress passed the Cable Act, which
imposes greater regulation on traditional hard-wire cable operators and
permits regulation of prices in areas in which there is no "effective
competition." Pursuant to the Cable Act, the FCC, among other things, adopted
comprehensive new Federal standards for local regulation of certain rates
charged by traditional hard-wire cable operators. The Cable Act also provided
for deregulation of traditional hard-wire cable in a given market once other
multi-channel video providers serve, in the aggregate, at least 15% of the
cable franchise area. Rates charged by wireless cable operators, typically
already lower than traditional hard-wire cable rates, are not subject to
regulation under the Cable Act.
On May 3, 1993, the FCC issued new regulations implementing the rate
regulation provisions in the Cable Act. Traditional hard-wire cable operators
with rates above a price benchmark average for basic services were directed to
reduce their rates by approximately 10%. On February 22, 1994, the FCC
announced that it would require traditional hardwire cable operators to
implement a further reduction in rates of another 7%. On November 18, 1994,
the FCC adopted some exceptions to its cable rate regulations which would
allow certain flow-through item rate increases and after rate flexibility.
These and other aspects of the FCC's rate regulation of traditional hard-wire
cable subscriber fees have and will continue to be met by challenges both in
the courts and at the FCC. The FCC has also adopted regulations implementing
the Cable Act that require traditional hard-wire cable operators to establish
standardized levels of customer service. The Company is currently unable to
predict what effect these regulations may have on the Company's price and
service competitiveness.
Both Houses of Congress recently passed the "Telecommunications Act of
1996." The President has announced his intention to sign the legislation into
law. Pursuant to the Telecommunications Act of 1996, all cable rate regulation
will be eliminated after three years, and for "small systems" as defined in
the Act, and under certain other circumstances, rate regulation will be
eliminated immediately. Until the Telecommunications Act of 1996 is signed
into law, and the FCC adopts implementing regulations, hard-wire cable
operators will continue to be subject to rate regulations.
While current FCC regulations are intended to promote the development of a
competitive pay television industry, the rules and regulations affecting the
wireless cable industry may change, and any future changes in FCC rules,
regulations, policies and procedures could have a material adverse effect on
the industry as a whole and on the Company in particular. In addition, a
number of legal challenges to the Cable Act and the regulations promulgated
thereunder have been filed, both in the courts and before the FCC. These
challenges, if successful, could substantially increase the Company's
operating costs, make some programming unavailable to the Company and
otherwise have a material adverse effect on the wireless cable industry as a
whole or the Company in particular. In particular, those sections of the Cable
Act which prohibit discriminatory or unfair practices in the sale of satellite
cable and satellite broadcast programming to competing multichannel video
programming distributors have been challenged. The Company's costs to acquire
satellite cable and broadcast programming may be affected by the outcome of
those challenges. See "Wireless Cable Industry -- Availability of
Programming." Other aspects of the Cable Act that have been challenged, the
outcome of which could adversely affect the Company and the wireless cable
industry in general, are the Cable Act's provisions governing rate regulation
and customer service standards to be met by traditional hard-wire cable
companies. The Cable Act empowered the FCC to regulate the subscription rates
charged by traditional hard-wire cable operators. As described above, the FCC
recently issued rules requiring such cable operators, under certain
circumstances, to
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reduce the rates charged for basic services by 17%. The Cable Act also
empowered the FCC to establish certain minimum customer service standards to
be maintained by traditional hard-wire cable operators. These standards
include prompt responses to customer telephone inquiries, reliable and timely
installations and repairs and readily understandable billing practices. Should
these provisions withstand court and regulatory challenges, the extent to
which wireless cable operators may continue to maintain an advantage over
traditional hard-wire cable operators in price and customer service practices
could be diminished.
Legislation currently pending before Congress could materially impact
wireless cable ownership rules and the competitive environment in which the
Company operates. The House and the Senate have passed bills, H.R. 1555 and
S.652, that, if enacted into law, would remove certain barriers to investment
by telephone companies in hard-wire cable companies. The proposed legislation
would lift the current statutory cross-ownership ban contained in the
Communications Act, that prevents a telephone company from using hard-wire
facilities to provide cable television service to the same community where it
provides telephone service. The constitutionality of this statutory cross-
ownership ban is currently being considered by the U.S. Supreme Court. This
statutory ban has never been applied to a telephone company's investment in
wireless cable. If the pending legislation is enacted in its current form or
the U.S. Supreme Court determines that the cross-ownership ban is
unconstitutional, telephone companies operating in the markets serviced by the
Company would be legally permitted to build, lease or purchase hard-wire cable
systems and become competitors of the Company.
Other Regulations. Since the vast complex of coaxial cable utilized by
traditional hard-wire cable operators requires a "right of way" to cross
municipal streets, such operators must acquire a municipal franchise and pay
municipal franchise fees. Since wireless cable uses FCC approved frequencies,
it does not require a municipal right of way. Accordingly, wireless cable
operators are not subject to those franchise fees. Traditional hard-wire cable
operators are also required to set aside public access channels for municipal
and local resident use. Wireless cable operators are not subject to these
requirements.
Wireless cable license holders are subject to regulation by the FAA with
respect to the construction of transmission towers and to certain local zoning
regulations affecting construction of towers and other facilities. There may
also be restrictions imposed by local authorities. There can be no assurance
that the Company will not be required to incur additional costs in complying
with such regulations and restrictions.
AVAILABILITY OF PROGRAMMING
Once a wireless cable operator has obtained the right to transmit
programming over specified frequencies, the operator must then obtain the
right to use the programming to be transmitted.
General. Currently, with the exception of the retransmission of local off-
air VHF/UHF broadcast signals, programming is made available in accordance
with contracts with program suppliers under which the system operator pays a
royalty based on the number of subscribers receiving service each month.
Individual program pricing varies from supplier to supplier; however, more
favorable pricing for programming is generally afforded to operators with
larger subscriber bases. The likelihood that program material will be
unavailable to the Company has been significantly mitigated by the Cable Act
and various FCC regulations issued thereunder which, among other things,
impose limits on exclusive programming contracts and prohibit cable
programmers in which a cable operator has an attributable interest from
discriminating against cable competitors with respect to the price, terms and
conditions of programming. Only a few of the major cable television
programming services carried by the Company are not currently directly owned
by vertically integrated multiple cable system operators and the Company
historically has not had difficulty in arranging satisfactory contracts for
these services. The basic programming package offered in each of the Existing
Systems is comparable to that offered by the local traditional hard-wire cable
operators. However, several of such local traditional hard-wire cable
operators currently offer more premium, pay-per-view and public access
channels than the Company.
Copyright. Under the Federal copyright laws, permission from the copyright
holder generally must be secured before a video program may be retransmitted.
Under Section 111 of the Copyright Act, certain "cable
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systems" are entitled to engage in the secondary transmission of programming
without the prior permission of the holders of copyrights in the programming.
In order to do so, a cable system must secure a compulsory copyright license.
Such a license may be obtained upon the filing of certain reports and the
payment of certain fees set by the Copyright Royalty Tribunal.
Wireless cable operators may rely on Section 111. The United States Congress
recently enacted legislation that confirmed the ability of wireless cable
operators to obtain the benefit of the compulsory copyright license.
Periodically, Congress has considered proposals to phase out the compulsory
license. Since the Existing Systems retransmit only a limited number of
broadcast channels, the Company does not believe that the termination of the
compulsory copyright license would have a material adverse effect on the
Company.
Effective October 6, 1993, local broadcasters may require that cable
operators obtain their consent before retransmitting local off-air VHF/UHF
broadcasts. The FCC has exempted wireless cable operators from the
retransmission consent rules if the receive-site antenna is either owned by
the subscriber or within the subscriber's control and available for purchase
by the subscriber upon the termination of service. In all other cases,
wireless cable operators must obtain consent to retransmit local broadcast
signals. The Company has obtained such consents in each of its Existing
Systems where the Company is retransmitting on a wireless cable channel. Such
consents will be required in the Company's other markets. There can be no
assurance that the Company will be able to obtain such consents on terms
satisfactory to the Company, if at all.
PAY TELEVISION INDUSTRY TRENDS
The Company's business will be affected by pay television industry trends
and, in order to maintain and increase its subscriber base in the years ahead,
the Company will need to adapt rapidly to industry trends and modify its
practices to remain competitive. Due to the limited number of physical
components of the wireless transmission system, the Company believes it will
be less expensive for it to adapt to coming industry trends than for
traditional hard-wire cable operators. The cost of such adaptation by the
Company could nonetheless be substantial.
Compression. Several decoder manufacturing companies are developing digital
compression technology, which would allow several programs to be carried in
the amount of bandwidth where only one program is carried now. Manufacturers
have projected varying compression ratios for future equipment, with more
conservative estimates ranging from 3-to-1 to 10-to-1. Within 12 months, the
Company believes compression technology, allowing six to 10 channels within
one 6-MHz bandwidth, will be available. It is generally expected that the
intended use for this expanded channel capacity would be for pay-per-view
video services. Wireless cable will be able to use immediately digital
compression technology when it becomes available, through existing and
upgraded set-top converters. The Company believes traditional hard-wire cable
companies will be required to expend significant funds on upgrading current
systems in order to utilize digitally-compressed signals.
Addressability and Pay-Per-View. "Addressability" means the ability to
implement specific orders from or send other communications to each subscriber
without having to modify a subscriber's equipment. "Impulse" addressability
allows a subscriber to select specialized programming, such as pay-per-view,
on an immediate basis simply through the remote control. While the Company,
like many wireless cable operators, uses impulse addressable set-top
convertors, only approximately 35% of traditional hard-wire cable operators
use addressability and approximately 5% use impulse addressability. Without
addressability, a traditional hard-wire cable customer not subscribing to a
premium channel must make two trips to the traditional hard-wire cable
operator's offices, once to obtain the descrambling device and once to return
it. A customer subscribing to a premium channel must telephone the traditional
hard-wire cable operator in advance. The Company believes this lack of
convenience has hindered pay-per-view sales. Pay-per-view is expected to
become more popular as additional exclusive events become available for
distribution on pay-per-view. Compression technology will greatly expand the
channel capacity available for such programming. The Company believes that it
will then have an additional advantage over most traditional hard-wire cable
operators because its impulse addressable converters provide greater
convenience for its subscribers. Traditional hard-wire cable operators will
incur significant expenditures to upgrade their systems to be able to offer
impulse addressability.
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Advertising. Until recently, most advertising on cable has been sold by
program suppliers, who sell national advertising time as part of the signal
they deliver to cable operators. Recently, however, advertisers have begun
placing advertisements on channels dedicated exclusively to advertising, as
well as in local available time (typically, two minutes each hour) set aside
by program suppliers for local insertions in their programming of
advertisements sold by cable operators. Use of local available time requires
automatic spot insertion equipment, which is readily available today at a
minimal capital cost.
Interactivity. Certain traditional hard-wire cable operators have announced
their intentions to develop interactive features for use by their subscribers.
Interactivity would allow subscribers to utilize their televisions for two-way
communications such as video games and home shopping. Wireless cable operators
will be able to utilize a frequency which the FCC has made available for
interactive communications. At this time, the Company believes that commercial
viability of interactivity in the Company's markets is at least several years
away.
COMPETITION
In addition to competition from established traditional hard-wire cable
television systems, wireless cable television operators face competition from
a number of other sources, including potential competition from emerging
trends and technologies in the pay television industry, some of which are
described below.
Satellite Receivers. Satellite receivers are generally seven to 12 foot
dishes mounted in the yards of homes to receive television signals from
orbiting satellites. Until the implementation of encryption, these dishes
enabled reception of any and all signals without payment of fees. Having to
purchase decoders and pay for programming has reduced their popularity,
although the Company will to some degree compete with these systems in
marketing its services.
Direct Broadcast Satellite. DBS involves the transmission of an encoded
signal direct from a satellite to the home user. Because the signal is at a
higher power level and frequency than most satellite transmitted signals, its
reception can be accomplished with a relatively small (18 inch) dish mounted
on a rooftop or in the yard. In 1994, Hughes Communications, Inc. began
offering DBS services capable of delivering approximately 150 channels of
programming. DBS receiver equipment for a single television set costs
approximately $700 per customer, plus installation fees. Each additional,
independent outlet requires a separate descrambling device at additional cost
to the subscriber. Primestar is offering DBS service for a monthly fee
covering programming services and equipment financing and is capable of
providing approximately 70 channels of programming. DBS subscribers pay
monthly subscription fees.
Satellite Master Antenna Television. SMATV is a multi-channel television
service offered through a wired plant very similar to a traditional hard-wire
cable system, except that it operates without a franchise from a local
authority. SMATV operates under an agreement with a private landowner to
service a specific multiple-dwelling unit. The FCC has recently amended its
rules to provide point-to-point delivery of video programming by SMATV
operators and other video delivery systems in the 18 gigahertz band.
Telephone Companies. Under the Communications Act, local exchange carriers
("LECs") are currently prohibited from providing video programming directly to
subscribers in their respective telephone service areas. The FCC has recently
ruled, however, that LECs may acquire wireless cable channel operations.
Moreover, certain U.S. District Courts and Courts of Appeal have held that the
"telco-cable cross-ownership ban" abridges the First Amendment rights of LECs
to free expression under the U.S. Constitution. Such rulings are currently
under appeal or are expected to be appealed. The United States Senate and the
United States House of Representatives have each passed a bill which, if
enacted into law, could lift barriers to the provision of cable television
service by telephone companies. The FCC already permits LECs to provide "video
dial-tone" service, thereby allowing such carriers to make available to
multiple service providers, on a nondiscriminatory common carrier basis, a
basic platform that will permit end users to access video program services
provided by others.
Video Stores. Retail stores rent VCRs and/or video tapes, and are a major
participant in the television program delivery industry. According to Paul
Kagan Associates, Inc., there are over 75.5 million households with VCRs now
in use in the United States.
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Local Off-Air VHF/UHF Broadcasts. Local off-air VHF/UHF broadcasts (such as
ABC, NBC, CBS and Fox) provide a free programming alternative to the public.
Previously, wireless cable systems could retransmit these broadcast signals
without permission. However, effective October 6, 1993, pursuant to the Cable
Act, local broadcasters may require that cable operators obtain their consent
before retransmitting local off-air VHF/UHF broadcasts. The Company has
obtained such consents in the Existing Systems where the Company is
retransmitting on a wireless cable channel. See "Risk Factors -- Government
Regulation." The FCC also has recently permitted broadcasters to acquire,
subject to certain restrictions, ownership interests in traditional hard-wire
cable systems.
Local Multi-Point Distribution Service. In 1993, the FCC proposed to
redesignate the 28 gigahertz band to create a new video programming delivery
service referred to as local multipoint distribution service ("LMDS"). In July
1995, the FCC proposed to award licenses in each of 493 BTAs pursuant to
auctions. Sufficient spectrum for up to 49 analog channels has been designated
for the LMDS service. The FCC has not determined how many licenses it will
award in each BTA. Final rules for LMDS have not been established. Auctions
are not expected to begin until later in 1996.
Low Power Television ("LPTV"). LPTV utilizes a limited portion of the
spectrum allocated by the FCC for local off-air VHF/UHF broadcasts, but LPTV
utilizes lower power transmission equipment than local off-air VHF/UHF
broadcasts and its signal may be encrypted. LPTV typically has only a 15 to 20
mile signal range. LPTV requires a separate transmitter for each channel and a
standard antenna at the receiving site.
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RECENT TRANSACTIONS
CONSENT SOLICITATION
Between September 12, 1995 and September 29, 1995, the Company engaged in
the solicitation of consents (the "Consent Solicitation") of the holders of
the Old Notes to (i) amend certain provisions of the indenture then in effect
governing the Notes (the "Original Indenture") to permit the Company to
consummate the Wireless One Transaction and the Transactions and (ii)
additionally amend certain definitions and covenants in the Original
Indenture, which imposed restrictions on the Company's ability to pursue
certain additional acquisition, divestiture, financing and other opportunities
that the Company believed were necessary to enhance the value of the Company.
The amendments referred to in (i) and (ii) above and sought by the Company in
the Consent Solicitation are referred to herein as the "Amendments."
In the Original Indenture, the Company agreed, among other things, to
certain restrictions on its and its subsidiaries's ability to make certain
investments, to incur certain indebtedness and to consummate certain asset
sales. Accordingly, in order to enable the Company to consummate the
Transactions and to facilitate the Company's ability to pursue such additional
opportunities, if and when they arise, the Company engaged in the Consent
Solicitation.
The Amendments required the approval of at least a majority in aggregate
principal amount of the Old Notes that were outstanding on or prior to
September 29, 1995, the expiration date of the Consent Solicitation. The
Amendments received approval of approximately 95.5% in aggregate principal
amount of the Old Notes and, accordingly, became effective as of October 2,
1995 upon the execution of a supplemental indenture embodying such Amendments.
Promptly after the effectiveness of the supplemental indenture including the
Amendments, the Company paid to each holder of the Old Notes who delivered a
properly completed and executed consent form $10 in cash for each $1,000
principal amount of Old Notes for which such consent form was delivered by
such holder. The Company paid an aggregate of $955,000 to the holders of the
Old Notes in this regard.
THE WIRELESS ONE TRANSACTION
Effective October 24, 1995, the Company and certain affiliates of Wireless
One, a newly formed Delaware corporation, consummated a transaction (the
"Wireless One Transaction") pursuant to which the Company and such affiliates
contributed all of their respective wireless cable assets in various markets
in Alabama, Florida, Georgia, Louisiana and Texas in exchange for $10 million
and common stock of Wireless One. The Company contributed assets relating to
28 markets, including 16 of which were either previously held for sale or were
markets in which the Company had not yet aggregated sufficient wireless cable
channel rights to launch a commercially viable wireless cable system. As a
result of the Wireless One Transaction, and after giving effect to the initial
public offering of its common stock contemporaneously therewith, the Company
became the beneficial owner of approximately 26% (after exercise of the over-
allotment option granted to the underwriters of such initial public offering)
of the outstanding common stock of Wireless One (the "Wireless One Common
Stock").
In connection with the Wireless One Transaction, the Company granted
Wireless One the option to purchase the wireless cable channel rights of the
Company and its subsidiaries in certain additional markets located in
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Florida, for either Wireless One Common Stock or cash, at Wireless One's
option. Further, following consummation of the Wireless One Transaction, the
Company and Wireless One entered into a letter of intent providing Wireless
One an option, exercisable prior to February 29, 1996, to purchase the
wireless cable channel rights of the Company in three markets in Georgia for
aggregate consideration of approximately $7.2 million, payable in cash.
The Company and certain of the other Wireless One stockholders, who
beneficially own in the aggregate 57.3% of the outstanding Wireless One Common
Stock, are parties to a stockholders agreement (the "Wireless One Stockholders
Agreement") whereby, among other things, they agreed to vote their shares of
Wireless One Common Stock so that the Board of Directors of Wireless One will
have up to seven members, up to three of whom will be designated by the
Company (at least one of whom cannot be an affiliate of Wireless One or the
Company), up to three of whom will be designated by the other Wireless One
stockholders who are parties to the Wireless One Stockholders Agreement,
including Chase Manhattan Capital Company ("CMCC") (at least one of whom must
be independent of Wireless One and such stockholders), and one of whom will be
designated by CMCC.
In addition, the Company has agreed that with certain exceptions, from and
after the closing until the earlier to occur of (i) the third anniversary of
the closing and (ii) the time when the Company and its affiliates cease to own
at least five percent (5%) of the outstanding Wireless One Common Stock, the
Company will not, and will cause each of its subsidiaries to not, engage in
the wireless cable television business or acquire wireless cable television
assets or related rights in any market in any of the states of Alabama,
Georgia, Florida, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina or Tennessee, except for the Memphis, Tennessee market and certain
existing markets owned by the Company in these states as of the date of
consummation of the Wireless One Transaction. Wireless One has agreed that,
also subject to certain exceptions, from and after the closing until the
earlier to occur of (i) the third anniversary of the closing and (ii) the time
when the Company and its affiliates cease to own at least five percent (5%) of
the outstanding Wireless One Common Stock, Wireless One will not, and will
cause each of its subsidiaries to not, engage in the wireless cable television
business or acquire wireless cable television assets or related rights in any
market in any of the states of Arizona, Arkansas, Colorado, Illinois, Indiana,
Iowa, Kansas, Michigan, Missouri, New Hampshire, Oklahoma, Ohio, Texas and
Wyoming, except for certain existing wireless cable markets owned by Wireless
One in these states as of the closing of the Wireless One Transaction.
AMENDMENT TO NOTE PURCHASE AGREEMENT
On October 3, 1995, the Company and Jupiter entered into that certain Second
Amendment to Note Purchase Agreement (the "Second Amendment") to the Note
Purchase Agreement for the Convertible Notes (the "Note Purchase Agreement").
The Company agreed to such amendments in connection with Jupiter's agreement
to consent, pursuant to the terms of the Note Purchase Agreement, to the CMAX
Merger. Such amendments included the following:
(a) the Company's agreement that Jupiter's consent would be required for
all acquisitions prior to December 31, 1997, except the acquisition of
channel rights in any wireless cable market where the Company previously
owned or leased 16 or more channels or a lease of channel rights in any
wireless cable market where the Company previously owned or leased 12 or
more channels, in each case subject to maximum aggregate consideration of
$900,000 in cash and 100,000 shares of restricted Common Stock, without
registration rights;
(b) the parties clarification that an acquisition of channel rights for
purposes of the foregoing restriction would include any loan made in
connection with an agreement to enter into a purchase transaction,
including any option agreement;
(c) the Company's agreement that Permitted Dispositions (as defined in
the Note Purchase Agreement) would be limited to dispositions for cash,
with Jupiter's approval required for any non-cash dispositions and the
contribution of assets to any non-wholly owned entity;
(d) the definition of a Change of Control (as defined in the Note
Purchase Agreement) being amended to include a series of transactions
consummated prior to December 31, 1997, culminating in a Change of Control;
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(e) the period for which a Change of Control triggers a Material Default
(as defined in the Note Purchase Agreement) being extended until December
31, 1997;
(f) the definition of a Material Default being clarified to confirm that
a Change of Control is a Material Default, whether or not the transaction
resulting in a Change of Control is approved by Jupiter; and
(g) the Jupiter nominee who is elected to the Board of Directors of the
Company serving as a member of the Compensation Committee of the Company.
NEWCO TRANSACTION
Effective December 12, 1995, the Company, CAI and Newco, entered into the
Participation Agreement, pursuant to which the Company or its subsidiaries
will contribute or sell to Newco the wireless cable assets and all related
liabilities of certain specified Disposition Assets. Simultaneous with the
Company's contribution and sale of these assets to Newco, CAI or its
subsidiaries will contribute to Newco all of the outstanding capital stock of
certain of its subsidiaries. See "The Transactions and Planned Divestitures."
THE TRANSACTIONS AND PLANNED DIVESTITURES
MERGER OF HEARTLAND AFFILIATE WITH AND INTO AWS
AWS Merger; Consideration. Upon the consummation of the AWS Merger, AWS
Merger Sub will be merged with and into AWS, and AWS will be the surviving
corporation. Under the AWS Merger Agreement, all of the shares of the Common
Stock of AWS (the "AWS Common Stock") outstanding immediately prior to the
effective time of the AWS Merger (the "AWS Effective Time") will be converted
into the right to receive a proportionate number of newly issued publicly
tradeable shares of Common Stock having an aggregate exchange value of
approximately $34 million (subject to certain reductions and the escrow
requirements discussed below), resulting in each such share of AWS Common
Stock, subject to certain adjustments, being converted into the right to
receive shares of Common Stock having an exchange value of approximately $5.90
per share of AWS Common Stock, of which shares having an exchange value of
approximately $0.56 per share of AWS Common Stock will be held in the escrow
described below. The exchange value of the Common Stock to be issued in the
AWS Merger will be equal to the average closing price of the Common Stock as
reported on the Nasdaq National Market System (the "Nasdaq-NMS") over the ten-
trading-day period ending on the fifth business day preceding the consummation
of the AWS Merger (or February 15, 1996 based upon a contemplated closing date
of February 23, 1996); provided, however, that if such average is less than
$20 or more than $26 per share, then the number of shares of Common Stock to
be issued in the AWS Merger will be based upon an exchange value of $20 or $26
per share, as applicable. As a result, a maximum of 1,700,000 shares of Common
Stock are issuable in connection with the AWS Merger.
At the closing of the AWS Merger, shares of Common Stock to be delivered to
the AWS stockholders having an aggregate exchange value of up to $3.25 million
will be held in escrow pursuant to the terms of an escrow agreement ("AWS
Escrow Agreement") for a period of approximately one year. Pursuant to the
terms of the AWS Escrow Agreement, Heartland will have the right to submit
claims to the Exchange Agent (as defined in the AWS Escrow Agreement) and,
following a claims procedure, seek to recover the escrowed shares or proceeds
thereof for any claims for which indemnity is proper pursuant to the terms of
the AWS Merger Agreement. The AWS Escrow Agreement includes provisions
pursuant to which certain claims are fully indemnified by AWS from the escrow
fund (including all liabilities in excess of $3.15 million, subject to
adjustment) and other claims are shared equally by the escrow fund and the
Company. Pursuant to the terms of the AWS Escrow Agreement, if certain
litigation pending against AWS is dismissed prior to the consummation of the
AWS Merger, the exchange value of the shares of Common Stock to be held in
escrow will be reduced from $3.25 million to $2.75 million and the exchange
value of the shares of Common Stock initially to be distributed to the AWS
stockholders will be increased from $30.75 million to $31.25 million.
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The Company has previously loaned to AWS the principal sum of $1.8 million
(the "AWS Loan"). The AWS Loan is secured by a first lien on the wireless
cable channel rights of AWS in the Dallas, Texas market. Upon the consummation
of the AWS Merger, the AWS Loan will remain in place as an intercompany
obligation from AWS to the Company. The AWS Merger Agreement provides that
specified amounts ("Exclusivity Fees") are to be periodically offset against
the AWS Loan as additional consideration for the non-solicitation covenant
contained in the AWS Merger Agreement. The AWS Merger Agreement and documents
relating to the AWS Loan further provide that (a) if the AWS Merger Agreement
is terminated as a result of a competing proposal to acquire AWS or its
material assets, then the aggregate amount of all previously offset
Exclusivity Fees will be added back to the AWS Loan and the AWS Loan will be
immediately due and payable; (b) if the AWS Merger Agreement is terminated as
a result of certain specified events (generally arising from the conduct or
past conduct of AWS or its predecessors), then the aggregate amount of all
previously offset Exclusivity Fees will be added back to the AWS Loan and the
AWS Loan is to be repaid in accordance with its terms; (c) if the Company
fails to consummate the AWS Merger after all of the conditions precedent to
its obligations to consummate the AWS Merger Agreement have been satisfied or
waived, then the remaining balance of the AWS Loan will be forfeited by the
Company as liquidated damages; and (d) upon any other termination under the
AWS Merger Agreement, the AWS Loan (reduced by any previously offset
Exclusivity Fees) is to be repaid to the Company within one year following the
date of termination of the AWS Merger Agreement.
Stock Options; Warrants. Upon the AWS Effective Time, no options or warrant
agreements allowing the holder to exercise rights thereunder to receive shares
of AWS Common Stock shall exist. However, at the AWS Effective Time, any
unexercised warrants will be converted into warrants to purchase shares of
Common Stock on an adjusted basis. The holders of such warrants have certain
demand registration rights attached to the warrant agreements that will
survive the AWS Merger.
Conditions to Consummation of the AWS Merger. Consummation of the AWS Merger
is conditioned upon the fulfillment or waiver (where permissible) of certain
conditions set forth in the AWS Merger Agreement.
Effective Time of the AWS Merger. If the AWS Merger is approved by the
requisite vote of the stockholders of AWS and the other conditions to the
consummation of the AWS Merger are satisfied or waived (where permissible),
the AWS Merger will become immediately effective at the time a Certificate of
Merger is duly filed with the Secretary of State of the State of Delaware. The
Certificate of Merger for the AWS Merger will be filed only upon satisfaction
or waiver of the conditions contained in the AWS Merger Agreement.
Termination of the AWS Merger Agreement. In general, the AWS Merger
Agreement may be terminated (i) by mutual consent of the Company and AWS, (ii)
by either the Company or AWS if the AWS Merger has not been consummated by
February 29, 1996 and (iii) under certain other circumstances.
TRANSACTION WITH FTW PARTNERSHIP
Asset Purchase; Consideration. Pursuant to the Amended and Restated Asset
Purchase Agreement dated as of October 4, 1995 (the "FTW Agreement"), between
the Company and the FTW Partnership, (i) the FTW Partnership will assign to
the Company the FTW Interest, (ii) the FTW Partnership and the FTW partners
approving the FTW Transaction will assign (the "FTW Claim Assignment") to the
Company or release (the "FTW Claim Release") the FTW Claims (as defined in the
FTW Agreement), (iii) the Company will assume up to $570,000 of certain types
of liabilities (including disputed liabilities) of the FTW Partnership to AWS,
and (iv) the Company will issue to the FTW Partnership the shares of Common
Stock having an aggregate exchange value of $13.3 million (the "FTW
Transaction"). The exchange value for the shares of Common Stock to be issued
in connection with the FTW Agreement will be equal to the average closing
price of the Common Stock as quoted on the Nasdaq-NMS over the ten-trading-day
period ending on the fifth business day preceding the consummation of the FTW
Agreement (or February 15, 1996 based upon a contemplated closing date of
February 23, 1996) provided that if such average closing price is in excess of
$23 per share, the exchange value will be $23 per share. Further, either FTW
Partnership or the Company, at its option, may terminate the FTW Agreement if
such average closing price is below $17 per share. The Company currently
intends to exercise such right, if applicable. As a result, a maximum of
782,353 shares of Common Stock are issuable in connection with the FTW
Agreement. The FTW Agreement also grants to the Company a right of first
refusal with regard to the FTW Interest.
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In connection with the FTW Agreement, the Company (a) deposited in escrow
$100,000 on October 12, 1995, $55,000 on November 7, 1995, $55,000 on December
1, 1995, $55,000 on January 5, 1996 and has agreed to deposit in escrow an
additional $55,000 on the first day of each month thereafter (collectively,
"FTW Earnest Money"), and (b) has agreed to loan to the FTW Partnership up to
$500,000 ("FTW Loan"), $350,000 of which has been advanced through January 15,
1996, to enable the FTW Partnership to pay accrued expenses of the FTW
Partnership, primarily legal fees, accounting fees, and reimbursable expenses
incurred by members of the FTW Committee (as defined in the FTW Agreement).
The FTW Loan is secured by a first lien on the FTW Interest pursuant to the
terms of a security agreement between the Company and the FTW Partnership.
Upon the consummation of the FTW Transaction, the FTW Loan will be repaid to
the Company from the proceeds of FTW Shares to be liquidated in connection
with the dissolution of the FTW Partnership.
Conditions to Consummation of the FTW Transaction. The consummation of the
FTW Transaction is conditioned upon the fulfillment or waiver (where
permissible) of certain conditions set forth in the FTW Agreement.
Consummation of the FTW Agreement. If the FTW Transaction is approved by the
requisite vote of the FTW partners and the other conditions to the
consummation of the FTW Transaction are satisfied or waived where permissible,
the FTW Transaction will be consummated upon the transfer of the FTW Interest,
the assignment or release of the FTW Claims, and the delivery of the FTW
Shares to the Exchange Agent (as defined in the FTW Agreement). It is
anticipated that such transactions will occur as soon as practicable after the
satisfaction or waiver where permissible of the conditions noted above.
Termination of the FTW Agreement. In general, the FTW Agreement may be
terminated (i) by mutual consent of the Company and the FTW Partnership, (ii)
by either the Company or the FTW Partnership if the FTW Transaction has not
been consummated by March 15, 1996 and (iii) under certain other
circumstances.
TRANSACTION WITH MINNEAPOLIS PARTNERSHIP
Asset Purchase; Consideration. Pursuant to the terms of the Amended and
Restated Asset Purchase Agreement dated as of October 4, 1995 (the
"Minneapolis Agreement"), between the Company and the Minneapolis Partnership,
(i) the Minneapolis Partnership will assign to the Company the Minneapolis
Interest, (ii) the Minneapolis Partnership and Minneapolis partners approving
the Minneapolis Agreement will assign to the Company the Minneapolis Claims
(as defined in the Minneapolis Agreement), (iii) the Company will assume up to
$2.2 million of liabilities of the Minneapolis Partnership to AWS, and (iv)
the Company will issue to the Minneapolis Partnership shares of Common Stock
(the "Minneapolis Shares") having an aggregate exchange value equal to the sum
of (A) $18 million plus (B) $500 for each wireless cable television subscriber
in excess of 2,500 ("Additional Subscribers") the fifth business day preceding
the consummation of the Minneapolis Transaction (or February 15, 1996 based
upon a contemplated closing date of February 23, 1996) (currently anticipated
to be 1,000 Additional Subscribers on the relevant date, and not anticipated
to exceed 2,000 Additional Subscribers) (the "Minneapolis Transaction"). Under
the terms of the Minneapolis Agreement, certain claims may be resolved by
mutual agreement of the parties prior to closing, with any agreed damages
relating thereto ("Stipulated Damages") to be paid from the liquidation of
Minneapolis Shares in connection with the dissolution of the Minneapolis
Partnership; provided, that the aggregate amount of such Stipulated Damages
may not exceed $1 million. Pursuant to the terms of the Minneapolis Agreement,
claims by the Company against the Minneapolis Partnership for breaches of the
Minneapolis Agreement (other than Stipulated Damages) may only be made during
the six-month period following the consummation of the Minneapolis
Transaction, and the Company will not have any recourse to the Minneapolis
partners other than to the extent that the Minneapolis Committee (as defined
in the Minneapolis Agreement) is in possession of the proceeds of Minneapolis
Shares liquidated for the payment of contingent claims (which Minneapolis
Shares will have an aggregate exchange value of at least $500,000). Any claims
asserted against the Minneapolis Partnership by the Company after the closing
of the Minneapolis Transaction will be subject to the alternative dispute
resolution procedures set forth in the Minneapolis Agreement.
The exchange value of the Common Stock to be issued in the Minneapolis
Transaction will be equal to the average closing price of the Common Stock as
reported on the Nasdaq-NMS over the ten-trading-day period
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ending on the fifth business day preceding the consummation of the Minneapolis
Agreement (or February 15, 1996 based upon a contemplated closing date of
February 23, 1996); provided, however, that if such average is (a) greater
than or equal to $23 per share but less than $30 per share, then the exchange
value will be $23 per share, and (b) greater than or equal to $30 per share,
then the exchange value will be (i) the product of the closing average
multiplied by $23, divided by (ii) $30, and the number of Minneapolis Shares
will be adjusted accordingly. Further, either the Minneapolis Partnership or
the Company, at its option, may terminate the Minneapolis Agreement if such
average closing price is below $17 per share. The Company currently intends to
exercise such right, if applicable. As a result, a maximum of 1,117,647 shares
of Common Stock are issuable in connection with the Minneapolis Agreement
(assuming that there are 4,500 subscribers on the relevant date.)
In connection with the Minneapolis Agreement, the Company has agreed to loan
to the Minneapolis LLC up to $1,575,000 (the "Minneapolis Loan"), of which (a)
$575,000 was advanced on October 31, 1995 and used to repay an existing
obligation, and (b) $1 million ("Subscriber Proceeds") may be used for general
working capital purposes (not to exceed $100,000) and for subscriber growth.
The Company advanced $250,000 of the Subscriber Proceeds on October 31, 1995
and $234,000 on December 20, 1995 to fund working capital needs and subscriber
growth. The Minneapolis Loan is secured by a first lien on the wireless cable
channel assets in the Minneapolis, Minnesota market, and, upon the
consummation of the Minneapolis Transaction, the Minneapolis Partnership will
be responsible for the repayment of a portion of the Minneapolis Loan
(approximately $215,000) from the proceeds of the Minneapolis Shares to be
liquidated in connection with the dissolution of the Minneapolis Partnership.
The Minneapolis Agreement also grants to the Company a right of first refusal
with regard to the Minneapolis Interest.
Conditions to Consummation of the Minneapolis Transaction. The consummation
of the Minneapolis Transaction is conditioned upon the fulfillment or waiver
(where permissible) of certain conditions set forth in the Minneapolis
Agreement. The Minneapolis Transaction is also subject to the closing of the
AWS Merger.
Termination of the Minneapolis Agreement. In general, the Minneapolis
Agreement may be terminated (i) by mutual consent of the Company and the
Minneapolis Partnership, (ii) by either the Company or the Minneapolis
Partnership if the Minneapolis Transaction has not been consummated by March
15, 1996 and (iii) under certain other circumstances.
MERGER OF HEARTLAND AFFILIATE WITH AND INTO CMAX
CMAX Merger; Consideration. Upon consummation of the CMAX Merger, CMAX
Merger Sub will be merged with and into CMAX (the "CMAX Merger") and CMAX will
become a wholly owned subsidiary of the Company. Under the CMAX Merger
Agreement, each share of CMAX Common Stock issued and outstanding immediately
prior to the CMAX Merger (excluding the shares of CMAX Common Stock held by
CMAX as treasury stock, all of which will be cancelled) will be converted into
the right to receive that portion of a newly issued publicly tradeable share
of Common Stock having an exchange value of $8.50 per share of CMAX Common
Stock for an aggregate exchange value of approximately $80.8 million for all
shares of CMAX Common Stock, subject to adjustment (the "CMAX Merger
Consideration"). The exchange value of the Common Stock to be issued pursuant
to the CMAX Merger will be equal to the average closing price of Common Stock
as reported on the Nasdaq-NMS for the 20-trading-day period ending on the
fifth business day preceding the consummation of the CMAX Merger (or February
15, 1996 based upon a contemplated closing date of February 23, 1996). If
CMAX's Net Liabilities exceed its Permitted Net Liabilities (each as defined
in the CMAX Merger Agreement) as of the closing of the CMAX Merger Agreement
(such excess being referred to as "CMAX Excess Liabilities"), then the CMAX
Merger Consideration will be reduced by the amount of the CMAX Excess
Liabilities. The Company, at its option, may terminate the CMAX Merger
Agreement if such average closing price is below $10 per share. The Company
currently intends to exercise such right, if applicable. As a result, a
maximum of 8,081,214 shares of Common Stock are issuable in connection with
the CMAX Merger. CMAX, at its option, may terminate the CMAX Merger Agreement
if the average closing price of Common Stock is above $34 per share.
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In connection with the execution of the CMAX Merger Agreement, CMAX entered
into a Sublease and Purchase Agreement (the "Sublease Agreement") with the
Company. Pursuant to the terms of the Sublease Agreement, CMAX subleased to
the Company all of its wireless cable television rights in the Additional
Texas Systems and Heartland paid CMAX a $2.4 million non-refundable deposit
for such rights. If the CMAX Merger Agreement is terminated as a result of a
breach thereof by CMAX or as a result of the acceptance by the Board of
Directors of CMAX of a competing acquisition proposal, the Company will
acquire such wireless cable television rights for nominal additional
consideration. If the CMAX Merger Agreement is terminated for any other
reason, the Company will acquire such wireless cable television rights for an
amount equal to the difference between the appraised value of such rights and
the $2.4 million previously paid by the Company.
In connection with the CMAX Merger Agreement, the Company agreed to loan to
CMAX ("CMAX Loan") up to $1,000,000 of which (a) $500,000 was advanced on
December 29, 1995 to be used for working capital purposes, and (b) $500,000
may be used for subscriber growth. The CMAX Loan will not increase the amount
of CMAX Excess Liabilities. Upon consummation of the CMAX Merger, it is
anticipated that the CMAX Loan will remain as an inter-company obligation from
CMAX to the Company. In the event that the CMAX Merger is not consummated, the
CMAX Loan is payable August 29, 1996; provided, that if the CMAX Merger
Agreement is terminated as a result of a competing acquisition proposal, then
the CMAX Loan will be immediately due and payable.
In connection with the CMAX Merger, the Company will grant registration
rights to Charter Wireless Cable Holdings, L.L.C. ("Charter Wireless"), the
majority stockholder of CMAX, with respect to shares to be issued to such
stockholder in connection with the CMAX Merger that are subject to the
restrictions on transfer contained in Rules 144 and 145 promulgated by the
Commission under the Securities Act.
For a period of three years from and after the date of the consummation of
the CMAX Merger, Charterhouse Equity Partners, L.P., an affiliate of Charter
Wireless, and Tommy L. Gleason, the President and Chief Executive Officer of
CMAX, have agreed not to own or operate a wireless cable television business
within a fifty-mile radius of any wireless television cable market acquired by
the Company from CMAX.
Stock Options; Warrants. Pursuant to the terms of the CMAX Agreement, all
stock options and warrants to acquire shares of CMAX Common Stock will be
exercised or terminated prior to the CMAX Effective Time (as defined herein).
Conditions to Consummation of the CMAX Merger. The consummation of the CMAX
Merger is conditioned upon the fulfillment or waiver (where permissible) of
certain conditions set forth in the CMAX Merger Agreement.
Effective Time of the CMAX Merger. If the CMAX Merger is approved by the
requisite vote of the stockholders of CMAX and the other conditions of the
consummation of the CMAX Merger are satisfied or, where permissible, waived,
the CMAX Merger will become effective immediately upon the filing of a
Certificate of Merger with the Secretary of State of Delaware (the "CMAX
Effective Time"). The Certificate of Merger for the CMAX Merger will be filed
only upon satisfaction or waiver (where permissible) of the conditions
contained in the CMAX Merger Agreement and only if no party has exercised any
right of termination provided in the CMAX Merger Agreement.
Termination of the CMAX Merger Agreement. In general, the CMAX Merger
Agreement may be terminated (i) by mutual consent of the Company and CMAX,
(ii) by either the Company or CMAX if the CMAX Merger has not been consummated
by February 29, 1996 and (iii) under certain other circumstances.
TRANSACTION WITH TSC
Asset Purchase; Consideration. Pursuant to the Amended and Restated Asset
Purchase Agreement dated as of October 19, 1995 (the "TSC Agreement"), among
the Company, TSC and Technivision, TSC will sell to the Company substantially
all of the assets formerly held by Technivision, consisting of wireless cable
television assets in Dayton, Ohio, Corpus Christi, Texas and El Paso, Texas,
and the Company will issue to TSC the shares of Common Stock (the "TSC
Shares") having an aggregate exchange value of (a) $36.75 million plus (b)
$1,200
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for each wireless cable television subscriber on the fifth business day
preceding the consummation of the TSC Transaction (or February 15, 1996 based
upon a contemplated closing date of February 23, 1996) in excess of amounts
specified in the TSC Agreement (currently estimated to be $1.5 million,
provided that the aggregate of such additional subscriber consideration shall
not exceed $3.5 million) minus (c) the amount of any obligations assumed by
the Company (not to exceed $5 million and currently estimated to be $5
million), minus (d) if the wireless cable television assets relative to the
Dayton, Ohio market are sold prior to the consummation of the TSC Transaction,
certain proceeds thereof to be retained by TSC. Pursuant to the terms of the
TSC Agreement, TSC Shares having an aggregate exchange value of $5 million
will be held in escrow for a period of approximately 18 months to satisfy
certain indemnification obligations of TSC to the Company, and TSC Shares
having an aggregate exchange value of up to $3.6 million (currently estimated
to be $1 million) will be held in a separate escrow for up to six months
(subject to extension) to secure the performance of certain post-closing
covenants of TSC. The exchange value for the shares of Common Stock to be
issued in the TSC Transaction will be equal to the average closing price of
the Common Stock as reported on the Nasdaq-NMS over the 20-trading-day period
ending on the fifth business day preceding the consummation of the TSC
Transaction (or February 15, 1996 based upon a contemplated closing date of
February 23, 1996). The Company, at its option, may terminate the TSC
Agreement if such average closing price is below $16 per share. The Company
currently intends to exercise such right, if applicable. As a result, a
maximum of 2,515,625 shares of Common Stock (assuming $3.5 million in
additional subscriber consideration and the assumption of no liabilities at
closing) are issuable in connection with the TSC Transaction.
Conditions to Consummation of the TSC Transaction. The consummation of the
TSC Transaction is conditioned upon the fulfillment or waiver (where
permissible) of certain conditions set forth in the TSC Agreement.
Termination of the TSC Agreement. The TSC Agreement may be terminated (i) by
mutual consent of the Company and TSC, (ii) by either the Company or TSC if
the TSC Transaction has not been consummated by February 29, 1996 and (iii)
under certain other circumstances.
PLANNED DIVESTITURES
Certain of the wireless cable assets currently held by the Company and
certain of the assets to be acquired by the Company in the Transactions are
not part of the Company's current long-term business plan, either because they
are inconsistent with the Company's focus on small to mid-sized markets with a
significant number of LOS households unpassed by traditional hard-wire cable
or because the Company's Board of Directors felt that the consideration to be
received in a disposition thereof might be attractive when compared to
developing and operating a wireless cable system in the market. The Board of
Directors of the Company has identified the Maysville and Sweet Springs,
Missouri, Grand Rapids/Moline Michigan, Bloom Center/Napoleon, Indiana and
Flippin, Tennessee markets currently owned by the Company, and the Los
Angeles, California, Dallas, Fort Worth and San Antonio, Texas, Memphis,
Tennessee, Dayton, Ohio, Salt Lake City, Utah and Minneapolis, Minnesota
markets to be acquired in the Transactions as being markets for which the
Company should seek one or more disposition opportunities for cash, promissory
notes, retained equity interests or a combination thereof. Notwithstanding its
determination to seek the sale, exchange or other disposition of the
Disposition Assets, the Company believes that some or all of such markets,
properly developed and operated, offer attractive opportunities to participate
in the wireless cable television industry.
The Company is currently a party to an agreement relating to the disposition
of the Memphis and Flippin, Tennessee markets. The Company expects to sell the
Flippin market to TruVision for $1.5 million contemporaneously with the sale
to TruVision by AWS of the Memphis market for $3.9 million. The Company will
not retain a direct or indirect interest in these markets.
Effective December 12, 1995, the Company, CAI and Newco, entered into the
Participation Agreement, pursuant to which the Company or its subsidiaries
will contribute or sell to Newco the wireless cable assets and all related
liabilities of the Disposition Assets, other than the assets to be sold to
TruVision as part of the Memphis Transaction and the Los Angeles, California
channel rights of AWS (which the Company will seek to
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sell directly to a third party). Simultaneous with the Company's contribution
and sale of these assets to Newco, CAI or its subsidiaries will contribute to
Newco all of the outstanding capital stock of certain subsidiaries of CAI,
which will retain all of their assets and liabilities related to the wireless
cable markets of Bakersfield, California, Charlotte, North Carolina,
Cleveland, Ohio and Stockton/Modesto, California. Subject to certain
conditions, the Company or CAI may sell certain of these assets prior to the
closing or contribute cash to Newco in lieu thereof. The Company contemplates
that the Newco Transaction will close contemporaneously with or immediately
following consummation of the Transactions.
The combination of these assets in Newco will create a company with
approximately 5.7 million LOS households and 54,700 subscribers. CAI is a
publicly held wireless cable company headquartered in Albany, New York whose
common stock is publicly traded on the Nasdaq-NMS under the symbol "CAWS."
In connection with the Newco Transaction, the Company (or its contributing
subsidiaries) will receive (i) shares of Newco Common Stock constituting
approximately 39.76% of the outstanding shares of Newco Common Stock at the
closing, (ii) approximately $28.3 million in cash payable by Newco at the
closing, (iii) a promissory note in the principal sum of $25 million payable
nine months from the closing and secured by proceeds of the Newco Financing
and (iv) a promissory note in the sum $15 million payable ten years from the
closing, and prepayable from asset sales and certain other events. Within six
months of closing, CAI and the Company will complete certain so-called post-
closing net working capital calculations. Components of such calculations
include the relative accounts payable, accounts receivable and related working
capital assets of the contributed systems, the number of granted channels
represented and actually contributed to Newco for each market, increase or
decrease in the number of subscribers in each contributed system from the
number of subscribers stated in the Participation Agreement and related
factors. Following the completion of these calculations, an increase or
decrease will occur in the principal amounts of the promissory notes received
by the Company from Newco, and CAI will either contribute to or be entitled to
a distribution of cash from Newco, depending upon such calculations.
In connection with the closing of the Newco Transaction, CAI, the Company
and Newco will enter into a stockholders agreement (the "Stockholders
Agreement"). The Stockholders Agreement will provide, among other things, that
the Company and CAI will agree to vote their shares of Newco Common Stock in
favor of a Board of Directors of Newco having nine members consisting of (i)
up to four members designated by CAI (provided that at least one of whom may
not be an affiliate of either CAI or the Company); (ii) up to three members
designated by the Company (provided that at least one of whom may not be an
affiliate of either CAI or the Company); (iii) the Chief Executive Officer of
Newco; and (iv) the Chief Operating Officer of Newco. The Stockholders
Agreement and Newco's Bylaws further provide that certain major transactions
will require the affirmative approval of at least 70% (or 7 of 9) of the
Directors of Newco.
Consummation of the Newco Transaction is expected contemporaneously with or
immediately following consummation of the Transactions and is subject to
significant customary closing conditions, including, without limitation,
consummation of the Transactions, receipt of certain consents (including
consent of the holders of CAI's outstanding debt securities), consummation of
the Newco Financing on terms acceptable to the Company and CAI, acceptable
partition or interference agreements with respect to certain markets adjacent
to the Newco markets, certain regulatory approvals, and satisfactory due
diligence review by each party of the assets to be contributed to Newco. Such
conditions may be waived in certain circumstances. No assurance can be given
that such conditions will be satisfied. If such closing conditions are not
satisfied, the Company will actively seek one or more disposition
opportunities for this portion of the Disposition Assets for cash, promissory
notes, retained equity interests or a combination thereof.
If the divestiture of any of the Disposition Assets is not effected as
currently anticipated by the Company's Board of Directors, the assets not
disposed of will be held by the Company until other strategic uses can be
found therefor.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus with respect to each person who is an executive officer or director
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J.R. Holland, Jr.(/1/).. 52 Chairman of the Board
David E. Webb........... 49 President, Chief Executive Officer and Director
John R. Bailey.......... 42 Senior Vice President -- Finance, Chief Financial Officer,
Treasurer and Secretary
Randy R. Hendrix........ 35 Senior Vice President -- Marketing
Thomas W. Dixon(/2/).... 48 Senior Vice President -- Operations
Robert R. Story......... 40 Senior Vice President -- Installations
David D. Hagey.......... 35 Vice President, Controller and Assistant Secretary
Alvin H. Lane, 53 Director
Jr.(/3/)...............
Dennis M. 53 Director
O'Rourke(/1/)..........
John A. Sprague......... 43 Director
Wes W. Watkins(/3/)..... 57 Director
L. Allen Wheel- 63 Director
er(/1/)(/3/)...........
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Mr. Dixon intends to resign upon the consummation of the Newco Transaction
and to join Newco as its Senior Vice President--Operations.
(3) Member of the Audit Committee.
J. R. Holland, Jr., began advising the Company as a consultant in October
1992 and became Chairman of the Board of Directors in October 1993. Mr.
Holland has been employed as President of Unity Hunt Resources, Inc. since
September 1991. Unity Hunt Resources is a large international, private holding
company with interests in entertainment, cable television, retail,
investments, real estate, natural resources and energy businesses. Mr. Holland
is also the President of Hunt Capital. See "Principal Stockholders." From
November 1988 to September 1991, Mr. Holland was Chairman of the Board and
Chief Executive Officer of Nedinco, Inc., a large diversified, international
holding company. Prior to that, Mr. Holland was President and a director of
KSA Industries, Inc., a private, diversified company involved in
entertainment, retail, transportation and energy businesses, and President and
a director of Western Services International, Inc., a company involved in
energy services, equipment and chemicals. Mr. Holland began his career with
Booz-Allen & Hamilton, Inc., a major management consulting firm. In addition,
Mr. Holland is currently a director of Placid Refining Company, Optical
Securities Group, Inc. and Wireless One, Inc. Mr. Holland is expected to serve
as a director of Newco upon consummation of the Newco Transaction.
David E. Webb, co-founder of the Company, has been President and Chief
Executive Officer and a director of the Company since its formation in
September 1990. During 1989 and 1990, Mr. Webb began acquiring rights to
wireless cable channels. From 1979 to January 1989, Mr. Webb was a
shareholder, director and manager of Durant Cablevision, Inc. and its
predecessor, a traditional hard-wire cable system company. Mr. Webb has been a
shareholder and director of several media/communications companies involved in
network and independent television stations, AM and FM radio stations, paging
and telephony. Mr. Webb is currently a director of Wireless One, Inc. Mr. Webb
is expected to serve as a director of Newco upon consummation of the Newco
Transaction.
John R. Bailey, began advising the Company as a financial consultant in July
1992 and joined the Company in September 1993 as Vice President -- Finance,
Chief Financial Officer, Treasurer and Secretary. Mr. Bailey was named Senior
Vice President -- Finance, Chief Financial Officer, Treasurer and Secretary in
August 1994. From 1988 to September 1993, Mr. Bailey was the founder and
Managing Director of Berkshire Partners, Inc., a private investment bank
focusing upon private placements and mergers and acquisitions for
communications clients. From February 1991 to February 1992, Mr. Bailey was a
Senior Vice President and Chief Financial Officer of Comstock Resources, Inc.,
an energy company. From October 1989 to February 1991 and from 1980
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to September 1985, Mr. Bailey was employed by Eppler, Guerin & Turner, Inc.,
an investment bank, as Vice President -- Corporate Finance. Prior to 1988, Mr.
Bailey was employed by Bear, Stearns & Co. as an Associate Director and
Kidder, Peabody & Co. Incorporated as a Vice President in Corporate Finance.
Upon consummation of the Newco Transaction, Mr. Bailey will serve as the
Acting Chief Financial Officer of Newco until Newco names a full-time Chief
Financial Officer.
Randy R. Hendrix began advising the Company as a marketing consultant in
January 1991 and joined the Company as Vice President -- Marketing in
September 1993. Mr. Hendrix was named Senior Vice President -- Marketing in
August 1994. From 1986 to January 1991, Mr. Hendrix was employed as a
Registered Representative for the Equitable Life Assurance Society. Prior to
that, Mr. Hendrix served as Marketing Director-- Franchise Development for
Curtis Mathis Corporation, a manufacturer and retailer of electronic
appliances.
Thomas W. Dixon began advising the Company as an operations consultant in
March 1992 and joined the Company as Vice President -- Operations in September
1993. Mr. Dixon was named Senior Vice President -- Operations in August 1994.
From 1985 to March 1992, Mr. Dixon was employed as a Vice President of Long
Distance Savers, Inc., a long distance telephone company. Mr. Dixon's
responsibilities included opening, staffing and training new company offices,
as well as sales and marketing in the Louisiana-Texas-Oklahoma tri-state area.
Mr. Dixon intends to resign upon the consummation of the Newco Transaction and
to join Newco as its Senior Vice President -- Operations.
Robert R. Story has been an adviser to the Company since its formation on
construction, installations and related technical matters. Mr. Story also
assisted the Company with numerous strategic acquisitions. Previously, Mr.
Story was President of United States Wireless Cable, Inc., an Austin, Texas
based wireless cable operator. In connection with the Company's purchase of
the Lubbock operating system in May 1995, Mr. Story was named Senior Vice
President--Installations. Mr. Story is responsible for the development of all
residential receive sites, special application installations and the training
of the Company personnel for these installations. Mr. Story has been a
shareholder and officer of Clear-Vue TV, Inc., Durant Cablevision, Inc. and
Green Country Radio, Inc.
David D. Hagey joined the Company in June 1994 as Vice President, Controller
and Assistant Secretary. Prior to joining the Company, Mr. Hagey was employed
by KPMG Peat Marwick LLP for 11 years, most recently as Senior Manager.
Alvin H. Lane, Jr., became a director of the Company in January 1994. In
1983, Mr. Lane founded, and since then has been the President of, Lane and
Associates, a management consulting firm. Since October 1993, Mr. Lane has
been the President of AHL Finance Company, L.L.C. From 1972 to 1983, Mr. Lane
was the Chief Financial Officer and Secretary of the Dr Pepper Company. Mr.
Lane is also Chairman of the Board of Love Bottling Company, a soft drink
bottling franchise.
Dennis M. O'Rourke became a director of the Company in January 1994. In
1985, Mr. O'Rourke founded, and since then has been the Chairman of the Board
and Chief Executive Officer of, O'Rourke Companies Inc., a human resources
consulting firm. Prior to that, Mr. O'Rourke was employed in various
capacities by Boise Cascade Corporation, American Hospital Supply Corporation
and General Motors Corporation.
John A. Sprague became a director of the Company in January 1995. Since
March 1994, Mr. Sprague has been the managing partner of Jupiter Partners
L.P., an investment firm. From January 1993 until February 1994, Mr. Sprague
was an independent investor. Prior to that, Mr. Sprague served as a General
Partner of Forstmann Little & Co., an investment firm. Mr. Sprague is also a
director of Insignia Financial Group, Inc.
Wes W. Watkins became a director of the Company in January 1994. Since
January 1991, Mr. Watkins has been the President of World Export Services,
Inc., a company that invests in telecommunications, real estate and oil
production. Mr. Watkins is also the Secretary and Representative for
international trade for the State of Oklahoma. From January 1991 until
December 1993, Mr. Watkins was the President of Global Communications, Inc., a
wireless cable and satellite telecommunications consulting corporation. Prior
to that, Mr. Watkins served for 14 years as a member of the House of
Representatives of the United States Congress from the State of Oklahoma,
serving on the Banking, Finance and Urban Affairs Committee and the House
Appropriations Committee.
100
<PAGE>
L. Allen Wheeler, co-founder of the Company, has served as a director of the
Company since its formation in September 1990. Mr. Wheeler has owned and
managed diversified investments through Allen Wheeler Management, Inc., a
personal holding company, for over 20 years. Mr. Wheeler's investments have
emphasized the media/communications industries. Mr. Wheeler has been a
shareholder, director and officer of several media/communications companies
involved in network and independent television stations, AM and FM radio
stations, paging and telephony. Mr. Wheeler is currently Chairman and Chief
Executive Officer of Green Country Radio, Inc., which owns and operates one AM
and one FM radio station and a television station.
Executive officers serve at the discretion of the Board of Directors. All
directors serve on the Board of Directors of the Company until the next annual
meeting of stockholders of the Company and until their successors are elected
and qualified. Non-employee directors receive an annual fee of $5,000 and a
meeting fee of $500 per meeting attended, plus reimbursement of out-of-pocket
expenses, for their services as directors of the Company. In addition, each
non-employee director of the Company (other than Mr. Wheeler) is entitled to
receive stock options under the Company's Stock Option Plan for Non-Employee
Directors for his services as a director. See "Management -- Stock Option
Plans." Directors who are also employees do not receive any additional
compensation for their services as directors.
The Board of Directors has established two committees. The Compensation
Committee is comprised of Messrs. Holland, O'Rourke and Wheeler and makes
recommendations to the Board with respect to general compensation and benefit
levels, determines the compensation and benefits for the Company's executive
officers and administers the Company's Employee Stock Option Plan. The Audit
Committee is comprised of Messrs. Lane, Watkins and Wheeler and oversees the
activities of the Company's independent auditors and internal accounting
controls.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of the
Company's Chief Executive Officer and each other executive officer of the
Company who earned in excess of $100,000 in annual salary and bonus during the
Company's fiscal year ended December 31, 1994 (collectively, the "Named
Executive Officers"), for services rendered in all capacities to the Company
during the Company's fiscal years ended December 31, 1994 and 1993,
respectively.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-
TERM
COMPEN-
SATION
AWARDS
ANNUAL COMPENSATION ----------
--------------------------------- SECURITIES
OTHER UNDERLYING ALL
ANNUAL OPTIONS/ OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION SARS COMPENSATION
POSITION YEAR ($) ($) ($)/1/ (#) ($)
- ------------------------ ---- -------- ------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
David E. Webb........... 1994 $120,000 $-- $7,306 -- $13,228(/2/)
President and Chief
Executive Officer 1993 60,750(/3/) -- -- -- $2,250(/2/)
John R. Bailey.......... 1994 90,000 45,000 4,200 100,000 --
Senior Vice President -- 1993 94,850(/3/) -- -- -- --
Finance, Chief
Financial Officer,
Treasurer and Secretary
Randy R. Hendrix........ 1994 90,000 45,000 6,668 130,000 --
Senior Vice President --
Marketing 1993 59,782(/3/) -- -- -- --
Thomas W. Dixon......... 1994 81,000 45,000 4,200 50,000 --
Senior Vice President --
Operations 1993 30,000(/3/) -- -- -- --
</TABLE>
- --------
(1) Other annual compensation is comprised of car allowances.
(2) Rental income paid by the Company for its operating offices. See "Business
- -- Properties" and "Certain Transactions."
(3) Paid by the Company in the form of consulting fees.
101
<PAGE>
Since the Initial Public Offering, Mr. Holland's annual base compensation
for the fiscal year ended December 31, 1994, was $120,000. Such compensation
is paid to Mr. Holland by Unity Hunt Resources, Inc., an affiliate of Hunt
Capital, which receives a management fee equal to such amount from the Company
for the provision of Mr. Holland's services. Mr. Holland devotes approximately
20 hours per week to the Company. See "Certain Transactions."
The following table sets forth, for the fiscal year ended December 31, 1994,
the number of individual grants of stock options made during such fiscal year
to each of the Named Executive Officers. All options granted during the last
fiscal year were granted pursuant to the Employee Option Plan at an exercise
price equal to the fair market value on the date of grant.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES PERCENT OF OF STOCK PRICE
UNDERLYING TOTAL APPRECIATION FOR OPTION
OPTIONS/ OPTIONS/SARS EXERCISE TERM(/1/)
SARS GRANTED TO OR BASE ---------------------------
GRANTED(/2/) EMPLOYEES IN PRICE EXPIRATION 5% 10%
NAME (#) FISCAL YEAR ($/SH) DATE ($) ($)
---- ------------ ------------ -------- -------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
David E. Webb........... 0 N/A N/A N/A N/A N/A
John R. Bailey.......... 100,000 18.8% $10.50 April 21, 2001 $427,500 $996,200
Randy R. Hendrix........ 130,000 24.5% $10.50 April 21, 2001 $555,700 $1,295,000
Thomas W. Dixon......... 50,000 9.4% $10.50 April 21, 2001 $213,700 $498,100
</TABLE>
- --------
(1) Potential realizable value is based on the assumption that the price of
the Company's Common Stock appreciates at the annual rate shown,
compounded annually, from the date of grant until the end of the seven-
year option term. The values are calculated in accordance with rules
promulgated by the Commission and do not reflect the Company's estimate of
future stock price appreciation.
(2) All options granted are non-qualified options granted at an exercise price
equal to fair market value on the date of grant, are 40% vested and will
continue to vest at a rate of 20% per year, subject to acceleration upon
the death of the optionee or termination of the optionee following a
Change of Control (as defined in the option agreements), and have a term
of seven years.
The following table sets forth information with respect to each exercise of
stock options during the fiscal year ended December 31, 1994, by each of the
Named Executive Officers and the number of options held at fiscal year end and
the aggregate value of in-the-money options held at fiscal year end.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES NUMBER OF UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY
ACQUIRED OPTION/SARS AT OPTION/SARS AT
ON VALUE FISCAL-YEAR-END FISCAL YEAR-END
EXERCISE REALIZED (#) (#)
(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
David E. Webb........... 0 N/A N/A N/A
John R. Bailey.......... -- -- 40,000/60,000 $ 90,000/$135,000
Randy R. Hendrix........ -- -- 52,000/78,000 $117,000/$175,000
Thomas W. Dixon......... -- -- 20,000/30,000 $ 45,000/$ 67,500
</TABLE>
NONCOMPETITION AGREEMENTS
The Company has entered into noncompetition agreements with Messrs. Holland,
Webb, Bailey, Hendrix, Dixon and Wheeler. The noncompetition agreements
provide that none of such persons will engage in competitive activities during
the term of their service with the Company and for a period of one year
thereafter.
102
<PAGE>
STOCK OPTION PLANS
Employee Stock Option Plan. The Company adopted, effective upon consummation
of the Initial Public Offering, the 1994 Employee Stock Option Plan (the
"Employee Option Plan"), which provides for the grant to officers and
employees of both "incentive stock options" within the meaning of Section 422
of the Code and stock options that are non-qualified for Federal income tax
purposes. The total number of shares of Common Stock for which options may be
granted pursuant to the Employee Option Plan is 950,000. The Employee Option
Plan will terminate on the tenth anniversary of the consummation of the
Initial Public Offering, and is administered by the Compensation Committee of
the Board of Directors. The Compensation Committee determines which of the
Company's officers and employees receive options, the time when options are
granted, whether the options are incentive stock options or non-qualified
stock options, the terms of such options, the exercise date of any options and
the number of shares subject to options. Members of the Compensation Committee
(including Mr. Holland) are not eligible to receive options under the Employee
Option Plan. Mr. Webb is not eligible to receive options under the Employee
Option Plan. Directors who are also employees (other than Mr. Webb) are
eligible to receive options under the Employee Option Plan. Non-employee
directors are not eligible to receive options under the Employee Option Plan.
The exercise price of incentive stock options granted under the Employee
Option Plan may not be less than 100% of the fair market value of the Common
Stock at the time of grant and the term of any option may not exceed 10 years.
With respect to any employee who owns stock representing more than 10% of the
voting power of the outstanding capital stock of the Company, the exercise
price of any incentive stock option may not be less than 110% of the fair
market value of such shares at the time of grant and the term of such option
may not exceed five years.
The exercise price of a non-qualified stock option is determined by the
Compensation Committee on the date the option is granted. However, the
exercise price of a non-qualified stock option may not be less than 100% of
the fair market value of the Common Stock at the time of grant.
Options granted under the Employee Option Plan are nontransferable and, with
certain exceptions in the event of the death or disability of an optionee, may
be exercised by the optionee only during employment. Options granted under the
Employee Option Plan typically vest over a five-year period, although options
granted to certain employees (including Messrs. Bailey, Dixon and Hendrix) are
40% vested upon grant and vest an additional 20% per year over a three-year
period. Upon the death of an optionee or the termination of the optionee
following a Change of Control (as defined in the option agreements), the
vesting of an option accelerates. Options granted under the Employee Option
Plan expire after seven years, unless terminated earlier.
The Company has granted options to purchase an aggregate of 772,000 shares
of Common Stock to nine employees, including 160,000, 154,000, 130,000, 65,000
and 20,000 shares, respectively, to each of Messrs. Bailey, Hendrix, Dixon,
Story and Hagey, at a weighted average exercise price per share equal to
$13.52 per share. Options to purchase 130,000 shares of Common Stock have been
cancelled.
Stock Option Plan for Non-Employee Directors. The Company adopted, effective
upon consummation of the Initial Public Offering, the 1994 Stock Option Plan
for Non-Employee Directors (the "Non-Employee Directors Plan"). The purpose of
the Non-Employee Directors Plan is to attract and retain the services of
experienced and knowledgeable independent directors of the Company for the
benefit of the Company and its stockholders and to provide additional
incentive for such directors to continue to work for the best interests of the
Company and its stockholders through continuing ownership of Common Stock. A
total of 50,000 shares of Common Stock may be issued through the exercise of
options granted pursuant to the Non-Employee Directors Plan. No option may be
granted under the Non-Employee Directors Plan after 10 years following
consummation of the Initial Public Offering.
The Non-Employee Directors Plan is administered by the Board of Directors.
Subject to the terms of the Non-Employee Directors Plan, the Board of
Directors has the sole authority to determine questions arising under,
103
<PAGE>
and to adopt rules for the administration of, the Non-Employee Directors Plan.
The Non-Employee Directors Plan may be terminated at any time by the Board of
Directors, but such action will not affect options previously granted pursuant
thereto.
Directors of the Company who are not, and who have not been during the
immediately preceding 12-month period, employees of the Company or any
subsidiary of the Company (each, a "Non-Employee Director") are automatically
participants in the Non-Employee Directors Plan. There are currently four
directors, Messrs. Lane, O'Rourke, Sprague and Watkins, who are eligible to
receive options under the Non-Employee Directors Plan. Mr. Wheeler is excluded
from participating in the Non-Employee Directors Plan. More than one option
may be granted to any one person and be outstanding at any time.
Each Non-Employee Director who was in office on the consummation of the
Initial Public Offering (Messrs. Lane, O'Rourke and Watkins) was, upon such
consummation, automatically granted an option to acquire 4,000 shares of
Common Stock at an exercise price per share equal to $10.50. Each Non-Employee
Director who is in office on November 15 of any year (commencing with November
15, 1995) will, on the immediately succeeding January 1, automatically be
granted an option to acquire 2,000 shares of Common Stock. The price of shares
that may be purchased upon exercise of an option is the fair market value of
the Common Stock on the date of grant, as evidenced by the average of the high
and low sales prices of Common Stock on such date as reported on the Nasdaq
National Market. The price of shares that may be purchased upon exercise of an
option granted upon the consummation of the Initial Public Offering is the
initial public offering price. Options granted pursuant to the Non-Employee
Directors Plan, except as discussed below, are exercisable in installments of
25% upon each anniversary of the date of grant. The term of each option,
except as discussed below, is for a period not exceeding seven years from the
date of grant. Options may not be assigned or transferred except by will or by
operation of the laws of descent and distribution.
In the event of a Change in Control of the Company (as defined below), an
option granted to a Non-Employee Director will become fully exercisable if,
within one year of such Change in Control, such Non-Employee Director ceases
for any reason to be a member of the Board of Directors. A Change in Control
will be deemed to have occurred if (a) there is consummated (i) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Common
Stock are converted into cash, securities or other property, other than a
merger of the Company in which the holders of Common Stock immediately prior
to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (ii) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company; (b)
the shareholders approve any plan or proposal for the liquidation or
dissolution of the Company; (c) any person (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) becomes the beneficial owner (within
the meaning of Rule 13d-3 under the Exchange Act) of 30% or more of the
outstanding Common Stock; or (d) during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire Board of
Directors cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of the
period. Any exercise of an option permitted in the event of a Change of
Control must be made within 180 days of the relevant Non-Employee Director's
termination as a director of the Company.
