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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-2
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of
1934
February 23, 1996
- --------------------------------------------------------------------------------
Date of Report (Date of earliest event reported)
HEARTLAND WIRELESS COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-23694 73-1435149
- ---------------------------- ------------ -------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
903 N. Bowser, Suite 140
Richardson, Texas 75081
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(214) 479-9244
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
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Item 2. Acquisition or Disposition of Assets.
Reference is made to that Registration Statement on Form S-4 (Reg. No.
33-65357) filed by Heartland Wireless Communications, Inc., a Delaware
corporation (the "Registrant" or "Company"), with the Securities and Exchange
Commission and declared effective thereby on January 26, 1996 (the
"Registration Statement").
Effective February 23, 1996, the Registrant consummated the following
five (5) separate, but related, transactions (collectively, the
"Transactions"):
(i) merger of Heartland Merger Sub, Inc., a wholly owned
subsidiary of the Registrant ("Merger Sub"), with and into American
Wireless Systems, Inc. ("AWS") pursuant to the Amended and Restated
Agreement and Plan of Merger dated as of September 11, 1995 ("AWS
Merger Agreement") by and among the Registrant, Merger Sub and AWS;
(ii) acquisition of substantially all of the assets of
Fort Worth Wireless Cable T.V. Associates ("FTW Partnership") pursuant
to the Amended and Restated Asset Purchase Agreement dated as of
October 4, 1995 ("FTW Agreement") by and between the Registrant and
FTW Partnership;
(iii) acquisition of substantially all of the assets of
Wireless Cable TV Associates # 38 ("Minneapolis Partnership") pursuant
to the Amended and Restated Asset Purchase Agreement dated as of
October 4, 1995 ("Minneapolis Agreement") by and between the
Registrant and Minneapolis Partnership;
(iv) merger of Heartland Merger Sub 2, Inc., a wholly
owned subsidiary of the Registrant ("Merger Sub 2") with and into
CableMaxx, Inc. ("CMAX") pursuant to the Amended and Restated
Agreement and Plan of Merger dated as of September 11, 1995 ("CMAX
Merger Agreement") by and among the Registrant, Merger Sub 2 and CMAX;
(v) acquisition of certain assets of Three Sixty Corp.
("TSC") pursuant to the Amended and Restated Asset Purchase Agreement
dated as of October 19, 1995 ("TSC Agreement") by and among the
Registrant, TSC and TechniVision, Inc., formerly a subsidiary of TSC
that has been merged with and into TSC ("TechniVision").
Effective February 23, 1996, Merger Sub was merged with and into AWS
pursuant to the terms of the AWS Merger Agreement, whereupon AWS became a
wholly owned subsidiary of the Registrant. Under the terms of the AWS Merger
Agreement, stockholders of AWS received, in the aggregate, 1,307,692 shares of
the Registrant's common stock, par value $.001 per share ("Registrant Common
Stock"), having an aggregate exchange value of approximately $34 million. As a
result, each issued and outstanding share of AWS common stock was converted
into the right to receive .22905 shares of Registrant Common Stock having an
exchange value of approximately $5.96 per share, of which approximately .02189
shares of
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Registrant Common Stock having an exchange value of approximately $0.57 per
share will be held in escrow as described in the AWS Merger Agreement. The
transactions contemplated by the AWS Merger Agreement will be accounted for by
the Registrant under the "purchase method" of accounting. The assets previously
held by AWS included minority interests in the wireless cable television
systems of Minneapolis, Minnesota, and Fort Worth, Texas (the remaining
interests being held by the FTW Partnership and Minneapolis Partnership,
respectively) and certain additional rights and properties held in connection
with wireless cable television markets located in Dallas, Texas, Los Angeles,
California and Memphis, Tennessee (collectively, the "AWS Assets").
Certain of the AWS Assets constitute plant, equipment or other physical
property. The Registrant will seek to sell directly to a third party the Los
Angeles, California market. The Memphis, Tennessee market is subject to a
pending contract of sale to TruVision Cable, Inc. The Dallas, Texas market, and
AWS' interest in the Fort Worth, Texas and Minneapolis, Minnesota markets were
assigned by the Registrant to CS Wireless Systems, Inc. ("CS Wireless")
effective February 23, 1996 pursuant to the terms of the Participation
Agreement (the "Participation Agreement") dated December 12, 1995 by and among
the Registrant, CAI Wireless Systems, Inc. ("CAI") and CS Wireless. The terms
of the AWS Merger Agreement were determined by arms-length negotiations between
the parties thereto and no material relationship existed between AWS and the
Registrant or any of its affiliates, any directors or officers of the
Registrant, or any associate of any such director or officer prior to the
consummation thereof.