CERTAIN TRANSACTIONS
The Company's founders, David E. Webb, the President and Chief Executive
Officer, and L. Allen Wheeler, a member of the Board of Directors, began
acquiring licenses, leases and options to wireless cable channels in 1989,
both individually and through various controlled entities. In September 1990,
Messrs. Webb and Wheeler formed WCI, and contributed to it certain assets in
exchange for capital stock of WCI. In September 1993, WCI issued the Hunt Note
to Unity Hunt, Inc. ("Unity Hunt"), an affiliate of Hunt Capital, pursuant to
a loan agreement that provided for a one-year term loan in the principal
amount of $988,000, to bear interest at the rate
104
<PAGE>
of 10% per annum, which was secured by substantially all of the assets of WCI.
In October 1993, Hunt Capital, a principal stockholder of the Company and
affiliate of J. R. Holland, Jr., the Chairman of the Board of the Company,
purchased the Hunt Note from Unity Hunt in connection with an internal
restructuring that included the dissolution of Unity Hunt. Hunt Capital
purchased the Hunt Note for $996,390 (representing the outstanding principal
balance plus accrued and unpaid interest through the date of transfer).
The Company was incorporated in Delaware in October 1993 to succeed to the
wireless cable businesses previously conducted by Messrs. Webb and Wheeler,
directly and indirectly through various controlled entities, including WCI.
Messrs. Webb and Wheeler contributed all capital stock of entities engaged in
the wireless cable businesses owned by them to the Company and Hunt Capital
contributed the Hunt Note, including accrued interest, and approximately
$2,000,000 in cash to the Company. In exchange therefor, Messrs. Webb and
Wheeler were each issued 2,000,000 shares of Common Stock by the Company and
Hunt Capital was issued 4,000,000 shares. In addition, Messrs. Webb and
Wheeler leased all other wireless cable channel license rights controlled,
directly and indirectly, by them to the Company for a nominal amount and
granted to the Company an option to purchase such license rights at a nominal
price. Finally, the net amount (approximately $68,740) of all advances made to
the Company's predecessors by, and all advances made from the Company's
predecessors to, Messrs. Webb and Wheeler and certain entities controlled by
them engaged in the wireless cable business was contributed to the Company.
Such advances, in the form of non-interest-bearing cash transfers, generally
arose as a result of borrowings made or services rendered, and included
various amounts loaned by a wholly-owned subsidiary of the Company to Reed's
Rail Service, Inc., an affiliate of Messrs. Webb and Wheeler, to fund such
entity's railroad repair operations and the purchase of equipment; the
outstanding balance of such indebtedness at December 31, 1992 was $117,284.
Also included in such advances are various amounts loaned by Preferred Capital
Corporation, an affiliate of Messrs. Webb and Wheeler, to a wholly-owned
subsidiary of the Company for general corporate purposes; the outstanding
balance of such indebtedness at December 31, 1992 was $42,235.
During the years ended December 31, 1991, 1992, 1993 and 1994, the Company
paid $52,078, $116,315, $376,206 and $24,000, respectively, to various
entities controlled by Messrs. Webb and Wheeler for services performed in
connection with the development of wireless cable systems or the acquisition
of wireless cable channel rights. Such payments included $52,800 during the
year ended December 31, 1992 and $258,555 during the year ended December 31,
1993 to Green Country Radio, an affiliate of Mr. Wheeler, for engineering and
consulting services. The Company has not retained the services of such
entities since the Initial Public Offering, and does not intend to do so in
the future. During the year ended December 31, 1993, Mr. Robert R. Story was a
director, officer and minority shareholder of Green Country. Mr. Story is
currently the Senior Vice President --Installations of the Company.
During the years ended December 31, 1993, 1994 and 1995, the Company paid
$38,776, $50,559 and $52,103, respectively, to an accounting firm controlled
by Mr. Webb for services rendered to the Company.
During the year ended December 31, 1993, the Company paid $40,600 to World
Export Services, Inc., an entity controlled by Wes W. Watkins, a director of
the Company, for consulting services provided in connection with the
acquisition of certain wireless cable channel rights. In June 1993, World
Export Services, Inc. purchased approximately 10% and 5% minority interests,
respectively, in two of the Company's subsidiaries for an aggregate of
$45,000. Pursuant to the Minority Interests Exchange Offer, World Export
Services, Inc. was issued an aggregate of 4,526 shares of Common Stock in
exchange for such minority interests.
The Company leases approximately 2,400 square feet for its operating offices
in Durant, Oklahoma from an affiliate of Messrs. Webb and Wheeler for which
the expense amounted to approximately $18,000 annually for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995. The Company also leases an
aggregate of approximately an additional 8,113 square feet of office space in
Durant, Oklahoma from affiliates of Messrs. Webb and Wheeler for which the
expense amounted to approximately $4,000 for the year ended December 31, 1994
and $47,878 for the year ended December 31, 1995. See "Business --
Properties."
105
<PAGE>
Messrs. Webb and Wheeler pledged certain personal assets to secure, and
personally guaranteed, notes payable by the Company to a bank totaling
$970,000. Such notes were due in March 1995 and bore interest at variable and
fixed rates ranging from 6% to 8% at December 31, 1993. The Company repaid
such notes from the net proceeds of the Initial Public Offering.
Mr. Holland's annual base compensation for 1994 and 1995 was $120,000, which
was paid to him by Unity Hunt Resources, Inc., an affiliate of Hunt Capital of
which Mr. Holland is President, which receives a management fee equal to such
amount from the Company for the provision of Mr. Holland's services.
In connection with a $1.0 million principal amount loan to U.S. Wireless by
First National, the Company agreed to purchase such loan upon demand from
First National for the aggregate amount of principal and interest thereon plus
any other amounts owed to First National by U.S. Wireless. The loan was paid
in full upon the consummation of the Lubbock Acquisition. See "Acquisitions
and Recent Transactions -- Acquisitions of Minority Interests" and "Principal
Stockholders." In addition, on December 15, 1994, the Company (i) loaned $2.0
million to U.S. Wireless, which loan is secured by 300,000 shares of the
Company's Common Stock owned by U.S. Wireless and all of the rights of USWS in
and to the Tulsa, Oklahoma wireless cable market, (ii) acquired the rights of
U.S. Wireless in the Amarillo, Texas market and (iii) was granted an option to
acquire the Tulsa, Oklahoma market. On May 3, 1995, the Company agreed to
exercise the option on the Tulsa market and the closing of the Tulsa
Acquisition is expected to occur in May 1995. In addition, U.S. Wireless and
USWS agreed to repay the $2.0 million loan in full upon the consummation of
the Tulsa Acquisition. See "Recent Transactions -- Other Acquisitions."
On May 3, 1995, the Company acquired from Robert R. Story, an affiliate of
USWS and U.S. Wireless, all of the issued and outstanding capital stock of
RRSI, which owns and operates the Lubbock System, for $5.4 million in cash.
Immediately prior to the consummation of the Lubbock Acquisition, RRSI
acquired from USWS all of USWS's rights in the Lubbock System. Upon the
consummation of the Lubbock Acquisition, the $1,000,000 principal amount loan
to U.S. Wireless by First National was paid in full.
Pursuant to the Loan Agreement, Hunt Capital and Mr. Wheeler agreed to loan
the Company up to an aggregate of $4.0 million ($2.0 million each) and Jupiter
agreed to loan to the Company, or to guarantee a bank loan to the Company in
the amount of, $2.0 million. Borrowings under the Loan Agreement could be used
solely for working capital. Borrowings under the Loan Agreement bore interest
at 11% per annum. All accrued interest on, and the principal amount of, all
borrowings under the Loan Agreement would have been due and payable in full on
June 30, 1995, subject to prepayment upon the receipt by the Company of cash
proceeds from any financing, refinancing or sale of assets. Amounts borrowed
and repaid under the Loan Agreement could not be reborrowed. Borrowings under
the Loan Agreement were secured by the capital stock and assets of the
Company's subsidiaries operating the Lindsay and Shaw Systems. The Company
borrowed $2.0 million under the Loan Agreement, funded $1.0 million each by
Hunt Capital and Mr. Wheeler. The Company used a portion of the net proceeds
of the sale of the Units to repay all amounts owed under the Loan Agreement.
Pursuant to the Chemical Bank Loan, Chemical Bank agreed to loan the Company
up to an aggregate of $2.0 million. Borrowings under the Chemical Bank Loan
bore interest at the prime rate plus 1% per annum. All accrued interest on,
and the principal amount of, all borrowings under the Chemical Bank Loan would
have been due and payable on demand, but in any event not later than June 30,
1995. The Company paid Chemical Bank a facility fee of $5,000. Amounts
borrowed and repaid under the Chemical Bank Loan could not be reborrowed.
Borrowings under the Chemical Bank Loan were guaranteed by Jupiter and Mr.
Sprague. The Company borrowed $1.0 million under the Chemical Bank Loan. The
Company used a portion of the net proceeds of the sale of the Units to repay
all amounts owed under the Chemical Bank Loan.
The terms of the transactions described above were determined by the parties
thereto, and the Company believes that such transactions involving affiliates
were on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions between the Company
and its officers, directors, principal stockholders and affiliates will be on
terms no less favorable to the Company than could be obtained from
unaffiliated third parties and will be approved by a majority of the
disinterested members of the Board of Directors.
106
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth (a) certain information regarding the
ownership of Common Stock as of February 1, 1996 with respect to (i) each
person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers and (iv) all directors and officers
as a group and (b) the effect of the Transactions (assuming the consummation
of all of the Transactions and an average closing price during the relevant
periods of $28 per share or $17 per share, the closing average at which the
maximum number of shares of the Common Stock are issuable pursuant to the
Transactions, of the Common Stock, as noted) on the amount and percentage of
current holdings of shares of the Common Stock owned beneficially by each of
such persons. Except as otherwise indicated, each of the stockholders has sole
voting and investment power with respect to the shares beneficially owned.
Unless otherwise indicated, the address for each stockholder is c/o the
Company, 903 North Bowser, Suite 140, Richardson, Texas 75081.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
BEFORE THE
TRANSACTIONS(1)
----------------------
NUMBER OF
SHARES PERCENT
------------ ---------
<S> <C> <C>
Hunt Capital Group, L.L.C.................................. 4,000,000 31.72%
David E. Webb.............................................. 1,900,425 15.07
L. Allen Wheeler........................................... 2,000,000 15.86
Jupiter Partners, L.P.(/4/)................................ 2,837,688 18.37
J. R. Holland, Jr.(/5/).................................... --
Alvin H. Lane, Jr.(/6/).................................... 2,000 *
Dennis M. O'Rourke(/7/).................................... 2,000 *
John A. Sprague(/8/)....................................... --
Wes W. Watkins(/9/)........................................ 7,526 *
John R. Bailey(/1//0/)..................................... 57,250 *
Randy R. Hendrix(/1//1/)................................... 92,400 *
Thomas W. Dixon(/1//2/).................................... 67,300 *
Robert R. Story............................................ 8,900 *
All officers and directors as a group
(12
persons)(/5/)(/6/)(/7/)(/8/)(/9/)(/1//0/)(/1//1/)(/1//2/)(/1//3/).. 4,141,801 32.27
<CAPTION>
PRO FORMA BENEFICIAL OWNERSHIP
AFTER THE TRANSACTIONS
-----------------------------------------
NUMBER OF PERCENT(/2/) PERCENT(/3/)
SHARES ($17 PER SHARE) ($28 PER SHARE)
--------- --------------- ---------------
<S> <C> <C> <C>
Hunt Capital Group, L.L.C.................................. 4,000,000 17.14% 20.65%
David E. Webb.............................................. 1,900,425 8.14 9.81
L. Allen Wheeler........................................... 2,000,000 8.57 10.33
Jupiter Partners, L.P.(/4/)................................ 2,837,688 10.84 12.78
J. R. Holland, Jr.(/5/).................................... --
Alvin H. Lane, Jr.(/6/).................................... 2,000 * *
Dennis M. O'Rourke(/7/).................................... 2,000 * *
John A. Sprague(/8/)....................................... --
Wes W. Watkins(/9/)........................................ 7,526 * *
John R. Bailey(/1//0/)..................................... 57,250 * *
Randy R. Hendrix(/1//1/)................................... 92,400 * *
Thomas W. Dixon(/1//2/).................................... 67,300 * *
Robert R. Story............................................ 8,900 * *
All officers and directors as a group
(12
persons)(/5/)(/6/)(/7/)(/8/)(/9/)(/1//0/)(/1//1/)(/1//2/)(/1//3/).. 4,141,801 17.58 21.13
</TABLE>
- --------
* Less than 1%.
(1) Based upon 12,611,132 shares of the Common Stock outstanding on February
1, 1996.
(2) Percentage based on 23,332,434 shares of the Common Stock outstanding
after the Transactions (based upon a closing average of $17 per share,
the closing average at which the maximum number of shares of the Common
Stock are issuable, assuming (i) that there will be 4,500 subscribers to
the Minneapolis system on the relevant date, (ii) additional subscriber
consideration of $3.5 million will be paid in the TSC Transaction, (iii)
assumption of no liabilities in the TSC Transaction and (iv) CMAX's Net
Liabilities do not exceed its Permitted Net Liabilities.
(3) Percentage based on 19,375,081 shares of the Common Stock outstanding
after the Transactions (based upon a closing average of $28 per share,
the approximate closing average of the Common Stock over the preceding
ten- and 20-day trading periods), assuming (i) that there will be 3,500
subscribers to the Minneapolis system on the relevant date, (ii)
additional subscriber consideration of $1.5 million will be paid in the
TSC Transaction, (iii) assumption of $5 million of liabilities in the TSC
Transaction and (iv) CMAX's Net Liabilities do not exceed its Permitted
Net Liabilities.
(4) Address is 30 Rockefeller Plaza, Suite 4525, New York, N.Y. 10112.
Jupiter is the holder of $40.0 million gross proceeds of the Convertible
Notes. Each Convertible Note is convertible into the number of shares of
Common Stock computed by dividing (i) the principal amount of the
Convertible Note (after taking into account accretions in value) by (ii)
the Conversion Price then in effect. The current Conversion Price is
$15.34 per share.
(5) Address is 1962 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201.
Mr. Holland is the sole director, Manager and President of Hunt Capital.
Hunt Capital is owned by trusts, of which Mr. Holland serves as a
trustee. Mr. Holland disclaims beneficial ownership of the shares of
Common Stock owned by Hunt Capital.
(6) Includes 2,000 options granted to Mr. Lane under the Non-Employee
Directors Plan, which are presently exercisable. Does not include options
granted to Mr. Lane under the Non-Employee Directors Plan that are not
presently exercisable.
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<PAGE>
(7) Includes 2,000 options granted to Mr. O'Rourke under the Non-Employee
Directors Plan, which are presently exercisable. Does not include options
granted to Mr. O'Rourke under the Non-Employee Directors Plan that are
not presently exercisable.
(8) Mr. Sprague is indirectly a controlling general partner of Jupiter.
Accordingly, Mr. Sprague may be deemed to be a beneficial owner of the
shares issuable to Jupiter on conversion of the Convertible Notes. Mr.
Sprague shares voting and investment power as to shares issuable to
Jupiter on conversion of the Convertible Notes with Terry J. Blumer. Mr.
Sprague disclaims beneficial ownership of such shares.
(9) Includes 2,000 options granted to Mr. Watkins under the Non-Employee
Directors Plan, which are presently exercisable. Does not include options
granted to Mr. Watkins under the Non-Employee Directors Plan that are not
presently exercisable.
(10) Includes 56,000 shares issuable upon the exercise of presently
exercisable options. Excludes 64,000 shares issuable upon the exercise of
options that are not presently exercisable.
(11) Includes 92,400 shares issuable upon the exercise of presently
exercisable options. Excludes 64,000 shares issuable upon the exercise of
options that are not presently exercisable.
(12) Includes 66,000 shares issuable upon the exercise of presently
exercisable options. Excludes 44,000 shares issuable upon the exercise of
options that are not presently exercisable.
(13) Includes 4,000 shares issuable upon the exercise of presently exercisable
options issued to David D. Hagey for a total of 225,400 shares issuable
upon the exercise of presently exercisable options held by officers and
directors. Excludes shares issuable upon the exercise of options issued
to Mr. Hagey that are not presently exercisable.
108
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued under an Indenture, as
supplemented (the "Indenture"), between the Company and First Trust of New
York, National Association, as trustee (the "Trustee"). The terms of the New
Notes are identical in all material respects to the Old Notes, except that the
New Notes have been registered under the Securities Act and, therefore, will
not bear legends restricting their transfer and will not contain certain
provisions providing for an increase in the interest rate on the Old Notes
under certain circumstances relating to the Registration Rights Agreement,
which provisions will terminate upon the consummation of the Exchange Offer.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended and as in effect on the date of the qualification of the Indenture
under the Trust Indenture Act (the "Trust Indenture Act"). The Notes are
subject to all such terms, and holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture,
including the definitions therein of certain terms used below. A copy of the
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The definitions of certain terms used in the
following summary are set forth below under "Certain Definitions." As used in
this section, the term "Company" refers only to Heartland Wireless
Communications, Inc. and not to its subsidiaries and the term "Holder" refers
to a holder of an Old Note or a New Note.
The Notes are secured by a first priority security interest in the Escrow
Account described under "Disbursement of Funds -- Escrow Account." The Notes
are senior obligations of the Company ranking pari passu in right of payment
to all existing and future Indebtedness of the Company, other than
Indebtedness that is expressly subordinated to the Notes. The Company has no
senior Indebtedness, other than the Notes. The Notes are senior in right of
payment to the Convertible Notes, which are expressly subordinated to the
Notes. However, subject to certain limitations set forth in the Indenture, the
Company and its Subsidiaries may incur Indebtedness which is secured by assets
of the Company and its Subsidiaries. In addition, the operations of the
Company are conducted through its subsidiaries and, therefore, the Company is
dependent upon the cash flow of its subsidiaries to meet its obligations under
the Notes. As a result, the Notes are effectively subordinated to all existing
liabilities and future Indebtedness and other liabilities and commitments of
the Company's subsidiaries. Any right of the Company to receive assets of the
Company's Subsidiaries or any future Subsidiaries of the Company, upon the
latter's liquidation or reorganization (and the consequent right of the
Holders to participate in those assets), will be effectively subordinated to
the claims of that Subsidiary's creditors, except to the extent that the
Company is itself recognized as a creditor of such Subsidiary, although other
creditors of such Subsidiary may be secured by certain assets of such
Subsidiary. As of September 30, 1995, on a pro forma basis after giving effect
to the consummation of the Transactions, the outstanding liabilities of the
Company's consolidated subsidiaries, including all the liabilities of
consolidated subsidiaries that are not wholly-owned by the Company, were
approximately $12.1 million. The Indenture permits the Company's subsidiaries
to incur additional indebtedness in the future.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, Bankers
Trust Company will act as Paying Agent and Registrar for the Notes. The Notes
may be presented for registration or transfer and exchange at the offices of
the Registrar, which will be the Registrar's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to the
Holders. The Company will pay principal (and premium, if any) on the Notes at
the Paying Agent's corporate office in New York, New York. At the Company's
option, interest may be paid by check mailed to the registered addresses of
Holders.
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<PAGE>
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100 million and will
mature on April 15, 2003. Interest on the Notes will accrue at the rate of 13%
per annum and will be payable semiannually in cash on each April 15 and
October 15 commencing on October 15, 1995, to the Persons who are registered
Holders at the close of business on the April 1 and October 1 immediately
preceding the applicable interest payment date. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of issuance.
OPTIONAL REDEMPTION
Optional Redemption. The Notes will not be redeemable at the Company's
option prior to April 15, 1999. Thereafter, the Notes will be subject to
redemption at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1999.......................................................... 105.571%
2000.......................................................... 103.714%
2001.......................................................... 101.857%
2002 and thereafter........................................... 100.000%
</TABLE>
Optional Redemption Upon Sale of Equity to Strategic Equity
Investor. Notwithstanding the foregoing, in the event of the sale by the
Company prior to April 15, 1998 of at least $25.0 million of its Capital Stock
(other than Disqualified Stock) to a Strategic Equity Investor in a single
transaction, the Company may, at its option, use the net cash proceeds of such
sale of Capital Stock to redeem up to 25% of the Notes at a redemption price
equal to 113% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided that at least 75% of the
initial principal amount of the Notes remains outstanding immediately after
such redemption. In order to effect the foregoing redemption with the proceeds
of any such sale of Capital Stock (other than Disqualified Stock), the Company
shall make such redemption not more than 120 days after the consummation of
any such sale of Capital Stock.
MANDATORY REDEMPTION
Except as set forth below under "Offer to Purchase Upon Change of Control"
and "Certain Covenants -- Limitation on Asset Sales," the Company will not be
required to make mandatory redemption or sinking fund payments with respect to
the Notes.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee or Paying Agent in compliance
with the requirements of the principal national securities exchange, if any,
on which the Notes are listed, or, if the Notes are not so listed, on a pro
rata basis, by lot or by such method as the Trustee or Paying Agent shall deem
fair and appropriate, provided that no Notes with a principal amount of $1,000
or less shall be redeemed in part. Notice of redemption shall be mailed by
first class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount to be redeemed. A
new Note in principal amount equal to the unredeemed portion will be issued in
the name of the Holder thereof upon cancellation of the original Note. On and
after the redemption date, interest will cease to accrue on the Notes or
portions of the Notes called for redemption.
110
<PAGE>
OFFER TO PURCHASE UPON CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, each
Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date
of purchase.
Within 30 days following the date upon which a Change of Control occurs, the
Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note purchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the Paying Agent at the address specified in the Note prior to
the close of business on the third Business Day prior to the Change of Control
Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not
have available funds to meet its purchase obligations. However, the Indenture
limits the Company's ability to incur Indebtedness (see "Certain Covenants --
Limitation on Indebtedness") and there can be no assurance that the Company
would be able to obtain such financing.
The definition of "Change of Control" includes a disposition of all or
substantially all of the property and assets of the Company. With respect to
the disposition of property or assets, the phrase "all or substantially all"
as used in the Indenture (including as set forth under "Certain Covenants --
Merger, Consolidation and Sale of Assets" below) varies according to the facts
and circumstances of the subject transaction, has no clearly established
meaning under New York law (which is the governing law under the Indenture)
and is subject to judicial interpretation. Accordingly, in certain
circumstances there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially
all" of the property or assets of the Company, and therefore it may be unclear
as to whether a Change of Control has occurred and whether the Company is
required to make a Change of Control Offer.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company
and its Subsidiaries to incur additional Indebtedness, to grant liens on its
property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management or Permitted Holders of the Company. Consummation of
any such transaction in certain circumstances may require redemption or
repurchase of the Notes, and there can be no assurance that the Company or the
acquiring party will have sufficient financial resources to effect such
redemption or repurchase. Such restrictions and the restrictions on
transactions with Affiliates may, in certain circumstances, make more
difficult or discourage any leveraged buyout of the Company or any of its
Subsidiaries by the management or Permitted Holders of the Company. While such
restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not
afford the Holders of Notes protection in all circumstances from the adverse
aspects of a highly leveraged transaction, reorganization, restructuring,
merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company
111
<PAGE>
shall comply with the applicable securities law and regulations and shall not
be deemed to have breached its obligations under the "Change of Control"
provisions of the Indenture by virtue thereof.
DISBURSEMENT OF FUNDS -- ESCROW ACCOUNT
The Company placed approximately $24.1 million of the net proceeds realized
from the sale of the Units, representing funds sufficient to pay two years'
interest on the Notes, in the Escrow Account held by the Escrow Agent for the
benefit of the Trustee under the Indenture in accordance with the Escrow and
Disbursement Agreement. The Company entered into the Escrow and Disbursement
Agreement, which provides, among other things, that funds may be disbursed
from the Escrow Account only to pay interest on the Notes (or, if a portion of
the Notes has been retired by the Company, funds representing the interest
payment on the retired Notes may be paid to the Company) and, upon certain
repurchases or redemptions thereof, to pay principal of and premium, if any,
thereon. Pending such disbursement, the Company will cause all funds contained
in the Escrow Account to be invested in Marketable Securities. Interest earned
on these Marketable Securities will be added to the Escrow Account.
The Notes are secured by a first priority security interest in the Escrow
Account. See "Security" below.
CERTAIN COVENANTS
Limitation on Restricted Payments. The Indenture provides that the Company
and its Subsidiaries may not, directly or indirectly (i) declare or pay any
dividend or make any distribution on account of any Equity Interests of the
Company or any of its Subsidiaries other than dividends or distributions
payable (A) in Equity Interests of the Company that are not Disqualified Stock
or (B) to the Company or any Wholly-Owned Subsidiary of the Company; (ii)
purchase, redeem or otherwise acquire or retire for value any Equity Interests
of the Company or any of its Subsidiaries (other than any such Equity
Interests owned by the Company or a Wholly-Owned Subsidiary); (iii) purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is pari passu or subordinated in right of payment to the Notes, except in
accordance with the scheduled repayment provisions set forth in the original
documentation governing such Indebtedness; or (iv) in a single transaction or
a series of related transactions, until the date on which the ratio of
Annualized EBITDA to Consolidated Interest Expense equals or exceeds 1.75 to
1.00, make Investments in a cumulative amount for the Company and all of its
Subsidiaries, in excess of (A) the sum of (1) $10 million and (2) 100% of the
Net Proceeds received by the Company from the issue or sale of Equity
Interests of the Company (other than Equity Interests sold to a Subsidiary of
the Company or to an employee stock ownership plan or similar trust and other
than Disqualified Stock) less (B) the cumulative amount of Net Proceeds
received by the Company from the issue or sale of Equity Interests of the
Company that has been applied to make Restricted Payments (all such payments
and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of
such Restricted Payment: (a) no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof; (b) after
giving effect to such Restricted Payment on a pro forma basis as if such
Restricted Payment had been made at the beginning of the applicable fiscal
quarter, the Company could incur $1.00 of additional Indebtedness pursuant to
the Annualized Cash Flow Ratio test described below under "Certain Covenants
- -- Limitation on Indebtedness"; and (c) such Restricted Payment, together with
the aggregate of all other Restricted Payments made by the Company and its
Subsidiaries after the Issue Date, is less than the sum of: (x) 50% of the
Consolidated Net Income (or if Consolidated Net Income shall be a loss, minus
100% of such loss) of the Company earned from the first day of the fiscal
quarter during which the Issue Date occurs to the end of the most recent
fiscal quarter ending prior to the date of such Restricted Payment, plus (y)
100% of the aggregate Net Cash Proceeds received by the Company from the issue
or sale of Equity Interests of the Company (other than Equity Interests sold
to a Subsidiary of the Company or to an employee stock ownership plan or
similar trust and other than Disqualified Stock or the Net Proceeds from the
sale of Equity Interests applied to make Investments in accordance with this
covenant) since the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit (i) the payment of any dividend within 60
days after the date of declaration thereof, if at such date of
112
<PAGE>
declaration such payment would have complied with the provisions of the
Indenture; (ii) so long as no Default or Event of Default shall have occurred
and be continuing, the redemption, repurchase, retirement or other acquisition
of any Equity Interests of the Company in exchange for, or out of the net
proceeds of, the substantially concurrent sale for cash or Marketable
Securities (other than to a Subsidiary of the Company) of other Equity
Interests of the Company that are not Disqualified Stock; (iii) so long as no
Default or Event of Default shall have occurred and be continuing, the
repurchase of Capital Stock of the Company (including options, warrants or
other rights to acquire such Capital Stock) from employees or former employees
of the Company or any Subsidiary thereof pursuant to any employment agreement,
management equity subscription agreement or stock option plan or similar
agreement in effect as of the Issue Date or entered into in the ordinary
course of business for consideration which, when added to all loans made
pursuant to clause (iv) below during the fiscal year and then outstanding,
does not exceed $0.5 million in the aggregate in any fiscal year or $2.5
million in the aggregate over the life of the Notes; (iv) so long as no
Default or Event of Default shall have occurred and be continuing, the making
of loans and advances to employees of the Company or any Subsidiary thereof in
the ordinary course of business which, when added to the aggregate
consideration paid pursuant to clause (iii) above during the same fiscal year,
does not exceed $0.5 million in any fiscal year or $2.5 million in the
aggregate over the life of the Notes; provided that upon repayment of such
loans or advances made after the Issue Date, such repaid amounts shall no
longer be included in the principal amount of loans and advances made to
employees; (v) so long as no Default or Event of Default shall have occurred
and be continuing, a Permitted Refinancing; (vi) so long as no Default or
Event of Default shall have occurred and be continuing, the redemption,
repurchase, retirement or other acquisition of Equity Interests of a
Subsidiary of the Company for (A) Equity Interests of the Company that are not
Disqualified Stock or (B) up to $1.0 million in the aggregate over the life of
the Notes of cash consideration; (vii) the payment of funds to satisfy or
discharge any liability or obligation incurred by the Company as a result of
its joint and several liability as a general partner for all third-party
liabilities and obligations of RuralVision Joint Venture, if any; (viii) the
acquisition by the Company of the Cross Country Sale Assets; (ix) the
acquisition by the Company of the Tulsa, Oklahoma wireless cable market from
USWS; (x) the acquisition by the Company of the Amarillo, Texas market from
U.S. Wireless; (xi) the payment of dividends on Preferred Stock of
Subsidiaries outstanding on the Issue Date; (xii) the redemption, repurchase,
retirement or other acquisition of Capital Stock of the Company from U.S.
Wireless for consideration comprised of the note receivable related to the
U.S. Wireless Loan; (xiii) Investments in Wireless Cable Related Assets made
with the Net Cash Proceeds from an Asset Sale made in compliance with the
first paragraph of the "Limitation on Asset Sales" covenant (whether such
Asset Sale shall have been consummated prior to or after the Issue Date) or
otherwise permitted by the "Limitation on Asset Sales" covenant, provided that
if such Investment had been acquired in a simultaneous swap or exchange for
the assets disposed of in such Asset Sale, such swap or exchange would have
complied with the provisions of the third paragraph under the "Limitation on
Asset Sales" covenant; (xiv) Investments that constitute part of an Asset Sale
transaction consummated in compliance with or otherwise permitted by the
provisions of the third paragraph under the "Limitation on Asset Sales"
covenant; (xv) Investments in the Wireless Cable Business acquired in
consideration for the issuance of Equity Interests of the Company (other than
Disqualified Stock) and cash paid in lieu of the issuance of fractional shares
and in satisfaction of any applicable dissenter's or appraisal rights; and
(xvi) the consummation of any of the Transactions. The amounts referred to in
clauses (i), (ii), (iii), (iv) and (vi) shall be included as Restricted
Payments in any computation made pursuant to clause (c) above. Restricted
Payments shall be deemed not to include Permitted Payments and Permitted
Investments.
Not later than the making any Restricted Payment, the Company shall deliver
to the Trustee an Officers' Certificate (as defined in the Indenture) stating
that such Restricted Payment is permitted and setting forth the basis upon
which the calculations required by the covenant "Restricted Payments" were
computed.
Limitation on Indebtedness. The Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume, Guarantee,
acquire, become liable, contingently or otherwise, with respect to, or
otherwise become responsible for payment of (collectively, "incur") any
Indebtedness; provided that the Company (but not its Subsidiaries) may incur
Indebtedness if (i) no Default or Event of Default shall have occurred and be
continuing and (ii) the Annualized Cash Flow Ratio of the Company as of the
date of such
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<PAGE>
incurrence or issuance shall not exceed (x) 7.0 to 1.0 if such incurrence or
issuance occurs on or prior to the second anniversary of the Issue Date and
(y) 5.0 to 1.0 if such incurrence or issuance occurs thereafter.
The foregoing limitation will not apply to: (i) Indebtedness evidenced by
the Notes and the Indenture; (ii) the incurrence by the Company and its
Subsidiaries of the Existing Indebtedness, other than any Existing
Indebtedness required to be repaid with proceeds of the sale of the Units;
(iii) the incurrence by the Company and its Subsidiaries of Bank Indebtedness
in an aggregate principal amount at any one time outstanding not to exceed
$25.0 million (less the amount of any then-outstanding Preferred Stock of
Subsidiaries issued to refinance Indebtedness to the extent such amount has
not been applied to reduce the amount of Indebtedness permitted under clause
(vii) below) , as such amount may be permanently reduced as specified in the
"Limitation on Asset Sales" covenant described below, and reduced by the
amount of any outstanding Guarantee incurred pursuant to clause (iv) below;
provided that no Default or Event of Default shall have occurred and be
continuing at the time of such incurrence; (iv) the Guarantee by the
Subsidiaries of Bank Indebtedness permitted to be incurred by the Company
pursuant to the immediately preceding paragraph; (v) Indebtedness of the
Company issued to any Wholly-Owned Subsidiary; provided that (a) any such
Indebtedness is unsecured and is subordinated to the Notes and (b) that any
subsequent issuance or transfer of any Capital Stock which results in any
Wholly-Owned Subsidiary ceasing to be a Wholly-Owned Subsidiary or any
transfer of such Indebtedness to a Person not a Wholly-Owned Subsidiary will
be deemed an incurrence of such Indebtedness; (vi) Indebtedness of a
Subsidiary issued to and held by the Company or any Wholly-Owned Subsidiary of
the Company; provided that any subsequent issuance or transfer of any Capital
Stock which results in a Wholly-Owned Subsidiary ceasing to be a Wholly-Owned
Subsidiary or any transfer of such Indebtedness to a Person not a Wholly Owned
Subsidiary of the Company will be deemed an incurrence of such Indebtedness;
(vii) the incurrence by the Company or its Subsidiaries of additional
Indebtedness in an aggregate principal amount not to exceed $15.0 million at
any one time outstanding (less the amount of any then-outstanding Preferred
Stock of Subsidiaries issued to refinance Indebtedness to the extent such
amount has not been applied to reduce the amount of Indebtedness permitted
under clause (iii) above); (viii) the incurrence (a "Permitted Refinancing")
by the Company and its Subsidiaries of Indebtedness issued in exchange for, or
the proceeds of which are used to extend, refinance, renew, replace or refund
Indebtedness incurred pursuant to the Annualized Cash Flow Ratio test above or
pursuant to clauses (ii), (iii), (iv) and (v) above ("Refinancing
Indebtedness"), provided that: (a) the net proceeds of such Refinancing
Indebtedness shall not exceed the principal amount of and required premium, if
any, and accrued interest on the Indebtedness so extended, refinanced,
renewed, replaced, substituted or refunded (or if such Indebtedness was issued
at an original issue discount, the original issue price plus amortization of
the original issue discount at the time of the repayment of such Indebtedness)
and reasonable expenses incurred in connection therewith; (b) the Refinancing
Indebtedness shall have a final maturity later than, and a Weighted Average
Life to Maturity equal to or greater than, the final maturity and remaining
Weighted Average Life to Maturity of the Indebtedness being extended,
refinanced, renewed, replaced or refunded; and (c) if the Indebtedness being
extended, refinanced, renewed, replaced or refunded is subordinated in right
of payment to the Notes, the Refinancing Indebtedness shall be subordinated in
right of payment to the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
so extended, refinanced, renewed, replaced or refunded; (ix) the incurrence of
obligations in respect of Interest Rate Agreements relating to Indebtedness to
the extent that the notional principal amount of such obligation does not
exceed the aggregate principal amount of the Indebtedness to which such
Interest Rate Agreement relates; or (x) the incurrence by the Company or any
of its Subsidiaries of Indebtedness owing to a Federal governmental authority
relating to the purchase of wireless cable channels in an auction or other
sale (or Indebtedness satisfying the requirements of (viii) (b) above issued
in exchange for, or the proceeds of which are used to extend, refinance,
renew, replace or refund, such Indebtedness) in an amount not to exceed in the
aggregate $30 million at any one time outstanding. The Company and its
Subsidiaries may incur Acquired Debt only in compliance with this covenant.
Limitation on Liens. The Indenture provides that neither the Company nor any
of its Subsidiaries may directly or indirectly create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or on any
income or profits therefrom, or assign or convey any right to receive income
therefrom, except Permitted Liens.
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The Indenture also provides that if the Company or any of its Subsidiaries
shall create, incur, assume or suffer to exist any Lien, other than a
Permitted Lien, on any assets or other property to secure Indebtedness in
violation of this covenant, the Company or such Subsidiary, as the case may
be, shall make effective provision for securing the Notes equally and ratably
with such Indebtedness as to such assets or other property for so long as such
Indebtedness shall be so secured; provided that the provision of such equal
and ratable security in favor of the Notes shall not cure any Default or Event
of Default arising from such violation of the provisions of this covenant.
Limitation on Issuance and Sale of Capital Stock of Subsidiaries. The
Indenture provides that the Company will not sell any Capital Stock of a
Subsidiary, and will not permit any Subsidiary to issue or sell any Capital
Stock, or permit any Person, other than the Company and its Subsidiaries, to
own or hold any such interest, other than (i) any interest owned or held on
the Issue Date by, or issuable as of the Issue Date to, a Person other than
the Company and its Subsidiaries in any Capital Stock of any Subsidiary or
(ii) any interest owned or held by a Person at the time that such Subsidiary
became a Subsidiary (other than any such interest created or issued in
anticipation of the acquisition of such Subsidiary by the Company); provided
that the foregoing limitation shall not apply to (i) the sale of 100% of the
Capital Stock of any Subsidiary made in accordance with "Limitation on Asset
Sales" and (ii) issuances of Preferred Stock permitted pursuant to clauses (i)
or (iii) of "Limitation on Preferred Stock of Subsidiaries."
Limitation on Preferred Stock of Subsidiaries. The Indenture provides that
the Company will not permit any of its Subsidiaries to issue, directly or
indirectly, any Preferred Stock, except (i) Preferred Stock of Subsidiaries
outstanding on the Issue Date, (ii) Preferred Stock issued to and held by the
Company or a Subsidiary, except that any subsequent issuance or transfer of
any Capital Stock which results in any Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary or any transfer of such Preferred Stock to a Person
not a Wholly-Owned Subsidiary will be deemed an issuance of Preferred Stock;
(iii) Preferred Stock issued by a Person prior to the time (a) such Person
became a Subsidiary, (b) such Person merges with or into a Subsidiary or (c)
another Person merges with or into such Person (in a transaction in which such
Person becomes a Subsidiary), in each case if such Preferred Stock was not
issued in anticipation of such transaction; and (iv) Preferred Stock issued in
exchange for, or the proceeds of which are used to refund Indebtedness or
refinance Preferred Stock referred to in clause (i) or issued pursuant to
clauses (ii) or (iii) (other than Preferred Stock which by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable) is redeemable at the option of the holder thereof or is
otherwise redeemable, pursuant to sinking fund obligations or otherwise, prior
to the date of redemption or maturity of the Preferred Stock or Indebtedness
being so refunded or refinanced); provided that (a) the liquidation value of
such Preferred Stock so issued shall not exceed the principal amount or the
liquidation value of the Indebtedness or Preferred Stock, as the case may be,
so refunded or refinanced and (b) the Preferred Stock so issued (1) shall have
a stated maturity not earlier than the stated maturity of the Indebtedness or
Preferred Stock being refunded or refinanced and (2) shall have a Weighted
Average Life to Maturity equal to or greater than the remaining Weighted
Average Life to Maturity of the Indebtedness or Preferred Stock being refunded
or refinanced.
Limitation on Asset Sales. The Indenture provides that the Company will not,
and will not permit any of its Subsidiaries to, consummate an Asset Sale
unless (i) the Company or the applicable Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the assets sold or otherwise disposed of (as determined
in good faith by the Company's Board of Directors or if the Fair Market Value
of such assets exceeds $20.0 million, the Company shall receive from an
investment banking firm of national standing a written opinion in customary
form as to the fairness, to the Company, of such Asset Sale) and (ii) at least
80% of the consideration received by the Company or the Subsidiary, as the
case may be, from such Asset Sale shall be cash or Marketable Securities and
is received at the time of such disposition. Upon the consummation of an Asset
Sale, the Company may apply, or cause such Subsidiary to apply, the Net Cash
Proceeds relating to such Asset Sale within 180 days of receipt thereof either
(A) to prepay any Bank Indebtedness and, in the case of any Bank Indebtedness
under any revolving credit facility, to effect a permanent reduction in the
availability under such revolving credit facility, (B) to reinvest in Wireless
Cable Related Assets
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or (C) to a combination of prepayment and investment permitted by the
foregoing clauses (A) and (B). On the 181st day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company or of such
Subsidiary determines not to apply the Net Cash Proceeds relating to such
Asset Sale as set forth in clauses (A), (B) or (C) of the preceding sentence
(each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash
Proceeds which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (A), (B) or (C) of the preceding sentence
(each a "Net Proceeds Offer Amount") shall be applied by the Company to make
an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds
Offer Payment Date") not less than 30 nor more than 45 days following the
applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata
basis that amount of Notes equal to the Net Proceeds Offer Amount at a price
equal to 100% of the principal amount of the Notes to be purchased, plus
accrued and unpaid interest thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration received by
the Company or any Subsidiary of the Company, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant.
Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than
$5.0 million, the application of the Net Cash Proceeds constituting such Net
Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time
as such Net Proceeds Offer Amount plus the aggregate amount of all Net
Proceeds Offer Amounts arising subsequent to the Net Proceeds Offer Trigger
Date relating to such initial Net Proceeds Offer Amount from all Asset Sales
by the Company and its Subsidiaries aggregates at least $5.0 million, at which
time the Company shall apply all Net Cash Proceeds constituting all Net
Proceeds Offer Amounts that have been so deferred to make a Net Proceeds Offer
(the first date the aggregate of all such deferred Net Proceeds Offer Amounts
is equal to $5.0 million or more shall be deemed to be a Net Proceeds Offer
Trigger Date).
Notwithstanding the two immediately preceding paragraphs, the Company and
its Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent (i) at least 95% of the
consideration for such Asset Sale, other than cash consideration, constitutes
assets used in the business of the Company and its Subsidiaries on the date of
such transaction, (ii) such Asset Sale is for Fair Market Value (as determined
in good faith by the Company's Board of Directors or if the Fair Market Value
of such assets exceeds $20.0 million, the Company shall receive from an
investment banking firm of national standing a written opinion in customary
form as to the fairness, to the Company, of such Asset Sale) and (iii) the
assets acquired in such an Asset Sale have historically generated revenues in
an amount at least equal to (1) the revenues attributable to the assets
disposed of in such Asset Sale, multiplied by (2) a fraction, the numerator of
which is the amount of consideration other than cash consideration received in
such Asset Sale, and the denominator of which is the total amount of
consideration received in such Asset Sale; provided that any consideration
received by the Company or its Subsidiaries, as the case may be, in an Asset
Sale permitted to be consummated under this paragraph that does not constitute
assets to be used in the operations of the Company or its Subsidiaries shall
constitute Net Cash Proceeds which are subject to the provisions of the two
preceding paragraphs. In addition, notwithstanding the two immediately
preceding paragraphs, the Company will be permitted (i) to consummate the
Wireless One Transaction without complying with such paragraphs, (ii) to sell
the Call Markets to Wireless One or Wireless One LCC without complying with
such paragraphs, (iii) to sell any or all of the RuralVision Sale Assets on or
prior to December 31, 1995 without complying with such paragraphs, (iv) to
sell any or all of the assets acquired in the AWS Transaction, the CableMaxx
Transaction or the TechniVision Transaction on or prior to the first
anniversary of the consummation of each such Transaction without complying
with such paragraphs, (v) to sell any or all of the assets acquired by way of
an Investment permitted by clause (xv) of the second paragraph of the
"Limitation on Restricted Payments" covenant on or prior to the first
anniversary of the consummation of such acquisition without complying with
such paragraphs and (vi) to sell, in a single transaction or a series of
transactions, assets for up to $25 million of non-cash consideration,
provided, in the case of clauses (iii), (iv), (v) and (vi), that the Company
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the assets sold or otherwise disposed of (as determined
in good faith by the Company's Board of Directors or if the Fair Market Value
of such assets exceed $20.0 million, the Company
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shall receive from an investment banking firm of national standing a written
opinion in customary form as to the fairness, to the Company, of such Asset
Sale).
Each Net Proceeds Offer will be mailed within 25 days following the Net
Proceeds Offer Trigger Date to the record Holders as shown on the register of
Holders, with a copy to the Trustee, and shall comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 Business
Days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Dividend and Other Payment Restrictions Affecting Subsidiaries. The
Indenture provides that the Company and its Subsidiaries may not, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any such Subsidiary (i) to
pay dividends or make any other distributions to the Company or any of its
Subsidiaries on or in respect of its Capital Stock or with respect to any
other interest or participation in, or measured by, its profits, or pay any
Indebtedness or other obligation owed to the Company or any of its
Subsidiaries; (ii) to make loans or advances to the Company or any of its
Subsidiaries or Investments in Subsidiaries; or (iii) to transfer any of its
properties or assets to the Company or any of its Subsidiaries, except for
such encumbrances or restrictions existing under or by reason of: (a) any
encumbrance or restriction pursuant to the Notes or the Indenture; (b)
applicable law; (c) Existing Indebtedness, other than any Existing
Indebtedness required to be repaid with proceeds of the sale of the Units to
be issued on the Issue Date; (d) any instrument governing Acquired Debt as in
effect at the time of acquisition (except to the extent such Indebtedness was
incurred in connection with, or in contemplation of, such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired; (e) any encumbrance or restriction pursuant to an
agreement effecting a refinancing of Indebtedness pursuant to an agreement
referred to in clause (c) or (d) or contained in any amendment to an agreement
referred to in clause (c) or (d); provided, however, that the encumbrances and
restrictions contained in any such refinancing agreement or amendment are no
more restrictive than encumbrances or restrictions contained in the refinanced
or amended agreements; (f) with respect to clause (iii) above, by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business; or (g) with respect to clause (iii) above, purchase money
obligations for property acquired in the ordinary course of business, which
obligations do not cover any asset other than the asset acquired.
Merger, Consolidation or Sale of Assets. The Company will not, in a single
transaction or a series of related transactions, (i) consolidate with or merge
with or into any other Person, (ii) permit any other Person to consolidate
with or merge into (a) the Company or (b) any of its Subsidiaries in a
transaction in which such Subsidiary (or successor Person) remains (or
becomes) a Subsidiary or (iii) directly or indirectly, sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets
to another Person or Persons or adopt a plan of liquidation, (iv) directly or
indirectly, purchase, lease or otherwise acquire all or substantially all of
the property and assets of any Person or any existing business (whether
existing as a separate entity, subsidiary, division, unit or otherwise) of any
Person or acquire Equity Interests or other ownership interests of any other
Person such that such Person becomes a Subsidiary or (v) permit any of its
Subsidiaries to enter into any such transaction unless (i) either (A) the
Company or such Subsidiary shall be the survivor of such merger or
consolidation or (B) the surviving Person (if not the Company or such
Subsidiary) is a corporation, partnership or trust organized and existing
under the laws of the United States, any state thereof or the District of
Columbia
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and such surviving Person shall expressly assume all the obligations of the
Company or such Subsidiary, as the case may be, under the Notes and the
Indenture; (ii) immediately after giving effect to such transaction (on a pro
forma basis, including any Indebtedness incurred or anticipated to be incurred
in connection with such transaction), the Company or the surviving Person is
able to incur at least $1.00 of additional Indebtedness under the Annualized
Cash Flow Ratio test in compliance with the "Limitation on Indebtedness"
covenant; (iii) immediately before and immediately after giving effect to such
transaction (including any Indebtedness incurred or anticipated to be incurred
in connection with the transaction), no Default or Event of Default shall have
occurred and be continuing; and (iv) the Company has delivered to the Trustee
an Officers' Certificate and Opinion of Counsel, each stating that such
consolidation, merger or transfer complies with the Indenture, that the
surviving Person agrees to be bound thereby and that all conditions precedent
in the Indenture relating to such transaction have been satisfied. For
purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties and assets of one or more Subsidiaries of
the Company, the Capital Stock of which constitutes all or substantially all
of the properties and assets of the Company, shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company. The foregoing will not be deemed to apply to Permitted Investments or
Investments permitted under the covenant "Limitation on Restricted Payments"
above.
The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, the surviving entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture and the Notes with the same effect as if such surviving entity
had been named as such; provided that solely for purposes of computing amounts
described in clause (c) of the first paragraph of the covenant "Limitation on
Restricted Payments" above, any such surviving entity to the Company shall
only be deemed to have succeeded to and be substituted for the Company with
respect to periods subsequent to the effective time of such merger,
consolidation, combination or transfer of assets.
Transactions with Affiliates. The Indenture provides that the Company and
its Subsidiaries may not sell, lease, transfer or otherwise dispose of any of
their respective properties or assets to, or purchase any property or assets
from, or enter into any contract, agreement, understanding, loan, advance or
Guarantee with, or for the benefit of, any Affiliate of the Company or any
legal or beneficial owner of 5% or more of any class of Capital Stock of the
Company or with an Affiliate of any such owner (each of the foregoing, an
"Affiliate Transaction"), unless: (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Subsidiary with an unrelated Person; and (ii) the Company delivers to
the Trustee: (x) with respect to any Affiliate Transaction involving aggregate
payments in excess of $250,000 but less than $3.0 million, a resolution of the
Board of Directors of the Company set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above, (y)
with respect to any Affiliate Transaction involving aggregate payments equal
to or greater than $3.0 million but less than $20.0 million, a resolution of
the Board of Directors of the Company set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested directors of the Board of Directors of the Company, and (z) with
respect to any Affiliate Transaction involving aggregate payments equal to or
greater than $20.0 million, a resolution of the Board of Directors of the
Company set forth in an Officers' Certificate and certifying to the matters
referred to in (i) above and a written opinion as to the fairness to the
Company or such Subsidiary from a financial point of view issued by an
independent investment banking firm of national standing with respect to any
such Affiliate Transaction. Notwithstanding the foregoing, the following shall
not be deemed Affiliate Transactions: (a) any employment or option agreement
entered into by the Company or any of its Subsidiaries in the ordinary course
of business that is approved by the Compensation Committee of the Board of
Directors of the Company; (b) the payment by the Company of annual fees to
Unity Hunt Resources, Inc. for the provision of Mr. Holland's services to the
Company in an amount equal to Mr. Holland's annual base compensation from the
Company, which amount is approved by the Compensation Committee of the Board
of Directors of the Company; (c) transactions between or among the Company and
one or more of its Wholly Owned Subsidiaries provided that such transactions
are not otherwise
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prohibited; (d) Restricted Payments, Permitted Payments and Permitted
Investments; (e) Affiliate Transactions in existence on the Issue Date,
including, without limitation, channel leases and options between the Company
and any of its Subsidiaries, on the one hand, and Messrs. Webb and Wheeler and
their respective Affiliates, on the other hand, and the lease with respect to
the Company's operating offices in Durant, Oklahoma and agreements between the
Company, on the one hand, and U.S. Wireless and/or USWS, on the other hand, as
in effect on the Issue Date; (f) channel leases and options with Affiliates
entered into after the Issue Date; provided such leases are no less beneficial
to the Company or the applicable Subsidiary than any such leases in effect on
the Issue Date, meet the standard described in clause (i) above and are
approved by a majority of the disinterested directors of the Board of
Directors of the Company; (g) amendments to or renewals of the agreements and
leases referred to in clauses (d) and (e) above; provided that any such
amendments or renewals are no less beneficial to the Company or the applicable
Subsidiary than the agreement or lease being amended or renewed, meet the
standard described in clause (i) above and are approved by a majority of the
disinterested directors of the Board of Directors of the Company; (h) payment
of reasonable and customary compensation for director and Board of Director
observer fees, meeting expenses, insurance premiums and indemnities to the
extent permitted by law; and (i) the issuance of stock options (and shares of
stock upon the exercise thereof) pursuant to any stock option plan approved by
the Board of Directors and stockholders of the Company and loans or advances
to employees for relocation or travel related expenses consistent with
ordinary past practices.
Conduct of Business. The Indenture provides that the Company and its
Subsidiaries may not, directly or indirectly, engage in any business other
than the Wireless Cable Business; provided that in the event a Change of
Control occurs in which a Strategic Equity Investor gains control of the
Company this covenant shall no longer be of force or effect.
Provision of Information. The Company (at its own expense) shall file with
the Trustee within 15 days after it files them with the Commission copies of
the quarterly and annual reports and of the information, documents and other
reports (or copies of such portions of any of the foregoing as the Commission
may by rules and regulations prescribe) to be filed pursuant to Section 13 or
15(d) of the Exchange Act (without regard to whether the Company is subject to
the requirements of such Section 13 or 15(d) of the Exchange Act) ("SEC
Reports"). Upon qualification of the Indenture under the Trust Indenture Act,
the Company shall also comply with the provisions of Trust Indenture Act
Section 314(a). In the event that the Company is not required or shall cease
to be required to file SEC Reports pursuant to the Exchange Act, the Company
shall nevertheless continue to file such reports with the Commission and the
Trustee. If the Trustee (at the Company's request and expense) is to mail the
foregoing information to the Holders, the Company shall supply such
information to the Trustee at least five days prior thereto. The Company shall
provide to any Holder any information concerning the Company reasonably
requested by such Holder (including financial statements) necessary in order
to permit such Holder to sell or transfer Notes in compliance with Rule 144A
promulgated under the Securities Act.
SECURITY
The Notes are secured, pending disbursement pursuant to the Escrow and
Disbursement Agreement, by a pledge of the Escrow Account, which initially
contained approximately $24.1 million of the net proceeds from the sale of the
Units (the "Collateral"), representing funds sufficient to pay two years'
interest on the Notes.
The Company entered into the Escrow and Disbursement Agreement providing for
the grant by the Company to the Trustee for the benefit of the Holders of
security interests in the Collateral. All such security interests will secure
the payment and performance when due of all of the Obligations of the Company
under the Indenture with respect to the Notes and under such Notes, as
provided in the Escrow and Disbursement Agreement. The Liens created by the
Escrow and Disbursement Agreement will be first priority security interests in
the Collateral. The ability of Holders to realize upon any such funds or
securities may be subject to certain bankruptcy law limitations in the event
of the bankruptcy of the Company.
Funds will be disbursed from the Escrow Account only to pay interest on the
Notes and, upon certain repurchases or redemptions of the Notes, to pay
principal of and premium, if any, thereon. Pending such
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disbursements, all funds contained in the Escrow Account will be invested in
Marketable Securities. Upon the acceleration of the maturity of the Notes or
the failure to pay principal at maturity or upon certain redemptions and
repurchases of the Notes, the Escrow and Disbursement Agreement provides for
the foreclosure by the Trustee upon the net proceeds of the Escrow Account.
Under the terms of the Indenture, the proceeds of the Escrow Account shall be
applied, first, to amounts owing to the Trustee in respect of fees and
expenses of the Trustee and second, to the Obligations under the Notes and the
Indenture.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) the failure to pay interest on any Notes when the same becomes due
and payable and such default continues for a period of 30 days;
(ii) (a) the failure to pay the principal or premium when due on the
Notes at maturity, upon redemption, upon acceleration or otherwise or (b)
the failure to redeem or purchase the Notes when required pursuant to the
Indenture and the Notes (including, without limitation, failure to make
payments when due pursuant to a Change of Control Offer or Net Proceeds
Offer);
(iii) failure by the Company to comply with the provisions described
under "Offer to Purchase Upon Change of Control" or "Certain Covenants --
Limitation on Asset Sales," or the failure by the Company to comply with
the first sentence of the provision described under "Disbursement of
Funds -- Escrow Account;"
(iv) failure to comply with the covenant described under "Certain
Covenants -- Merger, Consolidation or Sale of Assets;"
(v) failure by the Company for 30 days after notice from the Trustee or
the Holders of at least 25% in principal amount of the Notes then
outstanding to comply with its agreements in the Indenture or the Notes or
in the Escrow and Disbursement Agreement (other than those referred to in
(i), (ii), (iii) or (iv) above);
(vi) a default in the payment of principal at final maturity under any
mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness of the Company or
any of its Subsidiaries (or the payment of which is Guaranteed now or
hereafter by the Company or any of its Subsidiaries), whether such
Indebtedness or Guarantee now exists or shall be created hereafter, in a
principal amount of at least $3.0 million (after the expiration of any
applicable grace period with respect thereto);
(vii) a default occurs under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness (including any interest thereon) of the Company or its
Subsidiaries (or the payment of which is Guaranteed now or hereafter by the
Company or any of its Subsidiaries), whether such Indebtedness or Guarantee
now exists or shall be created hereafter, if (i) as a result of such event
of default the maturity of such Indebtedness has been accelerated prior to
its stated maturity and (ii) the principal amount of such Indebtedness,
together with the principal amount of any other Indebtedness of the Company
and its Subsidiaries the maturity of which has been accelerated, aggregates
$3.0 million or more;
(viii) one or more final judgments rendered against the Company or any of
its Subsidiaries (other than any judgment as to which a reputable insurance
company has accepted full liability in writing) aggregating in excess of
$3.0 million which judgments are not stayed within 60 days after their
entry;
(ix) certain events of bankruptcy or insolvency with respect to the
Company or any of its Subsidiaries; or
(x) repudiation by the Company of its obligations under the Escrow and
Disbursement Agreement for any reason.
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If any Event of Default occurs and is continuing under the Indenture, the
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Notes may declare all the Notes to be due and payable immediately
by notice in writing to the Company and the Trustee specifying the respective
Event of Default and that it is a "notice of acceleration" (the "Acceleration
Notice"). Upon such declaration, the principal of, and premium, if any, and
interest on the Notes shall become due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company or any
of its Subsidiaries, the foregoing amount shall ipso facto become due and
payable without further action or notice. No premium is payable upon
acceleration of the Notes except that in the case of an Event of Default that
is the result of an action or inaction by the Company or any of its
Subsidiaries intended to avoid premiums related to redemptions of the Notes
contained in the Indenture or the Notes, the amount declared due and payable
will include the premium that would have been applicable on a voluntary
prepayment of the Notes or, if voluntary prepayment is not then permitted, the
premium set forth in the Indenture.
No Holder has the right to institute any proceeding with respect to the
Indenture or any remedy thereunder, unless the Holders of at least 25% in
principal amount of the outstanding Notes have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
Trustee, the Trustee has failed to institute such proceeding within 15 days
after receipt of such notice, and the Trustee has not within such 15-day
period received directions inconsistent with such written request by Holders
of a majority in principal amount of the outstanding Notes. Such limitations
do not apply, however, to suits instituted by a Holder for the enforcement of
the payment of the principal of, premium, if any, or interest on such Note on
or after the respective due dates expressed in such Note. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. In case an
Event of Default shall occur and be continuing, the Trustee will exercise such
of its rights and powers under the Indenture, and use the same degree of care
and skill in their exercise, as a prudent Person would exercise or use under
the circumstances in the conduct of his or her own affairs. Subject to certain
provisions of the Indenture, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
of the Holders unless they have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be incurred
by it in compliance with such request. The Trustee may withhold from Holders
notice of any continuing default (except a default in payment) if it
determines in good faith that the withholding of such notice is in the
interest of such Holders.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph, the Holders
of a majority in principal amount of the Notes may rescind and cancel such
declaration and its consequences (i) if the rescission would not conflict with
any judgment or decree, (ii) if all existing Events of Default have been cured
or waived except nonpayment of principal or interest that has become due
solely because of the acceleration, (iii) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (viii) of the description
above of Events of Default, the Trustee shall have received an Officer's
Certificate and an Opinion of Counsel that such Event of Default has been
cured or waived.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
payment of interest or premium on, or the principal of, the Notes, or in
respect of a covenant or a provision which cannot be amended or modified
without the consent of all Holders.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or the Escrow and Disbursement Agreement or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each Holder of Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver may not be effective to waive liabilities
under the Federal securities laws and it is the view of the Commission that
such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for:
(i) the rights of Holders of outstanding Notes to receive solely from
trust funds payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, or on the redemption
date, as the case may be;
(ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(iii) the rights, powers, trust, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Notes. In the event Covenant Defeasance
occurs, certain events (not including nonpayment, bankruptcy, receivership,
reorganization and insolvency events) described above under "Events of
Default" will no longer constitute Events of Default with respect to the
Notes. In the event of Legal Defeasance or Covenant Defeasance, the security
interests described above under "Security" will be released.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in trust for
the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
U.S. Government Securities or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Notes, on the stated maturity or on the
applicable optional redemption date, as the case may be, without
reinvestment of the deposited U.S. Government Securities and other
deposited monies;
(b) in the case of Legal Defeasance, the Company must deliver to the
Trustee an Opinion of Counsel in the United States reasonably satisfactory
to the Trustee confirming that (x) the Company has received from, or there
has been published by, the Internal Revenue Service a ruling or (y) since
the date of the Indenture, there has been a change in the applicable
Federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for Federal
income tax purposes as a result of such legal defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance had
not occurred;
(c) in the case of Covenant Defeasance, the Company must deliver to the
Trustee an Opinion of Counsel in the United States reasonably satisfactory
to the Trustee confirming that the Holders of the
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outstanding Notes will not recognize income, gain or loss for Federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Covenant Defeasance
had not occurred;
(d) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or Event of Default with
respect to the Indenture resulting from the incurrence of Indebtedness, all
or a portion of which will be used to defease the Notes concurrently with
such incurrence) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
123rd day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company is a party or
by which the Company is bound;
(f) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Notes over the other creditors of the
Company or with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others;
(g) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
(h) the Company delivers to the Trustee an Opinion of Counsel to the
effect that (i) the trust resulting from the deposit does not constitute,
or is qualified as, a regulated investment company under the Investment
Company Act of 1940, (ii) the Holders have a valid first priority perfected
security interest in the trust funds, and (iii) after passage of 123 days
following the deposit (or, with respect to any trust funds for the account
of any Holder who may be deemed to be an "insider" for purposes of the
Bankruptcy Code, after one year following the deposit), the trust funds
will not be subject to the effect of Section 547 of the Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law in a case commenced by
or against the Company under either such statute, and either (A) the trust
funds will no longer remain the property of the Company (and therefore,
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally) or
(B) if a court were to rule under any such law in any case or proceeding
that the trust funds remained in the possession of the Trustee prior to
such court ruling to the extent not paid to Holders, the Trustee will hold,
for the benefit of the Holders, a valid first priority perfected security
interest in such trust funds that is not avoidable in bankruptcy or
otherwise except for the effect of Section 552(b) of the Bankruptcy Code on
interest on the trust funds accruing after the commencement of a case under
such statute and (y) the Holders will be entitled to receive adequate
protection of their interests in such trust funds if such trust funds are
used in such case or proceeding; and
(i) certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable or will become due and payable within
one year and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in an amount sufficient to pay and discharge the entire
Indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal of, premium, if any, and interest on the Notes to
the date of deposit together with irrevocable
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instructions from the Company directing the Trustee to apply such funds to the
payment thereof at maturity or redemption, as the case may be; (ii) the
Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Trustee or Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
MODIFICATION OF INDENTURE OR NOTES
From time to time, the Company and the Trustee, without the consent of the
Holders of the Notes, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such
change does not adversely affect the rights of any of the Holders. The Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an Opinion of Counsel in executing any
supplemental indenture. Other modifications and amendments of the Indenture
may be made with the consent of the Holders of a majority in principal amount
of the then outstanding Notes issued under the Indenture, except that, without
the consent of each Holder of the Notes affected thereby, no amendment may:
(i) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(ii) reduce the principal of or change or have the effect of changing the
fixed maturity of any Note or change the date on which any Note may be
subject to redemption or repurchase, or reduce the redemption or repurchase
price thereof;
(iii) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any Notes;
(iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment default
relating solely to the principal or interest that has become due solely
because of the acceleration);
(v) make any Note payable in money other than that stated in the Notes;
(vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or interest on the Notes on or after the due date
thereof or to bring suit to enforce such payment;
(vii) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the captions
"Offer to Purchase Upon Change of Control" and "Certain Covenants --
Limitation on Asset Sales");
(viii) amend, change or modify in any material respect the obligation of
the Company to make and consummate a Change of Control Offer in the event
of a Change of Control or make and consummate a Net Proceeds Offer with
respect to any Asset Sale that has been consummated or modify any of the
provisions or definitions with respect thereto;
(ix) make any change in the foregoing amendment and waiver provisions; or
(x) directly or indirectly release Liens on all or substantially all of
the Collateral except as permitted by the Escrow and Disbursement
Agreement.
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GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. The Indenture contains certain limitations on the
rights of the Trustee, should the Trustee become a creditor of the Company, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee
will be permitted to engage in other transactions with the Company; however,
if the Trustee acquires any conflicting interest, it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue as
Trustee or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used herein and in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person, Indebtedness of
any other Person existing at the time such other Person merged with or into or
became a Subsidiary of such specified Person or Indebtedness incurred by such
Person in connection with the acquisition of assets, including, without
limitation, Indebtedness incurred or assumed in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person or the acquisition of such assets, as the
case may be.
"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (ii) any other Person who is a director
or officer (A) of such specified Person, (B) of any Subsidiary of such
specified Person or (C) of any Person described in clause (i) above or (iii)
any Person in which such Person has, directly or indirectly, a 5% or greater
voting or economic interest or the power to control. For purposes of this
definition, control of a Person means the power, direct or indirect, to direct
or cause the direction of the management or policies of such Person whether
through the ownership of voting securities or by contract or otherwise and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Annualized Cash Flow Ratio" with respect to any Person means the ratio of
the Consolidated Indebtedness of such Person to the Annualized EBITDA of such
Person for the relevant period.
"Annualized EBITDA" as of any date of determination means the aggregate
amount of EBITDA for the most recent fiscal quarter for which financial
information has been filed with the Commission multiplied by four; provided,
however, that (i) if the Company or any Subsidiary of the Company has incurred
any Indebtedness (including Acquired Debt) that remains outstanding on the
date of such determination or if the transaction giving rise to the need to
calculate the Annualized EBITDA is an incurrence of Indebtedness (including
Acquired Debt), EBITDA for such fiscal quarter will be calculated after giving
effect on a pro forma basis to (a) such Indebtedness, as if such Indebtedness
had been incurred on the first day of such fiscal quarter and (b) the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such fiscal quarter, (ii) if since the beginning
of such fiscal quarter the Company or any Subsidiary of the Company has made
any Asset Sale, EBITDA for such fiscal quarter will be (a) reduced by an
amount equal to EBITDA (if positive) directly
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attributable to the assets which are the subject of such Asset Sale for such
fiscal quarter or (b) increased by an amount equal to EBITDA (if negative)
directly attributable thereto for such fiscal quarter and (iii) if since the
beginning of such period the Company or any Subsidiary of the Company (by
merger or otherwise) has made an Investment in any Person which becomes a
Subsidiary of the Company as a result of such Investment or an Investment in
an existing Subsidiary with the result that such Investment will result in the
consolidation of a greater percentage of such Subsidiary's Consolidated Net
Income (other than a transfer of operating assets from the Company or one
Subsidiary to another Subsidiary) or has made an acquisition of assets (other
than from the Company or another Subsidiary of the Company), including any
acquisition of assets occurring in connection with a transaction causing a
calculation of Annualized EBITDA to be made hereunder, which constitutes all
or substantially all of an operating unit of a business, EBITDA for such
fiscal quarter will be calculated after giving pro forma effect thereto
(including the incurrence of any Indebtedness (including Acquired Debt)) as if
such Investment or acquisition occurred on the first day of such fiscal
quarter. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets or an Investment, the pro forma calculations
will be determined in good faith by a responsible financial or accounting
officer of the Company; provided, however, that such officer shall apply in
his calculations the historical EBITDA associated with such assets for the
most recent fiscal quarter for which financial information is available. If
any Indebtedness (including Acquired Debt) bears a floating rate of interest
and is being given pro forma effect, the interest on such Indebtedness will be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period.
"Asset Sale" means any sale, lease, transfer or other disposition (or series
of related sales, leases, transfers or dispositions) of shares of Capital
Stock of a Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction, other
than (i) a disposition of property or assets at Fair Market Value in the
ordinary course of business, (ii) a disposition that constitutes a Restricted
Payment and (iii) a disposition by a Subsidiary to the Company or by the
Company or a Subsidiary to a Wholly-Owned Subsidiary.
"AWS Transaction" means the acquisition by the Company of the capital stock
of American Wireless Cable Systems, Inc., a Delaware corporation, and the
acquisition by the Company of the assets of Wireless Cable TV Associates #38
and of Fort Worth Wireless Cable TV Associates for consideration comprised of
Equity Interests of the Company.
"Bankruptcy Code" means Title 11, United States Code, as amended.
"Bank Indebtedness" means loans made by banks, trust companies and other
institutions principally engaged in the business of lending money to
businesses to the Company or a Subsidiary under a credit facility, loan
agreement or similar agreement.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
of such Rules that a Person shall be deemed to have beneficial ownership of
all securities that such Person has a right to acquire within 60 days;
provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (i) arises solely as
a result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and
(ii) is not also then reportable on Schedule 13D or Schedule 13G (or any
successor schedule) under the Exchange Act.
"Business Day" means any day that is not a Saturday, Sunday or a day on
which banking institutions are required to close in the State of New York or
Texas.
"CableMaxx Transaction" means the acquisition by the Company of the capital
stock of CableMaxx, Inc., a Delaware corporation ("CableMaxx"), for
consideration comprised of Equity Interests of the Company or the
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acquisition by the Company of the assets of CableMaxx related to the Amarillo,
Athens, Lubbock and Sherman/Denison, Texas markets for either $2.4 million or
the fair market value of such assets in cash.
"Call Markets" means Fanning Springs, Florida; Leesburg, Florida; and Lake
City, Florida.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, participations,
warrants, options, rights or other equivalents of or interests in (however
designated and whether voting or non-voting) corporate stock of a corporation
and any and all equivalent ownership interests in a Person (other than a
corporation), in each case whether outstanding on the date of issuance of the
Notes or thereafter issued, including any Preferred Stock.
"Change of Control" means the occurrence of any of the following events:
(i) any Person (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Permitted Holders, is or becomes the
Beneficial Owner, directly or indirectly, of (a) more than 35% of the total
Voting Stock or Equity Market Capitalization of the Company or (b) a
greater percentage of the voting power of the total Voting Stock of the
Company than that represented by the voting power of the Voting Stock of
the Company then beneficially owned, in the aggregate, by the Permitted
Holders; or
(ii) the Company consolidates with, or merges with or into, another
Person or sells, assigns, conveys, transfers, leases or otherwise disposes
of all or substantially all of its assets to any Person, or any Person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which immediately after the consummation
thereof the stockholders of the Company immediately prior to the date of
such transaction cease to own, directly or indirectly, a majority of the
Voting Stock of the surviving or transferee corporation, or Persons owning
a majority of the Voting Stock of the Company immediately prior to such
transaction cease to own, directly or indirectly, a majority of the Voting
Stock of the surviving or transferee corporation; or
(iii) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the stockholders of the Company was
approved by a vote of 66 2/3% of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office; or
(iv) the Company adopts a plan of liquidation or dissolution.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the
Nasdaq National Market or, if such shares are not listed or admitted to
trading on any national securities exchange or quoted on such automated
quotation system, the average of the closing bid and asked prices in the over-
the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for that purpose and is
reasonably acceptable to the Trustee.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
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"Consolidated Income Tax Expense" for any Person for any period means,
without duplication, the aggregate amount of net taxes based on income or
profits for such period of the operations of such Person and its consolidated
Subsidiaries with respect to such period in accordance with GAAP.
"Consolidated Indebtedness" means, with respect to any Person, as of any
date of determination, the aggregate amount of Indebtedness of such Person and
its Subsidiaries as of such date determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, for any Person, for any period, the
aggregate of the following for such Person for such period determined on a
consolidated basis in accordance with GAAP: the amount of interest in respect
of Indebtedness (including amortization of original issue discount and non-
cash interest payments on any Indebtedness and the interest portion of any
deferred payment obligation and after taking into account the effect of
elections made under any Interest Rate Agreement, however denominated, with
respect to such Indebtedness), and the interest component of any Capital Lease
Obligation paid, in each case whether accrued or scheduled to be paid or
accrued by such Person during such period to the extent such amounts were
deducted in computing Consolidated Net Income, determined on a consolidated
basis in accordance with GAAP, provided that each of the foregoing shall only
be included in the calculation of Consolidated Interest Expense to the extent
such amounts reduce Consolidated Net Income for such period. For purposes of
this definition, interest on a Capital Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined by such Person to be the rate
of interest implicit in such Capital Lease Obligation in accordance with GAAP
consistently applied.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its consolidated
Subsidiaries for such period determined in accordance with GAAP, provided that
there shall be excluded (i) the Net Income of any Person (other than a
consolidated Subsidiary) in which such Person or any of its consolidated
Subsidiaries has a joint interest with a third party, including, without
limitation, interests accounted for on the equity method, except to the extent
of the amount of dividends or distributions actually paid to such Person or
its consolidated Subsidiary during such period; (ii) except to the extent
includable pursuant to the foregoing clause (i), the Net Income of any Person
accrued prior to the date it becomes a Subsidiary of such Person or is merged
into or consolidated with such Person or any of its Subsidiaries or that
Person's assets are acquired by such Person or any of its Subsidiaries; (iii)
the Net Income (if positive), or any portion thereof, of any Subsidiary of
such Person to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary to such Person or to any other
Subsidiary of such Net Income is not at the time permitted by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary, except
that (A) the Company's equity in the Net Income of any such Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Subsidiary during such
period to the Company or another Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to a
Subsidiary, to the limitation contained in this clause) and (B) the Company's
equity in a net loss of any such Subsidiary for such period shall be included
in determining such Consolidated Net Income; (iv) without duplication, any
gains or losses attributable to Asset Sales; (v) Net Income (if positive),
arising from the adoption of changes in accounting policy to comply with GAAP
or voluntarily by the Company with the consent of its independent auditors
that so qualify under Regulation S-X of the Securities Act; (vi) Net Income
arising for periods prior to the date of a transaction in connection with the
accounting treatment for a merger, combination or consolidation under the
pooling of interests method; and (vii) foreign currency translation gains and
losses.
"Contributed Markets" means Bedias/Huntsville, Texas; Freeport, Texas;
Milano, Texas; Baton Rouge, Louisiana; Ferriday, Louisiana; Holly Ridge,
Louisiana; Jena, Louisiana; Leesville, Louisiana; Monroe, Louisiana;
Natchitoches, Louisiana; Ruston, Louisiana; Alberta/Salem, Alabama; Ariton,
Alabama; Bankston, Alabama; Bucks, Alabama; Six Mile, Alabama; Society Hill,
Alabama; Tharpton, Alabama; Village Springs, Alabama; Charing, Georgia;
Groveland, Georgia; Hoggards Mill, Georgia; Jeffersonville, Georgia; Mathews,
Georgia; Tarboro, Georgia; Valdosta, Georgia; Ocala, Florida; and Tallahassee,
Florida.
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"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable) or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the date on which the Notes mature; provided, however, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require the Company to repurchase
or redeem such Capital Stock upon the occurrence of a Change of Control
occurring prior to the final maturity of the Notes shall not constitute
Disqualified Stock if (i) the change of control provisions applicable to such
Capital Stock are no more favorable to the holders of such Capital Stock than
the provisions applicable to the Notes contained in the covenant described
under "Offer to Purchase Upon Change of Control" and (ii) such Capital Stock
specifically provides that the Company will not repurchase or redeem any such
stock pursuant to such provisions prior to the Company's repurchase of such
Notes as are required to be repurchased pursuant to the covenant described
under "Offer to Purchase Upon Change of Control."
"EBITDA" for any period means the Consolidated Net Income for such period
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) Consolidated Income Tax Expense, (ii) Consolidated Interest
Expense, (iii) depreciation and amortization expense determined on a
consolidated basis for such Person and its consolidated Subsidiaries in
accordance with GAAP for such period and (iv) all other non-cash charges
(other than noncash charges which require an accrual of or reserve for cash
charges in future periods), and less any non-cash items which have the effect
of increasing Consolidated Net Income for such period.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock or that are measured by the value of Capital
Stock (but excluding any debt security that is convertible into or
exchangeable for Capital Stock).
"Equity Market Capitalization" of any Person means, as of any day of
determination, the product of (a) the aggregate number of outstanding shares
of Common Stock of such Person on such day (which shall not include any
options or warrants on, or securities convertible or exchangeable into, shares
of Common Stock of such Person) and (b) the average Closing Price of such
Common Stock over the 20 consecutive Trading Days immediately preceding such
day. If no such Closing Price exists with respect to shares of any such class,
the value of such shares for purposes of clause (ii) of the preceding sentence
shall be determined by an independent investment banking firm of national
repute.
"Escrow Account" means an escrow account for the deposit of approximately
$24.1 million of the net proceeds from the sale of the Units under the Escrow
and Disbursement Agreement.
"Escrow Agent" means Bankers Trust Company, as Escrow Agent under the Escrow
and Disbursement Agreement, or any successor thereto appointed pursuant to
such agreement.
"Escrow and Disbursement Agreement" means the Escrow and Disbursement
Agreement, dated as of the date of the Indenture, by and among the Escrow
Agent, the Trustee and the Company, governing the disbursement of funds from
the Escrow Account, as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act), and the rules and regulations promulgated thereunder.
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"Existing Indebtedness" means the Notes and any other Indebtedness of the
Company and its Subsidiaries in existence on the Issue Date.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are applicable as of the date of
determination.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of
any other Person and any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or other obligation or such
other Person (whether arising by virtue of partnership arrangements, or by
agreement to keepwell, to purchase assets, goods, securities or services, to
take-or-pay or to maintain financial statement conditions or otherwise) or
(ii) entered into the purposes of assuring in any other manner the obligee of
such Indebtedness or other obligation of the payment thereof or to protect
such obligee against loss in respect thereof (in whole or in part); provided,
however, that the term "Guarantee" shall not include endorsements for
collection or deposits in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning. The amount of any
Guarantee shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Guarantee is made
(unless such Guarantee shall be expressly limited to a lesser amount, in which
case such lesser amount shall apply) or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith.
"Indebtedness" of any Person means, without duplication: (i) the principal
of and premium (if any) in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is responsible
or liable; (ii) all Capital Lease Obligations of such Person; (iii) all
obligations of such Person issued or assumed as the deferred purchase price of
property, all conditional sale obligations of such Person and all obligations
of such Person under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business); (iv) all
obligations of such Person for the reimbursement of any obligor or any letter
of credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the third Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (v) the amount
of all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock (the amount of Indebtedness
represented by any Disqualified Stock will be the liquidation preference, plus
accrued and unpaid dividends); (vi) to the extent not otherwise included,
Interest Rate Agreements; (vii) all obligations of the type referred to in
clauses (i) through (vi) of other Persons and all dividends of other Persons
for the payment for which, in either case, such Person is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee; and (viii) all obligations of the type referred to
in clauses (i) through (vii) of other Persons secured by any Lien on any
property or asset of such Person (whether or not such obligation is assumed by
such Person); provided that if recourse with respect to such Indebtedness is
limited to such asset, the amount of such Indebtedness shall be deemed to be
the lesser of the value of such property or assets or the amount of the
obligation so secured.
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"Interest Rate Agreement" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Investments" means, with respect to any Person, (i) all investments by such
Person in other Persons (including Affiliates) in the forms of loans,
Guarantees, advances or capital contributions (excluding commission, travel
and similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities of any other Person and all other items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP and (ii) all acquisitions by such Person of assets to be
used in the Wireless Cable Business (other than any such acquisitions of
equipment made in the ordinary course of such Person's business and other than
any acquisition or lease (and any deposit required to be made in connection
therewith) of additional channel rights on or after the Issue Date in any
wireless cable market listed in the offering memorandum relating to the
issuance of the Units or any wireless cable market or "Basic Trading Area" (as
defined by Rand McNally) in which the Company and its Restricted Subsidiaries
(A) as of the date of the Indenture, have channel rights, whether by way of
license, lease with a channel license holder, lease with a channel license
applicant, lease with a qualified, non-profit educational organization that
plans to apply for a channel license or option to acquire any of the
foregoing, or (B) as of the date of such acquisition or lease, have rights
with respect to at least eight wireless cable channels, whether by way of
license, lease with a channel license holder, lease with a channel license
applicant, lease with a qualified, non-profit educational organization that
plans to apply for a channel license or option to acquire any of the
foregoing).
"Issue Date" means the date on which Notes are first authenticated and
issued.
"Lien" means, with respect to any asset, any mortgage, deed of trust, lien,
pledge, charge, security interest, lease, easement, restriction, covenant,
right-of-way, charge, encumbrance or other similar lien of any kind in respect
of such asset, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest in and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction).
"Marketable Securities" means (i) U.S. Government Securities maturing not
more than two years after the date of acquisition; (ii) any certificate of
deposit maturing not more than 270 days after the date of acquisition issued
by, or time deposit of, an Eligible Institution; (iii) commercial paper
maturing not more than 270 days after the date of acquisition issued by a
corporation (other than an Affiliate of the Company) with a rating, at the
time as of which any investment therein is made, of "A-1" (or higher)
according to S&P or "P-1" (or higher) according to Moody's; (iv) any banker's
acceptances or money market deposit accounts issued or offered by an Eligible
Institution; and (v) any fund investing exclusively in investments of the
types described in clauses (i) through (iv) above.
"Moody's" means Moody's Investors Service Inc. and its successors.
"Net Cash Proceeds" means the aggregate cash proceeds received by the
Company or any of its Subsidiaries in respect of any Asset Sale (excluding,
without limitation, any consideration received in the form of assumption by
the acquiring Person of Indebtedness or other obligations relating to such
property or assets or received in any other noncash form), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees and sales commissions), any relocation
expenses incurred as a result thereof, Federal, state, provincial, foreign and
local taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), title
and recording tax expenses, and in each case net of appropriate amounts to be
provided by the Company or its Subsidiaries as a reserve, in accordance with
GAAP, against any liabilities associated with such assets and retained by the
Company or any Subsidiary after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities and
liabilities related to environmental matters and the after-tax cost of any
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indemnification payments (fixed or contingent) attributable to the seller's
indemnities to the purchaser undertaken by the Company or any of its
Subsidiaries in connection with such Asset Sale (but excluding any payments,
which by the terms of the indemnities will not, under any circumstances, be
made during the term of the Notes) and net of all payments made on any
Indebtedness which is secured by any assets subject to such Asset Sale, in
accordance with the terms of any Lien upon or other security agreement of any
kind with respect to such assets, or which must by its terms, or in order to
obtain a release of such Lien or a necessary consent to such Asset Sale, or by
applicable law be repaid out of the proceeds from such Asset Sale, and net of
all distributions and other payments required to be made to minority interests
holders in Subsidiaries or joint ventures as a result of such Asset Sale. Net
Cash Proceeds shall exclude any non-cash proceeds received from any Asset
Sale, but shall include such proceeds when and as converted by the Company or
any Subsidiary to cash.
"Net Income" of any person for any period means the net income (loss) of
such Person for such period, determined in accordance with GAAP, except that
extraordinary gains and losses as determined in accordance with GAAP shall be
excluded.
"Net Proceeds" means, with respect to any issuance or sale of Equity
Interests, the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts and
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Opinion of Counsel" means an opinion in writing signed by legal counsel
reasonably satisfactory to the Trustee.
"Permitted Designee" means (i) a spouse, child or grandchild (whether such
relationship arises from birth, adoption or through marriage) of a Permitted
Holder, (ii) any trust, corporation, partnership or other entity, a majority
in interest of the beneficiaries, stockholders, partners or owners (direct or
beneficial) of which are Permitted Holders and/or Persons of the type referred
to in clause (i) above or (iii) any Person so long as a Permitted Holder owns
at least 50% of the Voting Stock of such Person.
"Permitted Holders" means Hunt Capital Group L.L.C. and its Affiliates,
David E. Webb and L. Allen Wheeler and their Permitted Designees.
"Permitted Investment" means (a) any Investments by the Company in a
Subsidiary (provided that, in the case of Wholly-Owned Subsidiaries, if such
Wholly-Owned Subsidiary ceases to be a Wholly-Owned Subsidiary (except by
reason of the sale by the Company or its Wholly-Owned Subsidiary of the Equity
Interests therein), then any Investment in such Subsidiary will be deemed to
be a Restricted Payment at the time of such event determined in accordance
with the "Limitation on Restricted Payments" covenant); and (b) any
Investments in Marketable Securities.
"Permitted Liens" means:
(i) Liens on (x) the Escrow Account and all funds and securities therein
securing only the Notes equally and ratably or (y) other assets of the
Company or any Subsidiary thereof securing only the Notes equally and
ratably;
(ii) Liens to secure Bank Indebtedness incurred by the Company or the
Subsidiaries in compliance with the "Limitation on Indebtedness" covenant
and Guarantees incurred by the Subsidiaries in compliance with clause (iv)
of the second paragraph of "Certain Covenants -- Limitation on
Indebtedness" executed in connection therewith;
(iii) Liens on the property of the Company or its Subsidiaries created
solely for the purpose of securing purchase money obligations incurred in
compliance with the Indenture; provided that (a) such property so
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acquired is for use in lines of business related to the Company's or its
Subsidiaries' business as it exists immediately prior to the issuance of
the related Indebtedness, (b) no such Lien shall extend to or cover other
property or assets of the Company and its Subsidiaries other than the
respective property so acquired and (c) the principal amount of
Indebtedness secured by any such Lien shall at no time exceed the original
purchase price of such property or assets;
(iv) Liens on the property or assets of a Subsidiary acquired after the
Issue Date or on property or assets acquired in an asset purchase
transaction with a Person that is not an Affiliate created solely to secure
the obligations that financed the acquisition of such Subsidiary or such
property and assets; provided that (a) no such Lien shall extend to or
cover property or assets of the Company and its Subsidiaries other than the
property or assets of the Subsidiary so acquired or the property or assets
so acquired and (b) no such Lien shall extend to the Capital Stock of any
Subsidiary so acquired and (c) the principal amount of Indebtedness secured
by any such Lien shall not exceed the original purchase price of such
Subsidiary or such property or assets;
(v) Liens on the assets of any entity existing at the time such entity or
assets are acquired by the Company or any of its Subsidiaries, whether by
merger, consolidation, purchase of assets or otherwise; provided that such
Liens (a) are not created, incurred or assumed in connection with, or in
contemplation of, such assets being acquired by the Company or any of its
Subsidiaries and (b) do not extend to any other property of the Company or
any of its Subsidiaries;
(vi) Liens to secure the performance of statutory obligations, surety or
appeal bonds or performance bonds or landlords', carriers', warehousemen's,
mechanics', suppliers', materialmen's or other like Liens, in any case
incurred in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate process of
law, if a reserve or other appropriate provision, if any, as required by
GAAP shall have been made therefor;
(vii) Liens existing on the date of the Indenture;
(viii) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; and
(ix) extensions or renewals of any Liens referred to in clauses (i)
through (viii) above, provided that such extension or renewal does not
extend to any assets or secure any Indebtedness not securing or secured by
the Liens being extended or renewed.
Notwithstanding the foregoing, Permitted Liens may not extend to the Escrow
Account or the Escrow and Disbursement Agreement.
"Permitted Payments" means, with respect to the Company or any of its
Subsidiaries, (a) any dividend on shares of Capital Stock payable solely in
shares of Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase Capital Stock (other than Disqualified
Stock); (b) any dividend, other distribution, loan or advance to the Company
by any of its Subsidiaries or by a Subsidiary to another Subsidiary; (c) any
defeasance, redemption, repurchase or other acquisition for value of any
Indebtedness of the Company with the proceeds from the issuance of (i)
Indebtedness which is subordinate to the Notes at least to the extent and in
the manner as the Indebtedness to be defeased, redeemed, repurchased or
otherwise acquired is subordinate in right of payment to the Notes; provided
that (1) such newly-issued subordinated Indebtedness provides for no payments
of principal by way of sinking fund, mandatory redemption, defeasance or
otherwise by the Company or its Subsidiaries (including, without limitation,
at the option of the holder thereof other than an option given to a holder
pursuant to a Change of Control covenant which (x) is no more favorable to the
holders of such Indebtedness than the provisions in favor of the Holders and
(y) such Indebtedness provides that the Company or its Subsidiaries will not
repurchase such Indebtedness pursuant to such provisions prior to the
Company's repurchase of the Notes required to be repurchased by the Company
upon a Change of Control) prior to the maturity of the Indebtedness being
replaced and (2) the proceeds of such new Indebtedness are utilized for
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such purpose within 45 days of issuance or (ii) Capital Stock (other than
Disqualified Stock) issued in accordance with the provisions of the Indenture;
and (d) the redemption or repurchase by a Wholly-Owned Subsidiary of its
Capital Stock owned by the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of
such Person, to shares of Capital Stock of any other class of such Person.
"Strategic Equity Investor" means any Person that, both as of the Trading
Day immediately before the day of such sale and the Trading Day immediately
after the day of such sale, has an Equity Market Capitalization of at least $2
billion and is engaged in the business of (i) transmitting video, voice or
data through wireless and other transmission facilities, (ii) creating,
developing or packaging entertainment or communication programming or (iii)
evaluating, participating or pursuing any other activity or opportunity that
is related to those identified in (i) or (ii) above.
"Subsidiary" means any corporation, association or other business entity of
which more than 50% of the total voting power of the outstanding Voting Stock
(or other interests, including partnership interests) is owned directly or
indirectly by any Person or one or more of the other Subsidiaries of that
Person or a combination thereof.
"S&P" means Standard & Poor's Corporation and its successors.
"TechniVision Transaction" means the acquisition by the Company of the
assets of TechniVision, Inc. for consideration comprised of Equity Interests
of the Company.
"Trading Day," with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Transactions" means the AWS Transaction, the CableMaxx Transaction, the
TechniVision Transaction and the Wireless One Transaction, collectively.
"U.S. Government Securities" means securities that are (x) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America, the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof, and shall
also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act) as custodian with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by
such depository receipt.
"Voting Stock" of any Person means all outstanding classes of Capital Stock
of any entity entitled (without regard to the occurrence of any contingency)
to vote in the election of directors, managers or trustees thereof.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Preferred Stock, as the case may be, at any date, the number of years
obtained by dividing (i) the then outstanding principal amount or stated value
of such Indebtedness or Preferred Stock, as the case may be, into (ii) the
total of the product obtained
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by multiplying (x) the amount of each then remaining installment, sinking
fund, serial maturity or other required payments of principal, including
payment at final maturity, or preference in respect thereof, by (y) the number
of years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment.
"Wholly-Owned Subsidiary" means any Subsidiary of the Company, all of the
outstanding Capital Stock (other than directors' qualifying shares), or in the
case of a non-corporate Subsidiary, other equity interests having ordinary
voting power for the election of directors or other governing body of such
Subsidiary, of which is owned by the Company or another Wholly-Owned
Subsidiary of the Company or a combination thereof.
"Wireless Cable Business" means, when used in reference to any Person, that
such Person, directly or indirectly, is engaged primarily in the business of
(i) transmitting video, voice or data primarily through wireless transmission
facilities, (ii) utilizing wireless cable channels for any commercial purpose
permitted by the FCC, (iii) creating, developing and packaging programming
that may be used to satisfy educational programming requirements for ITFS
channels and advertising, that, in either case, is transmitted over one or
more of the Company's wireless cable channels or (iv) evaluating,
participating or pursuing any other activity or opportunity that is related to
those identified in (i), (ii) or (iii) above.
"Wireless Cable Related Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used in connection
with a Wireless Cable Business.
"Wireless One Transaction" means either (i) the transaction contemplated by
the Letter of Intent dated July 17, 1995, between the Company and Wireless One
Operating Company, a Delaware corporation ("Old Wireless One"), whereby, among
other things, Wireless One, Inc., a newly-formed Delaware corporation
("Wireless One"), will acquire (A) all of the outstanding capital stock of Old
Wireless One (which will retain all of its assets and liabilities except its
wireless cable assets and certain related liabilities with respect to the
Springfield, Missouri market which the Company will acquire) for consideration
comprised of the Common Stock, $.01 par value per share (the "Wireless One
Common Stock"), of Wireless One and (B) the wireless cable assets and related
liabilities of certain Subsidiaries of the Company with respect to the
Contributed Markets for consideration comprised of Wireless One Common Stock
and promissory notes of Wireless One, or (ii) the transaction contemplated by
the Letter Agreement dated September 11, 1995 between the Company and Old
Wireless One, whereby, among other things, a newly-formed limited liability
company ("Wireless One LLC") will acquire (x) all of the assets of Old
Wireless One for consideration comprised of interests in Wireless One LLC and
(y) all of the wireless cable assets and related liabilities of certain
Subsidiaries of the Company with respect to the Contributed Markets for
consideration comprised of interests in Wireless One LLC and promissory notes
of Wireless One LLC.
DESCRIPTION OF CERTAIN INDEBTEDNESS
On November 30, 1994, the Company consummated the private placement of
$40,150,000 in gross proceeds of the Convertible Notes, representing an
aggregate principal amount payable at maturity of $62,351,722 to Jupiter and
an accredited individual pursuant to the terms of the Note Purchase Agreement.
The Convertible Notes were issued with an original issue discount of
approximately 35.607% from the principal amount at the maturity thereof. The
Convertible Notes mature November 1, 2004. The yield to maturity of the
Convertible Notes will be 9% per annum (computed on a semi-annual bond
equivalent basis). No periodic interest payments are due on the Convertible
Notes prior to the Applicable Date, after which interest will be payable in
cash semi-annually in arrears on each May 1 and November 1, commencing with
the first such date after the Applicable Date, which shall be no later than
November 30, 1999. The Convertible Notes may be converted to Common Stock at
the option of the holders thereof at any time prior to maturity, unless
previously redeemed by the Company, into the number of shares of Common Stock
computed by dividing the accreted value thereof (or, if after the Applicable
Date, the principal amount at maturity thereof plus accrued and unpaid
interest) (the "Applicable Amount") by the Conversion Price of $15.34. The
Conversion Price will not be adjusted for accrued original issue discount, but
will be subject to adjustment upon the occurrence of certain events affecting
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the Common Stock. The Convertible Notes are redeemable, in whole or in part,
at the option of the Company at any time on or after November 30, 1999, at a
redemption price equal to the principal amount at maturity thereof plus
accrued and unpaid interest, except that no such redemption may be made unless
the market price of the Common Stock for 20 trading days within a period of 30
consecutive trading days ending no later than the fifth trading day preceding
the redemption notice, which 20 trading days must include the thirtieth
trading day of such period, exceeds 150% of the Conversion Price on each of
such 20 trading days. The Note Purchase Agreement contains certain covenants
that, among other things, limit or prohibit the ability of the Company and its
subsidiaries to pay dividends, to liquidate or dissolve, to merge or sell all
or substantially all of its assets, to sell or lease channel rights, to enter
into a new business, to make certain acquisitions and to incur certain
indebtedness.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain Federal income tax
consequences of the exchange of Old Notes for New Notes pursuant to the
Exchange Offer and of the ownership of the New Notes. The discussion is based
upon the Code, Treasury Regulations, Internal Revenue Service ("IRS") rulings
and pronouncements and judicial decisions now in effect, all of which are
subject to change at any time by legislative, judicial or administrative
action. Any such changes may be applied retroactively in a manner that could
adversely affect a holder of the New Notes. The following discussion assumes
that holders will hold the New Notes, and have held the Old Notes, as capital
assets.
The Company has not sought and will not seek any rulings from the IRS with
respect to the positions of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the Exchange Offer or of the purchase, ownership or
disposition of the New Notes or that any such different position would not be
sustained.
The tax treatment of a holder of New Notes may vary depending on his or its
particular situation or status. This summary does not address the tax
consequences to taxpayers who are subject to special rules such as insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign entities and individuals, persons holding New Notes as a part of a
hedging or conversion transaction or a straddle and holders whose "functional
currency" is not the U.S. dollar, or aspects of Federal income taxation that
may be relevant to a holder based upon such holder's particular tax situation.
In addition, the description does not consider the effect of any applicable
foreign, state, local or other tax laws.
EACH HOLDER SHOULD CONSULT HIS OR ITS OWN TAX ADVISER AS TO THE PARTICULAR
TAX CONSEQUENCES TO HIM OR IT OF THE EXCHANGE OF OLD NOTES FOR NEW NOTES
PURSUANT TO THE EXCHANGE OFFER AND OF THE OWNERSHIP OF NEW NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
Although the matter is not entirely free from doubt, the exchange of an Old
Note for a New Note pursuant to the Exchange Offer should not be treated as an
exchange or otherwise as a taxable event for Federal income tax purposes.
Accordingly, the New Notes should have the same issue price as the Old Notes
and each holder should have the same adjusted basis and holding period in the
New Notes as it had in the Old Notes immediately before the Exchange Offer.
Notwithstanding the foregoing, the IRS might attempt to treat the Exchange
Offer as an "exchange" for Federal income tax purposes. In such event, the
Exchange Offer could be treated as a taxable transaction in which case a
holder could be required to recognize gain or loss equal to the difference
between such holder's tax basis in the Old Notes and the issue price of the
New Notes, and the amount of original issue discount ("OID") on such New
Notes, if any, could be different from the amount of OID on the Old Notes. In
addition, if the issue price of the New Notes is deemed to be less than the
adjusted issue price of the Old Notes, the Company could recognize
cancellation of indebtedness income in an amount equal to such difference. The
following assumes that the exchange of an Old Note for a New Note will not be
treated as an exchange, and that the New Notes and Old Notes will be treated
as the same instruments for Federal income tax purposes.
NEW NOTES
Payments of Interest; Original Issue Discount. Holders of the New Notes will
be required to include payments of qualified stated interest (as defined
below) received thereon in taxable income in accordance with their respective
methods of accounting. In addition, because the Old Notes were issued with
OID, the New Notes will also bear OID that holders will be required to include
in income on a yield-to-maturity basis over the term of the New Notes. As a
result, a holder will generally realize taxable income with respect to the New
Notes as the OID accrues, regardless of the holder's method of accounting.
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Pursuant to final Treasury Regulations regarding OID (the "OID
Regulations"), a debt instrument bears OID if its "stated redemption price at
maturity" exceeds its "issue price." The stated redemption price at maturity
of a New Note will equal its principal amount. The issue price of the New
Notes will equal the issue price of the Old Notes, that was determined by
allocating the issue price of the Units between their component parts based on
their relative fair market values. The holder of an investment unit must use
the issuer's allocation unless the holder discloses on its Federal income tax
return for the year that includes the acquisition date of such Unit that it
plans to use an allocation that is inconsistent with the issuer's allocation.
The Company allocated $958 to each $1,000 principal amount of Old Notes and
$42 to the six Warrants comprising each Unit and has used such allocation to
determine that the issue price of the Old Notes is $958 for each $1,000
principal amount. Such allocation is not binding on the IRS.
Taxation of Original Issue Discount. Each holder of a New Note will be
required to include in gross income an amount equal to the sum of the "daily
portions" of the OID of the New Note for all days during the taxable year in
which such holder holds the New Note ("accrued OID") without regard to when
the cash attributable to such income is received. The daily portion of the OID
is determined by allocating to each day in any "accrual period" a pro rata
portion of OID allocable to that accrual period. The "accrual period" for a
debt instrument may be of any length and may vary in length over the terms of
the New Note, provided that each accrual period is no longer than one year and
each scheduled payment of principal or interest occurs on the first day or the
final day of an accrual period. The amount of OID allocable to any accrual
period is an amount equal to the product of the New Note's adjusted issue
price at the beginning of such accrual period and its yield to maturity
(determined on the basis of compounding at the close of each accrual period
and properly adjusting for the length of the accrual period). OID allocable to
a final accrual period is the difference between the amount payable at
maturity and the adjusted issue price at the beginning of the final accrual
period. Special rules apply for calculating OID for an initial short accrual
period. The "adjusted issue price" of a New Note at the beginning of any
accrual period is equal to its issue price increased by the accrued OID for
each prior accrual period (determined without regard to the amortization of
any acquisition premium, as described below) and reduced by any payments made
on such New Note on or before the first day of the accrual period. Under these
rules, a holder of a New Note will have to include in income increasingly
greater amounts of OID in successive accrual periods.
In general, the Company is required to furnish certain information to the
IRS, and will furnish annually to record holders of the New Notes, other than
corporations and other exempt holders, information with respect to OID
accruing during the calendar year, as well as interest paid during that year.
This information will be based upon the adjusted issue price of the debt
instrument as if the holder were the original holder of the debt instrument.
In addition, each New Note will bear a legend setting forth the issue date,
the issue price, the total amount of OID, the yield to maturity and certain
other information, or such legend will indicate how a holder can receive such
information.
Subsequent holders who purchase New Notes for an amount other than the
adjusted issue price, and/or on a date other than the end of an accrual
period, will be required to determine for themselves the amount of OID, if
any, they are required to include in gross income for Federal income tax
purposes. The subsequent purchaser's aggregate includible income may vary
depending upon the amount paid for the New Note. See "Acquisition Premium of a
Subsequent Purchaser" and "Market Discount of a Subsequent Holder" below.
Effect on Original Issue Discount of Optional Redemption and Offer to
Redeem. In the event of a Change of Control or in the event of certain asset
sales, the Company will be required, subject to certain conditions, to offer
to redeem all of the New Notes. The OID Regulations provide that a required
redemption upon the occurrence of a contingent event such as a change of
control or asset sale will not affect the yield or maturity date of the New
Note unless, based on all of the facts and circumstances as of the issue date,
it is more likely than not that the contingent event will occur. In addition,
the Company may elect to redeem all or some of the New Notes at any time after
April 15, 1999. The OID Regulations provide that an issuer will be deemed to
exercise an optional redemption right with respect to a debt instrument if so
doing would reduce the yield to
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maturity of such debt instrument. The Company does not believe that pursuant
to the OID Regulations any of the redemption provisions of the New Notes
described above should affect the computation of the yield to maturity of any
New Note and will treat the New Notes accordingly.
Acquisition Premium of a Subsequent Purchaser. An acquisition premium will
exist if a subsequent purchaser purchases a New Note at a cost that is in
excess of its "adjusted issue price" (as defined above), but less than or
equal to the sum of all amounts payable on the New Note after the purchase
date. A subsequent holder of a New Note who purchases the New Note at an
acquisition premium may reduce the OID otherwise includible in gross income.
This reduction of OID for a taxable period is equal to the product of (i) the
OID includible in gross income for such taxable period (as otherwise
determined) and (ii) a fraction, the numerator of which is the excess of the
cost of the New Note over its adjusted issue price and the denominator of
which is the excess of the sum of all amounts payable on the New Note after
the purchase date, other than qualified stated interest, over the New Note's
adjusted issue price. The holder of a New Note purchased at an acquisition
premium is permitted to elect to compute OID accruals by treating the purchase
as a purchase at original issue and applying a constant yield method.
Market Discount of a Subsequent Holder. If a subsequent holder of a New Note
that was purchased at a "market discount" thereafter realizes gain upon its
disposition or retirement, such gain will be taxed as ordinary income to the
extent of the market discount that has accrued on a straight-line basis (or on
a constant interest rate basis, if such basis of accrual has been elected by
the holder under Section 1276(b) of the Code) while the debt instrument was
held by such holder. "Market discount" with respect to a New Note is the
amount by which the "revised issue price" of a New Note (i.e., the issue price
increased by the portion of OID previously included in the gross income of
prior holders, determined without regard to any reduction of OID attributable
to any acquisition premium) exceeds the holder's basis in the New Note
immediately after acquisition (unless such excess is less than 0.25% of the
stated redemption price at maturity of the New Note multiplied by the number
of complete years from acquisition by such holder to maturity, in which case
there is no "market discount"). If a subsequent holder makes a gift of a New
Note, accrued market discount, if any, will be recognized as if such holder
had sold such New Note for a price equal to its fair market value. The market
discount rules also provide that a holder who acquires a New Note at a market
discount may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such New Note until the holder disposes of the New Note in a
taxable transaction.
The New Notes provide for optional redemption, in whole or in part, and, in
the case of Change of Control, a mandatory offer to redeem, prior to maturity.
If the New Notes were redeemed, a holder generally would be required to
include in gross income as ordinary income, for Federal income tax purposes,
the portion of the payment that is attributable to accrued market discount on
the New Notes, if any.
A holder of New Notes acquired at a market discount may elect to include
market discount in gross income, for Federal income tax purposes, as the
discount accrues either on a straight-line basis or on a constant interest
rate basis. This current inclusion election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the IRS. If a holder of New Notes makes such an election, the foregoing
rules with respect to the recognition of ordinary income on sales and other
dispositions of such debt instruments, and with respect to the deferral of
interest deductions on indebtedness incurred or maintained to purchase or
carry such debt instruments, would not apply.
Sale, Exchange, Redemption, Retirement or Other Disposition of New Notes. In
general, subject to the market discount provisions discussed above, the holder
of a New Note will recognize gain or loss upon the sale, exchange, redemption,
retirement or other disposition of such debt instrument measured by the
difference between (i) the amount of cash and fair market value of property
received in exchange therefor and (ii) the holder's adjusted tax basis in such
debt instrument.
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A holder's initial tax basis in a New Note will be equal to the issue price
allocated to such New Note. See "Payments of Interest; Original Issue
Discount" above. The holder's initial tax basis in a New Note will be
increased from time to time by the portion of OID previously included in gross
income to the date of disposition (and the accrual of market discount, if any,
that the holder has previously elected to include in gross income on an annual
basis) and decreased from time to time to reflect the receipt of any payments
on such New Note.
Any gain or loss on the sale, exchange, redemption, retirement or other
disposition of a New Note should be capital gain or loss (except as discussed
in "Market Discount of a Subsequent Holder" above), provided the New Note was
a capital asset in the hands of the holder. Any capital gain or loss will be
long-term capital gain or loss if the debt instrument had been held for more
than one year and otherwise will be short-term capital gain or loss.
BACKUP WITHHOLDING
The backup withholding rules require a payor to deduct and withhold a tax if
(i) the payee fails to furnish a taxpayer identification number ("TIN") to the
payor, (ii) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (iii) the payee has failed to report properly the receipt of
"reportable payments" on several occasions and the IRS has notified the payor
that withholding is required or (iv) there has been a failure of the payee to
certify under the penalty of perjury that the payee is not subject to
withholding under Section 3406 of the Code. If any one of the events discussed
above occurs, the Company, its paying agent or other withholding agent will be
required to withhold a tax equal to 31% of any "reportable payment" made in
connection with the New Notes. A "reportable payment" includes, among other
things, interest actually paid and OID in respect of a New Note and amounts
paid through brokers in retirement of a New Note. Any amounts withheld from a
payment to a holder under the backup withholding rules will be allowed as a
refund or credit against such holder's Federal income tax, provided that the
required information is furnished to the IRS. Certain holders (including,
among others, corporations and certain tax exempt organizations) are not
subject to the backup withholding and information reporting requirements. A
holder should consult his or its tax advisor as to his or its qualification
for exemption from backup withholding and the procedure for obtaining such an
exemption.
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PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 promulgated under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement with any person to
participate in the distribution of such New Notes and neither such holder nor
any such other person is engaging in or intends to engage in a distribution of
such New Notes. Accordingly, any holder who is an affiliate of the Company or
any holder using the Exchange Offer to participate in a distribution of the
New Notes will not be able to rely on such interpretations by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a resale transaction.
Notwithstanding the foregoing, each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with any resale of New Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities (other than Old Notes
acquired directly from the Company). The Company has agreed that, for a period
of 120 days from the date of this Prospectus, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until , 1996 (90 days from the date
of this Prospectus), all dealers effecting transactions in the New Notes may
be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker-dealer that participates
in a distribution of such New Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
New Notes and any commissions or concessions received by any such persons may
be deemed to be underwriting compensation under the Securities Act. The Letter
of Transmittal states that by acknowledging that it will deliver, and by
delivering, a prospectus as required, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 120 days from the date of this Prospectus, the Company will
send a reasonable number of additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company will pay all the
expenses incident to the Exchange Offer (which shall not include the expenses
of any holder in connection with resales of the New Notes). The Company has
agreed to indemnify the Initial Purchasers and any broker-dealers
participating in the Exchange Offer against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the New Notes will be
passed upon for the Company by O'Sullivan Graev & Karabell, LLP, New York, New
York.
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EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1993 and 1994, and for each of the years in the three-year period
ended December 31, 1994, and the balance sheets of Cross Country Division as
of December 31, 1993 and 1994, and the related statements of operations and
division equity and cash flows for the year ended December 31, 1993, the
period from January 1, 1994 to August 18, 1994 and the period from August 19,
1994 to December 31, 1994 have been included herein and in the Registration
Statement of which this Prospectus forms a part in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of
Cross Country Division contains an explanatory paragraph that refers to a
business combination in 1994 accounted for as a purchase involving assets
comprising a portion of Cross Country Division. As a result of the
acquisition, financial information of Cross Country Division for periods after
August 18, 1994 is presented on a different cost basis than that for periods
before August 18, 1994 and, therefore, such information is not comparable.
The financial statements of Technivision as of May 31, 1995 and 1994, and
for each of the years in the three-year period ended May 31, 1995, have been
included herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP covering the May 31, 1995,
financial statements contains an explanatory paragraph that states that the
Technivision recurring losses from operations and excess of current
liabilities over current assets raise substantial doubt about the entity's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of that
uncertainty.
The consolidated balance sheets as of June 30, 1994 and 1995 and the
consolidated statements of operations, stockholders' equity and cash flows of
CMAX for the period December 18, 1992 to June 30, 1993 and the fiscal years
ended June 30, 1994 and 1995, and of the CMAX Predecessor for the period
commencing July 1, 1992 to December 17, 1992, included in this Prospectus have
been audited by Coopers & Lybrand L.L.P., independent certified public
accountants, as indicated in their report with respect thereto, which includes
an explanatory paragraph which states that specified circumstances raise
substantial doubt about CMAX's ability to continue as a going concern, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of American Wireless Systems, Inc. included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
The consolidated financial statements of Fort Worth Wireless Cable T.V.
Associates included in this Prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said report. Reference is made
to said report which includes an explanatory paragraph that describes factors
raising substantial doubt about the Company's ability to continue as a going
concern.
The consolidated financial statements of Wireless Cable TV Associates #38
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said report. Reference is made
to said report which includes an explanatory paragraph that describes factors
raising substantial doubt about the Company's ability to continue as a going
concern.
The combined financial statements of RuralVision Central, Inc. and
RuralVision South, Inc. included in this Prospectus have been included in
reliance upon the report of Grant Thornton LLP, independent certified public
accountants, appearing herein and upon the authority of said firm as experts
in accounting and auditing.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
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FINANCIAL STATEMENTS:
Heartland Wireless Communications, Inc.:
Independent Auditors' Report............................................ F-3
Consolidated Balance Sheets as of December 31, 1993 and 1994 and
September 30, 1995 (unaudited)......................................... F-4
Consolidated Statements of Operations for the years ended December 31,
1992, 1993 and 1994 and for the nine months ended September 30, 1994
and 1995 (unaudited)................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1992, 1993 and 1994 and for the nine months ended
September 30, 1995 (unaudited)......................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1992, 1993 and 1994 and for the nine months ended September 30, 1994
and 1995 (unaudited)................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
American Wireless Systems, Inc.:
Report of Independent Public Accountants................................ F-23
Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995
(unaudited)............................................................ F-24
Statements of Operations for the ten months ended December 31, 1992, the
years ended December 31, 1993 and 1994 and for the nine months ended
September 30, 1994 and 1995 (unaudited)................................ F-25
Statements of Stockholders' Equity for the ten months ended December 31,
1992, the years ended December 31, 1993 and 1994 and for the nine
months ended September 30, 1995 (unaudited)............................ F-26
Statements of Cash Flows for the ten months ended December 31, 1992, the
years ended December 31, 1993 and 1994 and for the nine months ended
September 30, 1994 and 1995 (unaudited)................................ F-27
Notes to Financial Statements........................................... F-28
Fort Worth Wireless Cable T.V. Associates:
Report of Independent Public Accountants................................ F-40
Consolidated Balance Sheets as of December 31, 1993 and 1994 and
September 30, 1995 (unaudited)......................................... F-41
Consolidated Statements of Operations for the years ended December 31,
1992, 1993 and 1994 and for the nine months ended September 30, 1994
and 1995 (unaudited)................................................... F-42
Consolidated Statements of Partners' Equity for the years ended December
31, 1992, 1993 and 1994 and for the nine months ended September 30,
1995 (unaudited)....................................................... F-43
Consolidated Statements of Cash Flows for the years ended December 31,
1992, 1993 and 1994 and for the nine months ended September 30, 1994
and 1995 (unaudited)................................................... F-44
Notes to Consolidated Financial Statements.............................. F-45
Wireless Cable T.V. Associates #38:
Report of Independent Public Accountants................................ F-50
Consolidated Balance Sheets as of December 31, 1993 and 1994 and
September 30, 1995 (unaudited)......................................... F-51
Consolidated Statements of Operations for the ten months ended December
31, 1992, the years ended December 31, 1993 and 1994 and the nine
months ended September 30, 1994 and 1995 (unaudited)................... F-52
Consolidated Statements of Partners' Equity for the ten months ended
December 31, 1992, the years ended December 31, 1993 and 1994 and the
nine months ended September 30, 1995 (unaudited)....................... F-53
Consolidated Statements of Cash Flows for the ten months ended December
31, 1992, the years ended December 31, 1993 and 1994 and the nine
months ended September 30, 1994 and 1995 (unaudited)................... F-54
Notes to Consolidated Financial Statements.............................. F-55
</TABLE>
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CableMaxx, Inc. and Supreme Cable Co., Inc. and Subsidiaries:
Report of Independent Accountants...................................... F-61
Consolidated Balance Sheets as of June 30, 1994 and 1995, and September
30, 1995 (unaudited).................................................. F-62
Consolidated Statements of Operations for the period of July 1, 1992 to
December 17, 1992, the period of December 18, 1992 to June 30, 1993,
the years ended June 30, 1994 and 1995, and the three month periods
ended September 30, 1994 and 1995, (unaudited)........................ F-63
Consolidated Statements of Stockholders' Equity for the period of
December 18, 1992 to June 30, 1993, the years ended June 30, 1994 and
1995, and the three month period ended September 30, 1995,
(unaudited)........................................................... F-64
Consolidated Statements of Cash Flows for the period of July 1, 1992 to
December 17, 1992, the period of December 18, 1992 to June 30, 1993,
the years ended June 30, 1994 and 1995, and the three month periods
ended September 30, 1994 and 1995, (unaudited)........................ F-65
Notes to Consolidated Financial Statements............................. F-66
TechniVision, Inc.
Independent Auditors' Report........................................... F-75
Balance Sheets as of May 31, 1994 and 1995 and November 30, 1995
(unaudited)........................................................... F-76
Statements of Operations for the years ended May 31, 1993, 1994 and
1995 and for the six months ended November 30, 1994 and 1995
(unaudited)........................................................... F-77
Statements of Stockholders' Deficit for the years ended May 31, 1993,
1994 and 1995 and for the six months ended November 30, 1995
(unaudited)........................................................... F-78
Statements of Cash Flows for the years ended May 31, 1993, 1994 and
1995 and for the six months ended November 30, 1994 and 1995
(unaudited)........................................................... F-79
Notes to Financial Statements.......................................... F-80
UNAUDITED PRO FORMA FINANCIAL INFORMATION:
Heartland Wireless Communications, Inc.:
Introduction to Unaudited Pro Forma Condensed Financial Statements for
Consummated Events.................................................... F-85
Unaudited Pro Forma Condensed Consolidated Balance Sheet for Consum-
mated Events as of September 30, 1995................................. F-86
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
Consummated Events for the year ended December 31, 1994............... F-87
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
Consummated Events for the nine months ended September 30, 1995....... F-88
Notes to Pro Forma Statements for Consummated Events................... F-89
RuralVision Central, Inc. and RuralVision South, Inc.:
Report of Independent Certified Public Accounts........................ F-91
Combined Balance Sheets as of December 31, 1992 and 1993 and August 18,
1994 (unaudited)...................................................... F-92
Combined Statements of Operations for the years ended December 31,
1991, 1992 and 1993 and for the six months ended June 30, 1993 (unau-
dited) and the period from January 1, 1994 to August 18, 1994 (unau-
dited)................................................................ F-93
Combined Statements of Stockholders' Deficit for the years ended Decem-
ber 31, 1991, 1992 and 1993 and the period from January 1, 1994 to Au-
gust 18, 1994 (unaudited)............................................. F-94
Combined Statements of Cash Flows for the years ended December 31,
1991, 1992 and 1993 and for the six months ended June 30, 1993 (unau-
dited) and the period from January 1, 1994 to August 18, 1994 (unau-
dited)................................................................ F-95
Notes to Combined Financial Statements................................. F-96
Cross Country Division:
Independent Auditor's Report........................................... F-103
Balance Sheets as of December 31, 1993 and 1994 and June 30, 1995 (un-
audited).............................................................. F-104
Statements of Operations and Division Equity for the year ended Decem-
ber 31, 1993, the period from January 1, 1994 to August 18, 1994, the
six months ended June 30, 1994 (unaudited), the period from August 19,
1994 to December 31, 1994 and the six months ended June 30, 1995 (un-
audited).............................................................. F-105
Statements of Cash Flows for the year ended December 31, 1993, the
period from January 1, 1994 to August 18, 1994, the six months ended
June 30, 1994 (unaudited), the period from August 19, 1994 to December
31, 1994 and the six months ended June 30, 1995 (unaudited)........... F-106
Notes to Financial Statements.......................................... F-107
</TABLE>
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Heartland Wireless Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Heartland
Wireless Communications, Inc. and subsidiaries as of December 31, 1993 and
1994, 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, 1994. 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heartland
Wireless Communications, Inc. and subsidiaries as of December 31, 1993 and
1994, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 3, 1995, except as to note 11 which is as of March 27, 1995
F-3
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- SEPTEMBER 30,
1993 1994 1995
---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 815,305 $11,985,953 $ 37,155,064
Restricted assets--investments in debt
securities........................... -- -- 11,669,874
Subscriber receivables, net of
allowance for doubtful accounts of
$25,082 in 1993, $122,901 in 1994 and
$551,866 in 1995..................... 74,560 219,287 1,407,830
Prepaid expenses and other............ 300,967 829,790 1,981,640
Note receivable (note 9).............. -- 2,000,000 --
Assets held for sale (note 8)......... -- 12,500,000 9,200,000
---------- ----------- ------------
Total current assets................. 1,190,832 27,535,030 61,414,408
---------- ----------- ------------
Investment in joint venture (note 8)... -- 12,044,392 --
Systems and equipment, net (notes 2 and
3).................................... 3,036,226 16,765,179 46,027,017
Leased license investment, net of
accumulated amortization of $14,167 in
1993, $179,593 in 1994 and $785,362 in
1995 (note 8)......................... 4,286,867 16,740,139 64,726,389
Excess of cost over fair value of net
assets acquired, net of accumulated
amortization of $80,815 in 1994 and
$223,819 in 1995 (note 4)............. -- 2,565,178 4,470,286
Restricted assets--investment in debt
securities............................ -- -- 13,077,340
Other assets, net...................... 151,141 2,271,610 10,435,034
---------- ----------- ------------
$8,665,066 $77,921,528 $200,150,474
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 522,240 $ 3,840,744 $ 3,745,724
Accrued expenses and other
liabilities.......................... 329,783 1,062,253 6,498,639
Current portion of long-term debt
(note 3)............................. 338,851 19,918 616,610
---------- ----------- ------------
Total current liabilities............ 1,190,874 4,922,915 10,860,973
---------- ----------- ------------
Long-term debt, less current portion
(note 3).............................. 1,253,678 40,485,934 139,428,429
Deferred income taxes (note 6)......... -- 1,045,959 1,287,560
Other long-term liabilities............ 13,520 -- --
Minority interests in subsidiaries
(note 4).............................. 1,714,426 1,385,835 279,695
Stockholders' equity (note 5):
Common stock, $.001 par value;
authorized 50,000,000 shares, issued
8,000,000 shares in 1993, 11,109,280
shares in 1994 and 12,476,393 shares
in 1995.............................. 8,000 11,109 12,476
Additional paid-in capital............ 5,029,675 33,658,204 63,047,864
Accumulated deficit................... (545,107) (3,588,428) (14,766,523)
---------- ----------- ------------
Total stockholders' equity........... 4,492,568 30,080,885 48,293,817
---------- ----------- ------------
Commitments and contingencies (notes 7,
8 and 10)............................. $8,665,066 $77,921,528 $200,150,474
========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
--------------------------------- -------------------------
1992 1993 1994 1994 1995
-------- ---------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $205,382 $ 868,765 $ 2,229,494 $ 1,289,526 $ 9,292,837
-------- ---------- ----------- ----------- ------------
Operating expenses:
Systems operations..... 36,042 118,649 527,476 320,029 2,894,074
Cost of goods sold..... -- 202,162 235,025 235,025 --
Selling, general and
administrative........ 147,927 646,611 4,183,307 2,042,124 7,449,699
Depreciation and amor-
tization.............. 34,919 138,560 1,097,668 418,960 3,966,120
-------- ---------- ----------- ----------- ------------
Total operating ex-
penses................ 218,888 1,105,982 6,043,476 3,016,138 14,309,893
-------- ---------- ----------- ----------- ------------
Operating loss......... (13,506) (237,217) (3,813,982) (1,726,612) (5,017,056)
Other income (expense):
Interest income........ 1,185 9,610 379,654 189,308 2,044,092
Interest expense....... (1,392) (82,916) (589,767) (128,789) (8,908,459)
Equity in losses of
joint venture (note
8).................... -- -- (386,985) (163,119) (128,663)
Other expense (notes 3,
4 and 9).............. (37,109) (95,578) (227,204) (34,192) (475,146)
-------- ---------- ----------- ----------- ------------
Total other income (ex-
pense)................ (37,316) (168,884) (824,302) (136,792) (7,468,176)
-------- ---------- ----------- ----------- ------------
Loss before income tax-
es.................... (50,822) (406,101) (4,638,284) (1,863,404) (12,485,232)
Income tax benefit (note
6)..................... -- -- 1,594,963 649,510 1,307,137
-------- ---------- ----------- ----------- ------------
Net loss............... $(50,822) $ (406,101) $(3,043,321) $(1,213,894) $(11,178,095)
======== ========== =========== =========== ============
Net loss per common
share.................. $ (.01) $ (.05) $ (.30) $ (.13) $ (.96)
======== ========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
---------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1991................... 8,000,000 $ 8,000 $ 253,593 $ (88,184) $ 173,409
Equity transactions of
subsidiaries (note 4).. -- -- 881,235 -- 881,235
Net loss................ -- -- -- (50,822) (50,822)
---------- ------- ----------- ------------ ------------
Balance, December 31,
1992.................. 8,000,000 8,000 1,134,828 (139,006) 1,003,822
Formation of Heartland
Wireless Communica-
tions, Inc.
(note 1)............... -- -- 3,000,000 -- 3,000,000
Equity transactions of
subsidiaries (note 4).. -- -- 807,472 -- 807,472
Other (note 9).......... -- -- 87,375 -- 87,375
Net loss................ -- -- -- (406,101) (406,101)
---------- ------- ----------- ------------ ------------
Balance, December 31,
1993.................. 8,000,000 8,000 5,029,675 (545,107) 4,492,568
Issuance of common stock
pursuant to initial
public offering (note
5)..................... 2,415,000 2,415 22,349,798 -- 22,352,213
Issuance of common stock
for acquisitions (note
4)..................... 694,280 694 6,278,731 -- 6,279,425
Net loss................ -- -- -- (3,043,321) (3,043,321)
---------- ------- ----------- ------------ ------------
Balance, December 31,
1994.................. 11,109,280 11,109 33,658,204 (3,588,428) 30,080,885
Issuance of common
stock, primarily for
minority interests and
other acquisitions (un-
audited)............... 1,367,113 1,367 29,389,660 -- 29,391,027
Net loss (unaudited).... -- -- -- (11,178,095) (11,178,095)
---------- ------- ----------- ------------ ------------
Balance, September 30,
1995 (unaudited)...... 12,476,393 $12,476 $63,047,864 $(14,766,523) $ 48,293,817
========== ======= =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------------- -------------------------
1992 1993 1994 1994 1995
---------- ---------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net loss............... $ (50,822) $ (406,101) $(3,043,321) $(1,213,894) $(11,178,095)
Adjustments to recon-
cile net loss to net
cash provided by (used
in) operating activi-
ties:
Depreciation and amor-
tization.............. 34,919 138,560 1,097,668 418,960 3,966,120
Deferred income tax
benefit............... -- -- (1,594,963) (649,510) (1,307,137)
Accretion on convert-
ible discount notes... -- -- 301,125 -- 3,156,858
Equity in losses of
joint venture......... -- -- 386,985 163,119 128,663
Other.................. 5,100 65,668 (16,205) 7,890 12,216
Changes in assets and
liabilities:
Subscriber receiv-
ables................ (6,123) (68,437) (57,362) (21,942) (1,160,242)
Inventories........... -- (251,172) -- -- --
Prepaid expenses and
other................ (6,496) (395,300) (656,061) (308,385) (765,834)
Accounts payable, ac-
crued expenses and
other liabilities.... 51,442 809,962 4,292,617 567,250 4,789,383
---------- ---------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities.......... 28,020 (106,820) 710,483 (1,036,512) (2,358,068)
---------- ---------- ----------- ----------- ------------
Cash flows from invest-
ing activities:
Investment in joint
venture............... -- -- (12,431,379) (11,649,908) (5,426,432)
Proceeds from assets
held for sale......... -- -- -- -- 3,323,250
Purchases of systems
and equipment......... (604,082) (2,072,937) (12,414,501) (4,011,480) (25,575,252)
Expenditures for leased
licenses.............. (797,655) (3,068,084) (3,354,471) (2,465,265) (1,592,024)
Restricted assets --
investment in debt se-
curities.............. -- -- -- (7,283,777) (24,747,214)
Acquisitions........... -- -- (16,300,000) -- (11,422,814)
Issuance of note re-
ceivable.............. -- -- (2,000,000) -- --
Other.................. -- -- -- -- (2,250,000)
---------- ---------- ----------- ----------- ------------
Net cash used in in-
vesting activities.. (1,401,737) (5,141,021) (46,500,351) (25,410,430) (67,690,486)
---------- ---------- ----------- ----------- ------------
Cash flows from financ-
ing activities:
Proceeds from issuance
of common stock....... -- 2,000,000 22,352,213 22,283,365 --
Proceeds from Units Of-
fering................ -- -- -- -- 100,000,000
Proceeds from minority
interest owners....... 1,430,900 1,553,355 -- -- --
Purchase of minority
interests............. -- -- (1,608,895) (1,408,858) --
Proceeds from short-
term borrowings and
notes payable......... -- 2,992,364 10,408,542 10,408,542 3,070,070
Proceeds from convert-
ible discount notes... -- -- 40,150,000
Payments on short-term
borrowings and notes
payable............... -- (399,835) (11,946,344) (2,001,071) (3,105,977)
Payments to stockhold-
ers and affiliates.... (523,493) (727,189) -- -- --
Proceeds from stock-
holders and affili-
ates.................. 578,035 479,480 -- -- --
Debt issuance costs.... -- -- (2,395,000) (495,000) (4,783,975)
Other.................. -- -- -- -- 37,547
---------- ---------- ----------- ----------- ------------
Net cash provided by
financing activi-
ties................ 1,485,442 5,898,175 56,960,516 28,786,978 95,217,665
---------- ---------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash equiv-
alents................. 111,725 650,334 11,170,648 2,340,036 25,169,111
Cash and cash equiva-
lents at beginning of
period................. 53,246 164,971 815,305 815,305 11,985,953
---------- ---------- ----------- ----------- ------------
Cash and cash equiva-
lents at end of peri-
od..................... $ 164,971 $ 815,305 $11,985,953 $ 3,155,341 $ 37,155,064
========== ========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1994
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and History
Heartland Wireless Communications, Inc. (the "Company") develops, owns and
operates wireless cable television systems. The Company has wireless cable
channel rights in various wireless cable television markets located primarily
in the central United States. The Company's first operational system, located
in Ada, Oklahoma, commenced operations in April 1992. Currently, the Company
provides service in fifteen markets located in Texas, Oklahoma, Kansas and
Louisiana. Systems in other markets are currently under construction and
development by the Company.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Significant intercompany balances and
transactions between the entities have been eliminated in consolidation.
The Company was formed in October 1993 to succeed to the wireless cable
businesses previously conducted by two of the current principal stockholders
of the Company. The two stockholders contributed their ownership in all
capital stock of entities engaged in the wireless cable businesses, including
Wireless Communications, Inc. ("WCI") which was formed in September 1990. In
addition, the stockholders agreed to lease all other wireless cable channel
lease rights controlled by them to the Company and grant to the Company an
option to purchase such channel rights at a nominal cost. The formation of the
Company and consolidation of the existing wireless cable businesses has been
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests. Accordingly, the Company's results of
operations for periods prior to its formation include the results of
operations of all wireless cable businesses previously conducted, either
directly or indirectly, through various controlled entities of the
stockholders, including WCI.
(c) Systems and Equipment
Systems and equipment are stated at cost and include the cost of
transmission equipment as well as subscriber installations. Reception
equipment on subscriber premises and costs associated with subscriber
installations are capitalized. Upon subscriber disconnect, the Company
continues to depreciate the full capitalized installation cost subsequent to
the disconnection. Depreciation and amortization are recorded on a straight-
line basis for financial reporting purposes over useful lives ranging from 6
to 10 years. Repair and maintenance costs are charged to expense when
incurred; renewals and betterments are capitalized.
Equipment awaiting installation consists primarily of accessories, parts and
supplies for subscriber installations and is stated at the lower of average
cost or market.
(d) Leased License Investment
Leased license investment includes costs incurred to acquire 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 20 years beginning with inception of service in each
respective market. As of December 31, 1994, approximately $12,040,000 of the
leased license investment was not yet subject to amortization. The Company
continually reevaluates the propriety of the carrying amounts of the leased
license investment with respect to each market as well as the amortization
period based on management's estimate of
F-8
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the fair value of each market to determine whether current events and
circumstances warrant adjustments to the carrying amounts or a revised
estimate of the useful life.
(e) Revenue Recognition
Revenues from subscribers are recognized in the period of service. Revenues
from the sale of subscriber premises equipment are recognized upon delivery of
such equipment to a subscriber ($237,730 in 1994 and $213,005 in 1993).
Installation fees are recognized upon origination of service to a subscriber
to the extent of costs incurred to obtain subscribers. Installation revenues
in excess of such costs will be deferred and amortized over six years.
(f) Systems Operations
Systems operations expenses consist principally of programming fees, channel
lease costs, tower rental and other costs of providing services.
(g) Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
(h) Sales of Subsidiary Stock
Gains and losses from the sales of stock by the Company's majority-owned
subsidiaries are accounted for as equity transactions in consolidation.
(i) Net Loss Per Common Share
Net loss per common share is based on the net loss applicable to the
weighted average number of common shares outstanding of 8,000,000 for the
years ended December 31, 1992 and 1993, 10,041,000 for the year ended December
31, 1994 and 9,693,000 and 11,624,000 for the nine-month periods ended
September 30, 1994 and 1995, respectively. The weighted average number of
common shares outstanding in each period gives retroactive effect to an 8,000-
for-one split of the Company's common stock (see note 5).
Shares issuable upon exercise of stock options and warrants are antidilutive
and have been excluded from the calculation. Fully-diluted loss per common
share is not presented as it would not materially differ from primary loss per
common share.
(j) Statements of Cash Flows
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
During the years ended December 31, 1992 and 1993, the Company had noncash
investing and financing activities. During 1992, an affiliate contributed
systems and equipment in the amount of $133,403 for preferred stock in a
subsidiary of the Company. During 1993, the Company acquired certain systems
and equipment by assuming notes payable in the amount of $388,017, certain
individuals contributed assets and services in the amount of $96,000 in
exchange for common and preferred stock in certain of the Company's
subsidiaries, and stockholders of the Company contributed certain equipment
and channel rights in the amount of $114,511.
Cash paid during 1993 and 1994 for interest was $67,124 and $296,596,
respectively (none in 1992).
F-9
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(k) Interim Financial Information
In the opinion of management, the accompanying unaudited consolidated
condensed financial information of the Company contains all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of September 30, 1995, and the
results of operations and cash flows for the nine months ended September 30,
1994 and 1995. These results are not necessarily indicative of the results to
be expected for the full fiscal year.
(2) SYSTEMS AND EQUIPMENT
Systems and equipment consists of the following at December 31, 1993 and
1994:
<TABLE>
<CAPTION>
1993 1994
---------- -----------
<S> <C> <C>
Equipment awaiting installation................... $ 336,920 $ 3,034,453
Subscriber premises equipment and installation
costs............................................ 676,347 6,581,632
Transmission equipment and system construction
costs............................................ 1,969,039 7,350,607
Office furniture and equipment.................... 139,946 406,936
Buildings and leasehold improvements.............. 70,286 145,550
---------- -----------
3,192,538 17,519,178
Accumulated depreciation and amortization......... (156,312) (753,999)
---------- -----------
$3,036,226 $16,765,179
========== ===========
</TABLE>
As of December 31, 1994, equipment awaiting installation and approximately
$914,000 of transmission equipment and system construction costs were not yet
subject to depreciation.
(3) LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1994 consists of the following:
<TABLE>
<CAPTION>
1993 1994
---------- -----------
<S> <C> <C>
Convertible subordinated discount notes.............. $ -- $40,451,125
Notes payable........................................ 1,592,529 54,727
---------- -----------
1,592,529 40,505,852
Less current portion................................. 338,851 19,918
---------- -----------
$1,253,678 $40,485,934
========== ===========
</TABLE>
On November 30, 1994, the Company consummated the private placement of
$40,150,000 in gross proceeds of 9% Convertible Subordinated Discount Notes
("Convertible Notes") pursuant to the terms of a Note Purchase Agreement. The
Convertible Notes accrete at a rate of 9% compounded semiannually, to an
aggregate principal amount of $62.4 million at November 30, 1999. Thereafter,
interest accrues at the rate of 9% per annum and is payable semiannually from
November 30, 1999 or earlier upon the occurrence of a Material Default (as
defined in the Note Purchase Agreement). The Convertible Notes mature on
November 1, 2004 and are subordinated as to all existing and future
indebtedness of the Company other than indebtedness that is expressly
subordinated to the Convertible Notes. The Note Purchase Agreement contains
covenants that, among other things, prohibit or limit the ability of the
Company and its subsidiaries to pay dividends, to sell or lease channel
rights, to make certain acquisitions and incur certain indebtedness.
At the option of a holder, the Convertible Notes are convertible into common
stock of the Company at $15.34 per share (the "Conversion Price"). The
Convertible Notes are redeemable at the option of the Company
F-10
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at any time on or after November 30, 1999 at 100% of the principal amount at
maturity plus accrued and unpaid interest. However, such redemption right is
only available if the market price of the Company's common stock exceeds 150%
of the Conversion Price for a specified trading period. As the Convertible
Notes have been outstanding for only a short period of time, the carrying
amounts of borrowings outstanding at December 31, 1994 approximate estimated
fair value.
On March 31, 1994, the Company entered into an agreement with a bank for a
$15,000,000 Revolving Credit Facility (the "Facility"). Outstanding borrowings
under the Facility will bear interest at the bank's corporate base rate plus
1.5% per annum or LIBOR plus 4.0% per annum, at the Company's option. The
Facility will be on a revolving basis for three years with all outstanding
borrowings at the end of the third year converting to a term loan payable in
equal quarterly installments over three years. The Company must pay an annual
commitment fee of 3/8% per annum on the unused portion of the Facility. The
total amount of borrowings under the Facility will be subject to certain
limitations. Borrowings under the Facility will be secured by substantially
all the Company's assets and the capital stock of the Company's subsidiaries.
The Facility contains certain restrictive covenants that, among other things,
require the Company to satisfy certain financial ratios, and limit the ability
of the Company and its subsidiaries to pay dividends, repurchase Company stock
and incur additional indebtedness. No amounts were outstanding under the
Facility at December 31, 1994. Prior to borrowing any funds under the
Facility, the Company would need to obtain a waiver from the bank of certain
conditions and covenants relating to the sale of the Convertible Notes. The
Company does not currently intend to borrow any funds under the Facility. The
Company is actively pursuing alternative bank financing on terms, including an
increased amount of a facility, which the Company believes are more favorable
than those under the Facility.
In 1994, the Company incurred a recapitalization charge of $205,575 that is
included in other expense in the accompanying statement of operations. This
charge related to costs incurred in connection with a rescinded offering of
debt securities.
Aggregate maturities of long-term debt as of December 31, 1994 for the five
years ending December 31, 1999 are as follows: 1995--$19,918; 1996--$21,054
and 1997--$13,755.
(4) MINORITY INTERESTS
In connection with the development of certain wireless cable television
markets, the Company has sold stock in certain of its subsidiary companies
principally for cash. Total consideration received from the sales of
subsidiary stock amounted to $1,430,900 in 1992 and $1,553,355 in 1993. In
addition to providing a portion of the cash necessary for market development,
the sales of subsidiary stock were intended to provide for local community
involvement and ownership in the related wireless cable systems. Minority
ownership interests in the outstanding common stock of such subsidiary
companies range from 5% to 49.9999%.
As a result of the sales of subsidiary stock, the Company's investment in
majority-owned subsidiaries increased by $881,235 in 1992 and $807,472 in
1993. Such increases have been recorded by the Company as additional paid-in
capital in the accompanying consolidated statements of stockholders' equity.
The Company has not provided deferred income taxes on such increases since the
Company ultimately expects to recover its investments in the subsidiaries in a
tax-free manner.
Certain of the Company's subsidiaries have issued preferred stock, a portion
of which is held by outside third parties. Preferred stock owned by outside
third parties in the amounts of $453,935 at December 31, 1993 and 1994 has
been reflected as minority interests in the accompanying consolidated balance
sheets. Dividends on the preferred stock accrue at 8% of the stated value per
share per year and are cumulative. Preferred stock dividends of the
subsidiaries with respect to the third party ownership were $14,006 in 1992,
$26,606 in 1993 and $36,315 in 1994 and are included in other expense in the
accompanying statements of operations.
F-11
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In April 1994, the Company acquired all of the outstanding minority
ownership interests held by the minority interest owner in six of the
Company's majority-owned subsidiaries in exchange for the issuance by the
Company of 650,000 restricted shares of common stock. As a result of the
acquisition, the six subsidiaries became wholly-owned subsidiaries of the
Company. Additionally, at various dates during 1994, the Company acquired
minority interests in certain other subsidiaries for an aggregate of
approximately $1,609,000 in cash and 44,280 restricted shares of common stock.
The acquisitions of the minority ownership interests were accounted for as
purchases. For financial reporting purposes, the total purchase price was
approximately $7,882,000 and assumes a value per share of $8.93 to $10.75 for
the restricted shares. The excess (approximately $2,646,000) of the purchase
price over the fair value of the net identifiable assets acquired will be
amortized on a straight-line basis over 20 years. Pro forma disclosures that
include the effects of the acquisitions of the minority interests would not be
materially different from historical information and have not been presented.
In February 1995, the Company offered to exchange approximately 380,000
shares of its common stock for the minority interests in certain of its
subsidiaries (the "Minority Interest Exchange Offer"). The exchange ratio with
respect to each minority interest was determined by management of the Company
based upon the estimated fair market value of each respective subsidiary. The
Minority Interest Exchange Offer expired on March 15, 1995. On March 15, 1995,
Heartland issued an aggregate of 304,038 shares of common stock in exchange
for minority interests in 21 subsidiaries.
(5) STOCKHOLDERS' EQUITY
(a) Change in Capital Structure
On January 18, 1994, the board of directors filed a restated certificate of
incorporation to increase the number of authorized shares of common stock to
50,000,000, change the common stock from $.01 par to $.001 par value and
authorize 10,000,000 shares of preferred stock at $.01 par value per share. In
addition, the Company effected an 8,000-for-one split of its common stock. The
consolidated financial statements, including all references to the number of
shares of common stock and all per share information, have been adjusted to
reflect the common stock split and other changes in the capital structure on a
retroactive basis.
(b) Public Offering
On April 28, 1994, the Company completed an initial public offering of
2,100,000 shares of its common stock. On June 9, 1994, the Company sold an
additional 315,000 shares of common stock upon exercise by the underwriters of
their over-allotment option. The aggregate net proceeds to the Company were
approximately $22.3 million. The net proceeds have been used to repay
indebtedness, construct operating systems, finance operating losses in certain
markets and corporate overhead, acquire certain minority interests in
subsidiaries, acquire or secure the Company's existing channel rights and fund
a portion of the acquisition of certain RuralVision Joint Venture assets.
(c) Stock Options
In April 1994, the Company adopted the 1994 Employee Stock Option Plan which
provides for the granting of options to purchase a maximum of 950,000 shares
of common stock. Options may be granted to key employees at exercise prices of
not less than 100% of the fair market value of the common stock on the date of
grant. Options typically vest over a five-year period (although options
granted to certain employees are 40% vested upon grant and vest an additional
20% per year over a three-year period) and expire at the end of option periods
of not more than seven years.
F-12
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1994, the Company also adopted the 1994 Stock Option Plan for Non-
Employee Directors which provides for the granting of options to purchase a
maximum of 50,000 shares of common stock. Generally, each non-employee
director will be granted on an annual basis an option to acquire 2,000 shares
of common stock at exercise prices equal to the fair market value of the
common stock on the date of grant. Options granted generally become
exercisable in 25% cumulative annual installments beginning one year from the
date of grant and expire at the end of option periods of not more than seven
years.
The following table summarizes the 1994 activity in stock options under
these plans:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS PRICE RANGE
--------- --------------
<S> <C> <C>
Granted............................................ 543,000 $10.50-$11.125
Cancelled.......................................... (130,000) $10.50
--------
Outstanding at December 31, 1994................. 413,000 $10.50- 11.125
========
Exercisable at December 31, 1994................. 148,000 $10.50
========
</TABLE>
As of December 31, 1994, 587,000 shares were available for grant under the
stock option plans.
(6) INCOME TAXES
Income tax benefit of $1,594,963 for the year ended December 31, 1994
consists of a deferred tax benefit.
Income tax benefit for the years ended December 31, 1992, 1993 and 1994
differed from the amount computed by applying the U.S. federal income tax rate
of 34% to loss before income taxes as a result of the following:
<TABLE>
<CAPTION>
1992 1993 1994
-------- --------- -----------
<S> <C> <C> <C>
Computed "expected" tax benefit.......... $(17,299) $(138,074) $(1,577,017)
Amortization of goodwill................. -- -- 27,540
State tax benefit, net................... -- -- (103,500)
Loss for which no tax benefit was recog-
nized................................... 17,299 138,074 58,014
-------- --------- -----------
$ -- $ -- $(1,594,963)
======== ========= ===========
</TABLE>
F-13
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1993 and 1994 are presented below:
<TABLE>
<CAPTION>
1993 1994
--------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts............................ $ 8,528 $ 45,473
Basis differences between assigned values and tax
bases of stock of subsidiaries................... -- 791,453
Investment in joint venture....................... -- 609,668
Accretion on Convertible Notes ................... -- 115,486
Leased license investment, principally due to
start-up costs not yet deductible for tax
purposes......................................... 120,538 120,538
Net operating loss carryforwards.................. 136,359 1,082,567
--------- ----------
Total gross deferred tax assets................. 265,425 2,765,185
Less valuation allowance.......................... (183,295) (791,553)
--------- ----------
Net deferred tax assets......................... 82,130 1,973,632
--------- ----------
Deferred tax liabilities:
Systems and equipment, principally due to differ-
ences in depreciation............................ (82,130) (81,575)
Leased license investment......................... -- (2,938,016)
--------- ----------
Total gross deferred tax liabilities............ (82,130) (3,019,591)
--------- ----------
Net deferred tax liability...................... $ -- $1,045,959
========= ==========
</TABLE>
The net changes in the total valuation allowance for the years ended
December 31, 1994 and 1993 were increases of $183,295 and $791,553,
respectively. The Company has recognized deferred tax assets to the extent
such assets can be realized through future reversals of existing taxable
temporary differences.
As of December 31, 1994, the Company has approximately $2,926,000 of federal
income tax loss carryforwards which expire in years 2005 through 2009.
(7) LEASES
The Company leases from third parties channel rights licensed by the FCC.
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 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 for either a right of first refusal or automatic
renewal of their terms upon FCC renewal of the underlying license, grant the
Company a right of first refusal to purchase the channels after the expiration
of the lease and/or require the parties to negotiate renewal in good faith.
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.
F-14
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Payments under the channel rights lease agreements 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. Channel rights
lease expense was $1,000, $25,260 and $94,865 for the years ended December 31,
1992, 1993 and 1994, respectively.
In connection with the purchase of certain assets on December 1, 1994 for
RuralVision Joint Venture as discussed in note 8, the Company is obligated
under channel rights lease agreements which require royalty payments upon
grant of the channel rights. Channel rights lease expense was $72,132 for year
ended December 31, 1994.
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 $24,375, $41,761 and $205,210 for the years ended
December 31, 1992, 1993 and 1994, respectively.
Future minimum lease payments due under channel rights leases for
operational systems and other noncancellable operating leases in effect at
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
OTHER
YEAR ENDING CHANNEL OPERATING
DECEMBER 31, RIGHTS LEASES LEASES
------------ ------------- ---------
<S> <C> <C>
1995......................................... $1,481,275 $25,941
1996......................................... 1,599,500 26,139
1997......................................... 1,650,000 25,573
1998......................................... 1,649,450 16,461
1999......................................... 1,629,100 1,212
</TABLE>
(8) RURALVISION ACQUISITION
On August 19, 1994, RuralVision Joint Venture ("RuralVision Joint Venture"),
a newly-formed general partnership in which each of the Company and Cross
Country Wireless Inc. ("Cross Country") have a 50% interest, purchased certain
assets (the "Rural Vision Assets"), including five operating wireless cable
systems and channel rights in approximately 100 markets, from RuralVision
Central, Inc. and RuralVision South, Inc. (collectively, "RuralVision"). The
aggregate purchase price of approximately $50.0 million for the RuralVision
Assets was comprised of a $46.0 million note bearing interest at the rate of
8% per annum (the "RuralVision Note") and approximately $4.0 million of
acquisition-related costs paid primarily by the Company and Cross Country. The
Company and Cross Country have guaranteed the payment of the RuralVision Note.
As of December 31, 1994, the remaining balance outstanding under the
RuralVision Note was $8.0 million. The Company's investment in RuralVision
Joint Venture has been accounted for under the equity method of accounting.
On January 27, 1995, the Company, Cross Country and RuralVision entered into
the Venture Distribution Agreement, as a result of which the Company (i) paid
an additional $4.32 million (including accrued interest of $320,000) in
satisfaction of 50% of the remaining balance of the RuralVision Note, (ii)
paid $513,000 (including accrued interest of $13,000) in satisfaction of 50%
of the remaining balance of certain liabilities which RuralVision Joint
Venture had assumed, and (iii) received a distribution (the "RuralVision
Distribution") from RuralVision Joint Venture of an operating wireless cable
system and wireless cable channel rights in 36 other markets with a carrying
amount of approximately $16.0 million. As part of this transaction, the
Company granted to Cross Country the right to "put" or sell certain remaining
RuralVision Joint Venture assets to the Company for $3.25 million (reduced
dollar for dollar by the proceeds of any prior partial sales of such assets)
on May 17, 1995. Although the Company remains a 50% partner in RuralVision
Joint Venture, the Company, pursuant to
F-15
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Venture Distribution Agreement, has no economic interest in any remaining
RuralVision Joint Venture assets or liabilities other than certain immaterial
amounts of office furniture and equipment. As a result, subsequent to January
27, 1995, the carrying amount of the Company's investment in RuralVision Joint
Venture is zero.
Summarized condensed financial information of RuralVision Joint Venture
follows:
BALANCE SHEET AS OF
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C>
Current assets, including assets to be sold of $20,000,000.... $20,969,043
Systems and equipment......................................... 6,118,015
Leased license investment..................................... 4,626,244
-----------
$31,713,302
===========
LIABILITIES AND VENTURERS' EQUITY
Current liabilities, including notes payable of $9,000,000.... $10,537,272
Venturers' equity............................................. 21,176,030
-----------
$31,713,302
===========
STATEMENT OF OPERATIONS FOR THE
PERIOD FROM AUGUST 19, 1994 (INCEPTION) TO
DECEMBER 31, 1994
Subscription revenues......................................... $ 1,269,184
Operating expenses............................................ 2,043,154
-----------
Net loss.................................................... $ (773,970)
===========
</TABLE>
On December 1, 1994 the Company acquired an operating wireless cable system
and wireless cable channel rights in 37 other markets from RuralVision Joint
Venture for an aggregate purchase price of $14.0 million in cash. The Company
has allocated the purchase price on a preliminary basis to the assets acquired
and liabilities assumed based on the estimated fair values of such assets and
liabilities.
In connection with the Company's allocation of the purchase price of the
acquisition on December 1, 1994, the Company has identified wireless cable
channel rights in certain markets which management expects to sell and has
classified $12.5 million of such assets as assets held for sale as of December
31, 1994. Based on management's analysis of additional assets to be sold that
were included in the assets distributed to the Company as part of the January
27, 1995 Venture Distribution Agreement, the assets held for sale increased to
$21.5 million. The assets held for sale as of December 31, 1994 represent
wireless cable channel rights in 26 markets.
Management's determination of the carrying amount of the assets held for
sale is based on a number of factors including the markets' stage of
development; the value of any channel rights lease agreements held by a
market; the potential number of households in the relevant market; the number
of channels available in the relevant market; the number of channel rights
granted or pending in the relevant market; the capital necessary to commence
operations in the relevant market; competitive factors; and the estimated
rental payments under channel rights lease agreements and certain other costs
that will be capitalized during the estimated holding period. The Company
expects to sell certain markets within one year from the date of acquisition
from RuralVision Joint Venture. Rental expense under channel rights lease
agreements and other costs associated with
F-16
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the assets held for sale amounting to approximately $30,000 have been
capitalized and included in assets held for sale. Since the assets held for
sale are nonoperating markets, no other operating profit or loss has been
excluded from the Company's 1994 consolidated statement of operations.
Additionally, any difference between the carrying amounts and the sale prices
on the ultimate disposition of the assets held for sale will be treated as an
adjustment of the original purchase price allocation.
Although the Company expects to sell the assets held for sale for $12.5
million ($21.5 million subsequent to the Venture Distribution Agreement)
within one year from the date of their acquisition from RuralVision Joint
Venture, there can be no assurance that any sales will be consummated. The
Company has entered into definitive agreements and letters of intent to sell
certain of the assets held for sale for $4.19 million comprised of $3.515
million of cash and a $675,000 note receivable. In the event the Company is
unable to dispose of the assets held for sale within such time frame, the
Company would fund approximately $500,000 to $750,000 of rental payments and
other costs related to the assets held for sale through August 1995 from the
Company's existing available cash, proceeds from the sale of assets held for
sale, or other sources of financing, if secured. In addition, if the Company
is unable to dispose of certain of the assets held for sale the Company may be
required, due to the expiration of construction permits, to construct
operating systems for certain assets held for sale. The amount of such funding
would approximate $3,000,000 for the period from the estimated date of
disposition through December 31, 1995. Should construction of operating
systems of certain assets held for sale be required, the Company believes that
the value of the constructed systems would be significantly enhanced. However,
based on the estimated dates of disposition, the Company currently does not
anticipate that such construction will be required during 1995. The amount and
timing of the Company's obligations to fund rental payments and other costs
attributable to the assets held for sale will depend upon a number of factors,
many of which are not within the control of the Company, including the timing
of the disposition of the assets held for sale, programming costs and
equipment costs.
Unaudited consolidated condensed pro forma results of operations for 1993
and 1994, as if the December 1, 1994 acquisition of assets from RuralVision
Joint Venture discussed above had occurred at the beginning of the respective
periods, follow:
<TABLE>
<CAPTION>
1993 1994
---------- -----------
<S> <C> <C>
Subscription revenues.............................. $1,709,433 $ 3,087,379
========== ===========
Net loss........................................... $ (565,005) $(3,870,410)
========== ===========
Loss per common share.............................. $ (.07) $ (.35)
========== ===========
</TABLE>
(9) RELATED PARTY TRANSACTIONS
The Company has had certain advances to and from stockholders and
affiliates. As of October 31, 1993, these advances were converted to equity by
the Company and the stockholders and affiliates. The net amount of such
conversion of $68,743 has been recorded as additional paid-in capital in the
accompanying consolidated statements of stockholders' equity. Generally, these
amounts arose as a result of advances to and from stockholders and affiliates
for borrowings, or for services rendered in connection with the development of
wireless cable television systems or acquisition of wireless cable channel
rights. Such amounts were noninterest bearing.
The Company paid $134,165 in 1992, $414,982 in 1993 and $74,559 in 1994 to
various affiliates for services performed in connection with the development
of wireless cable television systems, acquisition of wireless cable channel
rights and certain administrative services.
F-17
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1993, an entity owned by a director of the Company was paid $40,660
for consulting services provided in connection with the acquisition of certain
wireless cable channel rights. Such amount has been included as part of the
leased license investment in the accompanying consolidated balance sheets.
Additionally, such entity purchased approximately 10% and 5% minority
interests, respectively, in two of the Company's subsidiaries for $45,000.
Subsequent to its formation in 1990, WCI utilized the services of several
third-party consultants in conducting its business activities. Consulting
services provided by these persons related principally to WCI's acquisition of
wireless cable channel rights. In September and October 1993, certain of the
persons that provided such consulting services to WCI joined the Company as
executive officers.
During 1993, the Company received inventory and other assets totaling
$114,969 in exchange for forgiveness of advances of $172,132 to a formerly
affiliated installation company. The Company has reflected the settlement of
$57,163 in other expense in the accompanying 1993 consolidated statement of
operations.
The Company leases office space from an entity owned by certain stockholders
of the Company for which the expense amounted to approximately $18,000 in 1992
and 1993 and $22,224 in 1994.
On December 15, 1994, the Company entered into an agreement with a
stockholder and its affiliate pursuant to which the Company loaned $2.0
million to the stockholder secured by 300,000 shares of the Company's common
stock owned by the stockholder and all of the affiliate's assets in and to the
Tulsa, Oklahoma wireless cable market. The loan bears interest at 12% per
annum with all accrued interest and the outstanding principal balance due on
June 15, 1995. In addition, on December 15, 1994, the affiliate granted to the
Company an option for the Company to acquire the Tulsa, Oklahoma wireless
cable market. The option is exercisable at any time after January 20, 1995 and
continuing through June 15, 1995. The purchase price to be paid upon any
exercise of the option is up to a maximum of $5.2 million, subject to
adjustment based on the number of granted channels. In addition, the affiliate
has the right to obtain a release of this option at any time prior to June 15,
1995, by payment of a $300,000 release price and payment in full of the loan.
(10) COMMITMENTS AND CONTINGENCIES
The Company has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire in 1994
through 1998. The agreements generally require monthly payments based upon the
number of subscribers to the Company's systems, subject to certain minimums.
In connection with a $1,000,000 loan from a bank to a stockholder of the
Company, the Company has agreed to purchase such loan upon demand from the
bank for the aggregate amount of principal and interest thereon plus any other
amounts owed to the bank by the stockholder. The loan is secured by all of the
wireless cable assets of the stockholder relating to the Lubbock, Texas
market, including wireless cable channel rights, equipment and accounts
receivable.
The Company is a party to a legal proceeding incidental to its business
which, in the opinion of management, is not expected to have a material
adverse effect on the Company's consolidated financial position or operating
results.
(11) SUBSEQUENT EVENT
Pursuant to a loan agreement dated March 27, 1995 (the "Loan Agreement"),
two stockholders of the Company have agreed to loan the Company up to an
aggregate of $4.0 million ($2.0 million each) and a holder of the Convertible
Notes has agreed to loan to the Company, or to guarantee a bank loan to the
Company in the
F-18
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amount of, $2.0 million. Borrowings under the Loan Agreement may be used
solely for working capital. Borrowings under the Loan Agreement will bear
interest at 11% per annum. All accrued interest on, and the principal amount
of, all borrowings under the Loan Agreement will be due and payable in full on
June 30, 1995, subject to prepayment upon the receipt by the Company of cash
proceeds from any financing, refinancing or sale of assets. Amounts borrowed
and repaid under the Loan Agreement may not be reborrowed. Borrowings under
the Loan Agreement will be secured by the capital stock and assets of two of
the Company's operating subsidiaries. As of March 27, 1995, the Company had
borrowed $2.0 million under the Loan Agreement, funded $1.0 million each by
the two stockholders.
(12) OTHER SUBSEQUENT INFORMATION (UNAUDITED)
(a) Accounting Change
In the third quarter of 1995, the Company changed, effective January 1,
1995, its method of accounting for the direct costs and installation fees
related to subscriber installations to achieve a better matching of its
revenues and expenses and to conform its accounting practices with those of
other companies in the wireless cable industry. Pursuant to the change, the
Company's policy is to capitalize the excess of direct costs of subscriber
installations over installation fees. These direct costs include reception
materials and equipment on subscriber premises, installation labor and
overhead charges, and direct commissions. Such capitalized costs are amortized
on a subscriber-by-subscriber basis over the estimated average subscription
term (presently six years). Any unamortized balance of the non-recoverable
portion of the cost of a subscriber installation is fully depreciated upon
subscriber disconnect and the related cost and accumulated depreciation are
removed from the balance sheet. The Company periodically evaluates the
estimated amortization period and the recoverability of these costs to
determine whether circumstances warrant adjustments to the carrying amounts or
revised estimates of the useful life. An impairment loss would be recognized
if the expected future operating cash flows from subscribers in an individual
market are less than the carrying amount of subscriber installation costs in
such market.
Prior to the accounting change, the Company's policy was to expense all
direct commissions associated with subscriber installations and to recognize
as revenue all installation fees to the extent of selling costs (including
direct commissions) incurred to obtain subscribers. Historically, such selling
costs have exceeded installation fees. In addition, upon subscriber
disconnect, the Company continued to depreciate the full capitalized
installation cost subsequent to the disconnection. The Company has not
presented the cumulative effect of the change in accounting because the effect
of this change on periods prior to January 1, 1995 was not material. In
addition, the results of operations for any prior annual period would not
differ materially from results under the new method of accounting. The effect
of this change on the nine-month period ended September 30, 1995 was to
decrease net loss by approximately $210,000 ($.02 per common share).
(b) Units Offering
On April 26, 1995, the Company consummated a private placement of 100,000
units (the "Units") consisting of $100.0 million aggregate principal amount of
13% Senior Notes due 2003 ("Senior Notes") and 600,000 warrants to purchase an
equal number of shares of common stock at an exercise price of $19.525 per
share to the initial purchasers. The Company placed approximately $24.1
million of the approximately $95.3 million net proceeds realized from the sale
of the Units into an escrow account and used approximately $3.0 million of
such proceeds to repay indebtedness. In connection with the issuance of the
Senior Notes, the Company agreed, among other things, to file within 30 days
of the issue date a registration statement with the Securities and Exchange
Commission (the "Commission") with respect to an offer to exchange new notes
registered under the Securities Act of 1933 for the Senior Notes, which new
notes will be identical in all respects to the Senior Notes, except that the
new notes will not contain terms with respect to transfer restrictions and to
cause such registration statement to become effective within 120 days of the
issue date. As of September 30,
F-19
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995, the Company had not caused such registration statement to become
effective within the 120-day period. As a result, subsequent to August 24,
1995, the Company has been required to pay additional interest on the
outstanding Senior Notes. The amount of additional interest will increase by
an additional 0.50% per annum for each subsequent 90-day period until such
obligations are complied with, up to a maximum amount of additional interest
of 2.00% per annum.
Between September 12, 1995 and September 29, 1995, the Company engaged in
the solicitation of consents from the holders of the Senior Notes to amend
certain provisions of the indenture to permit the Company to consummate the
Wireless One Transaction and the Transactions (as hereinafter defined) and
additionally amend certain definitions and covenants. The proposed amendments
to the indenture received approval of approximately 95.5% in aggregate
principle amount of the Senior Notes and became effective as of October 2,
1995 upon the execution of a supplemental indenture. The Company paid an
aggregate of $955,000 to consenting holders in October 1995.
The amounts placed in the escrow account have been invested in U.S. Treasury
Notes. As of September 30, 1995, $100.0 million aggregate principal amount of
the Senior Notes remain outstanding.
(c) Acquisitions of Minority Interests in Subsidiaries
On March 15, 1995, the Company consummated the Minority Interest Exchange
offer and issued an aggregate of 304,038 shares of common stock in exchange
for minority interests in 21 subsidiaries (18 of which are now wholly-owned).
The Company has used the purchase method to account for the acquisitions of
these minority interests. For financial statement purposes, the total purchase
price was approximately $5.1 million, including out-of-pocket expenses of
approximately $500,000. A deferred tax liability of approximately $1.4 million
has been recorded for differences between the assigned values and the tax
bases of assets and liabilities recognized in the acquisitions of the minority
interests. A corresponding amount has been recorded as excess purchase price
over the fair value of net identifiable assets acquired and will be amortized
over a 20-year period.
Pro forma disclosures that include the effects of the acquisitions of the
minority interests are not materially different from historical information
and are not presented.
(d) RuralVision Joint Venture
On May 17, 1995, Cross Country exercised its right to sell certain remaining
RuralVision Joint Venture assets to the Company and, as a consequence, the
Company acquired such markets. In addition, on May 17, 1995, the Company
assigned its remaining interest in RuralVision Joint Venture to an unrelated
third party in exchange for nominal consideration and, as a result, ceased to
be a joint venturer thereof on such date.
In connection with the RuralVision Distribution and the Company's
acquisition of other wireless cable channel rights from RuralVision Joint
Venture in December 1994, the Company identified wireless cable channel rights
in certain markets which will be either sold, exchanged or conveyed. The
remaining balance at September 30, 1995 of $9.2 million of assets held for
sale represents assets that were sold or conveyed for cash subsequent to
September 30, 1995.
(e) Other Acquisitions and Divestitures
In May 1995, the Company purchased an operating wireless cable system in the
Lubbock, Texas market and wireless cable channel rights in the Tulsa, Oklahoma
market for approximately $5.4 million (plus approximately $0.2 million of
acquisition-related costs) and $3.8 million (plus approximately $0.1 million
of acquisition-related costs) in cash, respectively (the "Lubbock and Tulsa
Acquisitions").
F-20
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1995, the Company sold certain wireless cable channel rights in five
markets to an unaffiliated entity for $2.7 million in cash. These assets
comprised a portion of the assets held for sale.
On July 18, 1995, the Company privately placed 1,029,707 shares of its
common stock to RuralVision Joint Venture in exchange for $20,000,000 in cash.
Immediately subsequent to the issuance of the shares to RuralVision Joint
Venture, the Company acquired substantially all of the remaining assets of
RuralVision Joint Venture, consisting primarily of wireless cable systems
located in Lykens, Ohio; Paragould, Arkansas; Sikeston, Missouri and channel
rights in additional markets located in five states for $20,000,000 in cash
(the "Cross Country Acquisition").
Summarized below is the unaudited pro forma information for the nine months
ended September 30, 1994 and 1995 as if the Cross Country Acquisition and the
Lubbock and Tulsa Acquisitions had been consummated as of the beginning of
1994 and 1995. The pro forma information does not purport to represent what
the Company's results of operations actually would have been had such
transactions or events occurred on the dates specified, or to project the
Company's results of operations for any future period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1994 1995
----------- ------------
<S> <C> <C>
Revenues...................................... $ 3,075,000 $ 10,872,000
=========== ============
Net loss...................................... $(1,655,000) $(11,794,000)
=========== ============
Net loss per common share..................... $ (.54) $ (.93)
=========== ============
</TABLE>
(f) Wireless One
In October 1995, the Company contributed certain assets and related
liabilities with respect to two operating wireless cable systems and certain
other wireless cable markets in Texas, Louisiana, Alabama, Georgia and Florida
to Wireless One, Inc. ("Wireless One") for consideration consisting of
approximately 35% of the outstanding common stock of Wireless One and
approximately $10.0 million of notes. A portion of these assets comprise the
assets held for sale presented in the accompanying balance sheet. Wireless One
is a newly-formed corporation into which Wireless One Operating Company, a
privately-held wireless cable company, was merged. On October 18, 1995,
Wireless One completed an initial public offering of 3,000,000 shares of its
common stock and, concurrently therewith, consummated the sale of $150,000,000
in gross proceeds of 13% Senior Notes due 2003. As a result and pursuant to
the merger agreement, Wireless One repaid the $10.0 million of notes from the
proceeds of the offerings.
In October 1995, the Company executed an agreement to sell wireless cable
channel rights in Flippen, Tennessee for $1.5 million in cash. The transaction
is subject to customary closing conditions, including each party's Board of
Directors and lender approvals, due diligence review and other conditions.
(g) Pending Acquisitions
In September 1995, the Company executed an agreement to acquire Cablemaxx,
Inc. ("Cablemaxx") for approximately $80.8 million in common stock of the
Company. The agreement provides for the conversion of the common stock of
Cablemaxx at a rate of $8.50 per share, subject to adjustment, into common
stock of the Company, with the exchange rate determined by the average price
of the Company's common stock preceding the closing date of the transaction.
In September 1995, the Company entered into agreements to acquire American
Wireless Cable Systems, Inc. ("AWS") and the assets of Wireless Cable TV
Associates #38 (the "Minneapolis Partnership") and Fort
F-21
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Worth Wireless Cable TV Associates (the "Fort Worth Partnership") for an
aggregate of approximately $65.3 million of common stock of the Company.
In October 1995, the Company entered into a definitive agreement with
Technivision, Inc. ("Technivision") whereby the Company will acquire
substantially all of the assets of Technivision for approximately $36.75
million of the Company's common stock, less an amount of assumed obligations
which shall not exceed $5.0 million.
These transactions (collectively, the "Transactions") are subject to certain
conditions, including, without limitation, approval by the shareholders of
each company.
The Company is also currently pursuing opportunities to dispose of certain
wireless cable channel rights, presently held by or sought to be acquired by
the Company pursuant to the Transactions, and expects to sell, contribute or
exchange such assets in one or more transactions.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
American Wireless Systems, Inc.:
We have audited the accompanying balance sheets of American Wireless
Systems, Inc. (a Delaware corporation) as of December 31, 1993 and 1994, and
the related statements of operations, stockholders' equity and cash flows for
the ten months ended December 31, 1992, and the years ended December 31, 1993
and 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Wireless Systems,
Inc. as of December 31, 1993 and 1994, and the results of its operations and
its cash flows for the ten months ended December 31, 1992, and the years ended
December 31, 1993 and 1994, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Phoenix, Arizona,
October 19, 1995.
F-23
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
AND SEPTEMBER 30, 1995 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1993 1994 1995
---------- ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents (note 2)..... $3,244,275 $ 376,621 $ 1,182,653
Marketable securities (note 2)......... 2,318,252 -- --
Income tax receivable (note 10)........ 401,316 -- --
Debt issuance costs (note 2)........... 591,957 -- --
Prepaid expenses and other current as-
sets.................................. 227,180 186,242 89,724
---------- ------------ ------------
Total current assets................. 6,782,980 562,863 1,272,377
Property and equipment, at cost, net
(note 2).............................. 228,782 431,790 218,404
Investments in and advances to joint
ventures (note 4)..................... 1,208,709 3,436,048 2,998,398
Investments in wireless cable systems
(notes 1 and 4)....................... 957,813 2,430,866 2,987,940
License deposits and other assets (note
2).................................... 123,009 88,333 77,179
---------- ------------ ------------
$9,301,293 $ 6,949,900 $ 7,554,298
========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 300,939 $ 482,342 $ 419,186
Accrued liabilities................... 389,779 345,063 219,337
Convertible subordinated notes payable
(note 7)............................. 7,707,000 -- --
Notes payable -- current portion...... -- -- 99,442
---------- ------------ ------------
Total current liabilities............ 8,397,718 827,405 737,965
---------- ------------ ------------
Deferred compensation (note 6)......... -- 354,636 233,044
---------- ------------ ------------
Notes payable (note 1)................. -- -- 1,800,000
---------- ------------ ------------
Commitments and contingencies (note 9)
Stockholders' equity (notes 1, 3, 7, 8,
9 and 10):
Common stock, $.01 par value,
40,000,000 shares authorized,
3,346,841 shares outstanding in 1993
and 5,709,187 shares outstanding in
1994 and 1995 (unaudited)............ 33,468 57,092 57,092
Additional paid-in capital............ 9,671,629 20,239,069 20,239,069
Accumulated deficit................... (8,801,522) (14,528,302) (15,512,872)
---------- ------------ ------------
Total stockholders' equity........... 903,575 5,767,859 4,783,289
---------- ------------ ------------
$9,301,293 $ 6,949,900 $ 7,554,298
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-24
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE TEN MONTHS ENDED DECEMBER 31, 1992,
THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30
----------- ----------- ----------- ------------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Management fees........ $ -- $ -- $ 83,333 $ 58,333 $ 75,000
----------- ----------- ----------- ----------- -----------
General and administra-
tive expenses:
Compensation........... 1,786,719 1,502,006 1,920,002 1,554,057 630,070
Outside services....... 552,018 476,008 1,111,104 409,267 335,807
Other.................. 1,019,789 780,920 1,127,356 807,536 633,354
----------- ----------- ----------- ----------- -----------
Total expenses......... 3,358,526 2,758,934 4,158,462 2,770,860 1,599,231
----------- ----------- ----------- ----------- -----------
Loss from operations.... (3,358,526) (2,758,934) (4,075,129) (2,712,527) (1,524,231)
----------- ----------- ----------- ----------- -----------
Loss from operations of
joint ventures......... (85,210) (184,906) (200,436) (157,794) (136,298)
----------- ----------- ----------- ----------- -----------
Other income (expense),
net
Interest expense....... -- (775,525) (976,867) (978,695) (126,119)
Other (note 7)......... -- 69,205 (474,348) (528,080) 802,078
----------- ----------- ----------- ----------- -----------
-- (706,320) (1,451,215) (1,506,775) 675,959
----------- ----------- ----------- ----------- -----------
Net loss................ $(3,443,736) $(3,650,160) $(5,726,780) $(4,377,096) $ (984,570)
=========== =========== =========== =========== ===========
Net loss per share (note
2)..................... $ (1.33) $ (1.16) $ (1.26) $ (1.06) $ (.17)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding............ 2,595,689 3,159,397 4,540,362 4,135,431 5,709,187
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED DECEMBER 31, 1992,
THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
--------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, March 1, 1992.. 2,469,120 $ 1,333 $ 2,667 $ (1,707,626) $(1,703,626)
Sale of common stock to
officer................ 102,880 56 111 -- 167
Assumption of net
liabilities by
shareholders (note 3).. -- 24,331 7,202,219 -- 7,226,550
Issuance of common stock
in connection with
Short Takes, Inc.
merger, net of offering
costs of $102,060 (note
1)..................... 546,666 5,467 561,473 -- 566,940
Net loss................ -- -- -- (3,443,736) (3,443,736)
--------- ------- ----------- ------------ -----------
Balance, December 31,
1992................... 3,118,666 31,187 7,766,470 (5,151,362) 2,646,295
Private placements of
common stock, net of
offering costs of
$361,123 (note 1)...... 346,666 3,466 2,547,411 -- 2,550,877
Redemption of common
stock owned by Wireless
California (note 3).... (258,333) (2,583) (2,167,417) -- (2,170,000)
Contribution of income
tax receivable
(note 10).............. -- -- 401,316 -- 401,316
Conversion of notes..... 126,509 1,265 973,982 -- 975,247
Common stock issued..... 13,333 133 149,867 -- 150,000
Net loss................ -- -- -- (3,650,160) (3,650,160)
--------- ------- ----------- ------------ -----------
Balance, December 31,
1993................... 3,346,841 33,468 9,671,629 (8,801,522) 903,575
Private placements of
common stock, net of
offering costs of
$48,990 (note 1)....... 240,000 2,400 1,964,610 -- 1,967,010
Conversion of notes..... 2,105,679 21,057 8,542,356 -- 8,563,413
Exercise of common stock
warrants at $3.75...... 667 7 2,493 -- 2,500
Exercise of common stock
warrants at $3.00...... 13,333 133 39,867 -- 40,000
Common stock to be is-
sued................... 2,667 27 29,973 -- 30,000
Contribution of income
tax receivable
(note 10).............. -- -- (11,859) -- (11,859)
Net loss................ -- -- -- (5,726,780) (5,726,780)
--------- ------- ----------- ------------ -----------
Balance, December 31,
1994................... 5,709,187 57,092 20,239,069 (14,528,302) 5,767,859
Net loss (unaudited).... -- -- -- (984,570) (984,570)
--------- ------- ----------- ------------ -----------
Balance, September 30,
1995 (unaudited)....... 5,709,187 $57,092 $20,239,069 $(15,512,872) $ 4,783,289
========= ======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE TEN MONTHS ENDED DECEMBER 31, 1992,
THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net loss............... $(3,443,736) $(3,650,160) $(5,726,780) $(4,377,096) $ (984,570)
Adjustments to
reconcile net loss to
cash used for
operating activities:
Depreciation and amor-
tization ............. 34,321 442,933 637,049 613,717 66,079
Loss on disposal of
assets................ -- 16,136 55,043 49,090 200,357
Gain on sale of as-
sets.................. -- -- -- -- (786,646)
Loss from operations
of joint ventures..... 85,210 184,906 200,436 157,794 136,298
Repricing of common
stock warrants (note
7).................... -- -- 425,000 425,000 --
Deferred compensation
(note 6).............. -- -- 529,462 566,381 --
Changes in assets and
liabilities:
Decrease (increase)
in prepaid expenses
and other assets..... 46,292 (198,332) 438,793 (128,280) 96,518
Decrease (increase)
in accounts payable
and accrued
liabilities.......... (291,485) 530,142 232,831 (2,276) (199,321)
----------- ----------- ----------- ----------- ----------
Net cash used for op-
erating activities.. (3,569,398) (2,674,375) (3,208,166) (2,695,670) (1,471,285)
----------- ----------- ----------- ----------- ----------
Cash flows from invest-
ing activities:
Acquisition of property
and equipment......... (160,960) (77,055) (287,291) (241,677) (40,035)
Investment in and ad-
vances to wireless ca-
ble systems........... (749,395) (755,271) (3,820,312) (3,546,334) (662,090)
Purchases of marketable
securities............ -- (2,318,252) -- -- --
Proceeds from sales of
marketable securi-
ties.................. -- -- 2,438,604 1,325,950 --
Proceeds from sale of
wireless cable televi-
sion system........... -- -- -- -- 1,250,000
Deposits made on li-
cense acquisitions ... -- (69,122) -- -- 1,154
----------- ----------- ----------- ----------- ----------
Net cash used for in-
vesting activities.. (910,355) (3,219,700) (1,668,999) (2,462,061) 549,029
----------- ----------- ----------- ----------- ----------
Cash flows from financ-
ing activities:
Proceeds from issuance
of notes payable...... -- -- -- -- 2,800,000
Proceeds from issuance
of convertible notes
payable............... -- 8,736,000 -- -- --
Payment of notes pay-
able ................. -- -- -- -- (1,071,712)
Net proceeds from sale
of common stock ...... 567,107 2,550,877 2,009,511 2,009,511 --
Redemption of common
stock................. -- (2,170,000) -- -- --
Deferred debt issuance
costs................. -- (1,083,371) -- -- --
Cash received from af-
filiates ............. 4,425,875 525,000 -- -- --
----------- ----------- ----------- ----------- ----------
Net cash provided by
financing activi-
ties................ 4,992,982 8,558,506 2,009,511 2,009,511 1,728,288
----------- ----------- ----------- ----------- ----------
Net (decrease) increase
in cash and cash equiv-
alents................. 513,229 2,664,431 (2,867,654) (3,148,220) 806,032
Cash and cash equiva-
lents, beginning of
year/period............ 66,615 579,844 3,244,275 3,244,275 376,621
----------- ----------- ----------- ----------- ----------
Cash and cash equiva-
lents, end of
year/period............ $ 579,844 $ 3,244,275 $ 376,621 $ 96,055 $1,182,653
=========== =========== =========== =========== ==========
Supplemental disclosure
of cash flow
information -- cash
paid during the
year/period for
interest............... $ -- $ -- $ 351,510 $ 351,510 $ 134,566
=========== =========== =========== =========== ==========
Supplemental disclosure
of noncash activities--
During 1993 and 1994,
respectively, 126,509
and 2,105,679 shares of
the Company's common
stock were issued
pursuant to the
conversion of $975,247
and $8,563,413 in
principal amount of
convertible notes
payable plus accrued
interest...............
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993 AND SEPTEMBER 30, 1995 (UNAUDITED)
(1) BACKGROUND, ORGANIZATION AND OPERATIONS
(a) Background and Organization
American Wireless Systems, Inc. (the Company) was originally incorporated in
Minnesota in 1988 as Short Takes, Inc. The Company ceased its prior business
activities in April 1991, at which time the Company began searching for a
suitable business for acquisition or merger. Its sole asset was cash of
$669,000 on December 17, 1992, when it acquired certain operating assets and
liabilities of AWS, Inc. (formerly American Wireless Systems, Inc.), a
California corporation (Wireless California) in exchange for 2,572,000 shares
of common stock which represented 82.5% of the outstanding common stock of the
Company. For accounting purposes, this transaction has been treated as an
issuance of common stock for cash by Wireless California (the reverse
acquisition). See Note 3 for additional discussion of this transaction.
In April 1993, the stockholders approved changing the Company's name from
Short Takes, Inc. to American Wireless Systems, Inc. In addition, the Company
was reincorporated in the state of Delaware and declared a reverse stock split
of 1-for-2.5. On October 18, 1994, the stockholders of the Company approved a
reverse stock split of 1-for-3. The accompanying financial statements have
been retroactively restated to reflect these reverse stock splits.
(b) Operations
The Company currently owns an interest in and manages the operations of
wireless cable television systems in Minneapolis and Fort Worth, and holds an
interest in or owns the rights to certain wireless cable television channels
in Los Angeles, Dallas, Memphis and formerly Pittsburgh. Wireless cable is an
emerging business that provides television programming to subscribers by
transmitting a signal via microwave frequencies licensed by the Federal
Communications Commission (FCC) to antennae located at the subscriber's
premises.
The Company's wireless cable systems are all in either the initial
development stage or in the early operating stage; therefore, significant
additional investment will be required to develop those systems to a level
which will provide positive cash flow.
During 1993 and 1994, the Company raised an aggregate of approximately
$13,664,000, including $8,736,000 of convertible subordinated notes (the
"Notes") through three private placements of common stock and notes. The Notes
matured July 15, 1994, and have been converted into shares of the Company's
common stock (see Note 7).
In April 1994, the Company filed a Registration Statement on Form SB-2 in
connection with a proposed public offering, which was amended to include the
offer and sale of 2,500,000 units, each unit consisting of two shares of
common stock and one warrant to purchase one share of common stock. For a
variety of reasons, the Company elected not to proceed with the proposed
offering.
Since January 1995, the Company has been pursuing various financing options
which culminated in signing of an Agreement Of Merger with Heartland Wireless
Communications, Inc. (Heartland) on September 11, 1995 (the "Merger
Agreement"). The Merger Agreement provides for the Company's stockholders to
exchange their stock in the Company for stock in Heartland. The Merger with
Heartland will give the Company's stockholders $34,000,000 in Heartland common
stock, of which $30,750,000 will be distributed immediately and $3,250,000
will be held in escrow for one year to indemnify Heartland for potential
liabilities (Note 9). The conversion ratio into Heartland common stock will be
the trading price of Heartland stock based on the average closing price for
the 10 trading days ending on the fifth day before consummation of the Merger,
provided Heartland's trading
F-28
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
price is at least $20 per share and not greater than $26 per share. If
Heartland's trading price is below $20 per share, the exchange price will be
$20 per share; if the trading price is above $26 per share, the exchange price
will be $26 per share.
In February and April 1995, the Company obtained loans totalling $1,000,000
from a shareholder of the Company. These loans carried an interest rate of 15%
per annum, were secured by various assets of the Company and were paid off in
September 1995.
In connection with the Merger Agreement, the Company received a $200,000
nonrefundable deposit and a loan for $1,800,000. The promissory note, dated
May 26, 1995 and amended August 17, 1995, is due 12 months after the Heartland
Merger Agreement is consummated or abandoned, carries an interest rate of 2%
above the prime rate with interest payable quarterly, and is secured by a
security interest in the Company's wireless channel rights in the Dallas
market.
On September 29, 1995, the Company sold its assets in the Pittsburgh market
for $1,250,000 in cash.
The Company is currently negotiating to sell its assets in the Memphis
market for $3,900,000. The Company is currently involved in litigation with
the same company that has offered to purchase this market. According to the
proposed agreement, at the time of closing of this transaction, all litigation
between the two parties will be withdrawn and all claims will be waived (note
9).
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of the
following accounting policies:
(a) Cash Equivalents
The Company considers all highly liquid investments and time deposits with
an initial maturity of three months or less to be cash equivalents.
(b) Marketable Securities
Marketable securities are carried at the lower of cost or market. The
Company primarily invests in treasury securities.
(c) Debt Issuance Costs
The costs associated with the issuance of debt are deferred and amortized
over the life of the debt using the effective interest rate method.
Amortization of debt issuance costs for the years ended December 31, 1994 and
1993, was approximately $592,000 and $405,000, respectively.
(d) Property and Equipment
Property and equipment represent corporate furniture and equipment unrelated
to the wireless cable television systems. Property and equipment are recorded
at cost and are depreciated using the straight-line method over the estimated
useful lives of the related assets.
F-29
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
DEPRECIABLE ------------------ SEPTEMBER 30,
LIFE (YEARS) 1993 1994 1995
------------ -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer equipment.......... 5 $ 86,074 $112,083 $103,756
Furniture and fixtures...... 7 60,645 58,093 26,369
Office and other equipment.. 5-7 135,461 384,782 213,508
Autos....................... 5 4,700 -- --
-------- -------- --------
286,880 554,958 343,633
Less accumulated deprecia-
tion....................... (58,098) (123,168) (125,229)
-------- -------- --------
$228,782 $431,790 $218,404
======== ======== ========
</TABLE>
(e) Investment in Joint Ventures
The Company accounts for its investments in joint ventures under the equity
method of accounting.
(f) Investment in Wireless Cable Systems
Investment in wireless cable systems consists principally of payments for
channel rights which are amortized over their estimated useful life of ten
years once placed in service.
(g) License Deposits
License deposits represent deposits made under agreements to acquire FCC
frequency rights.
(h) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS No.
109). Under SFAS No. 109, deferred taxes are provided based on the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities, using enacted tax rates in the years in
which the differences are expected to reverse. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date.
(i) Net Loss Per Share
The calculation of net loss per share is based on the weighted average
number of shares outstanding. Common stock equivalents are not considered as
their effect would be anti-dilutive.
(j) Unaudited Financial Information
The financial statements as of September 30, 1995, and for the nine months
ended September 30, 1994 and 1995, have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished herein reflects, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to fairly state the financial position and results of operations for
such periods.
(3) THE REVERSE ACQUISITION
Wireless California, the predecessor to certain of the Company's wireless
cable operations, was incorporated in April 1991 to acquire and subsequently
sell or develop wireless cable systems in various markets in the United
States. In accordance with the terms of the asset purchase agreement between
Wireless California and the Company, only the assets and liabilities related
solely to the Wireless California wireless cable systems development and
operations were acquired by the Company. The transaction specifically excluded
any assets or
F-30
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
liabilities related to Wireless California's activities in selling its
interests in the wireless cable systems (see Note 9).
Subsequent to the reverse acquisition, Wireless California began to wind
down its affairs until, on August 30, 1993, its remaining net assets
(consisting primarily of common stock of the Company) were distributed to its
shareholders who then contributed such assets, except for the common stock of
the Company, to a limited liability corporation, AWS Liquidating, L.L.C. (AWS
LLC).
In connection with its private placements in 1993, the Company redeemed
138,333 shares of common stock owned by Wireless California and 120,000 shares
of common stock of the Company owned by the shareholders of Wireless
California. The redemption price of $8.40 per share was equal to the offering
price in the private placements. A substantial amount of the proceeds were
used to discharge the remaining obligations of Wireless California.
(4) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND WIRELESS CABLE SYSTEMS
Investments in and advances to joint ventures and wireless cable systems
represent the historical costs incurred to develop the wireless cable systems,
including the acquisition of the FCC frequency rights and the head-end
transmission equipment and consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1993 1994 1995
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Jointly Owned Systems:
Minneapolis/St. Paul, Minnesota...... $ 545,655 $ 436,446 $ 345,819
Advances to Minneapolis/St. Paul,
Minnesota........................... -- 2,050,882 2,079,386
Ft. Worth, Texas..................... 261,720 243,054 205,389
Advances to Ft. Worth, Texas......... -- 253,177 367,804
Pittsburgh, Pennsylvania............. 401,334 452,489 --
---------- ---------- ----------
$1,208,709 $3,436,048 $2,998,398
========== ========== ==========
Wholly Owned Systems:
Los Angeles, California.............. $ -- $ 972,653 $1,469,444
Memphis, Tennessee................... 571,462 733,153 799,960
Dallas, Texas........................ 386,351 725,060 718,536
---------- ---------- ----------
$ 957,813 $2,430,866 $2,987,940
========== ========== ==========
</TABLE>
(a) Jointly Owned Systems
The Company currently owns an equity interest in operating wireless cable
systems in Minneapolis, Minnesota (AWS-Minneapolis) (25% interest) and Ft.
Worth, Texas (AWS-Ft. Worth) (20% interest) and formerly owned an equity
interest in a wireless cable system under development in Pittsburgh,
Pennsylvania (25% interest).
The Minneapolis system has been in operation since March 1993. The Company's
joint venture partner is a general partnership which was formed to acquire an
interest in and jointly develop and operate the Minneapolis wireless cable
system. In accordance with the terms of the joint venture agreement, losses
are to be allocated in accordance with contributed capital and profits are to
be allocated (i) in accordance with contributed capital to the extent of
previously allocated losses and then (ii) 25% to the Company and 75% to the
general partnership.
F-31
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In April 1994, the Company loaned the Minneapolis general partnership
$2,000,000 to fund additional development of the system. The loan bears
interest at 8% per annum and was originally payable in full in 18 months.
Prior to the due date, the Company agreed to extend the maturity of the loan
until the earlier of (i) February 28, 1996 or (ii) the abandonment of the
Heartland Merger Agreement. In the event that the loan is not repaid by the
due date, the Company will receive an additional equity interest in the
Minneapolis joint venture of approximately 10%.
AWS-Minneapolis received additional funding in May 1995 of $550,000 from
Tsunami Capital Corporation (Tsunami). The loan was made by Tsunami in
anticipation of a reverse merger between AWS-Minneapolis and Tsunami. The loan
is due December 31, 1995, and carries an interest rate of 12% per annum.
On October 4, 1995, the Company's joint venture partner signed a contract to
sell its 75% interest in AWS-Minneapolis to Heartland. As part of this
agreement Heartland agreed to loan AWS-Minneapolis up to $1,575,000, of which
$575,000 will be used to repay Tsunami and the remainder to fund subscriber
growth.
The Ft. Worth system has been in operation since November 1992. The
Company's joint venture partner is a general partnership which was formed to
acquire an interest in and jointly develop and operate the Ft. Worth wireless
cable system. The Ft. Worth system has been operated through an informal joint
venture agreement. The accompanying financial statements include an estimate
of the Company's pro rata losses in this system.
AWS-Ft. Worth does not have sufficient funds to continue development of the
system. The Company's joint venture partner also does not have funds to
contribute to the joint venture and has expressed its belief that either
Wireless California or the Company is obligated to provide additional funds to
develop the system to a positive cash flow position. Neither Wireless
California nor the Company believes it has such an obligation; however, the
Company is negotiating the terms of additional funding to continue development
of the system in conjunction with definitive joint venture and management
agreements. In order to protect the Company's interest in the assets of AWS-
Ft. Worth, the Company has advanced $253,177 through December 31, 1994 and an
additional $114,627 during 1995 to fund negative cash flow of the system and
maintain the current subscriber base.
On October 4, 1995, the Company's joint venture partner in AWS-Ft. Worth
signed a contract with Heartland to sell its 80% interest in AWS-Ft. Worth.
Pursuant to the agreement, Heartland has agreed to assume up to $570,000 of
amounts due to the Company. Additionally, Heartland has agreed to loan the Ft.
Worth partnership $500,000 secured by its interest in AWS-Ft. Worth.
The Pittsburgh system is still in its initial development stage. On
September 29, 1995, the Company sold all of its interest in the assets of the
Pittsburgh market for $1,250,000 in cash.
Selected combined balance sheet data related to the Company's jointly owned
operating systems is as follows (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets................................. $ 461 $ 402 $ 450
Total assets................................... 12,001 10,846 9,713
Total liabilities.............................. 296 790 1,577
Members equity................................. 11,705 10,056 8,136
AWS' interest.................................. 725 525 389
</TABLE>
F-32
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Selected combined operating data related to the Company's jointly owned
operating systems is as follows (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1992 1993 1994 1994 1995
----- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 146 $ 1,064 $ 1,187 $ 822 $ 1,191
Operating expenses.......... (947) (3,814) (4,363) (3,181) (3,494)
----- ------- ------- ------- -------
Net loss.................... $(801) $(2,750) $(3,176) $(2,359) $(2,303)
===== ======= ======= ======= =======
AWS' interest............... $ (85) $ (185) $ (200) $ (158) $ (136)
===== ======= ======= ======= =======
</TABLE>
(b) Wholly Owned Systems
The Company's investment in wholly owned systems consists primarily of the
costs to acquire the rights to FCC licenses in Dallas (16), Los Angeles (9)
and Memphis (22). The lease agreements provide for the Company to pay for the
excess airtime use, new transmission equipment and all other operating
expenses of the channels including co-location costs.
The Company is currently negotiating a contract to sell its assets in the
Memphis market for $3,900,000 to TruVision Cable, Inc. (TruVision) (Note 9).
(5) RELATED PARTIES
(a) Wireless California
Since the reverse acquisition on December 17, 1992, the Company has entered
into certain transactions with Wireless California, including the redemption
of 258,333 shares of common stock owned by Wireless California and the
shareholders of Wireless California (see Note 3), certain transactions related
to income taxes (see Note 10), the purchase of additional FCC licenses not
covered by the original acquisition agreement for $80,000 and the payment of
certain lease expenses related to the Pittsburgh wireless cable system. In
1994, the Company advanced $35,000 to pay administrative penalties assessed
Wireless California by the State of Arizona (see Note 9). The members of AWS
L.L.C. have agreed to reimburse the Company upon sale of the previously
escrowed shares (see Note 8). All transactions with Wireless California
subsequent to August 1993 have been approved by a majority of the independent
directors of the Company.
(b) AWS-Ft. Worth and AWS-Minneapolis
The Company serves as the manager and operator of the Minneapolis joint
venture. The terms of the Management Agreement, which was signed in April
1994, provide for annual management service fees equal to the greater of 5% of
collected gross revenues or $100,000.
The Company also serves as the manager to the Ft. Worth joint venture
although no formal management agreement exists. No management service fees
have been accrued relative to the Ft. Worth system.
In its capacity as manager, the Company contracted for subscriber
installation services and subscriber equipment on behalf of AWS-Ft. Worth and
AWS-Minneapolis to Wireless Technologies, Inc. (WTI), a Texas corporation
engaged in the business of providing subscriber installation services and
distributing subscriber equipment with respect to traditional and wireless
cable systems. WTI is a wholly owned subsidiary of North American Cable
Corporation (NACC), a Texas corporation engaged in the engineering,
construction and maintenance of cable television systems, local area networks,
fiber optic networks and wireless cable television
F-33
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
systems, with operations and business experience in the United States, England
and several other countries around the world. A former officer and director of
the Company beneficially owns 50% of the stock of North American Cable
Corporation.
WTI purchased certain of the subscriber equipment that it sold to AWS-Ft.
Worth and AWS-Minneapolis from Micom Products, Ltd., a Delaware limited
liability company engaged in the distribution of subscriber equipment for
wireless cable systems. Micom is owned by the beneficial owners of
approximately 36% of the Company's common stock.
In 1992, 1993 and 1994, payments were made by the Company, Wireless
California and the joint ventures to WTI of $421,650, $924,054 and $74,449,
respectively, for installation services and related subscriber equipment. In
1992, 1993 and 1994, payments were made by WTI to Micom of $22,018, $114,644
and $2,766, respectively, for subscriber equipment.
(c) American Wireless Systems, Inc.
In connection with the acquisition of the rights to utilize the FCC licenses
in Los Angeles (Note 4), the Company agreed to pay a finder's fee of $75,000
to the president of NACC as consideration for the introduction of the Company
to the license holder of the eight channels.
In February and April 1995, the Company obtained loans totalling $1,000,000
from a shareholder of the Company who is a principal in the firm which served
as the placement agent for the Company's private offerings in 1993 and 1994
(Note 1). In addition, this individual and certain other related entities are
shareholders of the Company's common stock.
(6) SEVERANCE AGREEMENT
Effective August 1994, an individual who held the position of Chairman of
the Board, President and Chief Financial Officer resigned. In connection with
such resignation, this individual entered into a severance agreement with the
Company, whereby the Company agreed to pay this individual his annual base
salary, as provided by the terms of his employment agreement, a bonus, if any,
consistent with the bonuses awarded to certain other officers and certain
other expenses for a period of three years. As a result, the Company
recognized approximately $566,000 of expense in the third quarter of 1994, of
which approximately $355,000 is a long-term liability. Upon the consummation
of the merger with Heartland (Note 1), the unpaid portion becomes due and
payable in full.
In September 1994, this individual resigned as a director of the Company. In
connection with such resignation, the Company granted this individual a
warrant to acquire 33,333 shares of common stock at $8.40 per share. This
warrant was granted on October 1, 1994, has a ten-year term and became fully
exercisable on April 1, 1994.
(7) CONVERTIBLE SUBORDINATED NOTES PAYABLE
At December 31, 1993, the Company had $7,707,000 in convertible subordinated
notes ("Notes") outstanding. Through May 1994, $462,000 in principal amount of
the Notes had been converted into shares of the Company's common stock. The
remaining $7,245,000 in Notes were called for prepayment by the Company in May
1994. Holders of $4,232,000 in principal amount of the Notes elected to
receive cash payment for their investment as opposed to converting their Notes
into shares of the Company's common stock. Because the Company did not
anticipate the relatively high level of repayment, the Company did not have
adequate funds available to pay all of the Noteholders who elected repayment.
In accordance with the terms of the Notes, the conversion price of the Notes
was adjusted from $8.40 per share to $3.75 per share. Following the redemption
F-34
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
date, the Company agreed to permit all of the Noteholders, including the
Noteholders that had elected repayment, to elect repayment or to convert their
Notes into shares of the Company's common stock at the adjusted conversion
price of $3.75 per share. Holders of all but $703,500 in principal amount of
the Notes agreed to convert their Notes into shares of the Company's common
stock at $3.75 per share. The placement agent for the Notes arranged for the
holders of the remaining $703,500 in principal amount of the Notes to sell
their Notes to certain accredited investors who converted such Notes into
shares of common stock at $3.75 per share by September 30, 1994.
As consideration for services rendered in connection with the conversion of
the Notes, the Company agreed to adjust the exercise price of existing
warrants held by the placement agent to acquire 165,732 shares of common stock
held by certain affiliates of the placement agent. As a result, the Company
recognized other expense of approximately $425,000 in the third quarter of
1994.
In connection with the issuance of the Notes in 1993, the Company also
granted contingent warrants (see Note 8).
(8) STOCKHOLDERS' EQUITY
(a) Outstanding Warrants and Options
As of December 31, 1994, the Company had outstanding warrants and options as
follows:
<TABLE>
<S> <C>
Warrants to acquire common stock assumed in the reverse
acquisition; exercisable at $10.08 through November 1996........ $ 27,066
Warrants to acquire common stock assumed in the reverse
acquisition; exercisable at $3.75 through April 1995............ 19,333
Warrants to acquire common stock issued to the placement agent in
connection with the 1993 private placements; exercisable at
$3.75 through August and November 1998.......................... 138,666
Contingent warrants to acquire common stock issued to the
Noteholders in connection with the 1993 private placements;
exercisable at $12.00 through July 1995......................... 15,833
Contingent warrants to acquire common stock issued to the
Noteholders in connection with the 1993 private placements;
exercisable at $12.00 through July 1996......................... 330,833
Warrants to acquire common stock issued to a third party for
services provided to the Company; exercisable at $6.75 through
August 2004..................................................... 8,333
Warrants to acquire common stock issued to a private investor;
exercisable at $12.00 through July 1996......................... 60,000
Warrants to acquire common stock issued to a former officer and
director of the Company in connection with a severance
agreement; exercisable at $8.40 through September 2004.......... 33,333
</TABLE>
(b) Escrowed Shares
Approximately 1.88 million shares of the Company's outstanding common stock,
which were owned by the former owners of Wireless California, were released
from escrow in February 1995. The shares were pledged by the former
shareholders to secure the indemnification of the Company by Wireless
California for potential losses incurred from claims arising out of the prior
offerings of general partnership interests by Wireless California (see Note
9). In December 1994, the Company made a $35,000 claim on the escrowed shares
for an advance to Wireless California (see Note 5). All but 50,000 shares were
released from escrow and distributed to the members of AWS L.L.C. in February
1995. The remaining 50,000 shares have been retained to potentially fund a
claim made by the Company which is currently being disputed by AWS L.L.C. The
shares will remain in escrow until the dispute is resolved. No other claims
were made on the escrowed shares.
F-35
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(c) Stock Option Plan
In April 1993, the Company adopted the 1993 Stock Option Plan (the Plan)
which reserved 416,666 shares of common stock to be issued to officers,
directors, key employees and independent consultants who provide valuable
services to the Company. The terms of the options are to be established by the
Board of Directors on the date of grant.
Activity in the Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Options outstanding at December 31, 1992............ -- --
Granted............................................. 151,666 $6.75-$15.75
Canceled............................................ -- --
Exercised........................................... -- --
-------
Options outstanding at December 31, 1993............ 151,666 $6.75-$15.75
Granted............................................. 25,000 $ 15.75
Canceled............................................ (13,333) $6.75-$15.75
Exercised........................................... -- --
-------
Options outstanding at December 31, 1994............ 163,333 $6.75-$15.75
Granted............................................. -- --
Canceled (unaudited)................................ (48,333) $6.75-$ 8.40
Exercised........................................... -- --
-------
Options outstanding at September 30, 1995
(unaudited)........................................ 115,000 $6.75-$15.75
=======
Options available for grant (unaudited)............. 301,666
=======
Exercisable at end of period (unaudited)............ 74,582 $6.75-$15.75
=======
</TABLE>
Prior to the completion of the merger with Heartland, the Company intends to
terminate the Plan.
(9) COMMITMENTS AND CONTINGENCIES
(a) Commitments
The Company leases office space, equipment and licenses under various
operating leases. Future obligations under these leases are as follows for
years ending December 31:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
1995.............................................................. $ 568,000
1996.............................................................. 265,000
1997.............................................................. 255,000
1998.............................................................. 170,000
1999.............................................................. 48,000
Thereafter........................................................ 72,000
----------
$1,378,000
==========
</TABLE>
(b) Prior Offerings of General Partnership Interests by Wireless California
Prior to the sale of certain assets by Wireless California to the Company,
approximately $29,000,000 was raised in connection with the offering of
general partnership interests in three general partnerships, each of which
F-36
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
was formed for the purpose of acquiring an interest in the rights to develop
and operate a wireless cable television system in Ft. Worth, Minneapolis and
Pittsburgh. Through an affiliate, Wireless California participated in the
offer and sale of the general partnership interests without registration under
any federal or state securities laws based on the belief that the general
partnership interests did not constitute securities under federal and
applicable state laws. Certain current and former officers and directors of
the Company were formerly officers and directors of Wireless California.
Following an investigation by the Securities and Exchange Commission (the
Commission) involving the activities of Wireless California in connection with
the offer and sale of the general partnership interests as described above,
the Company and certain of its current and former officers, without admitting
or denying any wrongdoing, agreed to consent to an order of the Commission to
cease and desist from committing or causing any violation and any future
violations of the securities registration provisions of the 1993 Act and the
broker-dealer registration provisions of the Exchange Act.
Securities administrators in 22 states also have conducted or are presently
conducting investigations of the activities related to the unregistered sale
of the general partnership interests described above. The actions taken by the
various state securities administrators range from no action taken to the
issuance of 15 cease and desist orders and consent orders pursuant to which
Wireless California, the issuing general partnerships, and certain officers of
Wireless California were required to cease selling general partnership
interests without registration, to offer rescission to individuals who
purchased general partnership interests and, in certain cases, to pay
administrative penalties. In addition, AWS L.L.C. has entered into a consent
order with the State of Illinois pursuant to which AWS L.L.C. agreed to cease
and desist from selling general partnership interests without registration, to
pay an administrative penalty, and to cause a rescission offer to be made to
Illinois residents. Following an investigation by the State of Arizona, AWS
L.L.C. and current and former officers of the Company consented to an order of
the Arizona Corporation Commission to cease and desist from selling securities
unless the sale is registered or exempt from registration and to the
imposition of an administrative penalty against AWS L.L.C. The Company also
consented to a separate order that requires the Company to make an offer of
rescission to all general partners who are Arizona residents or who were
offered and sold their interests from Arizona. To the knowledge of the
Company, there are no other active federal or state regulatory proceedings or
investigations.
Following the completion of the Company's proposed public offering, the
Company intended to effect a rescission offer to purchase the interests of the
general partners in the three general partnerships that own an interest in
joint ventures with the Company. Due to the Company's inability to complete
the offering and its current lack of funds, the Company is currently unable to
offer to purchase the general partnership interests, and will not have the
ability to complete the orders of rescission imposed by the State of Arizona
unless alternative financing is obtained or alternatives to rescission are
arranged. Accordingly, the Company will seek to amend the order to provide for
alternatives to rescission, although there can be no assurance that the
Company will be successful in this regard. The Arizona order provides that if
the offers to purchase are not made, the Company will be required to pay to
the Arizona Corporation Commission an amount equal to the amount of the
investment made by all general partners who are Arizona residents, or
approximately $566,000, plus interest from the time of investment. There can
be no assurance that the Company will be able to satisfy the Arizona
rescission orders.
Since October 31, 1992, Wireless California, the general partnerships and
the current and former officers of the Company have ceased all activities
involving the offer and sale of general partnership interests, although one of
the general partnerships continued to raise funds through capital calls to
existing general partners after such date. In addition to the rescission offer
described above, Wireless California and the general partnership issuers
voluntarily elected to offer to purchase the general partnership interests of
certain general partners in exchange for cash in an amount equal to the funds
contributed by such general partners. As of October 19, 1995, approximately
1,170 of the approximately 1,930 purchasers of general partnership interests
had been offered
F-37
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
rescission or a return of their investment by Wireless California or the
general partnership issuers and approximately 80 had accepted the offer, all
of which have been paid. None of such offers, however, were necessarily
conducted in accordance with the statutory requirements of the various states.
To the extent such requirements were not met, potential securities liability
arising from the offer and sale of the general partnership interests will not
be statutorily eliminated until the statutes of limitation with respect to
such claims have expired or an offer is made in accordance with the statutory
rescission requirements of any state.
In September 1995, AWS and the Pittsburgh general partnership sold all of
their wireless cable assets in the Pittsburgh market to a publicly held
wireless cable company. As consideration for the sale of its assets in the
Pittsburgh market, the Pittsburgh general partnership received approximately
$11,250,000 in cash and short-term notes, which amount exceeded the aggregate
amount that would have been required if all Pittsburgh general partners were
offered and accepted rescission.
There can be no assurance that current general partners or any governmental
agency will not institute proceedings against Wireless California or the
Company as the successor to Wireless California based on a failure to register
the general partnership interests in connection with a public offering or for
damages based on alleged omissions or misrepresentations of material
information in connection with the sale of such interests. In connection with
the acquisition of certain assets of Wireless California, the Company
expressly disclaimed any liabilities of Wireless California arising out of the
offer and sale of the general partnership interests described above. There is
a possibility, however, that a successful claim against Wireless California
could be asserted against the Company based on a number of theories involving
successor liability. The institution of legal action against the Company
arising out of the offer and sale of general partnership interests by Wireless
California could result in substantial defense costs to the Company and the
diversion of efforts by the Company's management, and the imposition of
liabilities which could have a material adverse effect on the Company. Based
on its experience to date, however, taking into account the status of
investigations by various state securities administrators, the absence of any
asserted claim for rescission having been instituted by any of the general
partners against any of the general partnerships, Wireless California or the
Company, the Company's assessment of the current value of the general
partnership interests, the relatively small number of general partners who
have accepted previous offers by Wireless California or its shareholders to
purchase general partnership interests, the existence of a number of possible
defenses to any claims asserted against it, the existence and terms of the
agreements between the Fort Worth and Minneapolis general partnerships and
Heartland (Note 4) and other factors, the Company does not believe the
ultimate resolution of this matter will have a material impact on its
financial condition or its results of operations.
(c) Other Contingencies
The Company is currently named as a defendant in two separate lawsuits. On
May 16, 1995, William R. Jenkins, the former Chief Executive Officer of the
Company, filed a lawsuit in Arizona state court alleging breach of his
employment contract and requesting as damages all amounts due under the
employment contract, treble damages under the Arizona statute, attorney's fees
and costs. On June 2, 1995, the Company filed a Petition to Compel Arbitration
and an Answer including counterclaims. The Company estimates that the amount
due under Mr. Jenkins' employment contract, if he were successful, is
approximately $167,000. The Company maintains that no amounts are due to Mr.
Jenkins as he was terminated for cause and breached his employment contract.
The Company believes it has adequate grounds to successfully defend this
lawsuit.
On June 21, 1995, TruVision, with whom the Company had entered into a letter
of intent relating to the sale of the Company's Memphis assets, filed a
lawsuit, as amended on June 29, 1995, in the state of Mississippi alleging
that the Company breached the letter of intent, that the parties entered into
a binding agreement which was breached, and that the Company committed fraud
and negligent misrepresentation. The Company disputes
F-38
<PAGE>
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
these claims based on the position that it lawfully terminated the letter of
intent. The Amended Complaint requests damages in the amount of $28,196,642
and punitive damages in the amount of $20,000,000, together with interest and
all costs of court. The Company believes it has adequate grounds to
successfully defend this lawsuit. The Company is currently negotiating with
TruVision to sell its assets in the Memphis market under a new contract.
According to the terms of the contract, at the time of closing, each party
will sign a release of all claims against the other.
The Company is also the subject of two threatened lawsuits. American
Telecasting, Inc. ("ATI") has sent letters to the Company claiming that the
Company breached a term sheet and has requested payment of $1,800,000 as the
alleged termination fee owed to ATI under the term sheet, plus expenses. The
Company has responded to ATI and disputes all of ATI's claims. The Company
believes that ATI's claims are without merit and would vigorously defend any
lawsuit filed.
By letter dated January 31, 1995, Laidlaw Holdings, Inc. ("Laidlaw"), the
underwriter of the Company's proposed public offering, claims that the Company
owes Laidlaw $182,165 as accountable expenses under a Letter Agreement between
the parties dated November 20, 1994. A follow-up letter was sent to the
Company on July 13, 1995. By letter dated February 3, 1995, from the Company
to Laidlaw, the Company asserted that Laidlaw terminated the Letter Agreement
and believes that if a claim is filed by Laidlaw, the Company has adequate
grounds to successfully defend the claim.
(10) INCOME TAXES
In connection with the reverse acquisition, the basis in the assets acquired
and liabilities assumed by the Company were substantially the same for book
and tax purposes.
For income tax reporting purposes, the Company was included in the
consolidated tax returns of Wireless California through August 13, 1993, the
date that Wireless California's ownership interest in the Company dropped
below 80%. As a result, the net operating losses generated by the Company from
December 18, 1992 (the date subsequent to the reverse acquisition) through
August 13, 1993, of approximately $1,000,000 were utilized by Wireless
California to reduce its tax obligations and to recapture approximately
$300,000 of previously paid taxes. In exchange, Wireless California agreed to
contribute this refund to the capital of the Company.
Since December 18, 1992, the Company has generated $8,199,000 in net
operating losses of which $890,000 was utilized by Wireless California through
August 13, 1993, and an additional $310,000 has been recognized for financial
reporting purposes to recapture taxes previously paid by Wireless California
as described above. Approximately $517,000 in net operating losses were
utilized to offset taxable income in prior year consolidated tax returns filed
with Wireless California. As of December 31, 1994, therefore, the Company has
approximately $6,482,000 in net operating loss carryforwards available for
financial reporting and income tax purposes which expire in 2009.
In 1994 and 1995, there were no material temporary differences between
financial reporting and income tax reporting. As a result, at December 31,
1994 and September 30, 1995 (unaudited), the Company has a net deferred tax
asset of approximately $2,593,000 and $2,931,000, respectively, which relates
primarily to its available net operating loss carryforwards. As the
realizability of this tax asset is solely dependent on the Company's ability
to generate future taxable income, this asset has been fully reserved.
F-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee and Partners of
Fort Worth Wireless Cable T.V. Associates:
We have audited the accompanying consolidated balance sheets of FORT WORTH
WIRELESS CABLE T.V. ASSOCIATES (WCTVA or the Partnership) (a general
partnership) as of December 31, 1993 and 1994, and the related consolidated
statements of operations, partners' equity and cash flows for the years ended
December 31, 1992, 1993 and 1994. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WCTVA as of December 31,
1993 and 1994, and the results of their operations and their cash flows for
the years ended December 31, 1992, 1993 and 1994, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Partnership will continue as a going concern. As discussed
in Note 1 to the financial statements, the Partnership has incurred losses
since inception and expects to incur additional losses until it is able to
generate sufficient income to cover operating expenses. The Partnership
currently does not have sufficient cash reserves to cover such anticipated
losses. These factors raise substantial doubt about the Partnership's ability
to continue as a going concern. The Partnership's current plans are also
discussed in Note 1. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Arthur Andersen LLP
Phoenix, Arizona,
October 19, 1995.
F-40
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994 AND SEPTEMBER 30, 1995 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents (note 1).... $ 94,898 $ 21,836 $ 25,014
Accounts receivable................... 90,458 51,750 45,931
Prepaid expenses and other current
assets............................... 18,230 23,923 16,525
----------- ----------- -----------
Total current assets................ 203,586 97,509 87,470
Investment in wireless systems and
equipment, at cost, net
(notes 1 and 4)........................ 4,463,630 3,763,423 3,179,029
----------- ----------- -----------
$ 4,667,216 $ 3,860,932 $ 3,266,499
=========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.......................... $ 85,451 $ 300,047 $ 547,286
Advances from affiliates (note 1)..... 109,730 471,613 660,025
----------- ----------- -----------
Total current liabilities........... 195,181 771,660 1,207,311
----------- ----------- -----------
Minority interest (note 1).............. 206,073 143,792 99,742
----------- ----------- -----------
Commitments and contingencies (note 6)
Partners' equity (note 2):
General partners' equity.............. 7,384,979 6,064,497 5,078,463
Less syndication costs................ (3,119,017) (3,119,017) (3,119,017)
----------- ----------- -----------
Total partners' equity.............. 4,265,962 2,945,480 1,959,446
----------- ----------- -----------
$ 4,667,216 $ 3,860,932 $ 3,266,499
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-41
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
1992 1993 1994 1994 1995
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Subscriber............ $ 55,119 $ 646,745 $ 650,214 $ 493,034 $ 443,564
Installation.......... 76,121 84,554 7,517 6,112 5,054
Other................. 13,141 60,578 9,529 6,113 2,963
--------- ----------- ----------- ----------- -----------
Total revenues...... 144,381 791,877 667,260 505,259 451,581
--------- ----------- ----------- ----------- -----------
Operating expenses:
Operating and
installation......... 232,148 594,747 567,461 420,763 396,302
Selling and
marketing............ 106,422 101,089 3,206 3,393 3,144
General and
administrative....... 299,792 412,652 692,784 541,721 500,766
Depreciation and
amortization......... 250,215 754,116 786,572 608,724 581,451
--------- ----------- ----------- ----------- -----------
Total operating
expenses........... 888,577 1,862,604 2,050,023 1,574,601 1,481,663
--------- ----------- ----------- ----------- -----------
Loss from operations.... (744,196) (1,070,727) (1,382,763) (1,069,342) (1,030,082)
Minority interest in
losses................. 76,446 57,689 62,281 47,974 44,048
--------- ----------- ----------- ----------- -----------
Net loss................ $(667,750) $(1,013,038) $(1,320,482) $(1,021,368) $ (986,034)
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-42
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL TOTAL
PARTNERS' SYNDICATION PARTNERS'
EQUITY COSTS EQUITY
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1991............. $ 4,959,517 $(2,424,000) $ 2,535,517
Capital contributions.................. 4,668,750 (695,017) 3,973,733
Return of capital...................... (550,000) -- (550,000)
Net loss............................... (667,750) -- (667,750)
----------- ----------- -----------
Balance, December 31, 1992............. 8,410,517 (3,119,017) 5,291,500
Return of capital...................... (12,500) -- (12,500)
Net loss............................... (1,013,038) -- (1,013,038)
----------- ----------- -----------
Balance, December 31, 1993............. 7,384,979 (3,119,017) 4,265,962
Net loss............................... (1,320,482) -- (1,320,482)
----------- ----------- -----------
Balance, December 31, 1994............. 6,064,497 (3,119,017) 2,945,480
Net loss (unaudited)................... (986,034) -- (986,034)
----------- ----------- -----------
Balance, September 30, 1995 (unau-
dited)................................ $ 5,078,463 $(3,119,017) $ 1,959,446
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-43
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------
1992 1993 1994 1994 1995
---------- ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (667,750) $(1,013,038) $(1,320,482) $(1,021,368) $(986,034)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Depreciation and
amortization.......... 250,215 754,116 786,572 608,724 581,451
Gain on sale of
equipment............. -- -- -- -- (9,048)
Loss on disposal of
assets................ -- -- -- -- 4,570
Minority interest in
losses................ (76,446) (57,689) (62,281) (47,974) (44,048)
Changes in assets and
liabilities:
(Increase) decrease
in accounts
receivable........... (48,335) (42,123) 38,708 37,282 5,819
(Increase) decrease
in prepaid expenses
and other current
assets............... (24,170) 5,940 (5,693) (1,569) 7,398
Increase (decrease)
in accounts payable
and accrued
liabilities.......... 241,045 (155,594) 214,596 132,914 247,239
---------- ----------- ----------- ----------- ---------
Net cash used for
operating
activities.......... (325,441) (508,388) (348,580) (291,991) (192,653)
---------- ----------- ----------- ----------- ---------
Cash flows from
investing activities:
Investment in wireless
systems and
equipment............. (1,933,269) (738,967) (86,365) (62,761) (22,984)
Proceeds from sale of
equipment............. -- -- -- -- 30,403
---------- ----------- ----------- ----------- ---------
Net cash (used for)
provided by
investing
activities.......... (1,933,269) (738,967) (86,365) (62,761) 7,419
---------- ----------- ----------- ----------- ---------
Cash flows from
financing activities:
Cash contributed by
(returned to)
partners, net......... 4,118,750 (12,500) -- -- --
Syndication costs
paid.................. (695,017) -- -- -- --
Net advances (to)
from affiliates..... (257,254) 366,984 361,883 285,780 188,412
---------- ----------- ----------- ----------- ---------
Net cash provided by
(used for) financing
activities.......... 3,166,479 354,484 361,883 285,780 188,412
---------- ----------- ----------- ----------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 907,769 (892,871) (73,062) (68,972) 3,178
Cash and cash
equivalents, beginning
of period.............. 80,000 987,769 94,898 94,898 21,836
---------- ----------- ----------- ----------- ---------
Cash and cash
equivalents, end of
period................. $ 987,769 $ 94,898 $ 21,836 $ 25,926 $ 25,014
========== =========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-44
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994 AND SEPTEMBER 30, 1995 (UNAUDITED)
(1) ORGANIZATION
(a) Background, Nature of Organization and Significant Accounting Policies
Fort Worth Wireless Cable T.V. Associates (the Partnership), a California
general partnership, was formed as of July 1, 1992. The Partnership is
comprised of certain partners of Wireless Cable T.V. Associates #34 (WCTVA), a
California general partnership, which was formed in 1991, who exchanged their
interest in WCTVA for an interest in the Partnership, and some new partners
who were admitted to the Partnership upon contributing cash thereto. Upon its
formation, the Partnership acquired the assets and assumed the operations of
WCTVA.
Concurrent with its formation, WCTVA entered into a Services and Acquisition
Agreement (the Agreement) with American Wireless Systems, Inc., a California
corporation (Wireless California). Under the terms of the Agreement, Wireless
California was obligated to provide various services including assistance with
Federal Communications Commission (FCC) filings, market projections, and
engineering services involving equipment assurances and new market evaluation
assistance. In addition, Wireless California was to coordinate construction of
broadcast facilities (commonly referred to as head-end equipment) and assign
to WCTVA a 75% interest in certain FCC licenses.
Wireless Cable television is an emerging business that provides television
programming to subscribers by transmitting a signal via microwave frequencies
licensed by the FCC to antennae located at the subscriber's premises.
The development and operations of the system have been conducted through an
informal joint venture relationship between the Partnership and American
Wireless Systems, Inc., a Delaware corporation (AWS-Delaware), which acquired
its interest in the informal joint venture from Wireless California in
December 1992. American Wireless Systems of Ft. Worth (AWS-Ft. Worth), a
general partnership, has been established through which the operations of the
informal joint venture have been conducted. AWS-Ft. Worth was initially
capitalized through the contribution by WCTVA and Wireless California of their
respective interests in the FCC licenses and head-end equipment. Subsequent to
the formation of AWS-Ft. Worth, the Partnership acquired an additional 4.99%
interest in AWS-Ft. Worth such that the ownership is now 79.99% for the
Partnership and 20.01% for AWS-Delaware.
(b) Operations
The system had approximately 1,900 and 1,750 subscribers at December 31,
1993 and 1994, respectively, which is not sufficient to provide positive cash
flow. Additionally, neither the joint venture nor the Partnership has
sufficient funds to support the installation of additional subscribers
sufficient to enable the joint venture to reach a positive cash flow. The
Partnership's joint venture partner, AWS-Delaware, has indicated that it is
not required to provide any funding to support system growth, however, AWS-
Delaware has advanced $253,177 from May 1, 1993 to December 31, 1994, and an
additional $114,627 during 1995 (unaudited) to fund negative cash flow. Such
advances are included in advances from affiliates in the accompanying
consolidated financial statements.
On September 11, 1995, AWS-Delaware and Heartland Wireless Communications,
Inc. ("Heartland") executed an Agreement and Plan of Merger, pursuant to which
a wholly-owned subsidiary of Heartland would be merged into AWS and AWS would
become a wholly-owned subsidiary of Heartland. On October 4, 1995, the
Partnership and Heartland executed an Asset Purchase Agreement (the "Fort
Worth Agreement") pursuant to which Heartland would purchase the Partnership's
79.99% interest in AWS-Ft. Worth. Pursuant to the Fort
F-45
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Worth Agreement, Heartland has agreed to assume up to $570,000 of liabilities
associated with its joint venture interest. The consideration to be paid to
the Partnership under the Fort Worth Agreement is $13.3 million payable in
Heartland Common Stock, based upon an exchange value equal to the average
trading price of Heartland Common Stock over the 10-day period ending five
business days prior to closing; provided that if such closing average is in
excess of $23.00 per share, then the exchange value will be $23.00 per share.
Subject to approval of two-thirds of the partners, the Partnership has agreed
to effectuate the Agreement and Plan of Liquidation and, in connection
therewith, liquidate shares of Heartland Common Stock having an aggregate
exchange value in an amount necessary to satisfy certain known and contingent
liabilities of the Partnership.
In connection with the Fort Worth Agreement, Heartland has funded an Escrow
Agreement with a third-party escrow agent in the amount of $100,000, and is
obligated to fund an additional $55,000 per month starting November 1, 1995,
until the transaction closes. In addition, Heartland has agreed to loan the
Partnership $500,000 secured by the Partnership's interest in AWS-Ft. Worth.
The loan carries an interest rate of 10% per annum prior to maturity and is
due in accordance with the terms of the documents evidencing and securing the
loan.
(c) Consolidation
The accompanying consolidated financial statements include the accounts of
the Partnership and AWS-Ft. Worth. All significant intercompany accounts have
been eliminated in consolidation.
(d) Cash Equivalents
The Partnership considers all highly liquid instruments and time deposits
with an initial maturity of three months or less to be cash equivalents.
(e) Property and Equipment
Property and equipment is stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
(f) Frequency Rights
Included in investment in wireless systems and equipment is $3,218,864,
$3,231,364 and $3,231,364 of frequency rights as of December 31, 1993 and
1994, and September 30, 1995 (unaudited), respectively, which are being
amortized over a ten-year period.
(g) Revenue Recognition
Subscription revenues are recognized in the period of service. Installation
fees are recognized as revenues upon subscriber hook-up.
(h) Income Taxes
No income tax liability or benefit is presented in the accompanying
consolidated financial statements as it will accrue to the partners.
(i) Unaudited Financial Information
The unaudited financial statements as of September 30, 1995, and for the
nine months ended September 30, 1994 and 1995, have been prepared by the
Partnership without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The information included herein, reflects,
in the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to fairly state the financial position and
results of operations for such periods.
F-46
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) PARTNERS' EQUITY
In 1991 WCTVA, sold approximately 800 general partnership units at $6,250
each, which provided capital of $5,000,000. Subsequent to their initial
contribution, certain partners requested a return of their capital; therefore,
$40,483 of the gross proceeds were returned. The initial offer and sale of
WCTVA interests were made by Wireless California (Note 6). Approximately
$2,424,000 was paid for costs incurred in connection with the offering. Such
costs are reflected as an offset to equity in the accompanying consolidated
financial statements.
As discussed in note 1, the Partnership was formed in July 1992. The
partners of WCTVA were given the option to either exchange their interest in
WCTVA for an interest in the Partnership or to receive a return of their
initial contribution. The owners of 88 WCTVA partnership units elected to
receive a return of their contribution. An additional 747 units of the
Partnership were sold which provided additional capital of $4,668,750. The
offer and sale of the Partnership units were also made by Wireless California.
Approximately $695,000 was paid for costs incurred in connection with this
offering. Such costs are reflected as an offset to equity in the accompanying
consolidated financial statements.
(3) JOINT VENTURE
As indicated in note 1, AWS-Ft. Worth has been operated through an informal
joint venture agreement (the "Agreement"). Key aspects of the Agreement
utilized in the development of the accompanying consolidated financial
statements are as follows:
(a) Initial Capital Contributions
Each member contributed to AWS-Ft. Worth their respective interests in the
wireless cable system assets to the joint venture in exchange for their
ownership interests of 79.99% (the Partnership) and 20.01% (AWS-Delaware.) The
accompanying consolidated financial statements reflect such contributed assets
at their respective owners' historical cost which does not directly correlate
to the ownership interests.
(b) Allocations of Profits and Losses
Profits and losses have been allocated in accordance with the respective
ownership percentages (the initial ownership percentages as adjusted for
additional cash contributions).
(c) Management
Wireless California and its successor, AWS-Delaware, have provided
management services to the joint venture since its inception. These services
have been provided through an informal management agreement. Management
services expense of $16,666, $100,000, $100,000, $75,000 and $75,000 has been
provided in the accompanying consolidated financial statements for the years
ended December 31, 1992, 1993 and 1994, and the nine months ended September
30, 1994 and 1995 (unaudited), respectively.
F-47
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) INVESTMENT IN WIRELESS SYSTEMS AND EQUIPMENT
Investment in wireless systems and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ------------------------ SEPTEMBER 30,
IN YEARS 1993 1994 1995
----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Frequency rights........ 10 $ 3,218,864 $ 3,231,364 $ 3,231,364
Broadcast equipment and
inventory.............. 3-7 2,094,317 2,166,958 2,157,402
Vehicles................ 5 48,593 48,689 48,173
Office equipment........ 5-7 100,653 101,582 93,053
Leasehold improvements.. 7 5,534 5,534 8,770
----------- ----------- -----------
5,467,961 5,554,127 5,538,762
Less: Accumulated depre-
ciation and amortiza-
tion................... (1,004,331) (1,790,704) (2,359,733)
----------- ----------- -----------
$ 4,463,630 $ 3,763,423 $ 3,179,029
=========== =========== ===========
</TABLE>
(5) RELATED PARTY TRANSACTIONS
The Partnership had several transactions with Wireless California including
the original sale of general partnership interests, the transactions
contemplated under the services and acquisition agreement and the informal
joint venture and management agreements. In addition to the Partnership and
AWS-Ft. Worth, AWS-Delaware is the minority owner of a wireless cable system
joint venture with another partnership in Minneapolis/St. Paul, Minnesota.
AWS-Ft. Worth had contracted subscriber installation services to Wireless
Technologies, Inc. (WTI), a Texas corporation engaged in the business of
providing subscriber installation services and distributing subscriber
equipment with respect to traditional and wireless cable systems. WTI is a
wholly owned subsidiary of North American Cable Corporation, a Texas
corporation engaged in the engineering, construction and maintenance of cable
television systems, local area networks, fiber optic networks and wireless
cable television systems, with operations in the United States, England and
several other countries around the world. A former Chief Executive Officer and
Director of AWS-Delaware beneficially owns 50% of the stock of North American
Cable Corporation.
WTI purchased certain of the subscriber equipment that it sold to AWS-Ft.
Worth from Micom Products, Ltd. (Micom), a Delaware limited liability company
engaged in the distribution of subscriber equipment for traditional and
wireless cable systems. Micom is owned by the beneficial owners of
approximately 36% of AWS-Delaware.
In 1992 and 1993, payments of $196,860 and $542,521, respectively, were made
to WTI for installation services and related subscriber equipment. In 1992,
payments of $22,018 were made by WTI to Micom. Effective July 1993, AWS-Ft.
Worth ceased utilizing the services of WTI.
F-48
<PAGE>
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
(a) Commitments
AWS-Ft. Worth leases office space under an operating lease. Future
obligations under this lease are as follows for years ending December 31:
<TABLE>
<S> <C>
1995............................................................. $ 57,968
1996............................................................. 60,570
1997............................................................. 61,200
1998............................................................. 15,300
--------
$195,038
========
</TABLE>
Lease expense of $34,224, $62,347, $55,830, $41,873 and $43,060 has been
recorded for the years ended December 31, 1992, 1993 and 1994, and the nine
months ended September 30, 1994 and 1995 (unaudited), respectively.
AWS-Ft. Worth holds frequency rights to 14 wireless cable channels in the
Ft. Worth market under several leases. Thirteen local broadcast channels are
also transmitted for a total programming package of 27 channels. The channel
leases have original lease periods from five to ten years with options to
renew. Future minimum lease payments for the FCC licenses are as follows for
years ending December 31:
<TABLE>
<S> <C>
1995............................................................. $108,300
1996............................................................. 108,300
1997............................................................. 60,500
1998............................................................. 1,200
1999............................................................. 1,200
Thereafter....................................................... 2,900
--------
$282,400
========
</TABLE>
Lease expense of $62,918, $93,013, $90,460, $63,235 and $81,225 has been
recorded for the years ended December 31, 1992, 1993 and 1994 and the nine
months ended September 30, 1994 and 1995 (unaudited), respectively.
(b) Contingencies
The original formation of WCTVA and the subsequent formation of the
Partnership involved the sale of general partnership interests without
registration under any federal or state securities laws based on the belief
that the general partnership interests did not constitute securities under
federal and applicable state laws. As of December 31, 1994, securities
administrators in 20 states as well as the Securities and Exchange Commission
(SEC) have conducted or are currently conducting investigations of the
activities related to the unregistered sale of the general partnership
interests.
To date, the investigations have focused on Wireless California and its
successor AWS-Delaware, the Partnership's joint venture partner in AWS-Ft.
Worth; however, there is a possibility that future actions could be taken
against the Partnership. Such actions could involve fines, administrative
penalties and the requirement for the Partnership to file information with the
SEC pursuant to the Securities Exchange Act of 1934, as amended. Management
believes that any such penalties or fines should be the responsibility of
Wireless California and does not believe that any such actions will have a
material impact on its financial condition or its operations.
F-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management Committee and Partners of
Wireless Cable T.V. Associates #38:
We have audited the accompanying consolidated balance sheets of Wireless
Cable T.V. Associates #38 (WCTVA or the Partnership) (a general partnership)
as of December 31, 1993 and 1994, and the related consolidated statements of
operations, partners' equity and cash flows for the ten months ended December
31, 1992 and the years ended December 31, 1993 and 1994. These consolidated
financial statements are the responsibility of the Partnership'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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WCTVA as of December 31,
1993 and 1994, and the results of their operations and their cash flows for
the ten months ended December 31, 1992 and the years ended December 31, 1993
and 1994, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Partnership will continue as a going concern. As discussed
in Note 1 to the financial statements, the Partnership has incurred losses
since inception and expects to incur additional losses until it is able to
generate sufficient income to cover operating expenses. The Partnership
currently does not have sufficient cash reserves to cover such anticipated
losses. These factors raise substantial doubt about the Partnership's ability
to continue as a going concern. The Partnership's current plans are also
discussed in Note 1. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Arthur Andersen LLP
Phoenix, Arizona,
October 19, 1995.
F-50
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994 AND SEPTEMBER 30, 1995 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents (note 1).... $ 167,897 $ 620,058 $ 177,941
Accounts receivable................... 17,862 111,848 197,300
Prepaid expenses and other current as-
sets................................. 69,999 13,840 25,918
----------- ----------- -----------
Total current assets................ 255,758 745,746 401,159
Investment in wireless systems and
equipment, at cost, net
(notes 1 and 5)........................ 7,135,982 6,679,478 6,083,417
----------- ----------- -----------
$ 7,391,740 $ 7,425,224 $ 6,484,576
=========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued liabili-
ties................................. $ 74,690 $ 162,033 $ 177,199
Advances from affiliates.............. -- 49,112 55,304
Notes payable and obligations under
capital lease
(notes 1 and 4)...................... 26,287 2,016,692 2,578,562
----------- ----------- -----------
Total current liabilities........... 100,977 2,227,837 2,811,065
----------- ----------- -----------
Minority interest (note 1).............. 518,520 380,365 289,737
----------- ----------- -----------
Commitments and contingencies (note 7)
Partners' equity (note 2):
General partners' equity.............. 11,388,243 9,433,022 7,999,774
Less syndication costs................ (4,616,000) (4,616,000) (4,616,000)
----------- ----------- -----------
Total partners' equity.............. 6,772,243 4,817,022 3,383,774
----------- ----------- -----------
$ 7,391,740 $ 7,425,224 $ 6,484,576
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-51
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TEN MONTHS ENDED DECEMBER 31, 1992 AND
THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
1992 1993 1994 1994 1995
-------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Subscriber............ $ 9,261 $ 220,537 $ 459,215 $ 285,484 $ 643,381
Installation.......... -- 31,584 11,360 8,629 10,896
Other................. 14,433 20,031 64,471 35,644 86,318
-------- ----------- ----------- ----------- -----------
Total revenues...... 23,694 272,152 535,046 329,757 740,595
-------- ----------- ----------- ----------- -----------
Operating expenses:
Operating and instal-
lation............... 62,053 690,835 1,187,795 826,474 1,092,248
Selling and market-
ing.................. 237 70,881 71,317 39,539 11,137
General and adminis-
trative.............. 26,446 443,772 391,839 236,332 361,932
Depreciation and
amortization......... 6,158 738,860 977,471 719,045 799,154
-------- ----------- ----------- ----------- -----------
Total operating ex-
penses............. 94,894 1,944,348 2,628,422 1,821,390 2,264,471
-------- ----------- ----------- ----------- -----------
Loss from operations.... (71,200) (1,672,196) (2,093,376) (1,491,633) (1,523,876)
Minority interest in
losses................. 8,764 127,217 138,155 102,488 90,628
-------- ----------- ----------- ----------- -----------
Net loss................ $(62,436) $(1,544,979) $(1,955,221) $(1,389,145) $(1,433,248)
======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-52
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
FOR THE TEN MONTHS ENDED DECEMBER 31, 1992 AND
THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL TOTAL
PARTNERS' SYNDICATION PARTNERS'
EQUITY COSTS EQUITY
----------- ----------- -----------
<S> <C> <C> <C>
Balance, February 28, 1992 (incep-
tion)................................. $ -- $ -- $ --
Capital contributions.................. 12,075,082 (4,616,000) 7,459,082
Net loss............................... (62,436) -- (62,436)
----------- ----------- -----------
Balance, December 31, 1992............. 12,012,646 (4,616,000) 7,396,646
Capital contributions.................. 920,576 -- 920,576
Net loss............................... (1,544,979) -- (1,544,979)
----------- ----------- -----------
Balance, December 31, 1993............. 11,388,243 (4,616,000) 6,772,243
Net loss............................... (1,955,221) -- (1,955,221)
----------- ----------- -----------
Balance, December 31, 1994............. 9,433,022 (4,616,000) 4,817,022
Net loss (unaudited)................... (1,433,248) -- (1,433,248)
----------- ----------- -----------
Balance, September 30, 1995 (unau-
dited)................................ $ 7,999,774 $(4,616,000) $ 3,383,774
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-53
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TEN MONTHS ENDED DECEMBER 31, 1992 AND
THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (62,436) $(1,544,979) $(1,955,221) $(1,389,145) $(1,433,248)
Adjustments to
reconcile net loss to
net cash provided by
(used for) operating
activities:
Depreciation and
amortization.......... 6,158 738,860 977,471 719,045 799,154
Minority interest in
losses................ (8,764) (127,217) (138,155) (102,488) (90,628)
Changes in assets and
liabilities:
(Increase) decrease
in accounts
receivable........... (3,631) (14,222) (93,986) 15,524 (85,452)
(Increase) decrease
in prepaid expenses
and other current
assets............... (5,901) (64,098) 56,159 (497) (29,078)
Increase (decrease)
in accounts payable
and accrued
liabilities.......... 177,855 (103,166) 87,343 152,593 51,231
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used for) operating
activities.......... 103,281 (1,114,822) (1,066,389) (604,968) (788,021)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Investment in wireless
systems and
equipment............. (5,983,256) (1,214,519) (520,967) (334,408) (203,093)
----------- ----------- ----------- ----------- -----------
Net cash used for
investing
activities.......... (5,983,256) (1,214,519) (520,967) (334,408) (203,093)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Cash contributed by
partners, net......... 12,075,082 920,576 -- -- --
Proceeds from issuance
of notes payable...... -- -- 2,000,000 2,000,000 550,000
Net advances (to) from
affiliates............ (178,844) 178,844 49,112 (104,336) 6,192
Syndication costs
paid.................. (4,616,000) -- -- -- --
Payments on capital
lease................. -- (2,445) (9,595) (4,797) (7,195)
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities.......... 7,280,238 1,096,975 2,039,517 1,890,867 548,997
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 1,400,263 (1,232,366) 452,161 951,491 (442,117)
Cash and cash
equivalents, beginning
of period.............. -- 1,400,263 167,897 167,897 620,058
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents, end of
period................. $ 1,400,263 $ 167,897 $ 620,058 $ 1,119,388 $ 177,941
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-54
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994 AND SEPTEMBER 30, 1995 (UNAUDITED)
(1) ORGANIZATION:
(a) Background, Nature of Organization and Significant Accounting Policies
Wireless Cable T.V. Associates #38 (WCTVA or the Partnership) was formed in
February 1992 to develop and operate a wireless cable television system in
Minneapolis, Minnesota as a joint venture partner with American Wireless
Systems, Inc., a California corporation (Wireless California).
Wireless cable television is an emerging business that provides television
programming to subscribers by transmitting a signal via microwave frequencies
licensed by the Federal Communications Commission (FCC) to antennae located at
the subscriber's premises.
Concurrent with its formation, WCTVA entered into a Services and Acquisition
Agreement (the "Agreement") with Wireless California. Under the terms of the
Agreement, Wireless California provided various services including assistance
with Federal Communications Commission (FCC) filings, market projections, and
engineering services involving equipment assurances and new market evaluation
assistance. In addition, Wireless California coordinated construction of
broadcast facilities (commonly referred to as head-end equipment) and assigned
to WCTVA a 75% interest in certain FCC licenses previously held by Wireless
California.
Subsequent to the construction of the head-end equipment in March 1993, the
development and operations of the system have been conducted through a joint
venture relationship between WCTVA and Wireless California (see Note 3).
American Wireless Systems of Minneapolis L.L.C. ("AWS-Minneapolis"), a limited
liability company, was established through which the operations of the joint
venture have been conducted. AWS-Minneapolis was initially capitalized through
the contribution by WCTVA and Wireless California of their respective
interests in the FCC licenses and head-end equipment.
In December 1992, the Partnership's joint venture partner, Wireless
California, sold substantially all of its assets, including its remaining 25%
interest in AWS Minneapolis, to a publicly traded company which also
subsequently assumed the name of American Wireless Systems, Inc. ("AWS-
Delaware"). The former shareholders of Wireless California, beneficially own
approximately 36% of AWS-Delaware.
(b) Operations
The system, which was launched in March 1993, had approximately 800 and
2,200 subscribers at December 31, 1993 and 1994, respectively, which is not
sufficient to provide positive cash flow. Additionally, neither the joint
venture nor the Partnership has sufficient funds to support the installation
of additional subscribers to enable the joint venture to reach positive cash
flow. As a result of these factors, in April 1994, the Partnership borrowed
$2,000,000 from AWS-Delaware to fund additional development of the system.
AWS-Minneapolis received additional funding in May 1995, of $550,000 from
Tsunami Capital Corp. ("Tsunami"). The loan was made by Tsunami in
anticipation of a reverse merger between AWS-Minneapolis and Tsunami.
On September 11, 1995, AWS-Delaware and Heartland Wireless Communications,
Inc. ("Heartland") executed an Agreement and Plan of Merger pursuant to which
a wholly-owned subsidiary of Heartland would be merged into AWS-Delaware and
AWS-Delaware would become a wholly-owned subsidiary of Heartland. On October
4, 1995, the Partnership and Heartland executed an Asset Purchase Agreement
pursuant to which the Partnership agreed to sell to Heartland its membership
interest in AWS-Minneapolis ("Minneapolis Agreement"). In addition, pursuant
to the Minneapolis Agreement, Heartland has agreed to assume the obligation to
repay the $2,000,000 note owned by the Partnership to AWS-Delaware. The
consideration to be paid to the Partnership under the Minneapolis Agreement is
$18 million (plus the assumption of liabilities) plus
F-55
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$500 per subscriber added from October 4, 1995 to the closing date, payable in
Heartland Common Stock, based upon an exchange value equal to either (a) the
lesser of $23 per share and the average closing price of Heartland Common
Stock as reported on the Nasdaq Stock Market's National Market over the ten-
trading-day period ending on the fifth business day preceding the date of the
closing of the Minneapolis Agreement or (b) if such closing average is equal
to or in excess of $30 per share, then (i) the product of the closing average
multiplied by $23, divided by (ii) $30. Subject to the approval of two-thirds
of the partners, the Partnership has agreed to effectuate the Agreement and
Plan of Liquidation and, in connection therewith, liquidate shares of
Heartland Common Stock having an aggregate exchange value in an amount
necessary to satisfy certain contingent liabilities of the Partnership.
In connection with the Heartland transaction, AWS-Minneapolis received a
$1,575,000 loan from Heartland of which $575,000 was utilized to pay the
Tsunami note plus interest and the remaining $1,000,000 can be utilized to
fund subscriber growth. The $1,000,000 loan can be drawn down in increments of
not less than $25,000 and not more than $250,000, and carries an interest rate
of prime plus 2%, as defined, and is due on the earlier of (i) the closing of
the Heartland transaction, (ii) the termination of the Heartland transaction,
as defined, or (iii) February 28, 1997.
(c) Consolidation
The accompanying consolidated financial statements include the accounts of
the Partnership and AWS-Minneapolis. All significant intercompany accounts
have been eliminated in consolidation.
(d) Cash Equivalents
The Partnership considers all highly liquid instruments and time deposits
with an initial maturity of three months or less to be cash equivalents. At
December 31, 1993 and 1994 and September 30, 1995 (unaudited), cash
equivalents include a $105,000 restricted deposit collateralizing the AWS-
Minneapolis office lease.
(e) Property and Equipment
Property and equipment is stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
(f) Frequency Rights
Included in investment in wireless systems and equipment is $6,204,332 of
frequency rights as of December 31, 1993 and 1994 and September 30, 1995
(unaudited), which are being amortized over a ten-year period.
(g) Revenue Recognition
Subscription revenues are recognized in the period of service. Installation
fees are recognized as revenues upon subscriber hook-up.
(h) Income Taxes
No income tax liability or benefit is presented in the accompanying
consolidated financial statements as it will accrue to the partners.
(i) Unaudited Consolidated Financial Information
The unaudited consolidated financial statements as of September 30, 1995,
and for the nine months ended September 30, 1994 and 1995, have been prepared
by the Partnership without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished herein,
reflects, in the
F-56
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and results of
operations for such periods.
(2) PARTNERS' EQUITY
In 1992, WCTVA sold approximately 1,744 general partnership units at $6,250
each, which provided capital of $10,900,000. Additional funds of $1,175,082
(188 units) and $920,576 (147 units) were contributed by existing partners
during 1992 and 1993, respectively. The initial offer and sale of WCTVA units
were made by Wireless California. WCTVA reimbursed Wireless California
approximately $4,616,000 for costs incurred in connection with the offering.
Such costs are reflected as an offset to equity in the accompanying
consolidated financial statements.
(3) JOINT VENTURE
As indicated in Note 1, the Minneapolis wireless cable system has been
operated through a joint venture agreement (the "Agreement"). A summary of the
provisions of this agreement are as follows:
(a) Initial Capital Contributions
Each member contributed to AWS-Minneapolis their respective interests in the
wireless cable system assets to the joint venture in exchange for their
initial ownership interests of 75% (the Partnership) and 25% (AWS-Delaware.)
The accompanying consolidated financial statements reflect such contributed
assets at their respective owners' historical cost which does not directly
correlate to the ownership interests.
(b) Additional Capital Contributions
The Partnership is to make additional cash contributions to develop and
operate the system as it deems necessary. AWS-Delaware is only permitted to
make additional contributions with the consent of the Partnership.
(c) Allocations of Profits and Losses
Profits and losses are to be allocated in accordance with the respective
ownership percentages (the initial ownership percentages as adjusted for
additional cash contributions).
(d) Cash Distributions
Distributions of available operating cash flows are to be made in accordance
with the member's existing capital contribution percentages.
(e) Management
AWS-Delaware has provided management services to the joint venture since its
inception under the terms of a management agreement which provides for an
annual fee to AWS-Delaware equal to the greater of 5% of collected gross
revenues or $100,000 annually. The Partnership has the right to terminate the
management agreement upon 30 days' prior notice. Management services expense
of $--0--, $--0--, $83,333, $58,334 and $75,000 has been provided for the ten
months ended December 31, 1992 and the years ended December 31, 1993 and 1994
and the nine months ended September 30, 1994 and 1995 (unaudited),
respectively.
F-57
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASE
Notes payable, including accrued interest, and obligations under capital
lease consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
SEPTEMBER 30,
1993 1994 1995
------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to AWS-Delaware, interest at 8%,
due February 28, 1995; secured by a 10%
interest in the joint venture, as defined... $ -- $2,000,000 $2,000,000
Note payable to Tsunami, interest at 12%, due
December 31, 1995, subject to alternate
payment arrangements, as defined............ -- -- 569,067
Obligations under capital lease, aggregate
monthly payments of $810 through September
1996........................................ 26,287 16,692 9,495
------- ---------- ----------
$26,287 $2,016,692 $2,578,562
======= ========== ==========
</TABLE>
(5) INVESTMENT IN WIRELESS SYSTEMS AND EQUIPMENT
Investment in wireless systems and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ESTIMATED
USEFUL LIFE SEPTEMBER 30,
IN YEARS 1993 1994 1995
----------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Frequency rights............ 10 $6,204,332 $6,204,332 $6,204,332
Broadcast equipment and
inventory.................. 3-7 1,513,430 2,010,842 2,240,796
Vehicles.................... 5 77,271 77,271 77,271
Office equipment............ 5-7 83,279 106,834 78,747
Leasehold improvements...... 7 1,450 1,450 1,450
---------- ---------- ----------
7,879,762 8,400,729 8,602,596
Less: Accumulated
depreciation and
amortization............... (743,780) (1,721,251) (2,519,179)
---------- ---------- ----------
$7,135,982 $6,679,478 $6,083,417
========== ========== ==========
</TABLE>
(6) RELATED PARTY TRANSACTIONS
The Partnership had several transactions with Wireless California including
the original sale of general partnership interests and the transactions
contemplated under the services and acquisition agreement. In addition to the
Partnership and AWS-Minneapolis, AWS-Delaware is the minority owner of a
wireless cable system joint venture with another general partnership in Ft.
Worth, Texas.
In its capacity as manager of AWS-Minneapolis, AWS-Delaware contracted
subscriber installation services to Wireless Technologies, Inc. (WTI), a Texas
corporation engaged in the business of providing subscriber installation
services and distributing subscriber equipment with respect to traditional and
wireless cable systems. WTI is a wholly owned subsidiary of North American
Cable Corporation, a Texas corporation engaged in the engineering,
construction and maintenance of cable television systems, local area networks,
fiber optic networks and wireless cable television systems, with operations in
the United States, England and several other countries around the world. A
former Chief Executive Officer and Director of AWS-Delaware beneficially owns
50% of the stock of North American Cable Corporation.
F-58
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
WTI purchased certain of the subscriber equipment that it sold to AWS-
Minneapolis from Micom Products, Ltd. (Micom), a Delaware limited liability
company engaged in the distribution of subscriber equipment for traditional
and wireless cable systems. Micom is owned by the beneficial owners of
approximately 36% of AWS-Delaware.
In 1993, payments of $381,534 were made to WTI for installation services and
related subscriber equipment. In 1993 and 1994, payments of $114,644 and
$2,766, respectively, were made by WTI to Micom. Effective August 1993, AWS-
Minneapolis ceased utilizing the services of WTI.
(7) COMMITMENTS AND CONTINGENCIES
(a) Commitments
Beginning January 1, 1993, AWS-Minneapolis began leasing office space under
an operating lease. Future obligations under this lease are as follows for
years ending December 31:
<TABLE>
<S> <C>
1995.......................................... $ 89,496
1996.......................................... 98,280
1997.......................................... 98,280
1998.......................................... 98,280
--------
$384,336
========
</TABLE>
Lease expense of $62,378, $57,269, $43,541 and $66,971 has been recorded for
the years ended December 31, 1993 and 1994, and for the nine months ended
September 30, 1994 and 1995 (unaudited).
AWS-Minneapolis holds frequency rights to 21 wireless cable channels in the
Minneapolis market under several leases. Eight local broadcast channels are
also transmitted for a total programming package of 29 channels. The channel
leases have original lease periods from five to ten years with options to
renew. Future minimum lease payments for the FCC licenses are as follows for
years ending December 31:
<TABLE>
<S> <C>
1995........................................ $ 368,488
1996........................................ 371,488
1997........................................ 324,988
1998........................................ 303,988
1999........................................ 303,988
Thereafter.................................. 467,912
----------
$2,140,852
==========
</TABLE>
Lease expense of $21,292, $248,350, $317,180, $235,610 and $263,560 has been
recorded for the ten months ended December 31, 1992 and the years ended
December 31, 1993 and 1994, and for the nine months ended September 30, 1994
and 1995 (unaudited), respectively.
Contingencies
The original formation of WCTVA involved the sale of general partnership
interests without registration under any federal or state securities laws
based on the belief that the general partnership interests did not constitute
securities under federal and applicable state laws. Securities administrators
in 22 states as well as the
F-59
<PAGE>
WIRELESS CABLE T.V. ASSOCIATES #38
(A GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities and Exchange Commission (SEC) have conducted or are currently
conducting investigations of the activities related to the unregistered sale
of the general partnership interests.
To date, the investigations have focused on Wireless California and its
successor, AWS-Delaware, the Partnership's joint venture partner in AWS-
Minneapolis, however, there is a possibility that future actions could be
taken against the Partnership. Such actions could involve fines,
administrative penalties and the requirement for the Partnership to file
required 1934 Act information with the SEC. Management believes that any such
penalties or fines should be the responsibility of Wireless California and
does not believe that any such actions will have a material impact on its
financial condition or its operations.
F-60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CableMaxx, Inc.
Supreme Cable, Inc.
We have audited the accompanying consolidated balance sheets of CableMaxx,
Inc. as of June 30, 1994 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period December 18,
1992 to June 30, 1993 and for the years ended June 30, 1994 and 1995. We have
also audited the consolidated statements of operations and cash flows of
Supreme Cable Co., Inc. and Subsidiaries (the "Predecessor") for the period
from July 1, 1992 to December 17, 1992. These financial statements are the
responsibility of CableMaxx, Inc.'s and the Predecessor's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 consolidated financial position
of CableMaxx, Inc. as of June 30, 1994 and 1995, and the results of its
operations and its cash flows for the period from December 18, 1992 to June
30, 1993 and the years ended June 30, 1994 and 1995, and the consolidated
results of operations and cash flows of the Predecessor for the period from
July 1, 1992 to December 17, 1992, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11, the Company
has entered into a merger agreement which is pending approval. However, the
Company's inability to generate through operations or borrow under its
revolving credit facility sufficient cash flows to fund operations, the
Company's expectation that it will not meet certain financial covenant
requirements under its revolving credit facility and the Company's inability
to meet the debt service requirements as currently exist under its revolving
credit facility raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustment relating to the recoverability of asset carrying
amounts or the amount of liabilities that might result should the Company be
unable to continue as a going concern.
COOPERS & LYBRAND L.L.P.
Austin, Texas
August 25, 1995
F-61
<PAGE>
CABLEMAXX, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------ SEPTEMBER 30,
1994 1995 1995
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.............. $ 875,963 $ 2,206,303 $ 786,392
Investments............................ 13,682,358 -- --
Subscriber receivables, net of allow-
ance for doubtful accounts of approxi-
mately $211,000, $64,000, and $86,000
(unaudited) as of June 30, 1994 and
1995 and September 30, 1995, respec-
tively................................ 398,602 341,974 457,733
Prepaids and other..................... 653,054 318,300 480,704
Systems and equipment, net............. 24,681,896 27,424,267 26,447,933
Intangible assets, net................. 12,910,798 21,663,254 21,271,892
----------- ----------- -----------
Total assets....................... $53,202,671 $51,954,098 $49,444,654
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabili-
ties.................................. $ 5,131,799 $ 2,687,361 $ 2,851,680
Due to affiliates...................... 260,198 235,476 366,004
Subscriber deposits.................... 262,089 207,241 198,751
Deferred revenue....................... 262,650 307,954 308,179
Notes payable.......................... 3,200,000 10,807,500 10,807,500
----------- ----------- -----------
Total liabilities.................. 9,116,736 14,245,532 14,532,114
----------- ----------- -----------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized, none
issued and outstanding.............. -- -- --
Common stock, $.01 par value;
20,000,000 shares authorized,
8,600,000, 9,507,311, and 9,507,311
(unaudited) shares issued and
outstanding as of June 30, 1994 and
1995 and September 30, 1995,
respectively........................ 86,000 95,073 95,073
Additional paid-in capital........... 53,274,159 57,670,727 57,670,727
Accumulated deficit.................. (9,274,224) (20,057,234) (22,853,260)
----------- ----------- -----------
Total stockholders' equity......... 44,085,935 37,708,566 34,912,540
----------- ----------- -----------
Total liabilities and stockholders'
equity............................ $53,202,671 $51,954,098 $49,444,654
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE>
CABLEMAXX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR
CONSOLIDATED
------------
PERIOD FROM PERIOD FROM
JULY 1, 1992 DECEMBER 18,
TO 1992 TO YEAR ENDED YEAR ENDED
DECEMBER 17, JUNE 30, JUNE 30, JUNE 30,
1992 1993 1994 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues.................................... $ 1,834,789 $ 2,276,602 $ 7,709,411 $ 13,463,076
----------- ----------- ----------- ------------
Operating expenses:
Systems operations......................... 855,503 1,091,694 3,758,927 6,301,007
Selling, general and administrative........ 1,028,220 1,335,557 7,125,701 9,051,185
Depreciation and amortization.............. 1,149,138 1,338,356 4,239,005 8,274,058
----------- ----------- ----------- ------------
Total operating expenses.................. 3,032,861 3,765,607 15,123,633 23,626,250
----------- ----------- ----------- ------------
Operating loss.............................. (1,198,072) (1,489,005) (7,414,222) (10,163,174)
Interest expense............................ (343,214) (288,320) (505,928) (875,109)
Other income................................ 505,488 2,073 421,178 255,273
----------- ----------- ----------- ------------
Net loss.................................. $(1,035,798) $(1,775,252) $(7,498,972) $(10,783,010)
=========== =========== =========== ============
Net loss per share.......................... $ (0.35) $ (1.05) $ (1.21)
=========== =========== ============
Weighted average number of shares
outstanding................................ 5,100,000 7,141,667 8,902,437
=========== =========== ============
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1994 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................... $ 3,143,660 $ 3,633,462
------------ ------------
Operating expenses:
Systems operations......................... 1,441,821 1,540,162
Selling, general and administrative........ 2,188,320 2,080,532
Depreciation and amortization.............. 1,732,175 2,514,350
------------ ------------
Total operating expenses.................. 5,362,316 6,135,044
------------ ------------
Operating loss.............................. (2,218,656) (2,501,582)
Interest expense............................ (100,502) (311,169)
Other income................................ 81,569 16,725
------------ ------------
Net loss.................................. $(2,237,589) $(2,796,026)
============ ============
Net loss per share.......................... $ (0.26) $ (0.29)
============ ============
Weighted average number of shares
outstanding................................ 8,600,000 9,507,311
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-63
<PAGE>
CABLEMAXX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- --------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 18,
1992................... -- -- -- -- -- -- --
Issuance of common
stock.................. -- -- 5,100,000 $51,000 $15,199,000 -- $ 15,250,000
Net loss for period..... -- -- -- -- -- $ (1,775,252) (1,775,252)
------- ------- --------- ------- ----------- ------------ ------------
Balance, June 30, 1993.. -- -- 5,100,000 51,000 15,199,000 (1,775,252) 13,474,748
------- ------- --------- ------- ----------- ------------ ------------
Issuance of common
stock.................. -- -- 3,500,000 35,000 38,075,159 -- 38,110,159
Net loss for the year... -- -- -- -- -- (7,498,972) (7,498,972)
------- ------- --------- ------- ----------- ------------ ------------
Balance, June 30, 1994.. -- -- 8,600,000 86,000 53,274,159 (9,274,224) 44,085,935
------- ------- --------- ------- ----------- ------------ ------------
Issuance of common
stock.................. -- -- 907,311 9,073 4,396,568 -- 4,405,641
Net loss for the year... -- -- -- -- -- (10,783,010) (10,783,010)
------- ------- --------- ------- ----------- ------------ ------------
Balance, June 30, 1995.. -- -- 9,507,311 95,073 57,670,727 (20,057,234) 37,708,566
------- ------- --------- ------- ----------- ------------ ------------
Net loss, for the three
months ended September
30, 1995 (unaudited)... -- -- -- -- -- (2,796,026) (2,796,026)
Balance, September 30,
1995 (unaudited)....... -- -- 9,507,311 $95,073 $57,670,727 $(22,853,260) $ 34,912,540
======= ======= ========= ======= =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-64
<PAGE>
CABLEMAXX, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR
CONSOLIDATED
------------
PERIOD FROM PERIOD FROM
JULY 1, DECEMBER 18,
1992 TO 1992 TO YEAR ENDED YEAR ENDED
DECEMBER 17, JUNE 30, JUNE 30, JUNE 30,
1992 1993 1994 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $(1,035,798) $(1,775,252) $(7,498,972) $(10,783,010)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization.............. 1,149,138 1,338,356 4,239,005 8,274,058
Interest capitalized into notes payable.... -- -- 150,000 157,500
(Gain)/loss on sale of short-term
investments............................... -- -- (100,164) 16,696
Accretion of discount on short-term
investments............................... -- -- (238,561) (76,567)
Changes in assets and liabilities:
Subscriber receivables.................... 200,353 (28,055) (259,539) 56,628
Prepaids and other........................ (200,973) (44,675) (571,390) 334,754
Accounts payable and accrued
liabilities.............................. 652,411 1,154,420 735,938 (2,828,438)
Due to affiliates......................... -- 203,629 56,569 (24,722)
Subscriber deposits....................... (28,455) (16,158) (78,080) (54,848)
Deferred revenue.......................... -- -- 170,166 45,304
----------- ----------- ----------- ------------
Net cash provided by (used in) operating
activities.............................. 736,676 832,265 (3,395,028) (4,882,645)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Acquisition of wireless cable systems...... -- (12,372,712) -- --
Purchases of systems and equipment......... (654,581) (3,175,684) (14,445,866) (9,414,480)
Purchases of rights/options................ (27,073) -- (3,248,830) (5,456,264)
Purchase of trademark/tradename............ -- (10,000) -- --
Purchase of investments.................... -- -- (69,470,839) --
Proceeds from sale of investments.......... -- -- 56,127,206 13,742,229
----------- ----------- ----------- ------------
Net cash used in investing activities.... (681,654) (15,558,396) (31,038,329) (1,128,515)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock..... -- 12,500,000 38,110,159 --
Proceeds from borrowings................... 64,797 2,854,161 3,689,692 7,450,000
Repayments of borrowings................... (577,778) (153,322) (6,490,531) --
Loan acquisition costs..................... -- (474,708) -- (108,500)
----------- ----------- ----------- ------------
Net cash provided by (used in) financing
activities.............................. (512,981) 14,726,131 35,309,320 7,341,500
----------- ----------- ----------- ------------
Net increase (decrease) in cash............. (457,959) -- 875,963 1,330,340
Cash and cash equivalents, beginning of pe-
riod....................................... 502,406 -- -- 875,963
----------- ----------- ----------- ------------
Cash and cash equivalents, end of period.... $ 44,447 $ -- $ 875,963 $ 2,206,303
=========== =========== =========== ============
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1994 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................... $(2,237,589) $(2,796,026)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization.............. 1,732,175 2,514,350
Interest capitalized into notes payable.... -- --
(Gain)/loss on sale of short-term
investments............................... 16,696 --
Accretion of discount on short-term
investments............................... (76,567) --
Changes in assets and liabilities:
Subscriber receivables.................... (129,824) (115,759)
Prepaids and other........................ (63,829) (162,404)
Accounts payable and accrued
liabilities.............................. (3,004,028) (152,681)
Due to affiliates......................... (223,495) 130,528
Subscriber deposits....................... (9,822) (8,490)
Deferred revenue.......................... 28,977 225
------------ ------------
Net cash provided by (used in) operating
activities.............................. (3,967,306) (590,257)
------------ ------------
Cash flows from investing activities:
Acquisition of wireless cable systems......
Purchases of systems and equipment......... (2,620,827) (804,667)
Purchases of rights/options................ (19,497) (24,987)
Purchase of trademark/tradename............ -- --
Purchase of investments.................... -- --
Proceeds from sale of investments.......... 13,742,229 --
------------ ------------
Net cash used in investing activities.... 11,101,905 (829,654)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock..... -- --
Proceeds from borrowings................... -- --
Repayments of borrowings................... -- --
Loan acquisition costs..................... -- --
------------ ------------
Net cash provided by (used in) financing
activities.............................. -- --
------------ ------------
Net increase (decrease) in cash............. 7,134,599 (1,419,911)
Cash and cash equivalents, beginning of pe-
riod....................................... 875,963 2,206,303
------------ ------------
Cash and cash equivalents, end of period.... $ 8,010,562 $ 786,392
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-65
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following notes, insofar as they are applicable to the three month
periods ended September 30, 1994 and 1995, are not audited. In management's
opinion, all adjustments consisting of only normal recurring accruals
considered necessary for the fair presentation of such financial statements
are included. Interim results are not necessarily indicative of results for a
full year.
(1) DESCRIPTION OF BUSINESS
CableMaxx, Inc. develops, owns and operates wireless cable television
systems and currently provides wireless cable television service to
subscribers in Austin, San Antonio, Temple/Killeen and Waco, Texas.
On December 18, 1992, Charter Cable Corporation and Charter Cable (San
Antonio), Inc. acquired the Austin and San Antonio wireless cable systems from
certain sellers (collectively, the "Predecessor"). These corporations were
wholly-owned by Charter Wireless Cable Holdings, L.L.C. ("Charter Holdings").
Charter Holdings is owned by an affiliate of Charterhouse Group International,
Inc. ("Charterhouse"), Galaxy Cablevision, L.P. ("Galaxy") and Galaxy
Management, Inc. CableMaxx, Inc. was capitalized with $12,500,000 cash,
$2,000,000 previously deposited with the Predecessor by Galaxy, and an
ownership interest in Charter Holdings valued at $750,000 which was conveyed
to the Predecessor in connection with the acquisition.
In September 1993, Charter Cable (San Antonio), Inc. was merged with and
into Charter Cable Corporation, which changed its name to CableMaxx, Inc. and
which simultaneously increased its authorized and outstanding shares of $.01
par value Common Stock to 20,000,000 and 5,100,000 shares, respectively. This
merger and change in capital structure have been reflected in the financial
statements as of June 30, 1993. The Board of Directors is authorized to
determine all rights and privileges associated with the preferred stock,
including dividend and voting rights, redemption provisions and liquidation
preferences.
In November 1993, CableMaxx, Inc. sold in an initial public offering
("IPO"), 3,500,000 shares of its common stock, par value $.01 per share
("Common Stock"), at an initial price of $12.00 per share, resulting in net
proceeds to the Company of $38,110,159 after underwriting discounts and costs
in connection with the IPO.
In connection with the IPO, in November 1993, CableMaxx, Inc. granted to one
of the representatives of the Underwriters warrants to purchase an aggregate
of 100,000 shares of Common Stock (the "Warrants"). The consideration for the
Warrants was $10,000. The Warrants are exercisable from November 29, 1994
through November 28, 1998, at an exercise price of $14.40 per share of Common
Stock, subject to adjustment pursuant to the terms of the Warrants.
In December, 1994, in order to create a holding company structure to
facilitate CableMaxx, Inc.'s access to sources of financing, CM Newco, Inc., a
wholly-owned subsidiary of CableMaxx Holdings, Inc. ("Holdings"), was merged
with and into CableMaxx, Inc. As a result of such merger, (i) Holdings changed
its name to CableMaxx, Inc. (the "Company"), is now owned by the stockholders
of the former CableMaxx, Inc., immediately prior to such merger, and (ii)
CableMaxx, Inc., which changed its name to CableMaxx (Texas), Inc., is now a
wholly-owned subsidiary of the Company.
The accompanying balance sheets as of June 30, 1994 and 1995 and the
statements of operations and cash flows for the period December 18, 1992 to
June 30, 1993 and for the years ended June 30, 1994 and 1995 include the
consolidated accounts of the Company. All significant intercompany balances
and transactions between the entities have been eliminated.
F-66
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) ACQUISITIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Acquisitions
On December 18, 1992, the Company acquired assets and assumed liabilities
related to the Austin and San Antonio wireless cable operations of the
Predecessor. The acquisition has been accounted for using the purchase method
of accounting and, accordingly, the total acquisition cost has been allocated
to the net assets acquired based on the fair values of the assets and
liabilities at the date of acquisition. The results of operations of the
Austin and San Antonio wireless cable systems are included in the financial
statements since the date of acquisition. The acquisition included the
following assets and liabilities (amounts rounded):
<TABLE>
<CAPTION>
ACQUIRED PREDECESSOR COST
ASSETS AND OF ACQUIRED ASSETS
LIABILITIES AND LIABILITIES
----------- ------------------
<S> <C> <C>
Accounts receivable, net........................ $ 111,000 $ 111,000
Systems and equipment........................... 8,095,000 7,295,000
Intangible assets............................... 10,397,000 224,000
Deposits........................................ 37,000 37,000
Subscriber deposits and deferred revenue........ (517,000) (517,000)
----------- ----------
Net assets acquired........................... $18,123,000 $7,150,000
=========== ==========
</TABLE>
The acquisition costs consisted of the following (amounts rounded):
<TABLE>
<S> <C>
Cash paid to Predecessor and certain of their affiliates........... $ 9,934,000
Amount previously deposited with Predecessor by Galaxy............. 2,000,000
Subordinated seller note........................................... 3,000,000
Ownership interest in Charter Holdings............................. 750,000
Acquisition costs.................................................. 2,439,000
-----------
$18,123,000
===========
</TABLE>
The ownership interest in Charter Holdings was purchased from the
Predecessor by Galaxy for $750,000 in February 1993.
In connection with the acquisition, the Company also received options to
acquire wireless cable channel leases, tower leases and head-end sites in the
Sherman/Denison, Temple/Killeen, Waco, Lubbock, Athens and Amarillo, Texas
markets which did not constitute existing operating wireless cable systems.
For an aggregate price of approximately $1,133,000, the Company exercised
these options in April 1994, and reimbursed Galaxy approximately $217,000 for
costs necessary to maintain the options assets and properties during the
option period. Upon exercise of the options, the Company negotiated a
settlement with a third party totalling $500,000 to terminate all disputes and
claims related to channel rights in certain of the aforementioned markets. All
such costs are classified as "Intangible assets--channel rights."
In February 1995, the Company completed the acquisition of wireless cable
channel rights in Salt Lake City, Utah for approximately $11 million,
consisting of cash in the amount of $6.6 million and the issuance of 907,311
shares of common stock. These rights do not constitute an existing operating
wireless cable system. Under the Acquisition Agreement, the Company is
obligated to maintain the related licenses and perform all other obligations
imposed under each channel lease.
(b) Cash and Cash Equivalents
All investments including repurchase agreements purchased with remaining
maturities of three months or less are cash equivalents. Cash and cash
equivalents balances generally do not exceed FDIC coverage.
F-67
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Investments
At June 30, 1994, the Company's short-term investments consisted primarily
of U.S. Government instruments and were carried at the lower of amortized cost
or market, with cost approximating market at fiscal year end. Realized gains
or losses if any are determined on the specific identification method and are
reflected in income.
(d) Systems and Equipment
Systems and equipment is carried at cost and includes the cost of
transmission equipment as well as subscriber installations. Reception
equipment on subscriber premises and outside contractor costs associated with
subscriber installations including successful and unsuccessful transmission
reception testing are capitalized. Upon subscriber disconnect, the Predecessor
expensed remaining unamortized installation labor and certain materials. The
Company has elected to depreciate the full capitalized installation cost
subsequent to disconnect. Capitalized installation costs are accounted for
under the composite method. Cost of maintenance and repairs is charged to
expense as incurred. Upon sale or retirement, the related cost and accumulated
depreciation are removed from their respective accounts, and any resulting
gain or loss is credited or charged to income.
Systems and equipment is depreciated as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
---------------------------- ---------------------------
METHOD TERM METHOD TERM
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Wireless cable systems:
Subscriber installa-
tions:
Material............ Straight-line 5.5 to 7 years Straight-line 7 years
Outside contract la-
bor................ Straight-line 3 years Straight-line 7 years
Head-end, tower and
transmission
equipment............ Straight-line 7 to 10 years Straight-line 7 to 20 years
Vehicles, furniture and
equipment.............. Straight-line 3 to 10 years Straight-line 5 years
Leasehold improvements.. Straight-line 10 years -- --
</TABLE>
During the fiscal years ended June 30, 1994 and 1995 the Company transferred
ownership of installation materials to independent contractors. As a result,
ownership of materials removed from disconnected homes remains with the
independent contractors. Accordingly, the lives for this equipment are shorter
than estimated in prior years. The Company has changed the useful lives for
installation materials to 5.5 years, effective July 1, 1994. The effect of
this change in estimate increased depreciation expense and increased net loss
in the year ended June 30, 1995 by approximately $543,000. The effect of this
change was not significant in the year ended June 30, 1994.
(e) Intangible Assets
Intangible assets are amortized as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------------------- -------------------------------
METHOD TERM METHOD TERM
---------------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Channel rights and Straight-line 15 years Straight-line Original term of
goodwill............... channel lease--5
to 10 years
Trademark/tradename..... Straight-line 15 years Straight-line 10 years
Loan acquisition costs.. Straight-line 6 years -- --
which
approximates
interest method
</TABLE>
F-68
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Channel rights and goodwill include the allocation of the excess of purchase
price over the fair value of tangible assets and liabilities acquired. The
Company reviews goodwill for impairment from time to time, measuring
impairment based upon expected future undiscounted cash flows from operations.
(f) Revenue Recognition
Revenues from subscribers are recognized in the month that the service is
provided. Installation fees are recognized as revenue upon origination of
service to subscribers to the extent of any costs incurred to obtain the
subscriber, which are expensed as incurred.
(g) Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between tax basis 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 income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
(3) SYSTEMS AND EQUIPMENT
Systems and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Wireless cable systems............................. $26,606,302 $35,805,422
Vehicles, furniture and equipment.................. 1,678,329 2,156,052
Building and leasehold improvements................ 704,474 820,102
Land............................................... 50,030 50,030
----------- -----------
29,039,135 38,831,606
Accumulated depreciation and amortization.......... (4,357,239) (11,407,339)
----------- -----------
$24,681,896 $27,424,267
=========== ===========
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Channel rights and goodwill........................ $13,645,276 $23,507,181
Loan acquisition costs............................. 475,644 584,144
Trademark/tradename................................ 10,000 10,000
----------- -----------
14,130,920 24,101,325
Accumulated amortization........................... (1,220,122) (2,438,071)
----------- -----------
$12,910,798 $21,663,254
=========== ===========
</TABLE>
(5) NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1994 1995
---------- -----------
<S> <C> <C>
Revolving credit and term loan....................... $ 50,000 $ 7,500,000
Subordinated seller note............................. 3,150,000 3,307,500
---------- -----------
$3,200,000 $10,807,500
========== ===========
</TABLE>
F-69
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 18, 1992, the Company entered into a revolving credit and term
loan agreement (the "Agreement") with Fleet National Bank allowing it to
borrow up to $14.5 million to fund up to $1 million of closing costs in
connection with the acquisition and for working capital and capital
expenditures in connection with the construction, ownership and operation of
the existing wireless cable systems.
Advances under the Agreement are subject to limits based on multiples of the
Company's annualized adjusted net operating income and certain other
performance factors. As a result of such limits, the Company's availability
under the Agreement will vary over time. Subject to certain mandatory payment
provisions as set forth in the Agreement, amounts borrowed are not required to
be repaid prior to December 31, 1995 at which time the outstanding amounts
borrowed convert to a term loan with quarterly repayments of principal due as
follows:
<TABLE>
<CAPTION>
ANNUAL
PERCENTAGE OF
OUTSTANDING
PRINCIPAL
QUARTERLY DATES DUE
--------------- -------------
<S> <C>
March 31, 1996 through December 31, 1996...................... 21%
March 31, 1997 through December 31, 1997...................... 37%
March 31, 1998 through December 31, 1998...................... 42%
</TABLE>
In addition to the specified quarterly principal repayments, the Agreement
provides for a mandatory repayment based upon excess cash flow, as defined,
for annual periods ending December 31, 1996 and after.
Interest on the revolving credit and term loan is due on the last day of
each quarter. The Company has the option to elect either a fixed rate or
floating rate based on prime or LIBOR plus applicable margin of interest from
time to time throughout the term of the loan. The interest rate in effect on
amounts borrowed under this Agreement was 11.58% at June 30, 1995. The Company
is also required to pay a commitment fee equal to one-half of one percent of
the unused portion of the line of credit. Amounts borrowed are collateralized
by substantially all of the Company's assets, including its interests in
channel lease agreements.
The Agreement contains restrictions on capital expenditures and payments to
affiliates, as well as certain restrictive covenants that require the Company
to maintain specific financial ratios, minimum subscriber levels and minimum
net operating income, among other criteria, as defined by the Agreement. While
the Company has obtained a waiver of fiscal 1995 covenant violations, it
expects to violate certain of these restrictive financial covenants during
fiscal 1996, resulting in expected events of default under the existing terms
of the Agreement and leading to possible acceleration of indebtedness by the
Lender. The Company is currently seeking to amend the Agreement in order to
resolve these expected events of default. The Company obtained a waiver for a
covenant violation for the fiscal quarter ended September 30, 1995
(unaudited).
The current Agreement does not provide for any more advances to the Company.
Current cash reserves may not be sufficient to meet future operating needs and
liabilities. In connection with the proposed merger discussed in Note 11, the
Company sold its channel rights in Sherman, Lubbock, Amarillo and Athens for
approximately $2.4 million (unaudited). In addition, the merger agreement was
amended to allow the Company to borrow, if necessary, up to $1,000,000
(unaudited). The Company expects that these funds will enable the Company to
continue operations through the proposed closing date of the merger. If the
merger is not completed, the Company will have to find additional funding for
operations. Management will continue to negotiate and seek to amend the
current revolving credit facility and also pursue other areas of financing.
The subordinated seller note is payable to the Predecessor as part of the
consideration for the Company's acquisition of the wireless cable systems. The
note is due December 18, 1998. Interest accrues on the note at the
F-70
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rate of 10% per annum. Fifty percent of interest accrued for the preceding
twelve-month period as of each anniversary date is payable on the last day of
the month of the next anniversary date. The remaining accrued interest is
payable at 10% per annum on the note's due date. Obligations under this note
are subordinated to the Company's indebtedness under the Agreement, and are
subject to acceleration upon the occurrence of certain events.
As of June 30, 1995, the aggregate scheduled maturities of notes payable due
for each of the next five years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
----------- ----------
<S> <C>
1996....................................................... $ 787,500
1997....................................................... 2,175,000
1998....................................................... 2,962,500
1999....................................................... 4,882,500
</TABLE>
(6) INCOME TAXES
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
109, Accounting for Income Taxes. The Company has a net operating loss
carryforward for income tax purposes of approximately $19,211,000, which
expires beginning in 2007. SFAS 109 requires that the tax benefit of net
operating losses be reported as an asset to the extent management assesses the
utilization of such net operating losses to be more likely than not. Since the
Company has had net losses since inception, a valuation allowance of
approximately $6,807,000 has been recorded to offset the deferred tax asset.
Deferred income taxes result from temporary differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. The source of these differences and tax effect of each is as
follows (amounts rounded):
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liability:
Excess book basis over tax basis.................... $ (559,000) --
Deferred tax assets:
Net operating loss carryforward..................... 3,491,000 $ 6,532,000
Deferred revenue.................................... 89,000 105,000
Allowance for doubtful accounts..................... 72,000 22,000
Accrued liabilities................................. 51,000 23,000
Excess of tax over book basis....................... -- 125,000
----------- -----------
3,703,000 6,807,000
Valuation allowance................................... (3,144,000) (6,807,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The valuation allowance adjustments of $2,541,000 and $3,663,000 for 1994
and 1995, respectively, offset the income tax benefit computed by applying the
U.S. Federal statutory tax rates to pretax loss.
F-71
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
The Company and its Predecessor lease from third parties channel rights
licensed by the Federal Communication Commission ("FCC"). Under FCC rules, the
base term of each lease cannot exceed the term of the underlying FCC license.
FCC licenses for wireless cable frequencies range from five to ten years, and
there is no automatic renewal of such licenses. The use of such frequencies by
the third party lessors is subject to regulation by the FCC, and therefore the
Company's ability to enjoy the benefit of these leases is dependent upon the
third party lessors' continuing compliance with applicable regulations. The
remaining terms of the Company's leases range from approximately one year to
seven years. Most of the Company's leases provide for renewal of their terms
upon FCC renewal of the underlying license or require the parties to negotiate
renewal in good faith. Although the Company has no reason to believe that its
leases will not be renewed or that the underlying FCC licenses will be
canceled or not renewed, such event would prevent the Company from delivering
programming over the affected frequencies, which 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 factors including subscriber levels, subscriber revenues, the cost of
transmission equipment and facilities, and facility operating costs as
specified in the agreements.
Payments under the leases 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. Channel rights lease expenses were
approximately $168,000, $539,000 and $875,000 for the period from December 18,
1992 to June 30, 1993 and for the years ended June 30, 1994 and 1995,
respectively, and $198,000 and $240,000 for the three months ended September
30, 1994 and 1995, (unaudited) respectively.
Future minimum lease payments due under channel rights leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
----------- --------
<S> <C>
1996......................................... $516,400
1997......................................... 555,500
1998......................................... 560,500
1999......................................... 479,500
2000......................................... 360,000
</TABLE>
The Company and its Predecessor also have operating leases for office space
and equipment, land for head-ends, and transmission facilities. Rental
expenses incurred in connection with these leases approximated $64,000,
$173,000 and $408,000 for the period from December 18, 1992 to June 30, 1993
and for the years ended June 30, 1994 and 1995, respectively, and $83,000 and
$117,000 for the three months ended September 30, 1994 and 1995, (unaudited)
respectively.
Future minimum lease payments under such leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
----------- --------
<S> <C>
1996......................................... $434,100
1997......................................... 420,800
1998......................................... 427,600
1999......................................... 440,500
2000......................................... 361,200
</TABLE>
Wireless cable system equipment, excluding television-top converters which
are provided by the Company, site reception testing and installation are
provided through a third party contractor under three year agreement
F-72
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
commencing in fiscal year 1994, which establish rate structures for such
equipment and services by service area subject to periodic adjustment,
specifying minimum charges aggregating $28,400 per month.
(8) RELATED PARTY TRANSACTIONS
Prior to the IPO, the Company incurred management fees and expenses pursuant
to the terms of a management agreement with Galaxy Management, Inc., an
affiliate of Galaxy, under which it managed a significant portion of the
Company's business. In addition to reimbursing expenses, the Company paid a
management fee based on 3.5% of operating revenues as defined in the
management agreement. Subsequent to the IPO, Galaxy Management, Inc. ceased to
manage the Company's business, but continued to provide certain administrative
services for the Company for which it receives reimbursement for certain of
its salaries and expenses. Management fees and reimbursable expenses incurred
in association with these agreements approximated $269,000 for the period from
December 18, 1992 to June 30, 1993 and $523,000 and $320,000 for the years
ended June 30, 1994 and 1995, respectively, and $88,000 and $47,000 for the
three months ended September 30, 1994 and 1995, (unaudited) respectively. The
Company's president and CEO who receives an annual salary of $200,000 under
provisions of a two-year employment agreement is the principal stockholder and
president of Galaxy Management, Inc.
The Company shares certain operational and administrative expenses and
facilities in Austin, Texas with Galaxy and its affiliates, and certain of its
customer service representatives and executive and administrative personnel
also provide such services for Galaxy. Shared expenses are allocated based
upon the Company subscribers to Galaxy subscribers in Austin, Texas. Total
expenses allocated to Galaxy for the period from December 18, 1992 to June 30,
1993 and for the years ended June 30, 1994 and 1995 approximated $100,000,
$12,000 and $0, respectively, and $0 and $0 for the three months ended
September 30, 1994 and 1995, (unaudited) respectively.
Pursuant to the terms of a financial consulting agreement with Charterhouse,
the Company was charged a consulting fee at the rate of $400,000 per annum
through the IPO closing date and at the rate of $280,000 per annum thereafter.
Expenses incurred in connection with this agreement approximated $214,000 for
the period December 18, 1992 to June 30, 1993, and $330,000 and $280,000 for
the years ended June 30, 1994 and 1995, respectively, and $70,000 and $70,000
for the three months ended September 30, 1994 and 1995, (unaudited)
respectively. Payments in connection with this agreement are subordinated
under the Company's revolving credit and term loan agreement. Certain
directors of the Company also serve as officers of Charterhouse. In addition,
certain other directors of the Company are also officers of Charter
Communications.
Commencing after the IPO through October 1994, the Company was charged a
consulting fee of $10,000 per month under an agreement with Charter
Communications. Expenses incurred in connection with this agreement
approximated $70,000 and $40,000 for the years ended June 30, 1994 and 1995,
respectively, and $30,000 and $0 for the three months ended September 30, 1994
and 1995, (unaudited) respectively.
Amounts related to the above arrangements are included in due to affiliates
as of June 30, 1994 and 1995.
In connection with negotiating and structuring the acquisition, Charterhouse
and Galaxy were paid fees of $330,000 and $500,000, respectively, which have
been included in the purchase price allocation.
(9) SUPPLEMENTAL CASH FLOWS DISCLOSURES
The Company and its Predecessor paid $119,000, $359,000 and $709,000 in
interest (net of amounts capitalized into principal on notes payable) for the
periods from December 18, 1992 to June 30, 1993 and for the years ended June
30, 1994 and 1995, respectively, and $20,000 and $148,000 for the three months
ended September 30, 1994 and 1995, (unaudited) respectively.
F-73
<PAGE>
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Predecessor had noncash investing and financing activities related to
the acquisition and initial capitalization as disclosed in Notes 1 and 2. The
Company had obligations amounting to approximately $2,853,000 and $384,000
related to systems and equipment additions which are included in accounts
payable at June 30, 1994 and June 30, 1995, respectively, and $1,318,000 and
$317,000 for the three months ended September 30, 1994 and 1995, (unaudited)
respectively. Noncash financing activities included $150,000 and $157,500 of
interest capitalized into the principal balance of notes payable during the
years ended June 30, 1994 and June 30, 1995, respectively, and $0 and $0 for
the three months ended September 30, 1994 and 1995, (unaudited) respectively.
(10) STOCK OPTION PLAN
In December 1993, the Company adopted the CableMaxx, Inc. 1993 Stock Option
Plan (the "Plan"). The Plan, which is administered by a committee of the
Company's Board of Directors, provides for the grant of incentive stock
options and nonqualified stock options to key managerial employees and
consultants of the Company as determined by the committee. The Plan provides
that the total number of shares of Common Stock that may be subject to options
shall be 250,000 shares. The exercise price of the options granted under the
Plan shall be at least 100% of the fair market value of the Common Stock on
the date of grant. As of June 30, 1995, options for 117,500 shares have been
granted at an exercise price of $12.00 per share, with one-third being
exercisable.
(11) SUBSEQUENT EVENTS (UNAUDITED)
In September 1995, the Company entered into a agreement (the "Merger
Agreement") to merge with a subsidiary of Heartland Wireless Communications,
Inc. ("Heartland"). The Merger Agreement provides for the conversion of the
common stock of the Company at value of $8.50 per share, subject to
adjustment, into Heartland common stock, with the exchange ratio determined by
the average price of Heartland stock preceding the transaction date. The
transaction is subject to approval by the shareholders' of each company and is
subject, among other things, to consent by the Heartland bondholders. Should
the Merger Agreement be terminated as a result of a third party acquisition
proposal that is approved by the Board of Directors of the Company or
recommended to the stockholders of the Company by the Board of Directors, a $2
million fee is payable to Heartland.
In October 1995, the Company sold certain channel rights to Heartland for
approximately $2.4 million subject to adjustment to the appraised value of
such channel rights should the Merger Agreement be terminated for any reason
other than the Company's breach thereof or the Company's acceptance of a third
party's acquisition proposal.
In connection with the Merger Agreement on December 26, 1995, the Company
entered into a Loan Agreement (the "CMAX Loan") with Heartland for up to
$1,000,000 bearing interest at a published prime rate plus 2% of which (a)
$500,000 was advanced on December 29, 1995 to be used for working capital
purposes, and (b) $500,000 is to be used for subscriber growth funded at a
rate of $500 per additional subscriber. The CMAX Loan will not increase the
amount of CMAX Excess Liabilities as set forth in the Merger Agreement. Upon
consummation of the Merger Agreement, it is anticipated that the CMAX Loan
will remain as an inter-company obligation from the Company to Heartland. In
the event that the CMAX Merger Agreement is not consummated, the CMAX Loan is
payable August 29, 1996; provided, that if the Merger Agreement is terminated
as a result of a competing acquisition proposal, then the CMAX Loan will be
immediately due and payable.
F-74
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TechniVision, Inc.:
We have audited the accompanying balance sheets of TechniVision, Inc. as of
May 31, 1994 and 1995, and the related statements of operations, stockholders'
deficit and cash flows for each of the years in the three-year period ended
May 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TechniVision, Inc. as of
May 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended May 31, 1995, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has incurred cumulative losses since
inception of $14,870,712 through May 31, 1995, and as of that date current
liabilities exceeded current assets by $15,086,000. Additional capital or
financing is needed to enable the Company to meet its debt service
requirements in fiscal year 1996. These factors, as more fully discussed in
note 2, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Dallas, Texas
October 25, 1995
F-75
<PAGE>
TECHNIVISION, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31, MAY 31, NOVEMBER 30,
1994 1995 1995
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash.............................. $ 3,197 $ 51,637 $ 78,124
Subscriber receivables, net of
allowance for doubtful accounts
of $48,996 in 1994 and $80,715 in
1995............................. 349,702 386,390 324,281
Prepaid expenses and other........ 51,287 38,147 153,044
------------ ------------ ------------
Total current assets............ 404,186 476,174 555,449
Investment in equity security (note
6)................................. -- 1,638,629 1,134,473
Systems and equipment, net (notes 3
and 4)............................. 10,310,235 9,401,638 9,001,797
Leased license investment, net of
accumulated amortization of
$668,739 in 1994 and $863,504 in
1995............................... 3,238,648 3,144,649 3,552,846
Other assets, net................... 405,166 216,495 306,620
------------ ------------ ------------
$ 14,358,235 $ 14,877,585 $ 14,551,185
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................. $ 1,909,767 $ 1,990,880 $ 2,676,813
Accounts payable -- affiliates.... 63,312 468,886 158,905
Accrued expenses and other
liabilities...................... 1,185,073 1,642,771 806,353
Current portion of long-term debt
(note 4)......................... 11,875,980 11,043,590 12,276,898
Note payable -- affiliates........ 489,201 415,906 955,984
------------ ------------ ------------
Total current liabilities....... 15,523,333 15,562,033 16,874,953
Long-term debt, less current portion
(note 4)........................... 7,177,542 6,198,499 6,061,259
Stockholders' deficit:
Common stock, $1 par value;
authorized 30,000 shares, issued
30,000 shares in 1994 and 1995... 30,000 30,000 30,000
Paid-in capital................... 6,208,311 7,957,765 7,957,765
Accumulated deficit............... (14,580,951) (14,870,712) (16,372,792)
------------ ------------ ------------
Total stockholders' deficit..... (8,342,640) (6,882,947) (8,385,027)
Commitments (notes 5 and 8)
------------ ------------ ------------
$ 14,358,235 $ 14,877,585 $ 14,551,185
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE>
TECHNIVISION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Subscription.......... $ 3,796,172 $ 5,214,508 $ 6,663,988 $ 3,330,288 $ 3,268,823
Installation.......... 107,750 225,067 92,145 41,417 63,528
----------- ----------- ----------- ----------- -----------
Total revenues...... 3,903,922 5,439,575 6,756,133 3,371,705 3,332,351
----------- ----------- ----------- ----------- -----------
Operating expenses:
Systems operations.... 1,709,254 2,991,486 3,642,681 2,086,496 1,749,005
Selling, general and
administrative....... 1,617,598 2,664,162 2,803,415 1,138,360 1,364,880
Depreciation and amor-
tization............. 1,977,352 2,371,891 2,623,736 1,323,662 1,299,603
----------- ----------- ----------- ----------- -----------
Total operating ex-
penses............. 5,304,204 8,027,539 9,069,832 4,548,518 4,413,488
----------- ----------- ----------- ----------- -----------
Operating loss...... (1,400,282) (2,587,964) (2,313,699) (1,176,813) (1,081,137)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Gain on sale of assets
(note 6)............. -- -- 3,362,230 -- 253,352
Interest expense...... (1,063,620) (959,647) (1,338,292) (543,326) (674,295)
Other expense......... -- (105,000) -- -- --
----------- ----------- ----------- ----------- -----------
Total other income
(expense).......... (1,063,620) (1,064,647) 2,023,938 (543,326) (420,943)
----------- ----------- ----------- ----------- -----------
Net loss............ $(2,463,902) $(3,652,611) $ (289,761) (1,720,139) (1,502,080)
=========== =========== =========== =========== ===========
Net loss per common
share.................. $ (82.13) $ (121.75) $ (9.66) $ (57.34) (50.07)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
TECHNIVISION, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1992.... 30,000 $30,000 $4,739,185 $ (8,464,438) $(3,695,253)
Net investment by
parent.................. -- -- 1,183,344 -- 1,183,344
Net loss................. -- -- -- (2,463,902) (2,463,902)
------ ------- ---------- ------------ -----------
Balance, May 31, 1993.... 30,000 30,000 5,922,529 (10,928,340) (4,975,811)
Net investment by
parent.................. -- -- 285,782 -- 285,782
Net loss................. -- -- -- (3,652,611) (3,652,611)
------ ------- ---------- ------------ -----------
Balance, May 31, 1994.... 30,000 30,000 6,208,311 (14,580,951) (8,342,640)
Net investment by
parent.................. -- -- 1,749,454 -- 1,749,454
Net loss................. -- -- -- (289,761) (289,761)
------ ------- ---------- ------------ -----------
Balance, May 31, 1995.... 30,000 30,000 7,957,765 (14,870,712) (6,882,947)
Net loss (unaudited)..... -- -- -- (1,502,080) (1,502,080)
------ ------- ---------- ------------ -----------
Balance, November 30,
1995 (unaudited)........ 30,000 $30,000 $7,957,765 $(16,372,792) $(8,385,027)
====== ======= ========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
TECHNIVISION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31, SIX MONTHS ENDED NOVEMBER 30,
------------------------------------- ------------------------------
1993 1994 1995 1994 1995
----------- ----------- ----------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(2,463,902) $(3,652,611) $ (289,761) $ (1,720,139) $ (1,502,080)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization......... 1,977,352 2,371,891 2,623,736 1,323,662 1,299,603
Gain on sale of
assets............... -- -- (3,362,230) -- (253,352)
Changes in assets and
liabilities:
Subscriber
receivables........ (35,566) (176,261) (36,688) (146,225) (62,109)
Prepaid expenses and
other.............. (45,088) (139,846) 23,875 (57,090) (114,897)
Accounts payable,
accrued expenses
and other
liabilities........ (220,915) 128,918 944,385 544,053 8,425
----------- ----------- ----------- -------------- --------------
Net cash provided
by (used in)
operating
activities....... (788,119) (1,467,909) (96,683) (55,739) (624,410)
----------- ----------- ----------- -------------- --------------
Cash flows from
investing activities:
Proceeds from sale of
assets................ -- -- 1,958,575 -- 757,508
Purchases of systems
and equipment......... (1,225,104) (4,506,900) (1,514,824) (501,726) (603,216)
Expenditures for leased
licenses.............. -- (139,098) (163,354) (81,677) --
----------- ----------- ----------- -------------- --------------
Net cash provided
by (used in)
investing
activities....... (1,225,104) (4,645,998) 280,397 (583,403) 154,292
----------- ----------- ----------- -------------- --------------
Cash flows from
financing activities:
Net investment by
parent................ 1,183,344 285,782 1,749,454 988,824 --
Advances from
investors............. 1,124,000 5,876,000 -- -- --
Proceeds (payments) on
notes payable......... (294,370) (46,178) (1,884,728) (309,728) 496,605
----------- ----------- ----------- -------------- --------------
Net cash provided
by (used in)
financing
activities....... 2,012,974 6,115,604 (135,274) 679,096 496,605
----------- ----------- ----------- -------------- --------------
Net increase (decrease)
in cash................ (249) 1,697 48,440 39,954 26,487
Cash at beginning of
period................. 1,749 1,500 3,197 3,197 51,637
----------- ----------- ----------- -------------- --------------
Cash at end of period... $ 1,500 $ 3,197 $ 51,637 $ 43,151 $ 78,124
=========== =========== =========== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE>
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 1995
(INFORMATION AS OF NOVEMBER 30, 1995 AND FOR THE SIX-MONTH PERIODS
ENDED NOVEMBER 30, 1994 AND 1995 IS UNAUDITED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
TechniVision, Inc. ("TechniVision" or the "Company") develops, owns and
operates wireless cable television systems. The Company currently has wireless
cable channel rights in three markets (Dayton, Ohio and El Paso and Corpus
Christi, Texas) and has operational systems in the Dayton and Corpus Christi
markets. The Company is a majority-owned subsidiary of Three Sixty Corp.
("Three Sixty").
(b) Investment in Equity Security
The Company's investment in equity security is stated at cost and earnings
are realized as dividends are received.
(c) Systems and Equipment
Systems and equipment are stated at cost and include the cost of
transmission equipment as well as subscriber installations. Reception
equipment on subscriber premises and costs associated with initial subscriber
installations are capitalized. Upon subscriber disconnect, the Company
continues to depreciate the full capitalized installation cost subsequent to
the disconnection. Depreciation and amortization are recorded on a straight-
line basis for financial reporting purposes over useful lives ranging from 3
to 10 years. Repair and maintenance costs are charged to expense when
incurred; renewals and betterments are capitalized.
Equipment awaiting installation consists primarily of accessories, parts and
supplies for subscriber installations and is stated at the lower of average
cost or market.
(d) Intangible Assets
Leased license investment includes costs incurred to acquire wireless cable
channel rights. Costs incurred to acquire channel rights issued by the Federal
Communications Commission ("FCC") are deferred and amortized ratably over an
estimated useful life of 20 years beginning with inception of service in each
respective market. As of May 31, 1994 and 1995, approximately $276,567 and
$184,155 of the leased license investment was not yet subject to amortization.
The Company continually reevaluates the propriety of the carrying amounts of
the leased license investment based on undiscounted future cash flows with
respect to each market as well as the amortization period to determine whether
current events or circumstances warrant adjustments to the carrying amounts or
a revised estimate of the useful life.
(e) Revenue Recognition
Revenues from subscribers are recognized in the period that the service is
provided. Installation fees are recognized upon origination of service to a
subscriber to the extent of costs incurred to obtain subscribers. Installation
revenues in excess of such costs will be deferred and amortized over six
years.
(f) Systems Operations
Systems operations expenses consist principally of programming fees, channel
lease costs, tower rental and other costs of providing services.
(g) Income Taxes
The Company is included in the consolidated federal income tax return of
Three Sixty. Total current and deferred tax expense is allocated to the
Company as if such taxes were calculated on a separate return basis under
F-80
<PAGE>
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the asset and liability method prescribed by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." For the three years ended
May 31, 1995, no tax benefit or expense was recorded by the Company as a
result of losses incurred by the Company.
(h) Statements of Cash Flows
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Cash paid for interest during 1993, 1994 and 1995 was $1,049,926, $780,570
and $1,334,496, respectively.
(i) Interim Financial Information
In the opinion of management, the accompanying unaudited condensed financial
information of the Company contains all adjustments, consisting only of those
of a recurring nature, necessary to present fairly the Company's financial
position as of November 30, 1995, and the results of its operations and its
cash flows for the six-month periods ended November 30, 1994 and 1995. These
results are not necessarily indicative of the results to be expected for the
full fiscal year.
(2) REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. As shown on the accompanying balance sheet,
the Company's current liabilities exceeded its current assets by $15,086,000
at May 31, 1995. In addition, the Company has sustained losses through May 31,
1995 of $14,780,712. In order for the Company to meet its debt service
requirements in fiscal year 1996, the Company must obtain additional capital
or financing. Given these facts, the ability of the Company to continue as a
going concern and the recoverability of a major portion of its recorded asset
amounts is dependent upon its ability to meet its financing requirements on a
continuing basis.
The Company and its stockholders have been exploring financing and
capitalization alternatives, including the possibility of a sale of the
Company or its assets. As a result, in October 1995, the Company entered into
a definitive agreement with Heartland Wireless Communications, Inc.
("Heartland") whereby Heartland will acquire substantially all of the assets
of the Company for approximately $36.75 million of Heartland common stock,
less an amount of assumed obligations which shall not exceed $5.0 million.
This transaction is subject to certain conditions and there can be no
assurance that the Company will be able to consummate such transaction. The
financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts or amounts of liabilities that might
be necessary depending upon the outcome of these uncertainties.
(3) SYSTEMS AND EQUIPMENT
Systems and equipment consists of the following at May 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Equipment awaiting installation.................. $ 497,757 $ 385,596
Subscriber premises equipment and installation
costs........................................... 10,865,123 11,762,796
Transmission equipment and system construction
costs........................................... 3,384,604 3,922,033
Office furniture and equipment................... 1,063,133 1,200,060
Buildings and leasehold improvements............. 342,199 342,199
----------- -----------
16,152,816 17,612,684
Accumulated depreciation and amortization........ (5,842,581) (8,211,046)
----------- -----------
$10,310,235 $ 9,401,638
=========== ===========
</TABLE>
F-81
<PAGE>
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of May 31, 1994 and 1995, equipment awaiting installation and
approximately $285,435 and $230,481 of transmission equipment and system
construction costs were not yet subject to depreciation.
(4) LONG-TERM DEBT
Long-term debt at May 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Philips Credit Corporation.......................... $10,000,000 $ 9,326,358
Addison Group....................................... 1,660,000 1,600,000
Investor advances/UCL Disgorgement Fund............. 7,000,000 6,000,000
Other............................................... 393,522 315,731
----------- -----------
19,053,522 17,242,089
Less current portion................................ 11,875,980 11,043,590
----------- -----------
$ 7,177,542 $ 6,198,499
=========== ===========
</TABLE>
In 1990, TechniVision and Philips Credit Corporation ("PCC") entered into a
credit agreement, as amended, whereby the Company could borrow a maximum of
$10.0 million to finance principally the construction of and initial
operational costs for the wireless cable system located in Corpus Christi. As
of May 31, 1995, outstanding borrowings under the credit agreement amounted to
$9,326,000. The note is secured by an interest in certain assets of the
Company and bears interest at a rate floating at prime (9.00% at May 31, 1995)
plus 1.85%.
The Company has failed to make payments to PCC in accordance with the credit
agreement and has failed to comply with certain financial and other covenants.
As a result, on March 27, 1995, PCC and the Company entered into a forbearance
agreement which, among other things, extended the due date of the note to
January 2, 1996, contingent upon the Company entering into an agreement by
September 30, 1995 to sell the assets of the Company.
In connection with Three Sixty's acquisition of TechniVision in October
1989, the Company entered into a compensation agreement with the seller that
provided for additional payments during the first five years after launching a
market based on the number of subscribers added or a payment of $750,000 for
each market sold during such period. Amounts paid under the compensation
agreement with respect to additional subscribers are recorded as additional
leased license investment. As of May 31, 1995, the Company has remaining
obligations of $1,600,000 relating to the Dayton and Corpus Christi systems.
The notes are secured by security interests in certain assets of the Company
and bear interest at rates ranging from 8% to 10%. The obligations are
currently due, and the lenders may, at their option, give notice that the
amounts outstanding are immediately payable. As discussed in note 2, the
Company and its stockholders have been exploring financing and capitalization
alternatives, including the possibility of a sale of the Company or its
assets. If the sale of the Company to Heartland is consummated, an additional
$750,000 will be payable to the seller related to the El Paso market.
During 1993, the Company entered into a series of agreements with certain
third parties for the purpose of raising capital for the development of the
Dayton, Corpus Christi, El Paso and Salt Lake City systems. The third parties
were to receive interests in such systems in consideration for raising the
agreed upon capital. Solely as a result of having received funds derived from
securities laws violations committed by others, the Company was named as a
relief defendant by the Securities and Exchange Commission ("SEC"). As a
result, in February 1995, the Company voluntarily entered into an agreement
with the SEC to disgorge the sum of $7.0 million, representing the proceeds it
received from securities laws violations committed by others. The note is
F-82
<PAGE>
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
noninterest-bearing and is payable in full on December 31, 1996 or upon the
sale of TechniVision. In April 1995, the Company paid $1.0 million on the note
out of the proceeds from the sale of the Salt Lake City market (see note 6).
(5) LEASES
The Company leases from third parties channel rights licensed by the FCC.
Under FCC policy, the base term of most of these leases cannot exceed ten
years from the time the lessee begins using the leased channel rights. FCC
licenses for wireless cable channels range from five to ten years, and there
is no automatic renewal of such licenses. The use of such channels by third
parties 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 third party lessor's continuing compliance with applicable regulations.
The remaining terms of the Company's channel leases range from less than one
year to 10 years. Most of the Company's leases provide for automatic renewal
of their terms upon FCC renewal of the underlying license, grant the Company a
right of first refusal and/or require the parties to negotiate renewal in good
faith. Although the Company does not believe that the termination of or
failure to renew a single channel lease could 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 factors, such as
subscriber levels or subscriber revenues.
Payments under the channel rights lease agreements 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. Channel rights
lease expense was $61,190, $123,510 and $169,964 for the years ended May 31,
1993, 1994 and 1995, respectively.
The Company also has certain operating leases for office space and
transmission tower space. Rent expense incurred in connection with other
operating leases was $90,059, $142,326 and $159,383 for the years ended May
31, 1993, 1994 and 1995, respectively.
Future minimum lease payments due under channel rights leases for
operational systems and other noncancellable operating leases in effect at May
31, 1995 are as follows:
<TABLE>
<CAPTION>
CHANNEL OTHER
YEAR ENDING RIGHTS OPERATING
MAY 31, LEASES LEASES
----------- -------- ---------
<S> <C> <C>
1996................................................. $307,889 $148,770
1997................................................. 307,889 158,970
1998................................................. 325,889 163,170
1999................................................. 361,889 116,000
2000................................................. 361,889 99,600
</TABLE>
(6) SETTLEMENT AGREEMENT/SALE OF SALT LAKE CITY MARKET
In February 1995, the Company sold its wireless cable channel rights in the
Salt Lake City market to CableMaxx, Inc. ("CableMaxx"). The sales price
consisted of cash of $5.85 million and 907,311 restricted shares of CableMaxx
common stock. In April 1995, the Company entered into a settlement agreement
with various third parties with respect to certain claims and disputes which
arose in connection with the development of the Dayton, Corpus Christi, El
Paso and Salt Lake City systems (see note 4). The settlement agreement
provided for, among other things, the dismissal of certain actions and mutual
releases of claims among the parties and the manner of distribution among the
parties to the settlement agreement of the cash and CableMaxx
F-83
<PAGE>
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
common stock from the sale of the Salt Lake City wireless cable channel
rights. As a result of the sale of the channel rights and the settlement
agreement, the Company received 50% of the proceeds from the sale and recorded
a gain from the sale of the Salt Lake City channel rights of $3,362,000 during
the year ended May 31, 1995.
(7) RELATED PARTY TRANSACTIONS
The Company paid $305,496 in 1993, $1,055,029 in 1994 and $632,130 in 1995
to various affiliates for services performed in connection with the
development of wireless cable television systems and certain administrative
services.
(8) COMMITMENTS
The Company has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire in 1994
through 1997. The agreements generally require monthly payments based upon the
number of subscribers to the Company's systems, subject to certain minimums.
F-84
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
PRO FORMA FINANCIAL INFORMATION FOR CONSUMMATED EVENTS
The following Pro Forma Statements for Consummated Events present pro forma
financial information of the Company with respect to various events (other
than the Transactions). The Pro Forma Statements for Consummated Events are
further adjusted for the effects of the Transactions as set forth on pages 35
to 59 of the Registration Statement.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet for Consummated
Events as of September 30, 1995 gives effect to (i) the October 18, 1995
contribution of wireless cable systems located in Milano, Texas and Monroe,
Louisiana and wireless cable channel rights in other markets located in Texas,
Louisiana, Alabama, Georgia and Florida to Wireless One (the "Wireless One
Transaction"), (ii) the issuance of approximately 91,000 shares of Heartland
Common Stock related to the acquisition of wireless cable channel rights in a
non-operating Alabama market and the contribution of such channel rights to
Wireless One, (iii) the issuance by Wireless One of the $10.0 million of
Wireless One notes as part of the Wireless One Transaction and the subsequent
repayment of such notes, and (iv) the increase in the Company's equity
interest in Wireless One as part of the Wireless One Transaction as if such
events had occurred on September 30, 1995. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations for Consummated Events for the year
ended December 31, 1994 and the nine months ended September 30, 1995 give
effect to (i) the issuance of 2,415,000 shares of Heartland Common Stock in
the Company's initial public offering in April 1994, (ii) the sale in November
1994 of the Convertible Notes, (iii) the 1994 acquisitions of wireless cable
systems in Milano, Texas and Lindsay, Oklahoma, (iv) the 1995 acquisitions of
wireless cable systems in Shaw, Kansas, Lubbock, Texas, Lykens, Ohio,
Paragould, Arkansas and Sikeston, Missouri and wireless cable channel rights
in certain non-operating markets, (v) the 1994 and 1995 purchases by and
distribution to the Company of certain non-operating markets previously owned
by RuralVision Joint Venture, (vi) the issuance of 998,318 shares of Heartland
Common Stock in 1994 and 1995 in exchange for minority interests in certain of
the Company's subsidiaries, (vii) the issuance in July 1995 of 1,029,707
shares of Heartland Common Stock to RuralVision Joint Venture in exchange for
$20,000,000 cash, (viii) the elimination of historical revenues and expenses
associated with the wireless cable systems located in Milano, Texas and
Monroe, Louisiana which were contributed to Wireless One in connection with
the Wireless One Transaction and (ix) the Company's equity in pro forma losses
of Wireless One, as if such events had occurred on January 1, 1994.
The pro forma statements of operations financial information does not give
effect to the sale of the Notes by the Company in April 1995. Assuming the
Notes had been issued on January 1, 1994, interest expense, amortization of
related debt issuance costs and amortization of debt discount would have
increased by approximately $14 million and $4.6 million for the year ended
December 31, 1994 and the nine months ended September 30, 1995, respectively.
The Pro Forma Statements for Consummated Events and accompanying notes
should be read in conjunction with the Company's consolidated financial
statements (including notes thereto) appearing elsewhere in the Prospectus.
The Pro Forma Statements for Consummated Events do not purport to represent
what the Company's results of operations or financial position actually would
have been had such events occurred on the dates specified, or to project the
Company's results of operations or financial position for any future period or
date. The pro forma adjustments are based upon available information and
certain adjustments that management believes are reasonable. In the opinion of
management, all adjustments have been made that are necessary to present
fairly the Pro Forma Statements for Consummated Events.
F-85
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET FOR CONSUMMATED EVENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
HISTORICAL WIRELESS ONE HEARTLAND
HEARTLAND TRANSACTION PRO FORMA
---------- ------------ ---------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 37,155,064 $ 10,000,000 (B) $ 47,155,064
Restricted investments............. 11,669,874 -- 11,669,874
Net assets held for cash sale or
exchange.......................... 9,200,000 (7,000,000)(B) 2,200,000
Other current assets............... 3,389,470 (354,189)(A) 3,035,281
------------ ------------ ------------
Total current assets............. 61,414,408 2,645,811 64,060,219
Systems and equipment, net......... 46,027,017 (2,658,065)(A) 43,368,952
Leased license investment, net..... 64,726,389 (4,244,113)(A) 60,482,276
Investment in Wireless One......... -- 14,044,155 (A) 14,602,442
(10,000,000)(B)
2,000,000 (C)
8,558,287 (D)
Notes receivable................... -- --
Excess of cost over fair value of
net assets acquired............... 4,470,286 4,470,286
Restricted investments............. 13,077,340 13,077,340
Net assets held for exchange....... -- --
Other assets, net.................. 10,435,034 10,435,034
------------ ------------ ------------
$200,150,474 $ 10,346,075 $210,496,549
============ ============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
Current portion of long-term debt... $ 616,610 $ $ 616,610
Other current liabilities........... 10,244,363 (113,732)(A) 10,130,631
------------ ----------- ------------
Total current liabilities......... 10,860,973 (113,732) 10,747,241
Long-term debt, less current por-
tion............................... 139,428,429 139,428,429
Deferred income taxes............... 1,287,560 (98,480)(A) 1,189,080
Other liabilities................... 279,695 279,695
Stockholders' equity................ 48,293,817 2,000,000 (C) 58,852,104
8,558,287 (D)
------------ ----------- ------------
$200,150,474 $10,346,075 $210,496,549
============ =========== ============
</TABLE>
See accompanying notes to pro forma statements.
F-86
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR CONSUMMATED EVENTS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------
WIRELESS
HISTORICAL ACQUISITIONS ONE HEARTLAND
HEARTLAND AND OTHER TRANSACTION PRO FORMA
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Total revenues.......... $ 2,229,494 $ 5,472,554 (E) $ (111,225)(M) $ 7,590,823
----------- ----------- ---------- ------------
Operating expenses:
Systems operations.... 762,501 2,362,388 (E) (55,590)(M) 4,188,612
1,119,313 (F)
Selling, general and
administrative....... 4,183,307 2,300,261 (E) (105,599)(M) 6,377,969
Depreciation and
amortization......... 1,097,668 1,322,786 (E) (44,931)(M) 3,263,717
68,778 (G)
819,416 (H)
----------- ----------- ---------- ------------
Total operating
expenses........... 6,043,476 7,992,942 (206,120) 13,830,298
----------- ----------- ---------- ------------
Operating loss...... (3,813,982) (2,520,388) 94,895 (6,239,475)
Interest expense........ (589,767) (3,595,266)(I) (4,185,033)
Equity in losses of
investees.............. (386,985) 386,985 (J) (1,004,594)(N) (1,004,594)
Interest income and
other.................. 152,450 -- 152,450
----------- ----------- ---------- ------------
Loss before income
taxes.............. (4,638,284) (5,728,669) (909,699) (11,276,652)
Income tax benefit...... 1,594,963 863,849 (K) 2,458,812
----------- ----------- ---------- ------------
Net loss............ $(3,043,321) $(4,864,820) $ (909,699) $ (8,817,840)
=========== =========== ========== ============
Net loss per share...... $ (0.30) $ (0.70)
Weighted average shares
outstanding............ 10,041,000 2,407,412 (L) 93,032 (C) 12,541,444
=========== =========== ========== ============
</TABLE>
See accompanying notes to pro forma statements.
F-87
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR CONSUMMATED EVENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------
WIRELESS
HISTORICAL ACQUISITIONS ONE HEARTLAND
HEARTLAND AND OTHER TRANSACTION PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Total revenues.......... $ 9,292,837 $ 1,283,545 (O) $ (632,173)(M) $ 9,944,209
------------ ----------- ---------- ------------
Operating expenses:
Systems operations.... 2,894,074 627,144 (O) (399,687)(M) 3,371,531
250,000 (P)
Selling, general and
administrative....... 7,449,699 587,774 (O) (348,447)(M) 7,689,026
Depreciation and amor-
tization............. 3,966,120 350,966 (O) (193,962)(M) 4,396,920
256,602 (Q)
17,194 (G)
------------ ----------- ---------- ------------
Total operating ex-
penses............. 14,309,893 2,089,680 (942,096) 15,457,477
------------ ----------- ---------- ------------
Operating loss...... (5,017,056) (806,135) 309,923 (5,513,268)
Interest expense........ (8,908,459) (8,908,459)
Equity in losses of
investees.............. (128,663) 128,663 (J) (1,049,583)(N) (1,049,583)
Interest income and oth-
er..................... 1,568,946 1,568,946
------------ ----------- ---------- ------------
Loss before income
taxes.............. (12,485,232) (677,472) (739,660) (13,902,364)
Income tax benefit...... 1,307,137 (1,307,137)(K) --
------------ ----------- ---------- ------------
Net loss............ $(11,178,095) $(1,984,609) (739,660) $(13,902,364)
============ =========== ========== ============
Net loss per share...... $ (0.96) $ (1.10)
============ ============
Weighted average shares
outstanding............ 11,624,000 874,895 (L) 93,032 (C) 12,591,927
============ =========== ========== ============
</TABLE>
See accompanying notes to pro forma statements.
F-88
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
NOTES TO PRO FORMA STATEMENTS FOR CONSUMMATED EVENTS
(A) Reflects the contribution of wireless cable systems located in Milano,
Texas and Monroe, Louisiana and wireless cable channel rights in other
markets located in Texas, Louisiana, Alabama, Georgia and Florida to
Wireless One.
(B) Reflects the issuance by Wireless One of the $10.0 million of Wireless One
notes as part of the Wireless One Transaction and subsequent repayment of
such notes.
(C) Reflects the issuance of approximately 93,000 shares of Heartland Common
Stock related to the acquisition of wireless cable channel rights in a
non-operating Alabama market and the contribution of such channel rights
to Wireless One.
(D) Reflects the increase in Heartland's equity interest in Wireless One as
part of the Wireless One Transaction as if such event had occurred on
September 30, 1995. Subsequent to the Wireless One Transaction,
Heartland's equity interest in Wireless One was approximately 26.6%.
(E) Reflects the historical revenues and expenses associated with the
acquisitions of wireless cable systems in Milano, Texas in December 1994,
Lindsay, Oklahoma in December 1994, Shaw, Kansas in January 1995, Lubbock,
Texas in May 1995, Lykens, Ohio in July 1995, Paragould, Arkansas in July
1995, and Sikeston, Missouri in July 1995, until the respective
acquisition dates of such systems.
(F) Reflects the incremental lease rental payments associated with the 1994
and 1995 purchases by and distribution to Heartland of certain non-
operating markets previously owned by RuralVision Joint Venture.
(G) Reflects incremental amortization of the excess purchase price over the
fair value of net identifiable assets acquired associated with the
acquisitions of certain minority interests. Amortization of the excess
purchase price over the fair value of net identifiable assets acquired is
based on an estimated useful life of 20 years.
(H) Reflects the incremental amortization of leased license investment
associated with the acquisitions of wireless cable systems in Milano,
Texas, Lindsay, Oklahoma, Shaw, Kansas, Lubbock, Texas, Lykens, Ohio,
Paragould, Arkansas, and Sikeston, Missouri. The acquisition dates of each
respective system are set forth in note (E). Amortization of leased
license investment is calculated beginning with inception of service in
each respective market.
(I) Reflects incremental interest expense on $40 million of Convertible Notes
issued by Heartland in November 1994 at a rate of 9.0% and incremental
amortization of related debt issuance costs by the interest method over
the life of such notes.
(J) Reflects the reversal of equity in losses in RuralVision Joint Venture due
to the termination of such venture in January 1995 and acquisition of such
venture's markets by Heartland.
(K) Reflects the adjustment to income tax benefit related to pro forma
adjustments. Income tax benefit reflects the recognition of deferred tax
assets to the extent such assets can be realized through reversals of
existing taxable differences.
(L) Reflects the incremental increase in weighted average shares of Heartland
Common Stock outstanding related to the issuance of 2,415,000 shares in
Heartland's initial public offering in April 1994, the exchange of 694,280
and 304,038 shares for minority interests in certain of the Company's
subsidiaries in 1994 and 1995, respectively, and the issuance of 1,029,707
shares in July 1995 to RuralVision Joint Venture in exchange for
$20,000,000 cash.
(M) Reflects the elimination of historical revenues and expenses associated
with the wireless cable systems located in Milano, Texas and Monroe,
Louisiana which were contributed to Wireless One.
F-89
<PAGE>
HEARTLAND WIRELESS COMMUNICATIONS, INC.
NOTES TO PRO FORMA STATEMENTS FOR CONSUMMATED EVENTS--(CONTINUED)
(N) Reflects Heartland's equity in pro forma losses of Wireless One as if the
Wireless One Transaction had occurred on January 1, 1994.
(O) Reflects the historical revenues and expenses associated with the wireless
cable systems in Lubbock, Texas, Lykens, Ohio, Paragould, Arkansas, and
Sikeston, Missouri until their respective acquisition dates. The
acquisition dates of each respective system are set forth in note (E).
(P) Reflects the incremental lease rental payments associated with the 1995
purchases by and distribution to the Company of certain non-operating
markets previously owned by RuralVision Joint Venture.
(Q) Reflects the incremental amortization of leased license investment
associated with the acquisitions of wireless cable systems in Lubbock,
Texas, Lykens, Ohio, Paragould, Arkansas, and Sikeston, Missouri. The
acquisition dates of each respective system are set forth in note (E).
Amortization of leased license investment is calculated beginning with
inception of service in each respective market.
F-90
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders RuralVision Central, Inc. and RuralVision
South, Inc.
We have audited the accompanying combined balance sheets of RuralVision
Central, Inc. and RuralVision South, Inc. (Kansas and Texas corporations,
respectively) as of December 31, 1993 and 1992, and the related combined
statements of operations, stockholders' deficit, and cash flows for each of
the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of RuralVision
Central, Inc. and RuralVision South, Inc. as of December 31, 1993 and 1992,
and the combined results of their operations and cash flows for each of the
three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Companies will continue as going concerns. As discussed in Note 2 to the
financial statements, the Companies have incurred cumulative losses since
inception of $17,269,353 through December 31, 1993, and as of that date
liabilities exceeded assets by $17,204,736. Additional capital or financing is
needed to enable pending licenses to be secured and additional systems to be
built. These factors, among others, more fully discussed in Note 2, raise
substantial doubt about the Companies' ability to continue as going concerns.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
GRANT THORNTON
Kansas City, Missouri
February 10, 1994
F-91
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- AUGUST 18,
1992 1993 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash................................ $ 25,907 $ 248,271 $ 97,598
Accounts receivable -- trade, net of
allowance for doubtful accounts of
$46,495 in 1992, $89,423 in 1993
and $106,987 in 1994 (note 1(c))... 35,979 205,170 201,838
Inventories of subscriber reception
equipment (note 1(i)).............. 790,406 498,080 509,675
Prepaid expenses and deposits....... 438,410 821,400 1,381,756
Property and equipment, net (notes
1(d) and 4)........................ 7,734,063 7,468,540 7,268,923
Deferred licensing costs (notes 1(c)
and 3)............................. 1,059,500 1,024,459 1,553,941
Investment in joint venture (note
9)................................. -- 62,763 --
------------ ------------ ------------
$ 10,084,265 $ 10,328,683 $ 11,013,731
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFI-
CIT
Accounts payable.................... $ 1,576,331 $ 398,303 $ 465,271
Accrued expenses.................... 358,471 352,980 139,976
Notes payable -- related party (note
5)................................. 16,980,983 25,836,878 30,459,609
Other notes payable (note 5)........ 1,127,362 744,109 1,022,247
Other liabilities................... 152,150 201,149 200,975
Loss in excess of basis in joint
venture (note 8)................... 8,549 -- --
------------ ------------ ------------
20,203,846 27,533,419 32,288,078
Stockholders' deficit:
Common stock (note 7)............. 21,996 24,440 24,440
Additional paid-in capital........ 42,621 40,177 40,177
Accumulated deficit............... (10,184,198) (17,269,353) (21,338,964)
------------ ------------ ------------
(10,119,581) (17,204,736) (21,274,347)
Commitments and contingencies (note
6).................................
------------ ------------ ------------
$ 10,084,265 $ 10,328,683 $ 11,013,731
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-92
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED DECEMBER 31, SIX MONTHS JANUARY 1, 1994
------------------------------------- ENDED TO
1991 1992 1993 JUNE 30, 1993 AUGUST 18, 1994
----------- ----------- ----------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Wireless Cable Opera-
tions:
Revenues:
Pay television reve-
nue................ $ 176,922 $ 2,225,128 $ 4,203,430 $ 2,032,697 $ 3,042,203
Installation reve-
nue................ 97,101 247,320 136,305 88,597 53,390
----------- ----------- ----------- ----------- -----------
Total revenues.... 274,023 2,472,448 4,339,735 2,121,294 3,095,593
Costs and expenses:
Programming costs... 33,401 528,088 980,254 464,116 699,245
Direct selling and
marketing.......... 49,762 431,419 244,588 178,616 113,754
Airtime lease fees.. 18,000 90,208 183,083 84,792 151,062
Depreciation and
amortization....... 131,694 678,094 1,038,891 718,201 836,693
Management fee paid
to related party
(note 8)........... 12,000 249,422 439,305 214,113 295,992
Other operating
costs.............. 466,184 1,600,453 2,086,797 1,086,607 1,018,874
----------- ----------- ----------- ----------- -----------
711,041 3,577,684 4,972,918 2,746,445 3,115,620
----------- ----------- ----------- ----------- -----------
(437,018) (1,105,236) (633,183) (625,151) (20,027)
Licensing activities:
Salaries.............. 90,073 235,316 346,602 307,800 206,512
Engineering........... 871,610 1,723,912 784,549 491,358 173,481
Legal fees............ 214,169 341,221 345,307 150,504 282,597
Airtime lease fees on
nonoperating sites... 360,672 403,347 968,254 338,040 1,003,511
Other licensing
costs................ 124,420 646,252 222,669 62,146 279,565
Less capitalized li-
censing costs........ (1,027,430) (28,350) -- -- --
----------- ----------- ----------- ----------- -----------
633,514 3,321,698 2,667,381 1,349,847 1,945,666
Expenses:
General and
administrative
expenses............. 1,211,742 1,521,560 1,381,405 976,346 598,935
Interest expense --
related party........ 287,795 1,536,566 2,406,124 1,049,403 2,073,012
Interest expense --
other................ -- 18,520 140,742 45,572 38,251
Equity in loss of
joint venture........ -- 110,549 66,422 -- 80,043
----------- ----------- ----------- ----------- -----------
1,499,537 3,187,195 3,994,693 2,071,321 2,790,242
Other income............ -- -- (210,102) (16,798) (686,323)
----------- ----------- ----------- ----------- -----------
Net loss.............. $(2,570,069) $(7,614,129) $(7,085,155) $(4,029,521) $(4,069,611)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-93
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
(NOTE 7) ADDITIONAL
-------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1991.. 20 $10,000 $ -- $ -- $ 10,000
Net loss................. -- -- -- (2,570,069) (2,570,069)
Issued during the year... 10,000 11,996 38,004 -- 50,000
------ ------- ------- ------------ ------------
Balance December 31,
1991.................... 10,020 21,996 38,004 (2,570,069) (2,510,069)
Net loss................. -- -- -- (7,614,129) (7,614,129)
Issuance of warrants
(note 7)................ -- -- 4,617 -- 4,617
------ ------- ------- ------------ ------------
Balance December 31, 1992
(note 11)............... 10,020 21,996 42,621 (10,184,198) (10,119,581)
Net loss................. -- -- -- (7,085,155) (7,085,155)
Issuance of officer stock
award
(notes 10 and 11)....... 1,113 2,444 (2,444) -- --
------ ------- ------- ------------ ------------
Balance December 31,
1993.................... 11,133 24,440 40,177 (17,269,353) (17,204,736)
Net loss (unaudited)..... -- -- -- (4,069,611) (4,069,611)
------ ------- ------- ------------ ------------
Balance August 18, 1994.. 11,133 $24,440 $40,177 $(21,338,964) $(21,274,347)
====== ======= ======= ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-94
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED DECEMBER 31, SIX MONTHS JANUARY 1, 1994
------------------------------------- ENDED TO
1991 1992 1993 JUNE 30, 1993 AUGUST 18, 1994
----------- ----------- ----------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows used in
operating activities:
Net loss............... $(2,570,069) $(7,614,129) $(7,085,155) $(4,029,521) $(4,069,611)
Adjustments to
reconcile net loss to
net cash used by
operating activities:
Gain on sale of
asset................ -- -- (34,350) -- --
Depreciation and
amortization......... 174,210 854,521 1,194,897 718,203 836,693
Equity in loss of
joint venture........ -- 110,549 66,422 -- 80,043
(Increase) decrease in
assets:
Accounts receivable.. (10,147) (15,832) (169,191) (109,341) 50,436
Inventories.......... (748,690) (41,716) 292,326 5,952 (11,595)
Prepaid expenses..... (131,343) (283,899) (382,990) (421,660) (607,460)
Deferred licensing
costs............... (903,001) (192,499) 35,041 -- (510,455)
(Decrease) increase in
liabilities:
Accounts payable..... 668,232 887,346 (1,178,028) (823,856) (88,027)
Accrued expenses..... 173,401 185,070 (5,491) 704,668 (234,063)
Accrued interest..... 286,880 1,532,740 2,406,124 1,049,403 2,073,012
Other liabilities.... 67,170 84,980 64,263 32,423 (1,701)
----------- ----------- ----------- ----------- -----------
Total adjustments... (423,288) 3,121,260 2,289,023 1,155,792 1,762,937
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities......... (2,993,357) (4,492,869) (4,796,132) (2,873,729) (2,306,674)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Proceeds from sale of
vehicles.............. -- -- 198,000 -- --
Purchase of towers and
transmitting
equipment............. (2,476,615) (1,764,007) -- -- --
Purchase of subscriber
equipment............. (619,396) (2,824,655) (933,288) (690,006) (655,076)
Purchase of other
property and
equipment............. (247,134) (740,946) (175,000) -- --
Investment in joint
venture............... -- (66,000) (137,734) (63,737) (17,280)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (3,343,145) (5,395,608) (1,048,022) (753,743) (672,356)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds from issuance
of common stock....... 50,000 -- -- -- --
Proceeds from issuance
of warrants........... -- 4,617 -- -- --
Borrowings from
stockholder........... 5,862,182 9,190,929 6,449,771 3,936,110 (853,771)
Line of credit......... -- 907,996 (189,807) (161,058) (25,914)
Other borrowings....... -- 219,366 (193,446) -- 2,000,000
Advances from
affiliate............. 467,560 (467,560) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 6,379,742 9,855,348 6,066,518 3,775,052 2,827,857
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash................ 43,240 (33,129) 222,364 147,580 (151,173)
Cash at beginning of
period................. 15,796 59,036 25,907 25,907 248,271
----------- ----------- ----------- ----------- -----------
Cash at end of period... $ 59,036 25,907 248,271 173,487 96,735
=========== =========== =========== =========== ===========
Supplemental disclosures of cash
flow information:
Cash paid for
interest............. $ -- $ 10,041 $ 98,124 $ 36,265 $ --
=========== =========== =========== =========== ===========
Noncash investing and
financing activities:
Licenses transferred to
joint venture......... $ -- $ 36,000 $ -- $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-95
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF AUGUST 18, 1994 AND FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 1993 AND JANUARY 1, 1994 TO AUGUST 18, 1994 IS UNAUDITED)
(1) SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying combined financial statements follows.
(a) Principles of Combination
The accompanying combined financial statements include the accounts of
RuralVision Central, Inc. and RuralVision South, Inc. Voting control of each
company is vested in the same stockholders and the companies are under common
management. Because of these relationships, the financial statements of the
companies (hereinafter collectively referred to as RuralVision or the Company)
have been prepared as if they were a single entity. All significant
intercompany balances and transactions have been eliminated.
(b) History and Business Activity
Wireless Cable TV, Inc. was formed in May 1990, later named LDH Cablevision,
Inc., and ultimately renamed RuralVision Central, Inc. RuralVision, Inc. was
formed in December 1990 and its name was later changed to RuralVision South,
Inc. Since inception, RuralVision has been in the business of developing
wireless cable television systems in nonurban and rural markets in the United
States. RuralVision controls or has pending applications for channels in 103
separate markets. The Company has commenced wireless service in five of these
markets. The Company also has an interest in licenses in seven additional
markets through agreements with other parties.
(c) Deferred Licensing Costs
RuralVision defers outside legal and engineering fees incurred to develop
licenses in wireless cable markets. All additional costs related to site
modifications and legal and engineering expenses associated with license
amendments and defense of applications are expensed in the periods in which
they are incurred. Capitalized costs are amortized over the ten-year life of
the underlying licenses upon grant. Deferred costs related to abandoned
markets are expensed when the licenses are abandoned. Management continually
evaluates the recoverability of these deferred costs.
(d) Property and Equipment
Initial subscriber installation costs that are capitalized include reception
equipment on subscriber premises, direct labor, outside contract labor and
allocated overhead. All other initial subscriber costs, including marketing
costs, are expensed as incurred. Depreciation and amortization is provided for
on a straight-line basis over the following useful lives:
<TABLE>
<S> <C>
Subscriber installation costs............................... 7 years
Tower systems............................................... 10 years
Furniture, fixtures and equipment........................... 5 to 7 years
Buildings................................................... 20 years
</TABLE>
(e) Revenue Recognition
Subscriber revenues are recognized in the period of service. Installation
fees are recognized as revenues upon subscriber hook-up to the extent of costs
incurred to obtain subscribers.
F-96
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(f) Airtime Leases
Payments on granted airtime leases are expensed ratably in the year to which
they relate.
(g) Income Taxes
Income taxes on any net earnings of RuralVision Central, Inc. and
RuralVision South, Inc. would be payable by the stockholders pursuant to an
election as an S Corporation under the Internal Revenue Code not to have the
Company taxed as a corporation. Losses incurred also flow to the tax return of
the stockholders. No income taxes would have been payable had this election
not been made.
(h) Inventories
Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
(i) Interim Financial Information
In the opinion of management, the accompanying unaudited combined condensed
financial information of the Company contains all adjustments, consisting only
of those of a normal recurring nature, necessary to present fairly the
Company's results of operations and cash flows for the six months ended June
30, 1993 and the period from January 1, 1994 to August 18, 1994, and changes
in stockholders' deficit for the period from January 1, 1994 to August 18,
1994. These results are not necessarily indicative of the results to be
expected for the full fiscal year.
(2) REALIZATION OF ASSETS
The accompanying combined financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. As shown on the accompanying
balance sheet, the Company's liabilities exceeded its assets by $17,204,736 at
December 31, 1993. In addition, the Company has sustained losses through
December 31, 1993 of $17,269,353. Continued losses are anticipated as pending
licenses are secured and systems are developed. The Company must obtain
additional capital to develop and secure licenses, build systems, obtain
customers and become profitable. Given these facts, the ability of the Company
to continue as a going concern and the recoverability of a major portion of
its recorded asset amounts is dependent upon its ability to meet its financing
requirements on a continuing basis, to maintain its present financing and to
succeed in its future operations.
The Company and its stockholders are currently exploring financing and
capitalization alternatives, including the possibility of a sale of the
Company or its assets. There can be no assurance that the Company will be able
to obtain additional capital or financing.
The financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts or amounts of liabilities that might
be necessary depending upon the outcome of these uncertainties.
(3) DEFERRED LICENSING COSTS
The Company has ownership and lease interests in applications pending and
granted for both commercial and noncommercial wireless cable TV licenses. The
noncommercial licenses are those that have been set aside by the Federal
Communications Commission for "eligible" entities that provide instructional
television services. Typically, four television channels are granted to each
noncommercial licensee. Pursuant to exclusive lease agreements with
noncommercial eligible entities, RuralVision incurs the cost of preparing and
filing the
F-97
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
applications, constructing the wireless cable systems, and providing certain
minimum hours of educational programming per week. In exchange, the
noncommercial licensees lease excess airtime exclusively to the Company, which
may be used for commercial television services. The Company applies for
commercial licenses in its own name; these licenses consist of one to four
commercial channels.
Deferred licensing costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1992 1993
---------- ----------
<S> <C> <C>
Granted licenses..................................... $ 304,000 $ 497,859
Pending licenses..................................... 785,000 585,500
---------- ----------
1,089,000 1,083,359
Less accumulated amortization on granted licenses.... 29,500 (58,900)
---------- ----------
$1,059,500 $1,024,459
========== ==========
The following is a summary of licenses:
<CAPTION>
DECEMBER 31,
---------------------
1992 1993
---------- ----------
<S> <C> <C>
Noncommercial:
Pending............................................ 357 257
Granted............................................ 152 225
---------- ----------
509 482
========== ==========
Commercial:
Pending............................................ 180 129
Granted............................................ 12 7
---------- ----------
192 136
========== ==========
The Company has an interest in the following licenses through ventures with
other parties (see note 9):
<CAPTION>
DECEMBER 31,
---------------------
1992 1993
---------- ----------
<S> <C> <C>
Noncommercial:
Pending............................................ 21 11
Granted............................................ 15 23
---------- ----------
36 34
========== ==========
Commercial:
Pending............................................ 2 6
Granted............................................ 5 5
---------- ----------
7 11
========== ==========
</TABLE>
In addition, the Company has certain rights to seven microwave frequencies
in other markets. Subsequent to December 31, 1993, management was negotiating
the sale of these rights to a nonrelated third party.
F-98
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Five commercial licenses in one of the Company's currently operating markets
have been granted in the name of related parties. Management intends to enter
into agreements with these parties to lease the frequencies for nominal
amounts.
The ability to establish a viable wireless cable service market is dependent
on the Company obtaining the rights to a sufficient number of channels in the
market. The Company had licenses granted or pending, either directly or
through joint ventures, in 110 markets as of December 31, 1993. Management
believes that RuralVision will obtain channel rights in a significant number
of these markets. In markets where, due to
competing applications, the Company does not obtain sufficient channel rights
to warrant construction of a system, the Company has historically been able to
recover its capitalized costs through negotiated settlements with the
competing applicants. Management believes this will continue to be the case.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1992 1993
----------- -----------
<S> <C> <C>
Tower systems...................................... $ 4,240,622 $ 4,167,820
Subscriber installation costs...................... 3,444,051 4,185,899
Vehicles........................................... 239,500 --
Land and buildings................................. 286,328 366,381
Furniture, fixtures and equipment.................. 552,293 646,934
----------- -----------
8,762,794 9,367,034
Less accumulated depreciation...................... (1,028,731) (1,898,494)
----------- -----------
$ 7,734,063 $ 7,468,540
=========== ===========
(5) NOTES PAYABLE
Notes payable consisted of the following:
<CAPTION>
DECEMBER 31,
------------------------
1992 1993
----------- -----------
<S> <C> <C>
Related party notes payable:
Stockholder loans................................ $15,161,363 $21,611,134
Accrued interest on stockholder loans............ 1,819,620 4,225,744
----------- -----------
16,980,983 25,836,878
Other notes payable:
Bank line of credit.............................. 907,997 718,195
Vehicle loan..................................... 188,365 --
Other............................................ 31,000 25,914
----------- -----------
$ 1,127,362 $ 744,109
=========== ===========
</TABLE>
The stockholder loans consist of two unsecured notes payable on demand or,
if no demand is made, on December 1, 1994. The notes bear interest at the rate
of 12% compounded annually.
F-99
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The bank line of credit provides for available borrowings of $810,000 and
bears interest at the rate of 8% payable quarterly. The line is payable on
demand, or, if no demand is made, in May 1994. The line is secured by real
estate held in an affiliated company and the guarantee of the estate of the
majority stockholder. In July 1994, the bank line of credit, of which $718,195
was outstanding, was assigned to the estate of the majority stockholder and
accordingly has been reflected as an increase in the balance of notes payable-
related party in the combined balance sheet as of August 18, 1994.
The vehicle loan is payable in monthly payments of $1,787, including
interest at prime plus 1% (7% at December 31, 1992). The vehicle that secured
the loan was sold in 1993 and the loan was paid off.
(6) COMMITMENTS AND CONTINGENCIES
As noted above, the Company has entered into agreements with educational
institutions to lease excess airtime on noncommercial licenses. The standard
agreement has a 10-year term and provides that the Company has the right to
match any outside offer to lease the institution's excess air time at the end
of the 10-year period. The leases require payments as follows:
<TABLE>
<S> <C> <C>
Initial nonrefundable fee.................................... $1,000
Fee upon grant of license.................................... $ 4,000
One year from the date of grant.............................. 7,500
Annual payment in years three through ten.................... 10,000
</TABLE>
The Company has also entered into options to lease, and leases for, land for
tower sites in the majority of the markets in which the Company has pending or
granted lease rights. The option price generally averages $300 for a one-year
option period and is renewable for an additional year at the same price. The
lease terms are generally 15 years with a 10-year renewal option. The leases
call for annual payments averaging $2,500 per year and allow for inflation
increases based on the Consumer Price Index after the initial year. At
December 31, 1993, the Company was committed on land leases for its five
operating sites.
The Company also leases vehicles, equipment and facilities under
noncancellable operating leases.
Minimum rental commitments under lease obligations are as follows:
<TABLE>
<CAPTION>
GRANTED ALL OTHER
AIRTIME EXECUTED
LEASES LEASES
----------- ---------
<S> <C> <C>
1994................................................... $ 2,097,500 $241,416
1995................................................... 2,290,000 36,731
1996................................................... 2,290,000 17,178
1997................................................... 2,290,000 13,150
1998................................................... 2,290,000 11,400
Thereafter............................................. 7,370,000 86,000
----------- --------
$18,627,500 $405,875
=========== ========
</TABLE>
The rental commitments shown above do not include lease obligations related
to pending noncommercial licenses. Airtime lease obligations will increase
substantially if additional pending noncommercial licenses are granted.
F-100
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Lease expense in 1993, 1992 and 1991 under airtime leases was $1,151,337,
$493,555 and $378,672, respectively. Rental expense under all other
noncancellable operating leases in 1993, 1992 and 1991 was $339,939, $332,919
and $203,368, respectively.
The Company has entered into agreements with certain corporate officers. The
agreements provide that in the event of a sale of the Company, if the
officers' employment is not continued, they will be paid a bonus of one year's
salary.
(7) COMMON STOCK
RuralVision Central, Inc. has 100 authorized shares of $500 par value common
stock, of which 26.667 shares were outstanding at December 31, 1993.
RuralVision South, Inc. has 100,000 authorized shares of $1 par value common
stock, of which 11,106.66 shares were outstanding at December 31, 1993.
In 1992 warrants to purchase 16 shares of RuralVision Central, Inc. common
stock at a price of $1,250 per share were issued for total consideration of
$3,840. At the same time, warrants to purchase 6,664 shares of RuralVision
South, Inc. common stock at a price of $.65 per share were issued for total
consideration of $777. The warrants were issued to related parties of the
Company's stockholder. They can be exercised any time after December 31, 1995
and before April 1, 1996. The consideration paid was based upon an appraisal.
(8) RELATED PARTY TRANSACTIONS
The Company leases facilities under a noncancellable operating lease from a
stockholder. The lease provides for monthly rent of $6,600 through August
1994. Rental expense paid under the lease was $79,200, $79,200 and $60,000 in
1993, 1992 and 1991, respectively.
The Company also operates under a management agreement with an affiliated
company. Under the terms of the agreement, the Company pays the affiliate 10%
of gross revenues for administrative services. Management fee expense in 1993,
1992 and 1991 was $439,305, $249,422 and $12,000, respectively. The Company
also leased an airplane from the affiliate in 1992 and 1991. Total expense
under this agreement was $85,500 in 1992 and 1991.
(9) JOINT VENTURES
The Company entered into a 50% joint venture with a conflicting cable
license applicant in 1992. The joint venture, RuralVision of Southern
Illinois, was formed to combine the license rights of the two parties and
develop four wireless cable systems. The Company contributed license rights
with related deferred costs of $36,000 and cash of $66,000 in 1992 and cash of
$137,734 in 1993.
The summarized unaudited financial position of the unconsolidated joint
venture at December 31, 1993 is as follows:
<TABLE>
<S> <C>
Cable systems in progress...................................... $604,000
Other assets................................................... 72,000
--------
$676,000
--------
Accounts payable............................................... 6,000
Capital........................................................ 670,000
--------
$676,000
========
</TABLE>
F-101
<PAGE>
RURALVISION CENTRAL, INC. AND
RURALVISION SOUTH, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company also has an agreement with another party in a market where
RuralVision licenses are pending whereby the other party has a 10% interest in
future net profits when the cable system is developed. The other party is also
required to contribute toward development of the system.
In addition, the Company has entered into agreements with conflicting
license applicants to assign its noncommercial license applications in two
markets and abandon noncommercial licenses in one market. As consideration the
other parties have agreed to pay RuralVision $128,500. The Company will also
receive approximately $.91 per subscriber per month in one market and 2% of
gross revenues in the other market for a period of 10 years. The Company has
no obligations to contribute to the development of the cable systems in any of
these markets.
(10) STOCK GRANT
In December 1992, common stock of both companies was awarded to an officer
for services rendered. The award represents a 10% interest in each company
after considering the additional shares granted. The stock was distributed to
the officer in January 1993. In 1993 an additional cash bonus of $685,354 was
awarded to the same officer. See note 11.
(11) PRIOR PERIOD ADJUSTMENT
The combined balance sheet at December 31, 1992, and the related combined
statements of operations, stockholders' deficit and cash flows for the year
then ended have been restated to reflect the correction of an overstatement of
officer's compensation expense and the related accrual of $1,050,000 arising
from the award of stock to an officer of the Company (see note 10). The
accrued stock compensation, as originally determined, was based on inaccurate
information. Accordingly, the 1992 combined financial statements have been
restated by reducing the expense for the officer's stock award and the net
loss by $1,050,000.
F-102
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Heartland Wireless Communications, Inc.:
We have audited the accompanying balance sheets of Cross Country Division as
of December 31, 1993 and 1994, and the related statements of operations and
division equity and cash flows for the year ended December 31, 1993, the
period from January 1, 1994 to August 18, 1994 and the period from August 19,
1994 to December 31, 1994. These financial statements are the responsibility
of Cross Country Division's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cross Country Division as
of December 31, 1993 and 1994, and the results of its operations and its cash
flows for the year ended December 31, 1993, the period from January 1, 1994 to
August 18, 1994 and the period from August 19, 1994 to December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, on August 19, 1994,
RuralVision Joint Venture, a general partnership in which Cross Country
Wireless, Inc. had a 50% interest, purchased certain wireless cable television
assets, including assets comprising the Cross Country Division, in a business
combination accounted for as a purchase. As a result of the acquisition,
financial information for periods after August 18, 1994 is presented on a
different cost basis than that for the periods before August 18, 1994 and,
therefore, such information is not comparable.
KPMG Peat Marwick LLP
Dallas, Texas
July 28, 1995
F-103
<PAGE>
CROSS COUNTRY DIVISION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................................................. $ 50,370 $ 41,745 $ 9,348
Subscriber receivables, net of allowance for doubtful accounts of $50,977 in 1993 and
$77,979 in 1994...................................................................... 65,675 77,979 132,317
Prepaid expenses and other............................................................ 200,886 228,080 223,218
---------- ---------- ----------
Total current assets................................................................ 317,021 347,804 364,883
Systems and equipment, net (note 2)..................................................... 3,630,952 3,260,737 3,072,768
Leased license investment, net of accumulated amortization of $13,850 in 1993 and
$45,847 in 1994 (note 1(d))............................................................ 55,150 6,232,469 6,170,347
---------- ---------- ----------
$4,003,123 $9,841,010 $9,607,998
========== ========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable and accrued expenses................................................. $ 208,627 $ 121,169 $ 646,460
Unearned revenue...................................................................... 98,630 93,715 151,389
---------- ---------- ----------
Total current liabilities........................................................... 307,257 214,884 797,849
Division equity (note 1(a))............................................................. 3,695,886 9,626,126 8,810,149
Commitments (notes 3 and 5).............................................................
---------- ---------- ----------
$4,003,123 $9,841,010 $9,607,998
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-104
<PAGE>
CROSS COUNTRY DIVISION
STATEMENTS OF OPERATIONS AND DIVISION EQUITY
<TABLE>
<CAPTION>
JANUARY 1, SIX MONTHS AUGUST 18, SIX MONTHS
YEAR ENDED 1994 TO ENDED 1994 TO ENDED
DECEMBER 31, AUGUST 18, JUNE 30, DECEMBER 31, JUNE 30,
1993 1994 1994 1994 1995
------------ ---------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue............................................................. $1,952,207 $1,416,375 $1,064,905 $ 710,697 $1,008,608
---------- ---------- ---------- ---------- ----------
Operating expenses:
Systems operations................................................ 966,153 733,688 498,055 421,074 540,997
Selling, general and administrative............................... 839,522 398,938 331,511 242,206 297,127
Depreciation and amortization..................................... 493,478 339,838 247,881 208,922 287,439
---------- ---------- ---------- ---------- ----------
Total operating expenses........................................ 2,299,153 1,472,464 1,077,447 872,202 1,125,563
---------- ---------- ---------- ---------- ----------
Net loss........................................................ (346,946) (56,089) (12,542) (161,505) (116,955)
Division equity at beginning of period.............................. 3,599,438 3,695,866 3,695,866 3,533,807 9,626,126
Elimination of RuralVision equity
(note 1(a))........................................................ -- -- -- (3,533,807) --
Net investment in and advances from
(to) parents....................................................... 443,374 (105,970) (225,328) 9,787,631 (699,022)
---------- ---------- ---------- ---------- ----------
Division equity at end of period.................................... $3,695,866 $3,533,807 $3,457,996 $9,626,126 $8,810,149
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-105
<PAGE>
CROSS COUNTRY DIVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX SIX
JANUARY 1, MONTHS AUGUST 19, MONTHS
YEAR ENDED 1994 TO ENDED 1994 TO ENDED
DECEMBER 31, AUGUST 18, JUNE 30, DECEMBER 31, JUNE 30,
1993 1994 1994 1994 1995
------------ ---------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(346,946) $ (56,809) $(12,542) $ (161,505) $(116,955)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................ 493,478 339,838 247,881 208,922 287,439
Other........................................................ 96,538 71,574 121,634 55,363 14,551
Changes in assets and liabilities:
Subscriber receivables...................................... (58,738) (12,471) 6,332 257 (54,338)
Prepaid expenses and other.................................. (84,676) (15,931) (85,336) (22,263) 4,862
Accounts payable and accrued expenses....................... (91,592) (89,441) 29,092 1,983 525,291
Unearned revenue............................................ 27,118 2,332 (11,316) 10,924 57,674
--------- --------- -------- ----------- ---------
Net cash from provided by operating activities............. 35,182 239,812 295,745 86,510 718,524
--------- --------- -------- ----------- ---------
Cash flows used in investing activities -- capital
expenditures.................................................. (442,117) (169,824) (100,670) (9,846,784) (51,899)
--------- --------- -------- ----------- ---------
Cash flows provided by (used in) financing activities -- net
investment in and advances from (to) parents.................. 443,374 (105,970) (225,328) 9,787,631 (699,022)
--------- --------- -------- ----------- ---------
Net increase (decrease) in cash................................ 36,439 (35,982) (30,253) 27,357 (32,397)
Cash at beginning of period.................................... 13,931 50,370 50,370 14,388 41,745
--------- --------- -------- ----------- ---------
Cash at end of period.......................................... $ 50,370 14,388 $ 20,117 41,745 $ 9,348
========= ========= ======== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE>
CROSS COUNTRY DIVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
(INFORMATION AS OF JUNE 30, 1995 AND FOR THESIX-MONTH PERIODS ENDED JUNE 30,
1994 AND 1995 IS UNAUDITED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General and Basis of Presentation
Heartland Wireless Communications, Inc. ("Heartland") develops, owns and
operates wireless cable television systems. On July 18, 1995, Heartland
entered into an agreement with Cross Country Wireless, Inc. ("Cross Country"),
whereby Heartland issued 1,029,707 shares of its common stock to RuralVision
Joint Venture (the "Venture"), a general partnership in which Cross Country
owns a 50% interest, in exchange for $20,000,000 cash in a single privately
negotiated transaction. Immediately subsequent to the issuance of the shares
to the Venture, Heartland acquired substantially all of the remaining assets
of the Venture, consisting primarily of wireless cable systems located in
Lykens, Ohio; Paragould, Arkansas; Sikeston, Missouri and channel rights in 12
markets located in five states (collectively, "Cross Country Division") for
$20,000,000 cash.
The accompanying financial statements reflect the historical financial
position, results of operations and cash flows of the assets and liabilities
comprising Cross Country Division. Until August 18, 1994, the assets and
liabilities comprising Cross Country Division were owned by RuralVision
Central, Inc. ("RuralVision"). Accordingly, the financial information as of
and for the year ended December 31, 1993, the period from January 1, 1994 to
August 18, 1994 and the six months ended June 30, 1994 includes historical
financial information from RuralVision with respect to the assets and
liabilities comprising Cross Country Division.
On August 19, 1994, the Venture, a general partnership in which each of
Heartland and Cross Country had a 50% interest, purchased certain wireless
cable television assets, including assets comprising the Cross Country
Division, from RuralVision. The Venture accounted for the acquisition as a
purchase and, accordingly, established a new cost basis with respect to the
assets purchased from RuralVision. Subsequent to August 19, 1994, the assets
and liabilities comprising Cross Country Division were owned by the Venture.
Accordingly, the financial information as of December 31, 1994 and for the
period from August 19, 1994 to December 31, 1994 and the six months ended June
30, 1995 includes historical financial information from the Venture with
respect to the assets and liabilities comprising Cross Country Division. As a
result of the acquisition and the different cost basis with respect to the
assets and liabilities comprising Cross Country Division, financial
information for periods before and after August 19, 1994 is not comparable.
On May 17, 1995, Heartland assigned its remaining interest in the Venture to
an unrelated third party in exchange for nominal consideration and, as a
result ceased to be a joint venturer thereof on such date.
The accompanying financial statements include the assets, liabilities,
revenues and expenses that are directly related to Cross Country Division. The
financial statements do not include general unallocated corporate assets,
liabilities, revenues and expenses of the parent entities which are not
directly related to Cross Country Division or debt financing and associated
interest expense and, therefore, may not necessarily reflect what the
financial position and results of operations of Cross Country Division would
have been had it been a separate, stand-alone entity during the periods
covered by the financial statements.
(b) Cash Management
Cross Country Division primarily utilized central cash management systems of
its parent entities to finance its operations. Cash requirements were
satisfied either by transactions between Cross Country Division and its parent
entities or by cash from operations. Such transactions are included in the
division equity account in the balance sheets and as net investment in and
advances (to) from parents in the statements of cash flows.
F-107
<PAGE>
CROSS COUNTRY DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(c) Systems and Equipment
Systems and equipment are stated at cost and include the cost of
transmission equipment as well as subscriber installations. Receive-site
equipment on subscriber premises and costs associated with subscriber
installations are capitalized. All other initial subscriber costs, including
marketing costs, are expensed as incurred. Depreciation and amortization are
recorded on a straight-line basis for financial reporting purposes over useful
lives ranging from 6 to 10 years. Repair and maintenance costs are charged to
expense when incurred; renewals and betterments are capitalized.
Equipment awaiting installation consists primarily of accessories, parts and
supplies for subscriber installations and is stated at the lower of average
cost or market.
(d) Leased License Investment
Leased license investment includes costs incurred to acquire wireless cable
channel rights. Such costs were incurred by the parent entities on behalf of
Cross Country Division and have been allocated to Cross Country Division on a
proportional basis under a method that management believes is systematic and
rational. Costs incurred to acquire channel rights issued by the Federal
Communications Commission ("FCC") are deferred and amortized ratably over
estimated useful lives of 20 years beginning with inception of service. Prior
to August 19, 1994, leased license investment costs were amortized over ten
years beginning at the grant of the license. As of December 31, 1994,
approximately $3,800,000 of leased license investment was not subject to
amortization. Cross Country Division continually reevaluates the propriety of
the carrying amounts of the leased license investment as well as the
amortization period to determine whether current events or circumstances
warrant adjustments to the carrying amounts or a revised estimate of the
useful life.
(e) Revenue Recognition
Revenues from subscribers are recognized in the period service is provided.
(f) Channel Leases
Prepayments on granted channel leases are expensed ratably in the year to
which they relate.
(g) Systems Operations
Systems operations expenses consist principally of programming fees, channel
lease costs, tower rental and other costs of providing services. Such amounts
are charged to expense in the period incurred.
(h) Income Taxes
No provision for income taxes has been made as the liability for such taxes
was that of the individual stockholders of RuralVision (as an S Corporation)
or the Venturers rather than Cross Country Division.
(i) Interim Financial Information
In the opinion of management, the accompanying unaudited condensed financial
information of Cross Country Division contains all adjustments, consisting
only of those of a recurring nature, necessary to present fairly Cross Country
Division's financial position as of June 30, 1995, and the results of
operations and cash flows for the six-month periods ended June 30, 1994 and
1995. These results are not necessarily indicative of the results to be
expected for the full fiscal year.
F-108
<PAGE>
CROSS COUNTRY DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SYSTEMS AND EQUIPMENT
Systems and equipment consists of the following at December 31, 1993 and
1994:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Equipment awaiting installation.................... $ 239,472 $ 327,958
Subscriber premises equipment and installation
costs............................................. 1,868,122 1,317,882
Transmission equipment and system construction
costs............................................. 2,188,227 1,692,845
Other, principally office furniture and equipment.. 54,285 70,344
---------- ----------
4,350,106 3,409,029
Accumulated depreciation........................... (719,154) (148,292)
---------- ----------
$3,630,952 $3,260,737
========== ==========
</TABLE>
(3) LEASES
Cross Country Division leases from third parties channel rights licensed by
the FCC. Cross Country Division, through affiliates, has entered into leases
with channel license holders and leases with applicants for channel licenses.
Under FCC policy, the base term of most leases cannot exceed ten years from
the time the lessee begins using the leased channel rights. 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, Cross Country
Division'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 Cross Country Division's leases range from 4 to
10 years. Most of Cross Country Division's leases grant Cross Country Division
a right of first refusal to match another lease offer after expiration of the
lease and/or require the parties to negotiate renewal in good faith. The
termination of or failure to renew a channel lease or termination of the
channel license would result in Cross Country Division being unable to deliver
television programming on such channel. Although Cross Country Division does
not believe that the termination of or failure to renew a single channel lease
could adversely affect Cross Country Division, several of such terminations or
failures in one or more markets that Cross Country Division actively serves
could have a material adverse effect on Cross Country Division. Channel rights
lease agreements generally require payments based on the greater of specified
minimums or amounts based on various subscriber levels.
Payments under the channel rights lease agreements generally begin upon the
grant of the channel rights. Channel rights lease expense was $138,417,
$158,875 and $96,458 for the year ended December 31, 1993, the period from
January 1, 1994 to August 18, 1994 and the period from August 19, 1994 to
December 31, 1994, respectively.
Future minimum lease payments due under channel rights leases in effect at
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1995............................................................ $410,650
1996............................................................ 437,500
1997............................................................ 437,500
1998............................................................ 437,500
1999............................................................ 437,500
</TABLE>
F-109
<PAGE>
CROSS COUNTRY DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cross Country Division also has certain operating leases for office space
and transmission tower space which are generally cancellable or with terms
less than one year. Rent expense incurred in connection with these leases was
$22,184, $24,691 and $13,883 for the year ended December 31, 1993, the period
from January 1, 1994 to August 18, 1994 and the period from August 19, 1994 to
December 31, 1994, respectively.
(4) LIQUIDITY
The growth of Cross Country Division's business requires substantial
investment on a continuing basis to finance capital expenditures and related
expenses for subscriber growth and system development. These activities may be
financed in whole or in part by Cross Country Division through cash flows from
operations or other sources of financing. The amount and timing of Cross
Country Division's future capital requirements will depend upon a number of
factors, many of which are not within Cross Country Division's control,
including programming costs, equipment costs, marketing expenses, staffing
levels, subscriber growth and competitive conditions. Failure to obtain any
required additional financing could have a material adverse effect on the
growth of Cross Country Division and the development of its markets.
(5) COMMITMENTS
Cross Country Division has entered into a series of noncancellable
agreements to purchase entertainment programming for retransmission which
expire in 1995 through 1998. The agreements generally require monthly payments
based upon the number of subscribers to Cross Country Division's systems,
subject to certain minimums.
F-110
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED
HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO
WHICH IT RELATES NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... i
Prospectus Summary....................................................... 1
Risk Factors............................................................. 15
The Exchange Offer....................................................... 27
Pro Forma Financial Information Relative to the Transactions............. 35
Selected Historical Financial Data....................................... 60
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 61
Business................................................................. 73
Wireless Cable Industry.................................................. 82
Recent Transactions...................................................... 90
The Transactions and Planned Divestitures................................ 92
Management............................................................... 99
Certain Transactions..................................................... 104
Principal Stockholders................................................... 107
Description of Notes..................................................... 109
Description of Certain Indebtedness...................................... 135
Certain Federal Income Tax Considerations................................ 137
Plan of Distribution..................................................... 141
Legal Matters............................................................ 141
Experts.................................................................. 142
Index to Consolidated Financial Statements and Unaudited Pro Forma Finan-
cial Information........................................................ F-1
</TABLE>
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NEW NOTES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
----------------------------
PROSPECTUS
----------------------------
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
$100,000,000
13% SERIES B SENIOR NOTES DUE 2003
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
"DGCL"), Article VI of the Registrant's Restated Certificate of Incorporation
(the "Certificate of Incorporation") (Exhibit 3.1 to this Registration
Statement) eliminates the liability of the Registrant's directors to the
Registrant or its stockholders, except for liabilities related to breach of
duty of loyalty, actions not in good faith and certain other liabilities.
Section 145 of the DGCL provides for indemnification by the Registrant of
its directors and officers. In addition, Article IX, Section 1 of the
Registrant's Restated By-Laws (the "By-laws") (Exhibit 3.2 to this
Registration Statement) requires the Registrant to indemnify any current or
former director or officer to the fullest extent permitted by the DGCL. In
addition, the Registrant has entered into indemnity agreements with its
directors (a form of which is Exhibit 10.3 to this Registration Statement),
which obligate the Registrant to indemnify such directors to the fullest
extent permitted by the DGCL. The Registrant has also obtained officers' and
directors' liability insurance which insures against liabilities that officers
and directors of the Registrant may incur in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Letter Agreement regarding formation of the Registrant (filed as
Exhibit 2.1 to the Registrant's Registration Statement on Form S-1,
File No. 33-74244 (the "Form S-1"), and incorporated herein by
reference)
2.2 Supplement to Letter Agreement regarding formation of the Registrant
(filed as Exhibit 2.2 to the Form S-1 and incorporated herein by
reference)
2.3 Asset Purchase Agreement among RuralVision Joint Venture, RuralVision
Central, Inc. and RuralVision South, Inc. (filed as Exhibit 2.3 to the
Registrant's Registration Statement on Form S-1, File No. 33-84408
(the "November Form S-1") and incorporated herein by reference)
2.4 Supplemental Agreement to the Asset Purchase Agreement among
RuralVision Joint Venture, RuralVision Central, Inc. and RuralVision
South, Inc. (filed as Exhibit 2.4 to the November Form S-1 and
incorporated herein by reference)
2.5 Closing Agreement amending the Supplemental Agreement among
RuralVision Joint Venture, RuralVision Central, Inc. and RuralVision
South, Inc. (filed as Exhibit 2.5 to the November Form S-1 and
incorporated herein by reference)
2.6 Asset Purchase Agreement between RuralVision Joint Venture and Cable
Equity Partners, Inc. (filed as Exhibit 2.6 to the November Form S-1
and incorporated herein by reference)
2.7 Letter Agreement amending Asset Purchase Agreement between RuralVision
Joint Venture and Cable Equity Partners, Inc. (filed as Exhibit 2.7 to
the November Form S-1 and incorporated herein by reference)
2.8 Letter Agreement between the Registrant and Cross Country Wireless,
Inc. (filed as Exhibit 2.8 to the November Form S-1 and incorporated
herein by reference)
2.9 Letter Agreement between the Registrant and Cable Equity Partners,
Inc. (filed as Exhibit 2.9 to the Registrant's Registration Statement
on Form S-4, File No. 33-87076 (the "Form S-4"), and incorporated
herein by reference)
2.10 Lease Purchase Agreement between the Registrant and Choice Television
of Iowa, L.C. (filed as Exhibit 2.10 to the Form S-4 and incorporated
herein by reference)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.11 Asset Purchase Agreement between the Registrant and RuralVision Joint
Venture (filed as Exhibit 2.11 to the Form 8-K Current Report dated as
of December 1, 1994 and filed with the Commission on December 14, 1994
(the "Form 8-K"), and incorporated herein by reference)
2.12 Agreement for Purchase and Sales of Assets between the Registrant and
REC Services, Inc. (filed as Exhibit 2.12 to the Form S-4 and
incorporated herein by reference)
2.13 Letter Agreement among the Registrant, United States Wireless Cable,
Inc. and United States Wireless Cable Systems, Inc. (filed as Exhibit
2.13 to the Form S-4 and incorporated herein by reference)
2.14 Letter Agreement among the Registrant, Cross Country Wireless, Inc.
and RuralVision Joint Venture (filed as Exhibit 2.14 to the Form S-4
and incorporated herein by reference)
2.15 Extension Agreement among the Registrant, Cross Country Wireless,
Inc., Cross Country Wireless Cable West, L.P., RuralVision Joint
Venture, RuralVision Central, Inc., RuralVision South, Inc. and
Selling Shareholders of RuralVision Central, Inc. and RuralVision
South, Inc. (filed as Exhibit 2.15 to the Form S-4 and incorporated
herein by reference)
2.16 Note Modification Agreement among the Registrant, Cross Country
Wireless, Inc., Cross Country Wireless Cable West, L.P., RuralVision
Joint Venture, RuralVision Central, Inc., RuralVision South, Inc., the
Selling Shareholders of RuralVision Central, Inc. and RuralVision
South, Inc., the Larry D. Hudson Trust and Jerri Hudson Bell (filed as
Exhibit 2.16 to the Form S-4 and incorporated herein by reference)
2.17 Asset Purchase Agreement between Heartland Wireless Paducah, Inc. and
Cross Country Wireless, Inc. (filed as Exhibit 2.17 to the Form S-4
and incorporated herein by reference)
2.18 First Amendment to Joint Venture Agreement between the Registrant and
Cross Country Wireless, Inc. (filed as Exhibit 2.18 to the Form S-4
and incorporated herein by reference)
2.19 Venture Distribution Agreement between the Registrant and RuralVision
Joint Venture (filed as Exhibit 2.19 to the Form S-4 and incorporated
herein by reference)
2.20 Letter Agreement among the Registrant, United States Wireless Cable,
Inc. and United States Wireless Systems, Inc.
2.21 Stock Purchase Agreement between Wireless Communications, Inc. and
Robert R. Story
2.22 Asset Purchase Agreement between United States Wireless Systems, Inc.
and Robert R. Story, Inc.
2.23 Amended and Restated Agreement and Plan of Merger dated as of
September 11, 1995, between American Wireless Systems, Inc., Heartland
Merger Sub, Inc. and the Registrant (filed as Exhibit 2.22 to the
Registrant's Registration Statement on Form S-4, File No. 33-65357,
(the "January Form S-4"), and incorporated herein by reference)
2.24 Amended and Restated Asset Purchase Agreement dated as of October 4,
1995, between Fort Worth Wireless Cable T.V. Associates and the
Registrant (filed as Exhibit 2.23 to the January Form S-4 and
incorporated herein by reference)
2.25 Amended and Restated Asset Purchase Agreement dated as of October 4,
1995, between Wireless Cable TV Associates #38 and the Registrant
(filed as Exhibit 2.24 to the January Form S-4 and incorporated herein
by reference)
2.26 Amended and Restated Agreement and Plan of Merger dated as of
September 11, 1995, between CableMaxx, Inc., Heartland Merger Sub 2,
Inc. and the Registrant (filed as Exhibit 2.25 to the January Form S-4
and incorporated herein by reference)
2.27 Amended and Restated Asset Purchase Agreement dated as of October 19,
1995, between Three Sixty Corp., Technivision, Inc. and the Registrant
(filed as Exhibit 2.26 to the January Form S-4 and incorporated herein
by reference)
2.28 AWS Escrow Agreement (filed as Exhibit 2.27 to the January Form S-4
and incorporated herein by reference)
2.29 FTW Claim Release (filed as Exhibit 2.28 to the January Form S-4 and
incorporated herein by reference)
2.30 FTW Claim Assignment (filed as Exhibit 2.29 to the January Form S-4
and incorporated herein by reference)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.31 FTW Liquidation Plan (filed as Exhibit 2.30 to the January Form S-4
and incorporated herein by reference)
2.32 Minneapolis Claim Assignment (filed as Exhibit 2.31 to the January
Form S-4 and incorporated herein by reference)
2.33 Minneapolis Liquidation Plan (filed as Exhibit 2.32 to the January
Form S-4 and incorporated herein by reference)
2.34 TSC Escrow Agreement (filed as Exhibit 2.33 to the January Form S-4
and incorporated herein by reference)
2.35 TSC Liquidation Plan (filed as Exhibit 2.34 to the January S-4 and
incorporated herein by reference)
3.1 Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.1 to the Form S-1 and incorporated herein by reference)
3.2 Restated By-laws of the Registrant (filed as Exhibit 3.2 to the Form
S-1 and incorporated herein by reference)
4.1 1994 Employee Stock Option Plan of the Registrant (filed as Exhibit
4.1 to the Form S-1 and incorporated herein by reference)
*4.2 Revised Form of Nontransferable Incentive Stock Option Agreement under
the 1994 Employee Stock Option Plan of the Registrant
*4.3 Revised Form of Nontransferable Non-Qualified Stock Option Agreement
under the 1994 Employee Stock Option Plan of the Registrant
4.4 1994 Stock Option Plan for Non-Employee Directors of the Registrant
(filed as Exhibit 4.4 to the Form S-1 and incorporated herein by
reference)
4.5 Form of Stock Option Agreement under the 1994 Stock Option Plan for
Non-Employee Directors of the Registrant (filed as Exhibit 4.5 to the
Form S-1 and incorporated herein by reference)
4.6 Warrant Agreement between the Registrant and Gerard Klauer Mattison &
Co., Inc. (including form of warrant certificate) (filed as Exhibit
4.6 to the Form S-1 and incorporated herein by reference)
4.7 Registration Rights Agreement among the Registrant, Jupiter Partners
L.P. and Thomas R. Haack (filed as Exhibit 4.7 to the Form S-4 and
incorporated herein by reference)
4.8 Stockholders Agreement among the Registrant, Hunt Capital Group,
L.L.C., David E. Webb, L. Allen Wheeler and Jupiter Partners L.P.
(filed as Exhibit 4.8 to the Form S-4 and incorporated herein by
reference)
4.9 Note Purchase Agreement among the Registrant, Jupiter Partners L.P.
and Thomas R. Haack (filed as Exhibit 4.9 to the Form S-4 and
incorporated herein by reference)
4.10 First Amendment to Note Purchase Agreement among the Registrant,
Jupiter Partners L.P. and Thomas R. Haack (filed as Exhibit 4.10 to
the Form 10-K Annual Report filed with the Commission on March 31,
1995 (the "Form 10-K"), and incorporated herein by reference)
*4.11 Second Amendment to Note Purchase Agreement among the Registrant,
Jupiter Partners L.P. and Thomas R. Haack
4.12 Indenture between the Registrant and First Trust of New York, National
Association, as Trustee (the "Trustee") (previously filed as Exhibit
4.11 hereto)
*4.13 Supplemental Indenture dated October 2, 1995, between the Registrant
and the Trustee
4.14 Registration Rights Agreement among the Registrant, BT Securities
Corporation ("BT Securities") and Lazard Freres & Co. ("Lazard")
(previously filed as Exhibit 4.12 hereto)
4.15 Securityholders' and Registration Rights Agreement among the
Registrant, BT Securities and Lazard (previously filed as Exhibit 4.13
hereto)
4.16 Warrant Agreement between the Registrant and Bankers Trust Company, as
Warrant Agent (previously filed as Exhibit 4.14 hereto)
4.17 Unit Agreement among the Registrant, Bankers Trust Company, as Unit
Agent and Warrant Agent, and the Trustee (previously filed as Exhibit
4.15 hereto)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.18 Escrow and Disbursement Agreement among the Registrant, Bankers Trust
Company, as Escrow Agent, and the Trustee (previously filed as Exhibit
4.16 hereto)
*5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of
such firm) regarding legality of securities being offered
*8 Opinion of O'Sullivan Graev & Karabell, LLP regarding the material
United States Federal income tax consequences to the holders of the
securities being offered
10.1 Standard Form of MMDS License Agreement (filed as Exhibit 10.1 to the
Form S-1 and incorporated herein by reference)
10.2 Standard Form of ITFS License Agreement (filed as Exhibit 10.2 to the
Form S-1 and incorporated herein by reference)
10.3 Form of Indemnity Agreement between the Registrant and each of its
directors (filed as Exhibit 10.3 to the Form S-1 and incorporated
herein by reference)
10.4 Noncompetition Agreement between the Registrant and J. R. Holland, Jr.
(filed as Exhibit 10.4 to the Form S-1 and incorporated herein by
reference)
10.5 Noncompetition Agreement between the Registrant and David E. Webb
(filed as Exhibit 10.5 to the Form S-1 and incorporated herein by
reference)
10.6 Noncompetition Agreement between the Registrant and John R. Bailey
(filed as Exhibit 10.6 to the Form S-1 and incorporated herein by
reference)
10.7 Noncompetition Agreement between the Registrant and Randy R. Hendrix
(filed as Exhibit 10.7 to the Form S-1 and incorporated herein by
reference)
10.8 Noncompetition Agreement between the Registrant and Thomas W. Dixon
(filed as Exhibit 10.8 to the Form S-1 and incorporated herein by
reference)
10.9 Noncompetition Agreement between the Registrant and L. Allen Wheeler
(filed as Exhibit 10.9 to the Form S-1 and incorporated herein by
reference)
10.10 Credit Agreement between the Registrant and Bank One, Texas, N.A.
(filed as Exhibit 10.10 to the November Form S-1 and incorporated
herein by reference)
10.11 Credit Agreement between the Registrant and Internationale Nederlanden
(U.S.) Capital Corporation (filed as Exhibit 10.11 to the November
Form S-1 and incorporated herein by reference)
10.12 Standard Commercial Lease between the Registrant and Tech Concepts
Joint Venture regarding the Registrant's Richardson, Texas office
(filed as Exhibit 10.12 to the November Form S-1 and incorporated
herein by reference)
10.13 Building Lease Agreement dated June 1, 1990, between Wireless
Communications, Inc. and The Federal Building, Inc. (filed as Exhibit
10.13 to the Form 10-K and incorporated herein by reference)
10.14 Building Lease Agreement dated January 2, 1995, between the Registrant
and W&W Commercial Group, L.L.C. (filed as Exhibit 10.14 to the Form
10-K and incorporated herein by reference)
10.15 Building Lease Agreement dated May 1, 1994, between Wireless
Communications, Inc. and The Federal Building, Inc. (filed as Exhibit
10.15 to the Form 10-K and incorporated herein by reference)
10.16 Loan Agreement dated March 27, 1995, among the Registrant, Hunt
Capital Group, L.L.C., Jupiter Partners L.P. and L. Allen Wheeler
(filed as Exhibit 10.16 to the Form 10-K and incorporated herein by
reference)
10.17 Purchase Agreement among the Registrant, BT Securities and Lazard
*10.18 Building Lease Agreement dated November 20, 1995, between the
Registrant and the Federal Building, Inc.
*12.1 Statement re: Computation of Consolidated Earnings to Fixed Charges
21 List of Subsidiaries
*23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its
opinion filed as Exhibit 5 hereto)
*23.2 Consent of KPMG Peat Marwick LLP, independent certified public
accountants (Registrant)
*23.3 Consent of Arthur Andersen LLP, independent public accountants
*23.4 Consent of Coopers & Lybrand L.L.P., independent accountants
*23.5 Consent of KPMG Peat Marwick LLP, independent certified public
accountants (Technivision)
*23.6 Consent of Grant Thornton LLP, independent certified public
accountants
*23.7 Consent of KPMG Peat Marwick LLP, independent certified public
accountants (Cross Country Division)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
24 Powers of Attorney
25 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of First Trust of New York, National
Association, as Trustee (separately bound)
*99.1 Form of Letter of Transmittal
*99.2 Form of Notice of Guaranteed Delivery
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees
*99.4 Form of Letter to Clients
</TABLE>
- --------
* Filed herewith.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................... S-1
Schedule II -- Valuation and Qualifying Accounts -- Three years ended
December 31, 1994............................................... S-2
</TABLE>
Schedules other than the above have been omitted because they are either not
applicable or the required information has been disclosed in the financial
statements or notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the DGCL, the Certificate of
Incorporation and By-laws, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of that time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Act.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on the 7th day of February, 1996.
HEARTLAND WIRELESS COMMUNICATIONS,
INC.
/s/ J. R. Holland, Jr.*
By___________________________________
J. R. HOLLAND, JR.
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 7th day of February, 1996, by
the following persons in the capacities indicated:
SIGNATURE TITLE
Chairman of the
/s/ J. R. Holland, Jr.* Board and Director
-------------------------------------
J. R. HOLLAND, JR.
President, Chief
/s/ David E. Webb* Executive Officer
------------------------------------- and Director
DAVID E. WEBB (Principal
Executive Officer)
/s/ John R. Bailey Senior Vice
------------------------------------- President--
JOHN R. BAILEY Finance, Chief
Financial Officer,
Treasurer and
Secretary
(Principal
Financial Officer)
Vice President,
/s/ David D. Hagey* Controller and
------------------------------------- Assistant Secretary
DAVID D. HAGEY (Principal
Accounting Officer)
Director
/s/ Alvin H. Lane, Jr.*
-------------------------------------
ALVIN H. LANE, JR.
II-7
<PAGE>
SIGNATURE TITLE
Director
/s/ Dennis M. O'Rourke*
-------------------------------------
DENNIS M. O'ROURKE
Director
/s/ John A. Sprague*
-------------------------------------
JOHN A. SPRAGUE
Director
/s/ Wes W. Watkins*
-------------------------------------
WES W. WATKINS
Director
/s/ L. Allen Wheeler*
-------------------------------------
L. ALLEN WHEELER
*By /s/ John R. Bailey
----------------------------------
JOHN R. BAILEY
Attorney-in-Fact
II-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Heartland Wireless Communications, Inc.:
The audits referred to in our report dated March 3, 1995, except as to note
11 which is as of March 27, 1995, included the related financial statement
schedule as of December 31, 1994, and for each of the years in the three-year
period ended December 31, 1994, included in the registration statement. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
KMPG Peat Marwick LLP
Dallas, Texas
March 3, 1995
S-1
<PAGE>
SCHEDULE II
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------- BALANCE
BALANCE AT CHARGED TO AT END
BEGINNING COSTS AND CHARGED OF
DESCRIPTION OF PERIOD EXPENSES TO OTHER DEDUCTIONS PERIOD
- ------------------------ ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1992:
Allowance for doubtful
accounts............. $ -- $ 501 $ -- $ -- $ 501
======== ======= ======== ======= ========
Valuation allowance
for deferred tax
assets............... $ 29,982 $ -- $ 17,279(b) $ -- $ 47,261
======== ======= ======== ======= ========
Year ended December 31,
1993:
Allowance for doubtful
accounts............. $ 501 $26,065 $ -- $(1,484) $ 25,082
======== ======= ======== ======= ========
Valuation allowance
for deferred tax
assets............... $ 47,261 $-- $136,034(b) $-- $183,295
======== ======= ======== ======= ========
Year ended December 31,
1994:
Allowance for doubtful
accounts............. $ 25,082 $72,066 $ 25,753(a) $ -- $122,901
======== ======= ======== ======= ========
Valuation allowance
for deferred tax
assets............... $183,295 $-- ... $608,258(b) $ -- $791,553
======== ======= ======== ======= ========
</TABLE>
- --------
(a) Allocation of assets from the purchase of Milano System.
(b) Recognized as a component of federal income tax benefit.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.2 Revised Form of Nontransferable Incentive Stock Option Agreement under
the 1994 Employee Stock Option Plan of the Registrant
4.3 Revised Form of Nontransferable Non-Qualified Stock Option Agreement
under the 1994 Employee Stock Option Plan of the Registrant
4.11 Second Amendment to Note Purchase Agreement among the Registrant,
Jupiter Partners L.P. and Thomas R. Haack
4.13 Supplemental Indenture dated October 2, 1995, between the Registrant
and the Trustee
5 Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of
such firm) regarding legality of securities being offered
8 Opinion of O'Sullivan Graev & Karabell, LLP regarding the material
United States Federal income tax consequences to the holders of the
securities being offered
12.1 Statement re: Computation of Consolidated Earnings to Fixed Charges
10.18 Building Lease Agreement dated November 20, 1995, between the
Registrant and The Federal Building, Inc.
23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its
opinion filed as Exhibit 5 hereto)
23.2 Consent of KPMG Peat Marwick LLP, independent certified public
accountants (Registrant)
23.3 Consent of Arthur Andersen LLP, independent public accountants
23.4 Consent of Coopers & Lybrand L.L.P., independent accountants
23.5 Consent of KPMG Peat Marwick LLP, independent certified public
accountants (Technivision)
23.6 Consent of Grant Thornton LLP, independent certified public
accountants
23.7 Consent of KPMG Peat Marwick LLP, independent certified public
accountants (Cross Country Division)
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees
99.4 Form of Letter to Clients
</TABLE>
<PAGE>
EXHIBIT 4.2
REVISED FORM FOR ISO UNDER 1994
EMPLOYEE STOCK OPTION PLAN
-------------------------------
NONTRANSFERABLE INCENTIVE STOCK
OPTION AGREEMENT dated as of _________,
19__, between HEARTLAND WIRELESS
COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and
____________________________ (the
"Optionee", which term as used herein
shall be deemed to include any successor
to the Optionee by will or by the laws of
descent and distribution, unless the
context shall otherwise require).
Pursuant to the Company's 1994 Employee Stock Option Plan (the
"Plan"), the Company, acting through the Compensation Committee of its Board
of Directors (the "Committee"), approved the issuance to the Optionee,
effective as of the date set forth above, of an incentive stock option to
purchase up to an aggregate of [# OF SHARES] shares of Common Stock, $.001
par value, of the Company (the "Common Stock"), at the price (the "Option
Price") of [not less than 100% of the fair market value of a share of Common
Stock on the date of grant (110%, in the case of a 10% stockholder)] [PRICE]
per share, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual premises and
undertakings hereinafter set forth, the parties hereto agree as follows:
1. Option; Option Price. On behalf of the Company, the Committee
--------------------
hereby grants to the Optionee the option (the "Option") to purchase, subject
to the terms and conditions of this Agreement and the Plan (which are
incorporated by reference herein and which in all cases shall control in the
event of any conflict with the terms, definitions and provisions of this
Agreement), [# OF SHARES] shares (the "Option Shares") of Common Stock of
the Company at an exercise price per share equal to the Option Price, which
Option is intended to qualify for Federal income tax purposes as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). A copy of the Plan as in
effect on the date hereof has been supplied to the Optionee, and the
Optionee hereby acknowledges receipt thereof.
2. Term. The term (the "Option Term") of the Option shall
----
commence on the date of this Agreement (the "Grant Date") and shall expire
on the seventh anniversary of the Grant Date, unless such Option shall
theretofore have been terminated in accordance with the terms hereof or of
the Plan.
<PAGE>
3. Time of Exercise. (a) Unless accelerated in the discretion of
----------------
the Committee or as otherwise provided herein, the Option shall become
exercisable as to the total number of Option Shares multiplied by the
fraction specified in Exhibit A hereto, for the periods specified in Exhibit
A hereto; provided, however, that the Option shall in no event be exercisable
-------- -------
during the 180-day period (the "Offering Period") immediately following the
effective date of the Registration Statement on Form S-1 filed by the Company
under the Securities Act of 1933, as amended (the "Securities Act"), for an
initial public offering of the Common Stock; provided further, however, that
-------- ------- -------
the Option shall be exercisable during the 180-day period after the
expiration of the Offering Period if the Option Term expires during the
Offering Period. Subject to the provisions of Sections 5 and 8 hereof, shares
as to which the Option becomes exercisable pursuant to the foregoing
provisions may be purchased at any time thereafter prior to the expiration or
termination of the Option.
(b) Anything contained in this Agreement to the contrary
notwithstanding, the Option shall not be exercisable to the extent that the
aggregate Fair Market Value (as determined in accordance with Section 6.b. of
the Plan) on the date hereof of all stock with respect to which incentive
stock options are exercisable for the first time by the Optionee during any
calendar year (under the Plan and all other plans of the Company and its
subsidiaries, if any) exceeds $100,000.
(c) Anything contained herein to the contrary notwithstanding, the
Option shall become fully exercisable (to the extent it has not already done so)
as to the total number of shares of Common Stock subject to the Option upon the
Optionee's death or permanent and total disability (within the meaning of
Section 22(e)(3) of the Code).
(d) Anything contained herein to the contrary notwithstanding, in the
event of a Change in Control (as hereinafter defined), the Option shall become
fully exercisable (to the extent it has not already done so) as to the total
number of shares of Common Stock subject to the Option if, within one year of
such Change in Control, the Optionee shall cease for any reason to be an
employee of the Company or any of its subsidiaries. For purposes of this
Agreement, a Change in Control of the Company shall be deemed to have occurred
if (i) there shall be consummated (x) any consolidation or merger of the Company
in which the Company is not the continuing or surviving corporation or pursuant
to which shares of the Common Stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders of the
Common Stock immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after the
merger, or (y) any sale, lease, exchange or other transfer (in one transaction
or a series of related
-2-
<PAGE>
transactions) of all, or substantially all, of the assets of the Company; or
(ii) the stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company; or (iii) any person (as such term
is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"))(other than Hunt Capital Group, L.L.C.,
David E. Webb or L. Allen Wheeler), shall become the beneficial owner (within
the meaning of Rule 13d-3 under the Exchange Act) of 30% or more of the
Company's outstanding Common Stock; or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were directors at
the beginning of the period. Anything contained herein to the contrary
notwithstanding, any exercise of the Option permitted pursuant to this
Section 3(d) may be made within 180 days of the Optionee's termination.
4. Termination of Option. (a) Except as set forth in Section 3(d), the
---------------------
unexercised portion of the Option shall automatically terminate and shall become
null and void and be of no further force or effect upon the first to occur of
the following:
(i) the expiration of the Option Term;
(ii) the expiration of three months from the date that the Optionee
ceases to be an employee of the Company or any of its subsidiaries (other
than as a result of an Involuntary Termination (as defined in subparagraph
(iii) below) or a Termination For Cause (as defined in subparagraph (iv)
below)); provided, however, that if the Optionee shall die during such
-------- -------
three-month period, the time of termination of the unexercised portion of
the Option shall be determined in accordance with subparagraph (iii) below;
(iii) the expiration of 12 months from the date that the Optionee
ceases to be an employee of the Company or any of its subsidiaries as a
result of the Optionee's death or permanent and total disability (within the
meaning of Section 22(e)(3) of the Code) (an "Involuntary Termination");
(iv) immediately if the Optionee ceases to be an employee of the
Company or any of its subsidiaries if such-termination is for cause or is
otherwise attributable to a breach by the Optionee of an employee,
noncompetition or other similar agreement with the Company or any such
subsidiary (any such termination, determined in accordance with paragraph
(b) below, a "Termination For Cause");
-3-
<PAGE>
(v) the effective date of a Corporate Transaction (as defined in
Section 9.b. of the Plan) to which Section 9.b.(ii) of the Plan (relating to
assumptions and substitutions of Options) does not apply; provided, however,
-------- -------
that the Optionee's right to exercise the Option prior to such effective
date shall in all events be suspended during the period commencing 10 days
prior to the proposed effective date of such Corporate Transaction and
ending on either the actual effective date of such Corporate Transaction or
upon receipt of notice from the Company that such Corporate Transaction will
not in fact occur; and
(vi) except to the extent permitted by Section 9.b.(ii) of the
Plan, the date on which the Option or any part thereof or right or privilege
relating thereto is transferred (otherwise than by will or the laws of
descent and distribution), assigned, pledged, hypothecated, attached or
otherwise disposed of by the Optionee.
(b) The Board of Directors of the Company shall have the power to
determine what constitutes a Termination For Cause, and the date upon which such
Termination For Cause occurs. Any such determination shall be final, conclusive
and binding upon the Optionee.
(c) Anything contained herein to the contrary notwithstanding, the
Option shall not be affected by any change of duties or position of the Optionee
(including a transfer to or from the Company or one of its subsidiaries), so
long as the Optionee continues to be an officer or employee of the Company or
one of its subsidiaries.
5. Procedure for Exercise. (a) The Option may be exercised, from time to
----------------------
time, in whole or in part (but for the purchase of whole shares only), by
delivery of a written notice (the "Notice") from the Optionee to the Secretary
of the Company, which Notice shall:
(i) state that the Optionee elects to exercise the Option;
(ii) state the number of Option Shares with respect to which the
Option is being exercised (the "Optioned Shares");
(iii) state the method of payment for the Optioned Shares pursuant
to Section 5(b);
(iv) state the date upon which the Optionee desires to consummate
the purchase of the Optioned Shares (which date must be prior to the
termination of
-4-
<PAGE>
such Option and no later than 30 days from the delivery of such Notice);
(v) include any representations of the Optionee required under
Section 8(b); and
(vi) if the Option shall be exercised pursuant to Section 10 by any
person other than the Optionee, include evidence to the satisfaction of the
Committee of the right of such person to exercise the Option.
(b) Payment of the Option Price for the Optioned Shares shall be made
(i) in cash or by personal or certified check, (ii) by delivery of stock
certificates (in negotiable form) representing shares of Common Stock that have
been owned of record by the Optionee for at least six months prior to the date
of exercise and that have a Fair Market Value on the date of exercise
(determined in the manner set forth in Section 6.b. of the Plan) equal to the
aggregate Option Price of the Optioned Shares or (iii) a combination of the
methods set forth in the foregoing clauses (i) and (ii).
(c) The Company shall issue a stock certificate in the name of the
Optionee (or such other person exercising the Option in accordance with the
provisions of Section 10) for the Optioned Shares as soon as practicable after
receipt of the Notice and payment of the aggregate Option Price for such shares.
6. No Rights as a Stockholder. The Optionee shall not have any
--------------------------
privileges of a stockholder of the Company with respect to any Optioned Shares
until the date of issuance of a stock certificate pursuant to Section 5(c).
7. Adjustments. (a) Subject to Section 7(b), if, at any time while the
-----------
Option is outstanding, the Common Stock is changed by reason of a stock
split, reverse stock split, stock dividend or recapitalization, or converted
into or exchanged for other securities as a result of a merger, consolidation
or reorganization, the Committee shall make adjustments in the number and
class of shares of stock subject to the Option, and the Option Price of the
Option, subject to the provisions of Sections 9.a. and 9.c. of the Plan (or
any similar or successor provisions of the Plan which may be hereafter
adopted).
(b) In the event of the dissolution or liquidation of the
Company, or reorganization, merger or consolidation in which the Company is
not the surviving corporation, or a sale of all or substantially all of the
assets of the Company to another person or entity, the provisions of
Sections 9.b. and 9.c. of the Plan (or any similar or successor provisions
of the Plan which may be hereafter adopted) shall apply.
-5-
<PAGE>
8. Additional Provisions Related to Exercise. (a) The Option shall be
-----------------------------------------
exercisable only on such date or dates and during such period and for such
number of shares of Common Stock as are set forth in this Agreement.
(b) To exercise the Option, the Optionee shall follow the procedures
set forth in Section 5 hereof. Upon the exercise of the Option at a time when
there is not in effect a registration statement under the Securities Act
relating to the shares of Common Stock issuable upon exercise of the Option, the
Committee in its discretion may, as a condition to the exercise of the Option,
require the Optionee (i) to represent in writing that the shares of Common Stock
received upon exercise of the Option are being acquired for investment and not
with a view to distribution and (ii) to make such other representations and
warranties as are deemed appropriate by counsel to the Company. No shares of
Common Stock shall be issued and delivered upon the exercise of the Option
unless and until the Company and/or the Optionee shall have complied with all
applicable Federal or state registration, listing and/or qualification
requirements and all other requirements of law or of any regulatory agencies
having jurisdiction.
(c) Stock certificates representing shares of Common Stock acquired
upon the exercise of the Option that have not been registered under the
Securities Act shall, if required by the Committee, bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE
SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
9. No Evidence of Employment or Service. Nothing contained in the Plan
------------------------------------
or this Agreement shall confer upon the Optionee any right to continue in the
employ of the Company or any of its subsidiaries or interfere in any way with
the right of the Company or its subsidiaries (subject to the terms of any
separate agreement to the contrary) to terminate the Optionee's employment or to
increase or decrease the Optionee's compensation at any time.
10. Restriction on Transfer. The Option may not be transferred, pledged,
-----------------------
assigned, hypothecated or otherwise disposed of in any way by the Optionee,
except by will or by the laws of descent and distribution, and may be exercised
during the
-6-
<PAGE>
lifetime of the Optionee only by the Optionee. If the Optionee dies, the
Option shall thereafter be exercisable, during the period specified in Section
4(a)(iii), by his executors or administrators to the full extent to which the
Option was exercisable by the Optionee at the time of his death. The Option
shall not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition of
the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
11. Disqualifying Dispositions. If Optioned Shares are disposed of
--------------------------
within two years following the date of this Agreement or one year following the
issuance thereof to the Optionee (a "Disqualifying Disposition"), the Optionee
shall, immediately prior to such Disqualifying Disposition, notify the Company
in writing of the date and terms of such Disqualifying Disposition and provide
such other information regarding the Disqualifying Disposition as the Company
may reasonably require.
12. Notices. All notices or other communications which are required or
-------
permitted hereunder shall be in writing and sufficient if (i) personally
delivered, (ii) sent by nationally-recognized overnight courier or (iii) sent by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
if to the Optionee, to the address set forth on the
signature page hereto; and
if to the Company, to:
Heartland Wireless Communications, Inc.
903 North Bowser
Suite 140
Richardson, Texas 75081
Attention: Secretary;
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered, if
personally delivered, (ii) on the first Business Day (as hereinafter defined)
after dispatch, if sent by nationally-recognized overnight courier and (iii)
on the third Business Day following the date on which the piece of mail
containing such communication is posted, if sent by mail. As used herein,
"Business Day" means a day that is not a Saturday, Sunday or a day on which
banking institutions in the city to which the notice or communication is to
be sent are not required to be open.
-7-
<PAGE>
13. No Waiver. No waiver of any breach or condition of this Agreement
---------
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
14. Optionee Undertaking. The Optionee hereby agrees to take whatever
--------------------
additional actions and execute whatever additional documents the Company may in
its reasonable judgment deem necessary or advisable in order to carry out or
effect one or more of the obligations or restrictions imposed on the Optionee
pursuant to the express provisions of this Agreement.
15. Modification of Rights. The rights of the Optionee are subject to
----------------------
modification and termination in certain events as provided in this Agreement and
the Plan.
16. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware applicable to contracts made
and to be wholly performed therein.
17. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
18. Entire Agreement. This Agreement and the Plan constitute the entire
----------------
agreement between the parties with respect to the subject matter hereof, and
supersede all previously written or oral negotiations, commitments,
representations and agreements with respect thereto.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Nontransferable Incentive Stock Option Agreement as of the date first written
above.
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By:
----------------------------
J. R. Holland, Jr.
Chairman of the Board
Optionee:
-------------------------------
Name:
--------------------------
Address:
-----------------------
-----------------------
-----------------------
<PAGE>
EXHIBIT A
---------
This Option shall become exercisable as to one-fifth (1/5) of the
aggregate number of Option Shares on each anniversary of the Grant Date on which
the Optionee is employed by the Company or any of its subsidiaries.
<PAGE>
EXHIBIT 4.3
REVISED FORM FOR NSO UNDER 1994
EMPLOYEE STOCK OPTION PLAN
-------------------------------------------
NONTRANSFERABLE NON-QUALIFIED STOCK
OPTION AGREEMENT dated as of _______ ___,
199_, between HEARTLAND WIRELESS
COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and __________
(the "Optionee", which term as used herein
shall be deemed to include any successor
to the Optionee by will or by the laws of
descent and distribution, unless the
context shall otherwise require).
Pursuant to the Company's 1994 Employee Stock Option Plan (the
"Plan"), the Company, acting through the Compensation Committee of its Board
of Directors (the "Committee"), approved the issuance to the Optionee,
effective as of the date set forth above, of a non-qualified option to
purchase up to an aggregate of [# OF SHARES] shares of Common Stock, $.001
par value, of the Company (the "Common Stock"), at the price of (the "Option
Price") [not less than 100% of the fair market value of a share of Common
Stock on the date of grant] [PRICE] per share, upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual premises and
undertakings hereinafter set forth, the parties hereto agree as follows:
1. Option; Option Price. On behalf of the Company, the Committee
--------------------
hereby grants to the Optionee the option (the "Option") to purchase, subject
to the terms and conditions of this Agreement and the Plan (which are
incorporated by reference herein and which in all cases shall control in the
event of any conflict with the terms, definitions and provisions of this
Agreement), [# OF SHARES] shares (the "Option Shares") of Common Stock of the
Company at an exercise price per share equal to the Option Price, which
Option is not intended to qualify for Federal income tax purposes as an
---
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). A copy of the Plan as in
effect on the date hereof has been supplied to the Optionee, and the Optionee
hereby acknowledges receipt thereof.
2. Term. The term (the "Option Term") of the Option shall
----
commence on the date of this Agreement (the "Grant Date") and shall expire
on the seventh anniversary of the Grant Date, unless such Option shall
theretofore have been terminated in accordance with the terms hereof or of
the Plan.
3. Time of Exercise. (a) Unless accelerated in the discretion of
----------------
the Committee or as otherwise provided herein, the
<PAGE>
Option shall be exercisable as to the total number of Option Shares
multiplied by the fraction specified in Exhibit A hereto, for the periods
specified in Exhibit A hereto; provided, however, that the Option shall in no
-------- -------
event be exercisable during the 180-day period (the "Offering Period")
immediately following the effective date of the Registration Statement on
Form S-1 filed by the Company under the Securities Act of 1933, as amended
(the "Securities Act"), for an initial public offering of the Common Stock;
provided further, however, that the Option shall be exercisable during the
- -------- ------- -------
180-day period after the expiration of the Offering Period if the Option Term
expires during the Offering Period. Subject to the provisions of Sections 5
and 8 hereof, shares as to which the Option becomes exercisable pursuant to
the foregoing provisions may be purchased at any time thereafter prior to the
expiration or termination of the Option.
(b) Anything contained herein to the contrary notwithstanding, the
Option shall become fully exercisable (to the extent it has not already done so)
as to the total number of shares of Common Stock subject to the Option upon the
Optionee's death or permanent and total disability (within the meaning of
Section 22(e)(3) of the Code).
(c) Anything contained herein to the contrary notwithstanding, in the
event of a Change in Control (as hereinafter defined), the Option shall become
fully exercisable (to the extent it has not already done so) as to the total
number of shares of Common Stock subject to the Option if, within one year of
such Change in Control, the Optionee shall cease for any reason to be an
employee of the Company or any of its subsidiaries. For purposes of this
Agreement, a Change in Control of the Company shall be deemed to have occurred
if (i) there shall be consummated (x) any consolidation or merger of the Company
in which the Company is not the continuing or surviving corporation or pursuant
to which shares of the Common Stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders of the
Common Stock immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after the
merger, or (y) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of the assets
of the Company; or (ii) the stockholders of the Company approve any plan or
proposal for the liquidation or dissolution of the Company; or (iii) any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"))(other than Hunt Capital Group,
L.L.C., David E. Webb or L. Allen Wheeler), shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of 30% or more of the
Company's outstanding Common Stock; or (iv) during any period of two consecutive
years, individuals who at the beginning of such period constitute the entire
Board of Directors shall cease for any reason to constitute a majority thereof
-2-
<PAGE>
unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period. Anything contained herein to the contrary notwithstanding, any exercise
of the Option permitted pursuant to this Section 3(c) may be made within 180
days of the Optionee's termination.
4. Termination of Option. (a) Except as set forth in Section
---------------------
3(c), the unexercised portion of the Option shall automatically terminate
and shall become null and void and be of no further force or effect upon the
first to occur of the following:
(i) the expiration of the Option Term;
(ii) the expiration of three months from the date that the
Optionee ceases to be an employee of the Company or any of its
subsidiaries (other than as a result of an Involuntary Termination (as
defined in subparagraph (iii) below) or a Termination For Cause (as
defined in subparagraph (iv) below)); provided, however, that if the
-------- -------
Optionee shall die during such three-month period, the time of
termination of the unexercised portion of the Option shall be
determined in accordance with subparagraph (iii) below;
(iii) the expiration of 12 months from the date that the
Optionee ceases to be an employee of the Company or any of its
subsidiaries as a result of the Optionee's death or permanent and total
disability (within the meaning of Section 22(e)(3) of the Code) (an
"Involuntary Termination");
(iv) immediately if the Optionee ceases to be an employee
of the Company or any of its subsidiaries if such termination is for
cause or is otherwise attributable to a breach by the Optionee of an
employee, noncompetition or other similar agreement with the Company
or any such subsidiary (any such termination, determined in
accordance with paragraph (b) below, a "Termination For Cause");
(v) the effective date of a Corporate Transaction (as
defined in Section 9.b. of the Plan) to which Section 9.b.(ii) of the
Plan (relating to assumptions and substitutions of Options) does not
apply; provided, however, that the Optionee's right to exercise the
-------- -------
Option prior to such effective date shall in all events be suspended
during the period commencing 10 days prior to the proposed effective
date of such Corporate Transaction and ending on either the actual
effective date of such Corporate Transaction or upon receipt of notice
from the Company that such Corporate Transaction will not in fact
occur; and
-3-
<PAGE>
(vi) except to the extent permitted by Section 9.b.(ii) of the
Plan, the date on which the Option or any part thereof or right or
privilege relating thereto is transferred (otherwise than by will or the
laws of descent and distribution), assigned, pledged, hypothecated,
attached or otherwise disposed of by the Optionee.
(b) The Board of Directors of the Company shall have the power to
determine what constitutes a Termination For Cause, and the date upon which such
Termination For Cause occurs. Any such determination shall be final, conclusive
and binding upon the Optionee.
(c) Anything contained herein to the contrary notwithstanding, the
Option shall not be affected by any change of duties or position of the Optionee
(including a transfer to or from the Company or one of its subsidiaries), so
long as the Optionee continues to be an officer or employee of the Company or
one of its subsidiaries.
5. Procedure for Exercise. (a) The Option may be exercised, from time to
----------------------
time, in whole or in part (but for the purchase of whole shares only), by
delivery of a written notice (the "Notice") from the Optionee to the Secretary
of the Company, which Notice shall:
(i) state that the Optionee elects to exercise the Option;
(ii) state the number of Option Shares with respect to which the
Option is being exercised (the "Optioned Shares");
(iii) state the method of payment for the Optioned Shares
pursuant to Section 5(b);
(iv) state the date upon which the Optionee desires to
consummate the purchase of the Optioned Shares (which date must be prior
to the termination of such Option and no later than 30 days from the
delivery of such Notice);
(v) include any representations of the Optionee required under
Section 8(b); and
(vi) if the Option shall be exercised pursuant to Section 10 by
any person other than the Optionee, include evidence to the satisfaction
of the Committee of the right of such person to exercise the Option.
(b) Payment of the Option Price for the Optioned Shares shall be made
(i) in cash or by personal or certified
-4-
<PAGE>
check, (ii) by delivery of stock certificates (in negotiable form) representing
shares of Common Stock that have been owned of record by the Optionee for at
least six months prior to the date of exercise and that have a Fair Market Value
on the date of exercise (determined in the manner set forth in Section 6.b. of
the Plan) equal to the aggregate Option Price of the Optioned Shares or (iii) a
combination of the methods set forth in the foregoing clauses (i) and (ii).
(c) The Company shall issue a stock certificate in the name
of the Optionee (or such other person exercising the Option in accordance
with the provisions of Section 10) for the Optioned Shares as soon as
practicable after receipt of the Notice and payment of the aggregate Option
Price for such shares.
6. No Rights as a Stockholder. The Optionee shall not have any
--------------------------
privileges of a stockholder of the Company with respect to any Optioned Shares
until the date of issuance of a stock certificate pursuant to Section 5(c).
7. Adjustments. (a) Subject to Section 7(b), if, at any time
-----------
while the Option is outstanding, the Common Stock is changed by reason of a
stock split, reverse stock split, stock dividend or recapitalization, or
converted into or exchanged for other securities as a result of a merger,
consolidation or reorganization, the Committee shall make adjustments in the
number and class of shares of stock subject to the Option, and the Option
Price of the Option, subject to the provisions of Sections 9.a. and 9.c. of
the Plan (or any similar or successor provisions of the Plan which may be
hereafter adopted).
(b) In the event of the dissolution or liquidation of the
Company, or reorganization, merger or consolidation in which the Company is
not the surviving corporation, or a sale of all or substantially all of the
assets of the Company to another person or entity, the provisions of
Sections 9.b. and 9.c. of the Plan (or any similar or successor provisions
of the Plan which may be hereafter adopted) shall apply.
8. Additional Provisions Related to Exercise. (a) The Option
-----------------------------------------
shall be exercisable only on such date or dates and during such period and
for such number of shares of Common Stock as are set forth in this Agreement.
(b) To exercise the Option, the Optionee shall follow the
procedures set forth in Section 5 hereof. Upon the exercise of the Option at
a time when there is not in effect a registration statement under the
Securities Act relating to the shares of Common Stock issuable upon exercise
of the Option, the Committee in its discretion may, as a condition to the
exercise of the Option, require the Optionee (i) to represent in writing
that the shares of Common Stock received upon exercise of the Option are
being acquired for investment and not with a view to
-5-
<PAGE>
distribution and (ii) to make such other representations and warranties as are
deemed appropriate by counsel to the Company. No shares of Common Stock shall be
issued and delivered upon the exercise of the Option unless and until the
Company and/or the Optionee shall have complied with all applicable Federal or
state registration, listing and/or qualification requirements and all other
requirements of law or of any regulatory agencies having jurisdiction.
(c) Stock certificates representing shares of Common Stock acquired upon
the exercise of the Option that have not been registered under the Securities
Act shall, if required by the Committee, bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE
SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
9. No Evidence of Employment or Service. Nothing contained in the Plan
------------------------------------
or this Agreement shall confer upon the Optionee any right to continue in the
employ of the Company or any of its subsidiaries or interfere in any way with
the right of the Company or its subsidiaries (subject to the terms of any
separate agreement to the contrary) to terminate the Optionee's employment or to
increase or decrease the Optionee's compensation at any time.
10. Restriction on Transfer. The Option may not be transferred, pledged,
-----------------------
assigned, hypothecated or otherwise disposed of in any way by the Optionee,
except by will or by the laws of descent and distribution, and may be exercised
during the lifetime of the Optionee only by the Optionee. If the Optionee dies,
the Option shall thereafter be exercisable, during the period specified in
Section 4(a)(iii), by his executors or administrators to the full extent to
which the Option was exercisable by the Optionee at the time of his death. The
Option shall not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition of
the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
11. Taxes. Whenever under the Plan shares of Common Stock are to be
-----
delivered to an Optionee upon exercise of an Option, the Company shall be
entitled to require as a condition
-6-
<PAGE>
of delivery that the Optionee remit or, in appropriate cases, agree to remit
when due, an amount sufficient to satisfy all current or estimated future
Federal, state and local withholding tax and employment tax requirements
relating thereto. At the time of a Disqualifying Disposition (as defined in
the Plan), the Optionee shall remit to the Company in cash the amount of any
applicable Federal, state and local withholding taxes and employment taxes.
12. Notices. All notices or other communications which are
-------
required or permitted hereunder shall be in writing and sufficient if (i)
personally delivered, (ii) sent by nationally recognized overnight courier or
(iii) sent by registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
if to the Optionee, to the address set forth on the
signature page hereto; and
if to the Company, to:
Heartland Wireless Communications, Inc.
903 North Bowser
Suite 140
Richardson, Texas 75081
Attention: Secretary;
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered, if
personally delivered, (ii) on the first Business Day (as hereinafter defined)
after dispatch, if sent by nationally-recognized overnight courier and (iii)
on the third Business Day following the date on which the piece of mail
containing such communication is posted, if sent by mail. As used herein,
"Business Days" means a day that is not a Saturday, Sunday or a day on which
banking institutions in the city to which the notice or communication is to
be sent are not required to be open.
13. No Waiver. No waiver of any breach or condition of this
---------
Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature.
14. Optionee Undertaking. The Optionee hereby agrees to take
--------------------
whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order
to carry out or effect one or more of the obligations or restrictions
imposed on the Optionee pursuant to the express provisions of this
Agreement.
-7-
<PAGE>
15. Modification of Rights. The rights of the Optionee are
----------------------
subject to modification and termination in certain events as provided in this
Agreement and the Plan.
16. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware applicable
to contracts made and to be wholly performed therein.
17. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
18. Entire Agreement. This Agreement and the Plan constitute the
----------------
entire agreement between the parties with respect to the subject matter
hereof, and supersede all previously written or oral negotiations,
commitments, representations and agreements with respect thereto.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Nontransferable Non-Qualified Stock Option Agreement as of the date first
written above.
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By:_______________________________
J. R. Holland Jr.
Chairman of the Board
Optionee:
----------------------------------
Name:_____________________________
Address:__________________________
__________________________
__________________________
-9-
<PAGE>
EXHIBIT A
---------
This Option shall become exercisable as to one-fifth (1/5) of the
aggregate number of Option Shares on each anniversary of the Grant Date on which
the Optionee is employed by the Company or any of its subsidiaries.
-10-
<PAGE>
EXHIBIT 4.11
SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT
SECOND AMENDMENT dated of October 3, 1995 (this "Amendment") to the NOTE
---------
PURCHASE AGREEMENT dated November 30, 1994, as amended, between HEARTLAND
WIRELESS COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and
-------
JUPITER PARTNERS L.P. and THOMAS R. HAACK (the "Purchasers") (the "Note Purchase
---------- -------------
Agreement"). Capitalized terms used herein and not otherwise defined herein
- ---------
shall have the meanings ascribed to such terms in the Note Purchase Agreement.
WHEREAS, the Company and the Purchasers desire to amend certain
provisions of the Note Purchase Agreement;
NOW, THEREFORE, in consideration of the terms and conditions contained
in this Amendment and the Note Purchase Agreement and of the purchase of the
Notes by the Purchasers pursuant thereto, the parties hereto hereby agree as
follows:
1. Amendment to Representative Covenant: Appointment of Jupiter
------------------------------------------------------------
Director. Section 6.3 (Representative of Purchasers) of the Note Purchase
- --------
Agreement is hereby amended to provide in full that the Company covenants and
agrees that it will:
"5.12 Representative of Purchasers; Jupiter Director.
----------------------------------------------
In addition to the director which Jupiter has the right to designate
pursuant to the Stockholders Agreement (the "Jupiter Director"), permit one
non-voting representative of the Purchasers (who shall be selected in accordance
with Section 10.1) to attend all meetings of the Board of Directors, and
committees thereof, of the Company; cause the Board of Directors to hold at
least four (4) meetings per year; cause the Jupiter Director to be appointed to
the compensation committee of the Board of Directors; provide to the Jupiter
Director and such representative all notices, documents and information
furnished to the directors of the Company, at the same time as furnished to such
directors; use its best efforts to notify the Jupiter Director and such
representative of, and permit the Jupiter Director and such representative to
participate by telephone in, meetings of the Board of Directors or committees
thereof, and to provide the Jupiter Director
<PAGE>
2
and such representative copies of the minutes of all such meetings
promptly after they are held; and pay the Company's customary outside
director fees to the Jupiter Director as well as the reasonable expenses
of the Jupiter Director, and of the representative designated by the
Purchasers, in connection with attendance at meetings of the Board of
Directors and committees thereof."
2. Amendment to Divestiture Covenant: Restriction of
--------------------------------------------------
Consideration in Permitted Dispositions; Elimination of Permitted RuralVision
- -----------------------------------------------------------------------------
Dispositions. Section 6.1 (Liquidation Reorganization, Reclassification,
- ------------
Consolidation, Merger or Sale) of the Note Purchase Agreement is hereby amended
to provided in full that the Company covenants and agrees that it will not:
"6.1. Liquidation, Reorganization, Reclassification,
---------------------------------------------
Consolidation, Merger or Sale. (i) Wind up, liquidate its affairs or dissolve,
- ------------------------------
or permit any Subsidiary to do so (except any Subsidiary which has no assets);
or (ii) effect any capital reorganization or reclassification of its capital
stock; or (iii) effect any consolidation or merger with or into another
corporation, or any sale of all or substantially all of its assets to another
corporation, or permit any subsidiary to do so, expect that any Subsidiary may
merge with and into, or sell all or substantially all of its assets to, the
Company or another Subsidiary; or (iv) convey, sell, lease or otherwise dispose
of all or substantially all of its assets or properties (except inventory sold
in the ordinary course of business), or permit any Subsidiary to do so; or (v)
convey, sell, lease or otherwise dispose of any Interest in Channel Rights, or
permit any Subsidiary to do so (whether through a sale of assets or a sale of
stock of a Subsidiary which owns such assets), provided, however, that nothing
-------- -------
contained in this Section 6.1 shall prohibit (x) any Permitted Channel
Disposition, or (y) the purchase or redemption by the Company or any Subsidiary
of capital stock of any Subsidiary held by any minority stockholder thereof.
For the purposes of Section 6.1, 6.3 and 6.5 hereof, the following terms
shall have the respective meanings given thereto:
<PAGE>
3
"Channel Rights" shall mean any wireless cable channel license (ITFS,
--------------
MMDS, or MDS) issued by the FCC, or lease or sublease of any channel rights
associated with such license, or an option or agreement to lease or sublease
such channel rights whether or not such license has yet been granted to the
applicant or licensee by the FCC.
"Disposition" shall mean any conveyance, sale, lease, transfer or other
-----------
disposition whether pursuant to a sale of assets or sale of stock or other
equity interest.
"Full Market" shall mean a market in which the Company and/or any of its
-----------
Subsidiaries has an Interest in Channel Rights for at least eight channels in
the aggregate.
"Interest in Channel Rights" shall mean any legal or beneficial
--------------------------
interest in or right to acquire any Channel Rights.
"Permitted Channel Disposition" shall mean any of:
-----------------------------
(i) the Disposition of Interests in Channel Rights of the Company or any
Subsidiary, on fair market terms, for consideration in full in cash, for
markets which are not Full Markets; or
(ii) during any twelve-month period, the Disposition of any Interest in
Channel Rights in a Full Market, on fair market terms, for consideration
in full in cash, to the extent that the number of line of sight
households in such Full Market, when added to the number of line of
sight households in Full Markets subject to other Dispositions during
such twelve-month period, does not exceed 10% of the aggregate number of
line of sight households in all of the Full Markets of the Company and
its Subsidiaries at the end of such period; or
(iii) during any twelve-month period, the Disposition of any Interest in
Channel Rights of the Company or any of its Subsidiaries, on fair market
terms, for consideration in full in cash, to the extent that the number
of subscribers in the market or markets subject to such Disposition,
when added to the aggregate number of subscribers
<PAGE>
4
in all of the markets of the Company and its Subsidiaries subject to
Dispositions during such twelve-month period, does not exceed 10% of the
aggregate number of subscribers in all of the markets of the Company and
its Subsidiaries at the end of such period. For the purposes of this
calculation, the number of subscribers in a market subject to a
Disposition shall be the number of subscribers at the time of such
Disposition."
3. Amendment to Acquisitions Covenant: Restriction on Loans and
------------------------------------------------------------
Investments; Creation of New Channel Acquisition Basket. Section 6.3
- -------------------------------------------------------
(Acquisitions; Indebtedness) of the Note Purchase Agreement is hereby amended to
provide in full that the Company covenants and agrees that it will not:
"6.3. Acquisition; Indebtedness.
-------------------------
(a) Prior to January 1, 1998, with respect to itself or any Subsidiary:
without Jupiter's prior written consent (so long as Jupiter shall be a
Significant Purchaser), (i) purchase, lease or make any investment in, or agree
to purchase, lease or make any investment in, any assets or properties or (ii)
purchase or invest in (including any extension of credit or making any loans,
advances or capital contributions to) any person, firm, joint venture,
corporation, partnership, limited liability company or other entity; provided
--------
however, that the Company need not seek Jupiter's prior written consent for
- -------
purchases or leases made in the ordinary course of the Company's business of
inventory, equipment or office supplies used in the ordinary course of the
Company's business as existed prior to such purchase or lease; provided further,
-------- -------
that the Company or a Subsidiary need not seek Jupiter's prior written consent
to (x) acquire Channel Rights in any market where the Company has 12 or more
Channel Rights for a cumulative total consideration not in excess of $900,000 in
cash plus 100,000 shares of Common Stock (reduced proportionately to reflect
any reverse stock split, share repurchase or similar reduction in the
outstanding shares of Common Stock), provided that the holders of shares of
--------
Common Stock used for any such acquisition shall not be granted demand or
other similar registration rights with respect to such shares, except for piggy
back registration rights as provided in Section 3 of the Registration Rights
Agreement as of November 30,
<PAGE>
5
1994, as amended, among the Company and the Purchasers, or (y) enter into any
lease on fair market terms for Channel Rights in any market where the Company
already has 12 or more Channel Rights.
(b) On or after January 1, 1998, with respect to itself or any Subsidiary:
without Jupiter's prior written consent (so long as Jupiter shall be a
Significant Purchaser), (i) purchase, lease or make any investment in, or agree
to purchase, lease or make any investment in, any assets or properties or (ii)
purchase or invest in (including any extension of credit or making any loans,
advances or capital contributions to) any person, firm, joint venture,
corporation, partnership, limited liability company or other entity, for an
aggregate Net Acquisition Expense in excess of $15,000,000 (x) in any
consecutive 12-month period or (y) in any transaction or series of related
transactions (it being understood that transactions shall be deemed related if
they involve the purchase or lease (A) from the same seller or lessor or from
affiliates of the same seller or lessor or (B) from any group of sellers or
lessors and/or their affiliates acting in concert); provided, however, that this
-------- -------
Section 6.3(b) shall not apply to purchases or leases made in the ordinary
course of the Company's business of inventory, equipment or office supplies used
in the ordinary course of the Company's business as existing prior to such
purchase or lease. "Net Acquisition Expense" for any period shall mean the
-----------------------
excess of (i) the aggregate total consideration paid or payable for all
purchases, leases, loans, and investments covered by this Section 6.3(a) made
during such period over (ii) the aggregate consideration received from all
Permitted Channel Dispositions made during such period.
(c) With respect to itself or any Subsidiary: directly or indirectly
create, incur or assume, or otherwise be or become liable on, or permit to
exist, any indebtedness (other than trade accounts payable) for borrowed money
or any other liability evidenced by bonds, debentures, notes or similar
instruments, except for any such indebtedness or other liability (i) existing
pursuant to written agreements in effect on March 14, 1995 and known to the
Purchasers or (ii) in an amount incurred in any transaction or series or related
transactions not exceeding $10,000,000 or
<PAGE>
6
(iii) created, incurred or assumed after September 13, 1996."
4. Amended to Events of Default: Extension of Default for Change of
-----------------------------------------------------------------
Control. Section 7.7 of the Note Purchase Agreement governing defaults in the
- -------
event of a Change of Control of the Company is hereby amended to provide in full
that an Event of Default shall arise in the event that:
"7.7. There shall occur (a) a Change in Control on or prior to
December 31, 1997 or (b) a Change of Control which occurs as a result of a
transaction or series of related transactions (it being understood that
transactions shall be deemed related if they involve (x) the same person,
firm, joint venture, corporation, partnership, limited liability company or
entity, or any affiliates of the same person, firm, joint venture,
corporation, partnership, limited liability company or entity or (y) any
group of persons, firms, joint ventures, corporations, partnerships,
limited liability companies or entities and/or their affiliates acting in
concert) which commenced or was agreed to on or prior to December 31, 1997
(including the sale, transfer, pledge, assignment or other disposition of,
or the entrance into any contract, option or other arrangement with respect
to the sale, transfer, pledge, assignment or other disposition of, any
securities of the Company or any Subsidiary or any assets or properties of
the Company or any Subsidiary)."
5. Amendment to the Definition of Material Default: Extension of
-------------------------------------------------------------
Default for Change of Control. The definition of Material Default in the Note
- -----------------------------
Purchase Agreement is hereby amended to provide in full:
"Material Default" shall mean an Event of Default arising as a result
----------------
of a breach of any of the Company's covenants contained in Section 6.1,
6.2, 6.3, 6.4 or 6.5 hereof or arising as a result of a Change of Control
pursuant to Section 7.7 hereof. An Event of Default arising from a Change
of Control pursuant to Section 7.7 will constitute a Material Default
despite any consent or waiver."
6. Amendment to Expenses Covenant: Expenses Incurred After the Closing
-------------------------------------------------------------------
Date. Section 13.6 of the Note
- ----
<PAGE>
7
Purchase Agreement is hereby amended to provide in full that:
"13.6 Expenses. The Company agrees to pay and save Jupiter
--------
harmless against liability for the payment of all out-of-pocket expenses
arising in connection with its investment in the Notes, including the
negotiation, preparation, execution, delivery and enforcement of, and
any amendment, supplement or modification to, or waiver of any provision
of, any Transaction Document, or any document or including without
limitation all documentary, stamp and similar taxes and assessments, all
recording and filing fees charged by any Governmental Authority, all
fees and expenses incurred by Jupiter in connection with FCC and other
"due diligence" investigations, and the reasonable fees and
disbursements of counsel. In addition, if it shall be necessary pursuant
to the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 to file a Notification and Report Form with the Federal Trade
Commission in connection with any conversion or proposed conversion of
the Notes, the Company shall be liable for payment of all filing fees
and other expenses incurred by Jupiter in connection therewith,
including without limitation the reasonable fees of one counsel for all
the Purchasers in connection therewith. The obligations provided for in
this Section 13.6 shall survive any termination of this Agreement and
shall be payable regardless of whether the transactions contemplated
hereby are consummated."
7. Full Force and Effect of the Transaction Documents. Except
--------------------------------------------------
as specifically amended hereby, all of the terms and conditions of the Note
Purchase Agreement and the other Transaction Documents shall be and remain
in full force and effect as executed.
<PAGE>
8
IN WITNESS WHEREOF, this Second Amendment to Note Purchase Agreement has
been duly executed as of the day and year first above written.
Company:
- -------
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By: /s/ John R. Bailey
-------------------------
John R. Bailey
Senior Vice President and
Chief Financial Officer
Purchasers:
----------
JUPITER PARTNERS L.P.
By: Ganymede L.P.
General Partner
By: Europa L.P.
General Partner
By: /s/ Terry Blumer
----------------------------
a General Partner
/s/ Thomas R. Haack
-------------------------------
Thomas R. Haack
<PAGE>
EXHIBIT 4.13
EXECUTION COUNTERPART
SUPPLEMENTAL INDENTURE dated as of October 2, 1995, between Heartland
Wireless Communications, Inc., a Delaware corporation (the "Company"), and First
Trust of New York, National Association, as trustee (the "Trustee") under the
Indenture dated as of April 26, 1995 (as amended, supplemented or modified from
time to time, the "Indenture").
Pursuant to the Indenture, the Company has issued its 13% Senior Notes
due 2003 (the "Notes"). Section 10.02 of the Indenture provides, inter alia,
that the Company and the Trustee may amend or supplement the Indenture with the
written consent of the Holders of Notes of not less than a majority in aggregate
principal amount of the Notes then outstanding (the "Required Consent"). The
Company has solicited consents to the substance of this Supplemental Indenture
upon the terms and subject to the conditions set forth in its Consent
Solicitation dated September 12, 1995, and the related Consent Solicitation
Statement, as amended by the Supplement to Consent Solicitation Statement dated
September 22, 1995 (hereinafter referred to collectively as the "Consent
Solicitation"). The Company has obtained the Required Consent to the substance
of this Supplemental Indenture.
In order to effect the amendments contemplated by the Consent
Solicitation in accordance with Section 10.02 of the Indenture, the Company and
the Trustee agree as follows for the benefit of each other and for the equal and
ratable benefit of the Holders of the Notes:
ARTICLE 1
AMENDMENTS TO THE INDENTURE
Section 1.1. Amendments to Section 1.01. (a) Section 1.01 of the
Indenture is hereby amended by adding thereto the following definitions, to be
inserted therein in alphabetical order:
"AWS Transaction" means the acquisition by the Company of the
capital stock of American Wireless Cable Systems, Inc., a Delaware
corporation, and the acquisition by the Company of the assets of
Wireless Cable TV Associates #38 and of Fort Worth Wireless Cable TV
Associates for consideration comprised of Equity Interests of the
Company.
"CableMaxx Transaction" means the acquisition by the Company of
the capital stock of CableMaxx, Inc., a Delaware corporation
("CableMaxx"), for consideration comprised of Equity Interests of the
Company or the acquisition by the Company of the assets of CableMaxx
related to the Amarillo, Athens, Lubbock and Sherman/Denison, Texas
markets for either $2.4 million or the fair market value of such assets
in cash.
"Call Markets" means Fanning Springs, Florida; Leesburg,
Florida; and Lake City, Florida.
"Contributed Markets" means Bedias/Huntsville, Texas; Freeport,
Texas; Milano, Texas; Baton Rouge, Louisiana; Ferriday, Louisiana; Holly
Ridge, Louisiana; Jena, Louisiana; Leesville, Louisiana; Monroe,
Louisiana; Natchitoches, Louisiana; Ruston, Louisiana; Alberta/Salem,
Alabama; Ariton, Alabama; Bankston, Alabama; Bucks, Alabama; Six Mile,
Alabama; Society Hill, Alabama; Tharpton, Alabama; Village Springs,
Alabama; Charing, Georgia; Groveland, Georgia; Hoggards Mill, Georgia;
Jeffersonville,
<PAGE>
2
Georgia; Mathews, Georgia; Tarboro, Georgia; Valdosta, Georgia; Ocala,
Florida; and Tallahassee, Florida.
"TechniVision Transaction" means the acquisition by the Company
of the assets of TechniVision, Inc. for consideration comprised of
Equity Interests of the Company.
"Transactions" means the AWS Transaction, the CableMaxx
Transaction, the TechniVision Transaction and the Wireless One
Transaction, collectively.
"Wireless One Transaction" means either (i) the transaction
contemplated by the Letter of Intent dated July 17, 1995, between the
Company and Wireless One Operating Company, a Delaware corporation ("Old
Wireless One"), whereby, among other things, Wireless One, Inc., a
newly-formed Delaware corporation ("Wireless One"), will acquire (A) all
of the outstanding capital stock of Old Wireless One (which will retain
all of its assets and liabilities except its wireless cable assets and
certain related liabilities with respect to the Springfield, Missouri
market which the Company will acquire) for consideration comprised of
the Common Stock, $.01 par value per share (the "Wireless One Common
Stock"), of Wireless One and (B) the wireless cable assets and related
liabilities of certain Subsidiaries of the Company with respect to the
Contributed Markets for consideration comprised of Wireless One Common
Stock and promissory notes of Wireless One, or (ii) the transaction
contemplated by the Letter Agreement dated September 11, 1995 between
the Company and Old Wireless One, whereby, among other things, a newly-
formed limited liability company ("Wireless One LLC") will acquire (x)
all of the assets of Old Wireless One for consideration comprised of
interests in Wireless One LLC and (y) all of the wireless cable assets
and related liabilities of certain Subsidiaries of the Company with
respect to the Contributed Markets for consideration comprised of
interests in Wireless One LLC and promissory notes of Wireless One LLC.
(b) Section 1.01 of the Indenture is hereby further amended by deleting
therefrom the definition of "Investments" in its entirety and substituting
therefor the following:
"Investments" means, with respect to any Person, (i) all
investments by such Person in other Persons (including Affiliates) in
the forms of loans, Guarantees, advances or capital contributions
(excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or
other securities of any other Person and all other items that are or
would be classified as investments on a balance sheet prepared in
accordance with GAAP and (ii) all acquisitions by such Person of assets
to be used in the Wireless Cable Business (other than any such
acquisitions of equipment made in the ordinary course of such Person's
business and other than any acquisition or lease (and any deposit
required to be made in connection therewith) of additional channel
rights on or after the Issue Date in any wireless cable market listed in
the offering memorandum relating to the issuance of the Units or any
wireless cable market or "Basic Trading Area" (as defined by Rand
McNally) in which the Company and its Subsidiaries (A) as of the date of
the Indenture, have channel rights, whether by way of license, lease
with a channel license holder, lease with a channel license applicant,
lease with a qualified,
<PAGE>
3
non-profit educational organization that plans to apply for a channel
license or option to acquire any of the foregoing, or (B) as of the date
of such acquisition or lease, have rights with respect to at least eight
wireless cable channels, whether by way of license, lease with a channel
license holder, lease with a channel license applicant, lease with a
qualified, non-profit educational organization that plans to apply for a
channel license or option to acquire any of the foregoing; provided,
however, that until the date on which the ratio of Annualized EBITDA to
Consolidated Interest Expense equals or exceeds 1.75 to 1.00, the
aggregate amount of such acquisitions and leases (and deposits) shall
not exceed $12.5 million).
Section 1.2. Amendment to Section 4.07. Section 4.07 of the Indenture is
hereby amended by deleting the text thereof in its entirety and substituting
therefor the following:
Section 4.07. Limitation on Restricted Payments.
The Company and its Subsidiaries may not, directly or indirectly
(i) declare or pay any dividend or make any distnbution on account of
any Equity Interests of the Company or any of its Subsidiaries other
than dividends or distributions payable (A) in Equity Interests of the
Company that are not Disqualified Stock or (B) to the Company or any
Wholly-Owned Subsidiary of the Company; (ii) purchase, redeem or
otherwise acquire or retire for value any Equity Interests of the
Company or any of its Subsidiaries (other than any such Equity Interests
owned by the Company or a Wholly-Owned Subsidiary); (iii) purchase,
redeem, defease or otherwise acquire or retire for value any
Indebtedness that is pari passu or subordinated in right of payment to
the Notes, except in accordance with the scheduled repayment provisions
set forth in the original documentation governing such Indebtedness; or
(iv) in a single transaction or a series of related transactions, until
the date on which the ratio of Annualized EBITDA to Consolidated
Interest Expense equals or exceeds 1.75 to 1.00, make Investments in a
cumulative amount for the Company and all of its Subsidiaries, in excess
of (A) the sum of (l) $10 million and (2) 100% of the Net Proceeds
received by the Company from the issue or sale of Equity Interests of
the Company (other than Equity Interests sold to a Subsidiary of the
Company or to an employee stock ownership plan or similar trust and
other than Disqualified Stock) less (B) the cumulative amount of Net
Proceeds received by the Company from the issue or sale of Equity
Interests of the Company that has been applied to make Restricted
Payments (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of such Restricted Payment: (a) no
Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; (b) after giving effect to such
Restricted Payment on a pro forma basis as if such Restricted Payment
had been made at the beginning of the applicable fiscal quarter, the
Company could incur $1.00 of additional Indebtedness pursuant to the
Annualized Cash Flow Ratio test in Section 4.08; and (c) such Restricted
Payment, together with the aggregate of all other Restricted Payments
made by the Company and its Subsidiaries after the Issue Date, is less
than the sum of: (x) 50% of the Consolidated Net Income (or if
Consolidated Net Income shall be a loss, minus 100% of such loss) of the
Company earned from the first day of the
<PAGE>
4
fiscal quarter during which the Issue Date occurs to the end of the most
recent fiscal quarter ending prior to the date of such Restricted
Payment, plus (y) 100% of the aggregate Net Cash Proceeds received by
the Company from the issue or sale of Equity Interests of the Company
(other than Equity Interests sold to a Subsidiary of the Company or to
an employee stock ownership plan or similar trust and other than
Disqualified Stock or the Net Proceeds from the sale of Equity Interests
applied to make Investments in accordance with this covenant) since the
Issue Date.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph do not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at
such date of declaration such payment would have complied with the
provisions of this Indenture; (ii) so long as no Default or Event of
Default shall have occurred and be continuing, the redemption,
repurchase, retirement or other acquisition of any Equity Interests of
the Company in exchange for, or out of the net proceeds of, the
substantially concurrent sale for cash or Marketable Securities (other
than to a Subsidiary of the Company) of other Equity Interests of the
Company that are not Disqualified Stock; (iii) so long as no Default or
Event of Default shall have occurred and be continuing, the purchase of
Capital Stock of the Company (including options, warrants or other
rights to acquire such Capital Stock) from employees or former employees
of the Company or any Subsidiary thereof pursuant to any employment
agreement, management equity subscription agreement or stock option plan
or similar agreement in effect as of the Issue Date or entered into in
the ordinary course of business for consideration which, when added to
all loans made pursuant to clause (iv) below during the fiscal year and
then outstanding, does not exceed $0.5 million in the aggregate in any
fiscal year or $2.5 million in the aggregate over the life of the Notes;
(iv) so long as no Default or Event of Default shall have occurred and
be continuing, the making of loans and advances to employees of the
Company or any Subsidiary thereof in the ordinary course of business
which, when added to the aggregate consideration paid pursuant to clause
(iii) above during the same fiscal year, does not exceed $0.5 million in
any fiscal year or $2.5 million in the aggregate over the life of the
Notes; provided that upon repayment of such loans or advances made after
the Issue Date, such repaid amount shall no longer be included in the
principal amount of loans and advances made to employees; (v) so long as
no Default or Event of Default shall have occurred and be continuing, a
Permitted Refinancing; (vi) so long as no Default or Event of Default
shall have occurred and be continuing, the redemption, repurchase,
retirement or other acquisition of Equity Interests of a Subsidiary of
the Company for (A) Equity Interests of the Company that are not
Disqualified Stock or (B) up to $1.0 million in the aggregate over the
life of the Notes of cash consideration; (vii) the payment of funds to
satisfy or discharge any liability or obligation incurred by the Company
as a result of its joint and several liability as a general partner for
all third-party liabilities and obligations of RuralVision Joint
Venture, if any; (viii) the acquisition by the Company of the Cross
Country Sale Assets; (ix) the acquisition by the Company of the Tulsa,
Oklahoma wireless cable market from USWS; (x) the acquisition by the
Company of the Amarillo, Texas market from U.S. Wireless; (xi) the
payment of dividends on Preferred Stock of Subsidiaries outstanding on
the Issue Date; (xii) the redemption, repurchase, retirement
<PAGE>
5
or other acquisition of Capital Stock of the Company from U.S. Wireless
for consideration comprised of the note receivable related to the U.S.
Wireless Loan; (xiii) Investments in Wireless Cable Related Assets made
with the Net Cash Proceeds from an Asset Sale made in compliance with
the first paragraph of Section 4.12 (whether such Asset Sale shall have
been consummated prior to or after the Issue Date) or otherwise
permitted by Section 4.12, provided that if such Investment had been
acquired in a simultaneous swap or exchange for the assets disposed of
in such Asset Sale, such swap or exchange would have complied with the
provisions of the third paragraph under Section 4.12; (xiv) Investments
that constitute part of an Asset Sale transaction consummated in
compliance with or otherwise permitted by the provisions of the third
paragraph under Section 4.12; (xv) Investments in the Wireless Cable
Business acquired in consideration for the issuance of Equity Interests
of the Company (other than Disqualified Stock) and cash paid in lieu of
the issuance of fractional shares and in satisfaction of any applicable
dissenter's or appraisal rights; and (xvi) the consummation of any of
the Transactions. The amounts referred to in clauses (i), (ii), (iii),
(iv) and (vi) shall be included as Restricted Payments in any
computation made pursuant to clause (c) above. Restricted Payments shall
be deemed not to include Permitted Payments and Permitted Investments.
Not later than the making of any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating
that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by Section 4.07 were computed.
Section 1.3. Amendment of Section 4.08. Section 4.08 of the Indenture is
hereby amended by deleting the text thereof in its entirety and substituting
therefor the following:
Section 4.08. Limitation on Indebtedness
The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume,
Guarantee, acquire, become liable, contingently or otherwise, with
respect to, or otherwise become responsible for payment of
(collectively, "incur") any Indebtedness; provided that the Company (but
not its Subsidiaries) may incur Indebtedness if (i) no Default or Event
of Default shall have occurred and be continuing and (ii) the Annualized
Cash Flow Ratio of the Company as of the date of such incurrence or
issuance shall not exceed (x) 7.0 to 1.0 if such incurrence or issuance
occurs on or prior to the second anniversary of the Issue Date and (y)
5.0 to 1.0 if such incurrence or issuance occurs thereafter.
The foregoing limitation will not apply to: (i) Indebtedness
evidenced by the Notes and this Indenture; (ii) the incurrence by the
Company and its Subsidiaries of the Existing Indebtedness, other than
any Existing Indebtedness required to be repaid with proceeds of the
sale of the Units; (iii) the incurrence by the Company and its
Subsidiaries of Bank Indebtedness in an aggregate principal amount at
any one time outstanding not to exceed $25.0 million (less the amount of
any then-outstanding Preferred Stock of Subsidiaries issued to refinance
Indebtedness to the extent such amount has not been
<PAGE>
6
applied to reduce the amount of Indebtedness permitted under clause
(vii) below), as such amount may be permanently reduced as specified in
Section 4.12, and reduced by the amount of any outstanding Guarantee
incurred pursuant to clause (iv) below; provided that no Default or
Event of Default shall have occurred and be continuing at the time of
such incurrence; (iv) the Guarantee by the Subsidiaries of Bank
Indebtedness permitted to be incurred by the Company pursuant to the
immediately preceding paragraph; (v) Indebtedness of the Company issued
to any Wholly-Owned Subsidiary; provided that (a) any such Indebtedness
is unsecured and is subordinated to the Notes and (b) that any
subsequent issuance or transfer of any Capital Stock which results in
any Wholly-Owned Subsidiary ceasing to be a Wholly-Owned Subsidiary or
any transfer of such Indebtedness to a Person not a Wholly-Owned
Subsidiary will be deemed an incurrence of such Indebtedness; (vi)
Indebtedness of a Subsidiary issued to and held by the Company or any
Wholly-Owned Subsidiary of the Company; provided that any subsequent
issuance or transfer of any Capital Stock which results in a Wholly-
Owned Subsidiary ceasing to be a Wholly-Owned Subsidiary or any transfer
of such Indebtedness to a Person not a Wholly-Owned Subsidiary of the
Company will be deemed an incurrence of such Indebtedness; (vii) the
incurrence by the Company or its Subsidiaries of additional Indebtedness
in an aggregate principal amount not to exceed $15.0 million at any one
time outstanding (less the amount of any then-outstanding Preferred
Stock of Subsidiaries issued to refinance Indebtedness to the extent
such amount has not been applied to reduce the amount of Indebtedness
permitted under clause (iii) above); (viii) the incurrence (a "Permitted
Refinancing") by the Company and its Subsidiaries of Indebtedness
issued in exchange for, or the proceeds of which are used to extend,
refinance, renew, replace or refund Indebtedness incurred pursuant to
the Annualized Cash Flow Ratio test above or pursuant to clauses (ii),
(iii), (iv) and (v) above ("Refinancing Indebtedness"), provided that
(a) the net proceeds of such Refinancing Indebtedness shall not exceed
the principal amount of and required premium, if any, and accrued
interest on the Indebtedness so extended, refinanced, renewed, replaced,
substituted or refunded (or if such Indebtedness was issued at an
original issue discount, the original issue price plus amortization of
the original issue discount at the time of the repayment of such
Indebtedness) and reasonable expenses incurred in connection therewith;
(b) the Refinancing Indebtedness shall have a final maturity later than,
and a Weighted Average Life to Maturity equal to or greater than, the
final maturity and remaining Weighted Average Life to Maturity of the
Indebtedness being extended, refinanced, renewed, replaced or refunded;
and (c) if the Indebtedness being extended, refinanced, renewed,
replaced or refunded is subordinated in right of payment to the Notes,
the Refinancing Indebtedness shall be subordinated in right of payment
to the Notes on terms at least as favorable to the Holders of Notes as
those contained in the documentation goveming the Indebtedness being so
extended, refinanced, renewed, replaced or refunded; (ix) the incurrence
of obligations in respect of Interest Rate Agreements relating to
Indebtedness to the extent that the notional principal amount of such
obligation does not exceed the aggregate principal amount of the
Indebtedness to which such Interest Rate Agreement relates; or (x) the
incurrence by the Company or any of its Subsidiaries of Indebtedness
owing to a Federal governmental authority relating to the purchase of
wireless cable channels in an auction or other sale (or Indebtedness
satisfying the requirements of (viii)(b) above issued in exchange for,
or
<PAGE>
7
the proceeds of which are used to extend, refinance, renew, replace or
refund, such Indebtedness) in an amount not to exceed in the aggregate
$30 million at any one time outstanding. The Company and its
Subsidiaries may incur Acquired Debt only in compliance with this
covenant.
Section 1.4. Amendment of Section 4.10. Section 4.10 of the Indenture is
hereby amended by deleting the text thereof in its entirety and substituting
therefor the following:
Section 4.10. Limitation on Issuance and Sale of Capital
Stock of Subsidiaries.
The Company will not sell any Capital Stock of a Subsidiary, and
will not permit any Subsidiary to issue or sell any Capital Stock, or
permit any Person, other than the Company and its Subsidiaries, to own
or hold any such interest, other than (i) any interest owned or held on
the Issue Date by, or issuable as of the Issue Date to, a Person other
than the Company and its Subsidiaries in any Capital Stock of any
Subsidiary or (ii) any interest owned or held by a Person at the time
that such Subsidiary became a Subsidiary (other than any such interest
created or issued in anticipation of the acquisition of such Subsidiary
by the Company); provided that the foregoing limitation shall not apply
to (i) the sale of 100% of the Capital Stock of any Subsidiary made in
accordance with Section 4.12 and (ii) issuances of Preferred Stock
permitted pursuant to clauses (i) or (iii) of Section 4.11.
Section 1.5. Amendment of Section 4.12. Section 4.12 of the Indenture is
hereby amended by deleting the text thereof in its entirety and substituting
therefor the following:
Section 4.12. Limitation on Asset Sales.
(a) The Company will not, and will not permit any of its
Subsidiaries to, consummate an Asset Sale unless (i) the Company or the
applicable Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the Fair Market Value of the
assets sold or otherwise disposed of (as determined in good faith by the
Company's Board of Directors or if the Fair Market Value of such assets
exceeds $20.0 million, the Company shall receive from an investment
banking firm of national standing a written opinion in customary form as
to the fairness, to the Company, of such Asset Sale) and (ii) at least
80% of the consideration received by the Company or the Subsidiary, as
the case may be, from such Asset Sale shall be cash or Marketable
Securities and is received at the time of such disposition. Upon the
consummation of an Asset Sale, the Company may apply, or cause such
Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale
within 180 days of receipt thereof either (A) to prepay any Bank
lndebtedness and, in the case of any Bank Indebtedness under any
revolving credit facility, to effect a permanent reduction in the
availability under such revolving credit facility, (B) to reinvest in
Wireless Cable Related Assets or (C) to a combination of prepayment and
investment permitted by the foregoing clauses (A) and (B). On the 181st
day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Subsidiary determines not to apply
the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (A), (B) or (C) of the
<PAGE>
8
preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such
aggregate amount of Net Cash Proceeds which have not been applied on or
before such Net Proceeds Offer Trigger Date as permitted in clauses (A),
(B) or (C) of the preceding sentence (each, a "Net Proceeds Offer
Amount") shall be applied by the Company to make an offer to purchase
(the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment
Date") not less than 30 nor more than 45 days following the applicable
Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis
that amount of Notes equal to the Net Proceeds Offer Amount at a price
equal to 100% of the principal amount of the Notes to be purchased, plus
accrued and unpaid interest thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration
received by the Company or any Subsidiary of the Company, as the case
may be, in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash (other than interest received with
respect to any such non-cash consideration), then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and
the Net Cash Proceeds thereof shall be applied in accordance with this
covenant.
(b) Notwithstanding the foregoing, if a Net Proceeds Offer
Amount is less than $5.0 million, the application of the Net Cash
Proceeds constituting such Net Proceeds Offer Amount to a Net Proceeds
Offer may be deferred until such time as such Net Proceeds Offer Amount
plus the aggregate amount of all Net Proceeds Offer Amounts arising
subsequent to the Net Proceeds Offer Trigger Date relating to such
initial Net Proceeds Offer Amount from all Asset Sales by the Company
and its Subsidiaries aggregates at least $5.0 million, at which time the
Company shall apply all Net Cash Proceeds constituting all Net Proceeds
Offer Amounts that have been so deferred to make a Net Proceeds Offer
(the first date the aggregate of all such deferred Net Proceeds Offer
Amounts is equal to $5.0 million or more shall be deemed to be a Net
Proceeds Offer Trigger Date).
(c) Notwithstanding the two immediately preceding paragraphs (a)
and (b), the Company and its Subsidiaries will be permitted to
consummate an Asset Sale without complying with such paragraphs to the
extent (i) at least 95% of the consideration for such Asset Sale, other
than cash consideration, constitutes assets used in the business of the
Company and its Subsidiaries on the date of such transaction, (ii) such
Asset Sale is for Fair Market Value (as determined in good faith by the
Company's Board of Directors or if the Fair Market Value of such assets
exceeds $20.0 million, the Company shall receive from an investment
banking firm of national standing a written opinion in customary form as
to the fairness, to the Company, of such Asset Sale) and (iii) the
assets acquired in such an Asset Sale have historically generated
revenues in an amount at least equal to (1) the revenues attributable to
the assets disposed of in such Asset Sale, multiplied by (2) a fraction,
the numerator of which is the amount of consideration other than cash
consideration received in such Asset Sale, and the denominator of which
is the total amount of consideration received in such Asset Sale;
provided that any consideration received by the Company or its
Subsidiaries, as the case may be, in an Asset Sale permitted to be
consummated under this paragraph that does not assets to be
used in the operations of the Company or its Subsidiaries shall
constitute Net Cash
<PAGE>
9
Proceeds which are subject to the provisions of the two preceding
paragraphs. In addition, notwithstanding the two immediately preceding
paragraphs, the Company will be permitted (i) to consummate the Wireless
One Transaction without complying with such paragraphs, (ii) to sell the
Call Markets to Wireless One or Wireless One LLC without complying with
such paragraphs, (iii) to sell any or all of the RuralVision Sale Assets
on or prior to December 31, 1995 without complying with such paragraphs,
(iv) to sell any or all of the assets acquired in the AWS Transaction,
the CableMaxx Transaction or the TechniVision Transaction on or prior to
the first anniversary of the consummation of each such Transaction
without complying with such paragraphs, (v) to sell any or all of the
assets acquired by way of an Investment permitted by clause (xv) of the
second paragraph of Section 4.07 on or prior to the first anniversary of
the consummation of such acquisition without complying with such
paragraphs and (vi) to sell, in a single transaction or a series of
transactions, assets for up to $25 million of non-cash consideration,
provided, in the case of clauses (iii), (iv), (v) and (vi) that the
Company receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets sold or otherwise disposed
of (as determined in good faith by the Company's Board of Directors or
if the Fair Market Value of such assets exceeds $20.0 million, the
Company shall receive from an investment banking firm of national
standing a written opinion in customary form as to the fairness, to the
Company, of such Asset Sale).
(d) Each Net Proceeds Offer will be mailed within 25 days
following the Net Proceeds Offer Trigger Date to the record Holders as
shown on the register of Holders, at their last registered addresses as
of a date within 15 days of the mailing of such notice, with a copy to
the Trustee. The notice shall contain all instructions and materials
necessary to enable such Holders to tender Notes pursuant to the Net
Proceeds Offer and shall state the following terms:
(1) that the Net Proceeds Offer is being made pursuant
to Section 4.12 and that all Notes tendered will be accepted for
payment; provided, however, that if the aggregate principal
amount of Notes tendered in a Net Proceeds Offer plus accrued
interest at the expiration of such offer exceeds the aggregate
amount of the Net Proceeds Offer, the Company shall select the
Notes to be purchased on a pro rata basis (with such adjustments
as may be deemed appropriate by the Company so that only Notes
in denominations of $1,000 or multiples thereof shall be
purchased);
(2) the purchase price (including the amount of accrued
interest) and the purchase date (which shall be 20 Business Days
from the date of mailing of notice of such Net Proceeds Offer,
or such longer period as required by law) (the "Proceeds
Purchase Date");
(3) that any Note not tendered will continue to accrue
interest;
<PAGE>
10
(4) that, unless the Company defaults in making payment
therefor, any Note accepted for payment pursuant to the Net
Proceeds Offer shall cease to accrue interest after the Proceeds
Purchase Date;
(5) that Holders electing to have a Note purchased
pursuant to a Net Proceeds Offer will be required to surrender
the Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Note completed, to the Paying
Agent at the address specified in the notice prior to the close
of business on the third Business Day prior to the Proceeds
Purchase Date;
(6) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the second
Business Day prior to the Proceeds Purchase Date, a facsimile
transmission or letter, signature guaranteed, setting forth the
name of the Holder, the principal amount of the Notes the Holder
delivered for purchase and a statement that such Holder is
withdrawing his election to have such Note purchased; and
(7) that Holders whose Notes are purchased only in part
will be issued new Notes in a principal amount equal to the
unpurchased portion of the Notes surrendered; provided, however,
-------- -------
that each Note purchased and each new Note issued shall be in an
original principal amount of $1,000 or integral multiples
thereof.
On or before the Proceeds Purchase Date, the Company shall (i)
accept for payment Notes or portions thereof tendered pursuant to the
Net Proceeds Offer which are to be purchased in accordance with item
(b)(1) above, (ii) deposit with the Paying Agent, in accordance with
Section 2.14, U.S. Legal Tender sufficient to pay the purchase price
plus accrued interest, if any, of all Notes to be purchased, (iii)
deliver to the Trustee Notes so accepted together with an Officers'
Certificate stating the Notes or portions thereof being purchased by the
Company and (iv) deliver to the Paying Agent an Officers' Certificate
specifying the Notes or portions thereof being purchased by the Company
and the payees of the purchase price. The Paying Agent shall promptly
mail to the Holders of Notes so accepted payment in an amount equal to
the purchase price plus accrued interest, if any. For purposes of this
Section 4.12, the Trustee shall act as the Paying Agent.
The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of Notes pursuant to a Net Proceeds
Offer. To the extent that the provisions of any securities laws or
regulations conflict with the foregoing provisions of this lndenture,
the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations
under the foregoing provisions of this Indenture by virtue thereof.
<PAGE>
11
ARTICLE 2
MISCELLANEOUS
Section 2.1. Incorporation of Supplemental Indenture. Ratification of
Indenture. All of the provisions of this Supplemental Indenture shall be deemed
to be incorporated in, and made a part of, the Indenture; and the Indenture, as
supplemented and amended by this Supplemental Indenture, shall be read, taken
and construed as one and the same instrument. Except as otherwise expressly
modified herein, the Indenture shall remain in full force and effect and is
hereby ratified.
Section 2.2. Headings. The headings of the Articles and Sections of this
Supplemental Indenture have been inserted for convenience of reference only and
are not to be considered a part of this Supplemental Indenture and shall in no
way modify or restrict any of the terms or provisions hereof.
Section 2.3. Counterpart Originals. The parties may sign any number of
copies of this Supplemental Indenture. Each signed copy shall be an original,
but all of them taken together represent the same agreement.
Section 2.4. Conflict with Trust Indenture Act. If any provision of this
Supplemental Indenture limits, qualifies or conflicts with the duties imposed by
TIA SS 318(c), the imposed duties shall control.
Section 2.5. Successors. All agreements of the Company in this
Supplemental Indenture shall bind its successors. All agreements of the Trustee
in this Supplemental Indenture shall bind its successors.
Section 2.6. Benefits of Supplemental Indenture. Nothing in this
Supplemental Indenture, express or implied, shall give to any person, other than
the parties hereto and their successors hereunder and the Holders, any benefit
or any legal or equitable right, remedy or claim under this Supplemental
Indenture.
Section 2. 7. Defined Terms. Unless otherwise defined in this
Supplemental Indenture, all terms used in this Supplemental Indenture which are
defined in the Indenture shall have the meanings ascribed to them in the
Indenture.
Section 2.8. No Representation. The Trustee makes no representation as
to the validity or sufficiency of the Consent Solicitation, the Consents or this
Supplemental Indenture. The
<PAGE>
12
recitals contained herein are recitals of the Company, and the Trustee makes no
representation with respect thereto and shall have no responsibility therefor.
Section 2.9. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK
SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS.
IN WITNESS WHEREOF, the Company and the Trustee have caused this
Supplemental Indenture to be duly executed and attested, all as of the day and
year first above written.
HEARTLAND WIRELESS COMMUNICATIONS,
INC.
[SEAL] By:
------------------------------------
Name:
Attest: Title:
- -----------------------------
Name:
Title:
FIST TRUST OF NEW YORK, NATIONAL
ASSOCIATION
By: /s/ Alfia Monastra
-------------------------------
Name: ALFIA MONASTRA
Attest: Title: Assistant Vice President
/s/ F. J. Gillhaus
- --------------------------
Name: F. J. GILLHAUS
Title: Assistant SECRETARY
<PAGE>
EXHIBIT 5
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NY 10112
--------------
212 408-2400
FACSIMILE 212 408-2420
CABLE "APPLELAW NY"
February 7, 1996
Heartland Wireless
Communications, Inc.
903 North Bowser, Suite 140
Richardson, Texas 75081
Heartland Wireless Communications, Inc.
13% Series B Senior Notes Due 2003
---------------------------------------
Dear Sirs:
We have acted as counsel for Heartland Wireless Communications,
Inc., a Delaware corporation (the "Company"), in connection with the
preparation and filing of the Registration Statement of the Company on Form
S-4, as amended (File No. 33-91930) (the "Registration Statement"), under
the Securities Act of 1933, as amended (the "Securities Act").
In that connection, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary for the
purposes of rendering the opinions set forth below. As to certain questions of
fact material to the opinions contained herein, we have relied upon
certificates or statements of officers of the Company and certificates of
public officials. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to authentic originals of all documents submitted to us as
certified or photostatic copies.
Based upon the foregoing, we are of the opinion as follows:
1. The Company is a validly existing corporation under the laws of the
State of Delaware.
2. The 13% Series B Senior Notes Due 2003 (the "Series B Notes")
of the Company have been duly authorized and, when issued upon consummation of
the Exchange Offer (as definded in the Registration Statement) as contemplated
by the Registration Statement and the Indenture between the Company and First
Trust of New York, National Association, as trustee (the "Trustee"), as
supplemented by the Supplemental Indenture between the Company and the
Trustee, will be validly issued.
<PAGE>
O'SULLIVAN GRAEV & KARABELL, LLP
Heartland Wireless Communications, Inc.
February 7, 1996
Page 2
We are admitted to the Bar of the State of New York and we express
no opinion as to the laws of any other jurisdiction other than the
Delaware General Corporation Law.
We know that we are referred to under the heading "Legal Matters"
in the Prospectus forming a part of the Registration Statement, and we hereby
consent to such use of our name in said Registration Statement and to the use
of this opinion for filing with said Registration Statement as Exhibit 5
thereto.
Very truly yours,
/s/ O'Sullivan, Graev & Karabell, LLP
<PAGE>
EXHIBIT 8
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NY 10112
---------------
212 408-2400
FACSIMILE 212 408-2420
CABLE "APPLELAW NY"
February 7, 1996
Heartland Wireless
Communications, Inc.
903 North Bowser, Suite 140
Richardson, Texas 75081
Heartland Wireless Communications, Inc.
13% Series B Senior Notes Due 2003
---------------------------------------
Dear Sirs:
We have acted as counsel for Heartland Wireless Communications,
Inc., a Delaware corporation (the "Company"), in connection with the
preparation and filing of the Registration Statement of the Company on Form
S-4, as amended (File No. 33-91930) (the "Registration Statement"), under
the Securities Act of 1933, as amended (the "Securities Act"). All
capitalized terms used herein and not otherwise defined herein shall have
the meanings set forth in the Registration Statement.
In that connection, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary for the
purposes of rendering the opinions set forth below. As to certain questions of
fact material to the opinions contained herein, we have relied upon
certificates or statements of officers of the Company and certificates of
public officials. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to authentic originals of all documents submitted to us as
certified or photostatic copies.
Based upon and subject to the foregoing, and subject to the
qualifications and limitations set forth therein, we are of the opinion that
the discussion in the Registration Statement entitled "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS" fairly presents the material Federal income tax
considerations relevant to the exchange of Old Notes for New Notes pursuant to
the Exchange Offer.
<PAGE>
O'SULLIVAN GRAEV & KARABELL,LLP
Heartland Wireless Communications, Inc.
February 7, 1996
Page 2
We know that we are referred to under the heading "Legal
Matters" in the Prospectus forming a part of the Registration Statement, and
we hereby consent to such use of our name in said Registration Statement and
to the use of this opinion for filing with said Registration Statement as
Exhibit 8 thereto.
Very truly yours,
/s/ O'Sullivan Graev & Karabell, LLP
<PAGE>
EXHIBIT 10.18
BUILDING LEASE AGREEMENT
------------------------
STATE OF OKLAHOMA}
} ss. HEARTLAND WIRELESS COMMUNICATIONS
COUNTY OF BRYAN }
This indenture of lease, made this 20th day of Nov, 1995 by and between
HEARTLAND WIRELESS COMMUNICATIONS, INC., party of the first part (herein
referred to as Lessee), and THE FEDERAL BUILDING, INC., party of the second part
(herein referred as the Lessor).
WITNESSETH:
1. The term of this lease shall be for five (5) years commencing on
December 1, 1995, and terminating on May 31, 2000.
2. The rental payment by the Lessee to the Lessor shall consist of
$1987.00 and shall include all utilities.
3. The premises which is subject to this indenture of lease consists of
approximately 1,987 square feet in The Federal Building located at 224 West
Evergreen, Durant, Oklahoma, and is designated Suites 102 and 103 used for the
Collections Department and Suite 202 used for Tom Dixon's new office.
4. This contract is non-assignable without advance written consent of
the Lessor. In the event the premises are subleased to any other party, Lessor's
written approval of the new tenant must first be obtained by the Lessee.
5. Repairs to the premises shall be made by the Lessor, except in the
event of willful or malicious damage by the Lessee or his employees.
6. The premises are hereby let for the purpose and use as office space,
and Lessee agrees not to use said premises for any purpose that will increase
the insurance rate or risk on said building, or for any purpose prohibited by
the Statutes of the State of Oklahoma or the ordinances of the city of Durant.
7. Lessee agrees to pay and provide for his own cleaning service.
8. It is further agreed, that in case the building on said premises
shall, without any fault or neglect on the part of the Lessee, be destroyed, or
be so injured by the elements, fire, or any other cause, as to be untenable and
unfit for occupancy, the Lessee shall not be liable or bound to further pay rent
to the Lessor and such event will work a termination of this lease.
IN WITNESS WHEREOF, we have set our hands this 20th day of Nov, 1995.
HEARTLAND WIRELESS COMMUNICATIONS
BY /s/ Tom Dixon
-------------------------------
TOM DIXON
THE FEDERAL BUILDING, INC.
BY /s/ Allen Wheeler
-------------------------------
ALLEN WHEELER
<PAGE>
EXHIBIT 12.1
Consolidated Ratio of Earnings to Combined Fixed Charges
<TABLE>
<CAPTION>
Period from Nine months
September 30, ended
1990 (inception) Year ended December 31, September 30,
to December 31, ---------------------------------------------------------- --------------
1990 1991 1992 1993 1994 1995
---------------- ------------ ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Loss before income taxes $ (22,026) $ (66,158) $ (50,822) $ (406,101) $ (4,638,284) $ (12,485,232)
Fixed charges (1) - 4,059 8,324 87,836 278,516 6,984,367
----------- ----------- ----------- ----------- ------------ -------------
Earnings (1) $ (22,026) $ (62,099) $ (42,498) $ (318,265) $ (4,359,768) $ (5,500,865)
=========== =========== =========== =========== ============ =============
Ratio of earnings to fixed
charges - - - - - -
=========== =========== =========== =========== ============ =============
Earnings (1) $ (22,026) $ (66,158) $ (50,822) $ (406,101) $ (4,638,284) $ (12,485,232)
=========== =========== =========== =========== ============ =============
</TABLE>
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
consists of losses prior to income tax benefit and fixed charges. Fixed
charges consist of interest expense, amortization of debt issuance costs,
and one third of rental payments on operating leases (such amortization
having been deemed by the Company to represent the interest portion of such
payments).
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Heartland Wireless Communications, Inc.:
We consent to the use of our reports included herein and to the references
to our firm under the headings "Prospectus Summary--Summary Historical
Financial Data," "Selected Historical Financial Data" and "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 7, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made part of this
registration statement.
/s/ Arthur Andersen LLP
Phoenix, Arizona
February 6, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Prospectus contained in this
registration statement on Form S-4 of our report, which includes an
explanatory paragraph which states that specified circumstances raise
substantial doubt about the ability of CableMaxx, Inc. to continue as a going
concern, dated August 25, 1995, on our audits of the financial statements of
CableMaxx, Inc. and the financial statements of Supreme Cable Co., Inc. and
Subsidiaries. We also consent to the reference to our firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
Austin, Texas
February 6, 1996
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
TechniVision, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Experts" in the prospectus.
Our report dated October 25, 1995, contains an explanatory paragraph that
states that the TechniVision recurring losses from operations and excess of
current liabilities over current assets raise substantial doubt about the
entity's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 7, 1996
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' REPORT
We have issued our report dated February 10, 1994, accompanying the combined
financial statements of RuralVision Central, Inc., and RuralVision South, Inc.
contained in the Registration Statement and Prospectus. We consent to the use
of the aforementioned reports in the Registration Statement and Prospectus, and
to the use of our name as it appears under the caption "Experts".
Grant Thornton LLP
Kansas City, Missouri
February 6, 1996
<PAGE>
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Heartland Wireless Communications, Inc.:
We consent to the use of our report on the financial statements of Cross
Country Division as of December 31, 1993 and 1994 and for the year ended
December 31, 1993, the period from January 1, 1994 to August 18, 1994 and the
period from August 19, 1994 to December 31, 1994 included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
Our report covering the financial statements of Cross Country Division
contains an explanatory paragraph that refers to a business combination in
1994 accounted for as a purchase involving assets comprising a portion of
Cross Country Division. As a result of the acquisition, financial information
of Cross Country Division for periods after August 18, 1994 is presented on a
different cost basis than that for periods before August 18, 1994 and,
therefore, such information is not comparable.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 7, 1996
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
To Tender for Exchange
13% Senior Notes due 2003
of
HEARTLAND WIRELESS COMMUNICATIONS, INC.
Pursuant to the Prospectus dated February , 1996
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH
, 1996, UNLESS EXTENDED.
To: Bankers Trust Company, as Exchange Agent
Mail: By Facsimile: Hand/Overnight Delivery:
Bankers Trust Company Bankers Trust Company
Corporate Trust and (212) 250-6961
Agency Group Corporate Trust and
(212) 250-6392 Agency Group
Reorganization Dept. Receipt & Delivery Window
P.O. Box 1458 123 Washington Street,
Church Street Station 1st Floor
New York, New York 10008- New York, New York 10006
1458
Confirm by Telephone:
(212) 250-6270
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF
TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS
COMPLETED.
The undersigned acknowledges that he or she has received the Prospectus,
dated February , 1996 (the "Prospectus"), of Heartland Wireless
Communications, Inc. (the "Company") and this Letter of Transmittal (the
"Letter of Transmittal"), which together constitute the Company's offer (the
"Exchange Offer") to exchange its 13% Series B Senior Notes due 2003 (the "New
Notes") for an equal principal amount of its 13% Senior Notes due 2003 (the
"Old Notes" and, together with the New Notes, the "Notes"). The terms of the
New Notes are identical in all material respects to the Old Notes, except that
the New Notes have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and, therefore, will not bear legends restricting their
transfer and will not contain certain provisions providing for an increase in
the interest rate on the Old Notes under certain circumstances relating to the
Registration Rights Agreement (as defined in the Prospectus). The term
"Expiration Date" shall mean 5:00 p.m., New York City time, on March , 1996,
unless the Exchange Offer is extended as provided in the Prospectus, in which
case the term "Expiration Date" shall mean the latest date and time to which
the Exchange Offer is extended. Capitalized terms used but not defined herein
have the meanings given to them in the Prospectus.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal or an Agent's Message (as defined in the Prospectus) and any
other documents required by this Letter of Transmittal to the Exchange Agent
prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedures set forth under the caption "The Exchange
Offer--Guaranteed Delivery Procedures" in the Prospectus. See Instruction 5.
<PAGE>
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
If the undersigned is a broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company), the
undersigned may be deemed to be an "underwriter" under the Securities Act and
the undersigned acknowledges, therefore, that it will deliver a prospectus in
connection with any resale of such New Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
2
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY
BEFORE COMPLETING THIS LETTER OF TRANSMITTAL
DESCRIPTION OF 13% SENIOR NOTES DUE 2003
________________________________________________________________________________
Aggregate Principal Amount
Name(s) and Principal Tendered (must
Address(es) of Amount be in integral
Registered Holder(s) Certificate Represented by multiples
(please fill in, if blank) Number(s) Certificate(s) of $1,000)*
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
TOTAL
________________________________________________________________________________
* Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of Old Notes will be deemed to have tendered the entire
aggregate principal amount represented by the column labeled "Aggregate
Principal Amount Represented by Certificate(s)."
If the space provided above is inadequate, list the certificate numbers
and principal amounts on a separate signed schedule and affix such
schedule to this Letter of Transmittal.
The minimum permitted tender is $1,000 in principal amount. All other
tenders must be in integral multiples of $1,000.
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
TO THE EXCHANGE AGENT'S ACCOUNT AT THE DEPOSITORY TRUST COMPANY ("DTC") AND
COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN DTC MAY DELIVER OLD NOTES BY
BOOK-ENTRY TRANSFER) (SEE INSTRUCTION 4):
Name of Tendering Institution ______________________________________________
Account No. ________________________________________________________________
Transaction Code Number ____________________________________________________
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING (SEE INSTRUCTION 5):
Name(s) of Registered Holder(s) ____________________________________________
Window Ticket Number (if any) ______________________________________________
Date of Execution of Notice of Guaranteed Delivery _________________________
Name of Institution which Guaranteed Delivery ______________________________
[_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO AND COMPLETE THE FOLLOWING:
Name: ______________________________________________________________________
Address: ___________________________________________________________________
___________________________________________________________________
3
<PAGE>
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 7, 8 AND 9) (SEE INSTRUCTIONS 7, 8 AND 9)
To be completed ONLY if To be completed ONLY if
certificates for Old Notes in a certificates for Old Notes in a
principal amount not tendered, or principal amount not tendered, or
New Notes issued in exchange for New Notes issued in exchange for
Old Notes accepted for exchange, Old Notes accepted for exchange,
are to be issued in the name of are to be sent to someone other
someone other than the than the undersigned, or to the
undersigned. undersigned at an address other
than that shown above.
Issue certificate(s) to:
Deliver certificate(s) to:
Name: ____________________________
(Please Print)
Name: ____________________________
Address: _________________________ (Please Print)
Address: _________________________
__________________________________
(Include Zip Code)
__________________________________
__________________________________ (Include Zip Code)
(Tax Identification or Social
Security No.) __________________________________
(Tax Identification or Social
Security No.)
4
<PAGE>
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Old Notes indicated
above. Subject to and effective upon the acceptance for exchange of the
principal amount of Old Notes tendered in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the order
of, the Company all right, title and interest in and to the Old Notes tendered
hereby. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent its agent and attorney-in-fact (with full knowledge that the
Exchange Agent also acts as the agent of the Company) with respect to the
tendered Old Notes with full power of substitution (i) to deliver certificates
for such Old Notes to the Company and deliver all accompanying evidences of
transfer and authenticity to, or upon the order of, the Company and (ii) to
present such Old Notes for transfer on the books of the Company, all in
accordance with the terms of the Exchange Offer. The power of attorney granted
in this paragraph shall be deemed to be irrevocable and coupled with an
interest.
The undersigned hereby represents and warrants that he or she has full power
and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim when the same are acquired by the Company. The
undersigned and any beneficial owner of Old Notes tendered hereby further
represent and warrant that (i) the New Notes acquired by the undersigned and
any such beneficial owner of Old Notes pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, (ii) neither the undersigned nor any such beneficial owner has an
arrangement with any person to participate in the distribution of such New
Notes, (iii) neither the undersigned nor any such beneficial owner nor any such
other person is engaging in or intends to engage in a distribution of such New
Notes and (iv) neither the undersigned nor any such other person is an
"affiliate," as defined under Rule 405 promulgated under the Securities Act, of
the Company. The undersigned and each beneficial owner acknowledge and agree
that any person who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a resale transaction of the New Notes
acquired by such person and may not rely on the position of the staff of the
Securities and Exchange Commission set forth in the no-action letters discussed
in the Prospectus under the caption "The Exchange Offer--Purpose and Effect of
the Exchange Offer." The undersigned and each beneficial owner will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Old Notes tendered hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
notice (confirmed in writing) or written notice thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer because of an invalid tender, the occurrence of certain other
events set forth in the Prospectus or otherwise, any such unaccepted Old Notes
will be returned, without expense, to the undersigned at the address shown
below or at a different address as may be indicated herein under "Special
Delivery Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer--Withdrawal of Tenders."
5
<PAGE>
Unless otherwise indicated under "Special Registration Instructions," please
issue the certificates representing the New Notes issued in exchange for the
Old Notes accepted for exchange and any certificates for Old Notes not tendered
or not exchanged, in the name(s) of the undersigned. Similarly, unless
otherwise indicated under "Special Delivery Instructions," please send the
certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and any certificates for Old Notes not tendered or not
exchanged (and accompanying documents, as appropriate) to the undersigned at
the address shown below the undersigned's signature(s). In the event that both
"Special Registration Instructions" and "Special Delivery Instructions" are
completed, please issue the certificates representing the New Notes issued in
exchange for the Old Notes accepted for exchange in the name(s) of, and return
any certificates for Old Notes not tendered or not exchanged to, the person(s)
so indicated. The undersigned understands that the Company has no obligation
pursuant to the "Special Registration Instructions" and "Special Delivery
Instructions" to transfer any Old Notes from the name of the registered
Holder(s) thereof if the Company does not accept for exchange any of the Old
Notes so tendered.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal and any other documents required by this Letter of Transmittal
to the Exchange Agent prior to the Expiration Date may tender their Old Notes
according to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer--Guaranteed Delivery Procedures." See
Instruction 5.
6
<PAGE>
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X Date: ________
--------------------------------------------------
X Date: ________
--------------------------------------------------
Signature(s) of Registered Holder(s) or
Authorized Signatory
Area Code and Telephone Number: ___________________________________________
The above lines must be signed by the registered holder(s) as his or her
name(s) appear(s) on the Old Notes or by person(s) authorized to become
registered holder(s) by a properly completed bond power from the
registered holder(s), a copy of which must be transmitted with this Letter
of Transmittal. If the Old Notes to which this Letter of Transmittal
relate are held of record by two or more joint holders, then all such
holders must sign this Letter of Transmittal. If this Letter of
Transmittal or any Old Notes or bond powers are signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative
capacity, such person must (i) so indicate and set forth his or her full
title below and (ii) unless waived by the Company, submit evidence
satisfactory to the Company of such person's authority to so act. See
Instruction 7.
Name(s): __________________________________________________________________
(Please Print)
---------------------------------------------------------------------------
Capacity: _________________________________________________________________
Address: __________________________________________________________________
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution:
(If required by Instruction 7)
---------------------------------------------------------------------------
(Authorized Signature)
---------------------------------------------------------------------------
(Title)
---------------------------------------------------------------------------
(Name of Form)
Date: ______________, 1996
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. PROCEDURES FOR TENDERING. This Letter of Transmittal or a facsimile
hereof, properly completed and duly executed, or an Agent's Message and any
other documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. In addition, either (i) certificates for
tendered Old Notes must be received by the Exchange Agent along with the Letter
of Transmittal or (ii) a timely confirmation of a book-entry transfer (a "Book
Entry Confirmation") of such Old Notes, if such procedure is available, into
the Exchange Agent's account at DTC pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the Holder must comply with the guaranteed delivery
procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES AND THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER AND, EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY
MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IF SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN
RECEIPT REQUESTED, BE USED AND PROPER INSURANCE BE OBTAINED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE
SENT TO THE COMPANY.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify Holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall be
under any duty to give any such notification, nor shall any of them incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
2. TENDER BY HOLDER. Only a Holder of Old Notes may tender such Old Notes in
the Exchange Offer. Any beneficial owner whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and instruct
such registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing this Letter of
Transmittal and delivering such beneficial owner's Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
3. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering Holder should fill in the principal amount tendered
in the fourth column of the box entitled "Description of 13% Senior Notes due
2003" above.
8
<PAGE>
The entire principal amount of any Old Notes delivered to the Exchange Agent
will be deemed to have been tendered unless otherwise indicated. If the entire
principal amount of all Old Notes is not tendered, then Old Notes for the
principal amount of Old Notes not tendered and a certificate or certificates
representing New Notes issued in exchange for any Old Notes accepted will be
sent to the Holder at his or her registered address, unless a different address
is provided in the appropriate box on this Letter of Transmittal, promptly
after the Old Notes are accepted for exchange.
4. BOOK-ENTRY TRANSFER. Any financial institution that is a participant in
DTC's system may make book-entry delivery of Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account at DTC in accordance
with DTC's procedures for transfer. However, although delivery of Old Notes may
be effected through book-entry transfer at DTC, this Letter of Transmittal or a
facsimile hereof, or an Agent's Message, with any required signature guarantees
and any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
5. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Old Notes
and (i) whose Old Notes are not immediately available or (ii) who cannot
deliver their Old Notes, this Letter of Transmittal or an Agent's Message or
any other documents required hereby to the Exchange Agent prior to the
Expiration Date must tender their Old Notes according to the guaranteed
delivery procedures set forth in the Prospectus. Pursuant to such procedure:
(a) such tender must be made through an Eligible Institution (as defined
below); (b) prior to the Expiration Date, the Exchange Agent must have received
from the Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting
forth the name and address of the Holder, the certificate number(s) of such Old
Notes and the principal amount of Old Notes tendered, stating that the tender
is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the Expiration Date, this Letter of Transmittal (or
facsimile hereof) or an Agent's Message together with the certificate(s)
representing the Old Notes, or a Book-Entry Confirmation, and any other
required documents will be deposited by the Eligible Institution with the
Exchange Agent; and (c) such properly completed and executed Letter of
Transmittal (or facsimile hereof) or an Agent's Message, as well as the
certificate(s) representing all tendered Old Notes in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by this Letter of Transmittal must be received by the Exchange Agent
within three New York Stock Exchange trading days after the Expiration Date,
all as provided in the Prospectus under the caption "The Exchange Offer--
Guaranteed Delivery Procedures." Any Holder who wishes to tender his or her Old
Notes pursuant to the guaranteed delivery procedures described above must
ensure that the Exchange Agent receives the Notice of Guaranteed Delivery prior
to 5:00 p.m., New York City time, on the Expiration Date. Upon request to the
Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who
wish to tender their Old Notes according to the guaranteed delivery procedures
set forth above.
6. WITHDRAWAL OF TENDERS. To withdraw a tender of Old Notes in the Exchange
Offer, a written or facsimile transmission notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the Holder
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the persons withdrawing the tender and (iv) specify the name
in which any such Old Notes are to be registered, if different from that of the
Depositor. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the procedure
for book-entry transfer described
9
<PAGE>
above, any notice of withdrawal must specify the name and number of the account
at DTC to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, which determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Properly withdrawn Old Notes may be retendered by following one of
the procedures described above in Instruction 1, under Procedures for
Tendering, at any time prior to the Expiration Date.
7. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof) is
signed by the registered holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Old Notes tendered and the certificate or
certificates for New Notes issued in exchange therefor is to be issued (or any
untendered principal amount of Old Notes is to be reissued) to the registered
holder or holders and neither the "Special Delivery Instructions" nor the
"Special Registration Instructions" has been completed, then such holder or
holders need not and should not endorse any tendered Old Notes, nor provide a
separate bond power. In any other case, such holder or holders must either
properly endorse the Old Notes tendered or transmit a properly completed
separate bond power with this Letter of Transmittal with the signatures on the
endorsement or bond power guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or bond
powers are signed by a trustee, executor, administrator, guardian, attorney-in-
fact, officer of a corporation or other person acting in a fiduciary or
representative capacity, such person must so indicate when signing, and, unless
waived by the Company, submit evidence satisfactory to the Company of such
person's authority to so act with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 7 must be guaranteed by an Eligible Institution which is a member
of (a) the Securities Transfer Agents Medallion Program, (b) the New York Stock
Exchange Medallion Signature Program or (c) the Stock Exchange Medallion
Program.
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by a firm that is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (an
"Eligible Institution"). Signatures on this Letter of Transmittal need not be
guaranteed if (a) this Letter of Transmittal is signed by the registered
holder(s) of the Old Notes tendered herewith and such holder(s) have not
completed the box set forth herein entitled "Special Registration Instructions"
or the box set forth herein entitled "Special Delivery Instructions" or (b)
such Old Notes are tendered for the account of an Eligible Institution.
8. SPECIAL REGISTRATION AND DELIVERY INFORMATION. Tendering holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Old Notes for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person singing this Letter of Transmittal. In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated.
9. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered in the
10
<PAGE>
name of, any person other than the registered holder of the Old Notes tendered
hereby, or if tendered Old Notes are registered in the name of any person other
than the person signing this Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or on any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with this Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
Except as provided in this Instruction 9, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
10. WAIVER OF CONDITIONS. The Company reserves the right, in its sole
discretion, to amend, waive or modify specified conditions in the Exchange
Offer in the case of any Old Notes tendered.
11. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instructions.
12. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to the Exchange Agent at the address specified
herein. Holders may also contact their broker, dealer, commercial bank, trust
company or other nominee for assistance concerning the Exchange Offer.
11
<PAGE>
IMPORTANT TAX INFORMATION
The Holder is required to give the Exchange Agent the social security number
or employer identification number of the Holder of the Notes. If the Notes are
in more than one name or are not in the name of the actual owner, consult the
enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional guidance on which number to report.
PAYER'S NAME: HEARTLAND WIRELESS COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
Name of Holder (if joint, list first and circle the name of the person or
entity whose number you enter in Part I below).
- --------------------------------------------------------------------------------
Address (if Holder does not complete, signature below will constitute a
certification that the above address is correct.)
- --------------------------------------------------------------------------------
SUBSTITUTE
FORM W-9 Part I--Please provide Social Security Number
DEPARTMENT OF THE your TIN in the box at or
TREASURY right and certify by Employer Identification
INTERNAL REVENUE signing and dating below. Number
SERVICE If you do not have a ---------------------------
number, see How to Obtain
a "TIN" in the enclosed
Guidelines.
PAYER'S REQUEST ------------------------------------------------------------
FOR TAXPAYER Part II--For Payees exempt from backup withholding, see
IDENTIFICATION the enclosed Guidelines for Certification of Taxpayer
NUMBER (TIN) Identification Number on Substitute Form W-9.
- --------------------------------------------------------------------------------
CERTIFICATION. Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service (IRS) that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to
backup withholding.
CERTIFICATION INSTRUCTIONS. You must cross out item (2) above if you have
been notified by the IRS that you are subject to backup withholding because
of underreported interest or dividends on your tax return. However, if
after being notified by the IRS that you were subject to backup withholding
you received another notification from the IRS that you are no longer
subject to backup withholding, do not cross out item (2). (Also see
instructions in the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.)
Signature _____________________________________ Date ________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU UNDER THE NOTES. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
(DO NOT WRITE IN SPACE BELOW)
- --------------------------------------------------------------------------------
CERTIFICATE SURRENDERED OLD NOTES TENDERED OLD NOTES ACCEPTED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Delivery Prepared By _______________ Checked By _________________ Date _________
12
<PAGE>
EXHIBIT 99.2
HEARTLAND WIRELESS COMMUNICATIONS, INC.
NOTICE OF GUARANTEED DELIVERY
OF
13% SENIOR NOTES DUE 2003
As set forth in the Prospectus dated February , 1996 (the "Prospectus"), of
Heartland Wireless Communications, Inc. (the "Company") under the caption "The
Exchange Offer--Guaranteed Delivery Procedures," this form must be used to
accept the Company's offer to exchange its 13% Series B Senior Notes due 2003
(the "New Notes") for an equal principal amount of its 13% Senior Notes due
2003 (the "Old Notes"), by Holders who wish to tender their Old Notes and (i)
whose Old Notes are not immediately available or (ii) who cannot deliver their
Old Notes, the Letter of Transmittal or an Agent's Message (as defined in the
Prospectus) and any other documents required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date. This form must be delivered by
an Eligible Institution by mail or hand delivery or transmitted, via facsimile,
to the Exchange Agent at its address set forth below not later than the
Expiration Date. All capitalized terms used herein but not defined herein shall
have the meanings ascribed to them in the Prospectus.
The Exchange Agent is:
BANKERS TRUST COMPANY
Mail: By Facsimile: Hand/Overnight Delivery:
Bankers Trust Company Bankers Trust Company
Corporate Trust and (212) 250-6961
Agency Group Corporate Trust and
(212) 250-6392 Agency Group
Reorganization Dept. Receipt & Delivery Window
P.O. Box 1458 123 Washington Street,
Church Street Station 1st Floor
New York, New York 10008- New York, New York 10006
1458
Confirm by Telephone:
(212) 250-6270
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN ONE LISTED ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tenders for exchange to the Company, upon the terms
and subject to the conditions set forth in the Prospectus and the Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes set forth below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer--Guaranteed
Delivery Procedures."
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on March , 1996, unless extended by
the Company. The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on March , 1996, unless the Exchange Offer is extended as provided in
the Prospectus, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
All authority conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
<PAGE>
SIGNATURE Principal Amount of Old Notes
Tendered (must be in integral
multiples of $1,000): $ ___________
X_____________________ Date: ___________
Certificate Number(s) of Old Notes
(if available):
X_____________________ Date: ___________
Signature(s) of Registered Holder(s) or
Authorized Signatory ___________________________________
Area Code and Telephone Number: ________ Aggregate Principal
Amount Represented
by Certificate(s): $ ______________
Name(s): _______________________________
(Please Print) IF TENDERED OLD NOTES WILL BE
DELIVERED BY BOOK-ENTRY TRANSFER,
________________________________________ PROVIDE THE DEPOSITORY TRUST
COMPANY ("DTC") ACCOUNT NO. AND
Capacity (full title), if signing in a TRANSACTION CODE NUMBER (IF
fiduciary or representative capacity): AVAILABLE):
________________________________________ Account No. _______________________
Address: _______________________________ Transaction Number ________________
(including Zip Code)
Taxpayer Identification
or Social
Security No.: __________________________
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank
or trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 promulgated
under the Securities Exchange Act of 1934, as amended, guarantees deposit with
the Exchange Agent of a properly completed and executed Letter of Transmittal
(or facsimile thereof), or an Agent's Message, as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer, or
confirmation of the book-entry transfer of such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility described in the Prospectus
under the caption "The Exchange Offer--Book-Entry Transfer") and any other
documents required by the Letter of Transmittal, all by 5:00 p.m., New York
City time, on the third New York Stock Exchange trading day following the
Expiration Date.
Name of Eligible Institution: ________ ______________________________________
AUTHORIZED SIGNATURE
Address: _____________________________ Name: ________________________________
______________________________________ Title: _______________________________
Area Code and Telephone No.: _________ Date: ________________________________
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE. ACTUAL SURRENDER OF OLD NOTES
MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, THE LETTER OF TRANSMITTAL.
2
<PAGE>
EXHIBIT 99.3
HEARTLAND WIRELESS COMMUNICATIONS, INC.
Offer to Exchange up to $100,000,000 of its
13% Series B Senior Notes due 2003
for any and all of its outstanding
13% Senior Notes due 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH
, 1996, UNLESS EXTENDED.
To Brokers, Dealers, Commercial Banks, February , 1996
Trust Companies and Other Nominees:
Heartland Wireless Communications, Inc., a Delaware corporation (the
"Company"), is offering, upon the terms and subject to the conditions set forth
in the Prospectus dated February , 1996 (the "Prospectus") and the
accompanying Letter of Transmittal enclosed herewith (which together constitute
the "Exchange Offer"), to exchange its 13% Series B Senior Notes due 2003 (the
"New Notes") for an equal principal amount of its 13% Senior Notes due 2003
(the "Old Notes" and together with the New Notes, the "Notes"). As set forth in
the Prospectus, the terms of the New Notes are identical in all material
respects to the Old Notes, except that the New Notes have been registered under
the Securities Act of 1933, as amended, and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing
for an increase in the interest rate on the Old Notes under certain
circumstances relating to the Registration Rights Agreement (as defined in the
Prospectus). Old Notes may be tendered only in integral multiples of $1,000.
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY CONDITIONS. SEE "THE
EXCHANGE OFFER--CONDITIONS" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. the Prospectus, dated February , 1996;
2. the Letter of Transmittal for your use and for the information of your
clients (facsimile copies of the Letter of Transmittal may be used to
tender Old Notes);
3. a form of letter which may be sent to your clients for whose accounts
you hold Old Notes registered in your name or in the name of your nominee,
with space provided for obtaining such clients' instructions with regard to
the Exchange Offer;
4. a Notice of Guaranteed Delivery;
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9; and
6. a return envelope addressed to Bankers Trust Company, the Exchange
Agent.
YOUR PROMPT ACTION IS REQUESTED. PLEASE NOTE THE EXCHANGE OFFER WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH , 1996, UNLESS EXTENDED. PLEASE
FURNISH COPIES OF THE ENCLOSED MATERIALS TO THOSE OF YOUR CLIENTS FOR WHOM YOU
HOLD OLD NOTES REGISTERED IN YOUR NAME OR IN THE NAME OF YOUR NOMINEE AS
QUICKLY AS POSSIBLE.
<PAGE>
In all cases, exchanges of Old Notes accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(a) certificates representing such Old Notes, or a Book-Entry Confirmation (as
defined in the Prospectus), as the case may be, (b) the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, or an Agent's
Message (as defined in the Prospectus) and (c) any other required documents.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or an Agent's Message and any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the guaranteed delivery procedures set
forth under the caption "The Exchange Offer--Guaranteed Delivery Procedures" in
the Prospectus.
The Exchange Offer is not being made to, nor will tenders be accepted from or
on behalf of, holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Company will not pay any fees or commissions to brokers, dealers or other
persons for soliciting exchanges of Notes pursuant to the Exchange Offer. The
Company will, however, upon request, reimburse you for customary clerical and
mailing expenses incurred by you in forwarding any of the enclosed materials to
your clients. The Company will pay or cause to be paid any transfer taxes
payable on the transfer of Notes to it, except as otherwise provided in
Instruction 9 of the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent at its address set forth in the Prospectus or at (212) 250-6270.
Very truly yours,
HEARTLAND WIRELESS COMMUNICATIONS, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON THE AGENT OF THE COMPANY, OR ANY AFFILIATE THEREOF, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY DOCUMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
2
<PAGE>
EXHIBIT 99.4
HEARTLAND WIRELESS COMMUNICATIONS, INC.
Offer to Exchange up to $100,000,000 of its
13% Series B Senior Notes due 2003
for any and all of its outstanding
13% Senior Notes due 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH
, 1996, UNLESS EXTENDED.
To Our Clients:
Enclosed for your consideration is a Prospectus dated February , 1996 (he
"Prospectus") and a Letter of Transmittal (which together constitute the
"Exchange Offer") relating to the offer by Heartland Wireless Communications,
Inc. (the "Company") to exchange its 13% Series B Senior Notes due 2003 (the
"New Notes") for an equal principal amount of its 13% Senior Notes due 2003
(the "Old Notes" and together with the New Notes, the "Notes"). As set forth in
the Prospectus, the terms of the New Notes are identical in all material
respects to the Old Notes, except that the New Notes have been registered under
the Securities Act of 1933, as amended, and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing
for an increase in the interest rate on the Old Notes under certain
circumstances relating to the Registration Rights Agreement (as defined in the
Prospectus). Old Notes may be tendered only in integral multiples of $1,000.
The enclosed material is being forwarded to you as the beneficial owner of
Old Notes carried by us for your account or benefit but not registered in your
name. An exchange of any Old Notes may only be made by us as the registered
Holder and pursuant to your instructions. Therefore, the Company urges
beneficial owners of Old Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee to contact such Holder promptly
if they wish to exchange Old Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Old Notes held by us for your account or benefit, pursuant to
the terms and conditions set forth in the Prospectus and Letter of Transmittal.
We urge you to read carefully the Prospectus and Letter of Transmittal before
instructing us to exchange your Old Notes.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to exchange Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. THE EXCHANGE OFFER EXPIRES AT 5:00 P.M., NEW
YORK CITY TIME, ON MARCH , 1996, UNLESS EXTENDED. The term "Expiration Date"
shall mean 5:00 p.m., New York City time, on March , 1996, unless the
Exchange Offer is extended as provided in the Prospectus, in which case the
term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended. A tender of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount of
the New Notes for each $1,000 principal amount of the Old Notes, of which
$100,000,000 aggregate principal amount was outstanding as of February ,
1996. The terms of the New Notes are identical in all material respects to
the Old Notes, except that the New Notes have been registered under the
Securities Act of 1933, as amended, and therefore will not bear legends
restricting their transfer and will not contain certain provisions
providing for an increase in the interest rate on the Old Notes under
certain circumstances relating to the Registration Rights Agreement.
<PAGE>
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY CONDITIONS. SEE
"THE EXCHANGE OFFER--CONDITIONS" IN THE PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New
York City time, on March , 1996, unless extended.
4. The Company has agreed to pay the expenses of the Exchange Offer.
5. Any transfer taxes incident to the transfer of Old Notes from the
tendering Holder to the Company will be paid by the Company, except as
provided in the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to, nor will tenders be accepted from or
on behalf of, holders of Old Notes residing in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish us to tender any or all of your Old Notes held by us for your
account or benefit, please so instruct us by completing, executing and
returning to us the attached instruction form. THE ACCOMPANYING LETTER OF
TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATIONAL PURPOSES ONLY AND MAY NOT BE
USED BY YOU TO EXCHANGE OLD NOTES HELD BY US AND REGISTERED IN OUR NAME FOR
YOUR ACCOUNT OR BENEFIT.
2
<PAGE>
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of Heartland
Wireless Communications, Inc.
This will instruct you to tender for exchange the aggregate principal amount
of Old Notes indicated below (or, if no aggregate principal amount is indicated
below, all Old Notes) held by you for the account or benefit of the
undersigned, pursuant to the terms of and conditions set forth in the
Prospectus and the Letter of Transmittal.
Aggregate Principal Amount of Old Notes to be
tendered for exchange
$
*I (WE) UNDERSTAND THAT IF I ----------------------------------------
(WE) SIGN THIS INSTRUCTION FORM
WITHOUT INDICATING AN AGGREGATE ----------------------------------------
PRINCIPAL AMOUNT OF OLD NOTES IN
THE SPACE ABOVE, ALL OLD NOTES SIGNATURE(S)
HELD BY YOU FOR MY (OUR) ACCOUNT ----------------------------------------
WILL BE TENDERED FOR EXCHANGE. CAPACITY (FULL TITLE), IF SIGNING IN A
FIDUCIARY OR REPRESENTATIVE CAPACITY
________________________________________
________________________________________
________________________________________
________________________________________
NAME(S) AND ADDRESS,
INCLUDING ZIP CODE
DATE: __________________________________
________________________________________
AREA CODE AND TELEPHONE NUMBER
________________________________________
TAXPAYER IDENTIFICATION OR SOCIAL
SECURITY NO. ___________________________