Also on February 23, 1996, the Registrant acquired from the FTW
Partnership substantially all of the assets of the FTW Partnership pursuant to
the terms of the FTW Agreement. Consistent with the terms of the FTW Agreement,
the Registrant issued approximately 578,261 shares of Registrant Common Stock
having an aggregate exchange value of approximately $13.3 million to the FTW
Partnership. The transactions contemplated by the FTW Agreement will be
accounted for by the Registrant under the "purchase method" of accounting. The
principal asset of the FTW Partnership consisted of a 79.99% interest in a
joint venture that owned and operated the wireless cable television system in
Fort Worth, Texas (the "FTW Venture Interest"). Accordingly, the FTW Venture
Interest does not constitute plant, equipment or physical property.
As the owner of the FTW Venture Interest, the Registrant caused the transfer,
together with AWS, of the Fort Worth, Texas market to CS Wireless pursuant to
the terms of the Participation Agreement. The terms of the FTW Agreement were
determined by arms-length negotiations between the parties thereto and no
material relationship existed between FTW Partnership and the Registrant or any
of its affiliates, any directors or officers of the Registrant, or any
associate of any such director or officer prior to the consummation thereof.
Also on February 23, 1996, the Registrant acquired from the
Minneapolis Partnership substantially all of the assets of the Minneapolis
Partnership pursuant to the terms of the Minneapolis Agreement. Consistent with
the terms of the Minneapolis Agreement, the Registrant issued approximately
805,695 shares of Registrant Common Stock having an aggregate exchange value of
approximately $18.531 million to the Minneapolis Partnership. The transactions
contemplated by the Minneapolis Agreement will be accounted for by the
Registrant under the "purchase method" of accounting. The principal asset of
the Minneapolis Partnership
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consisted of a 75% membership interest in and to American Wireless Systems of
Minneapolis, L.L.C., a limited liability company that owned and operated the
wireless cable television system in Minneapolis, Minnesota (the "LLC
Interest"). Accordingly, the LLC Interest does not constitute plant, equipment
or other physical property. As the owner of the LLC Interest, the Registrant
caused the transfer, together with AWS, of the Minneapolis, Minnesota market to
CS Wireless pursuant to the terms of the Participation Agreement. The terms of
the Minneapolis Agreement were determined by arms-length negotiations between
the parties thereto and no material relationship existed between the
Minneapolis Partnership and the Registrant or any of its affiliates, any
directors or officers of the Registrant, or any associates of any such director
or officer prior to the consummation thereof.
Also on February 23, 1996, Merger Sub 2 was merged with and into CMAX
pursuant to the terms of the CMAX Merger Agreement, whereupon CMAX became a
wholly owned subsidiary of the Registrant. Under the terms of the CMAX Merger
Agreement, the stockholders of CMAX received, in the aggregate, approximately
2,883,573 shares of Registrant Common Stock having an aggregate exchange value
of approximately $80.8 million. As a result, each issued and outstanding share
of CMAX common stock was converted into the right to receive .3033 shares of
Registrant Common Stock having an exchange value of approximately $8.50 per
share. The transactions contemplated by the CMAX Merger Agreement will be
accounted for by the Registrant under the "purchase method" of accounting. The
assets previously held by CMAX included certain rights and properties held in
connection with certain wireless cable television markets throughout Texas and
in Salt Lake City, Utah (collectively, the "CMAX Assets"). Certain of the CMAX
Assets constitute plant, equipment and physical property. With the exception
of the San Antonio, Texas and Salt Lake City, Utah markets, which the
Registrant has contributed to CS Wireless pursuant to the terms of the
Participation Agreement, the CMAX Assets will continue to be used and operated
by the Registrant in connection with its wireless cable television business.
The terms of the CMAX Merger Agreement were determined by arms-length
negotiations between the parties thereto and no material relationship existed
between CMAX and the Registrant or any of its affiliates, any directors or
officers of the Registrant, or any associate of any such director or officer
prior to the consummation thereof. Mr. L. Allen Wheeler, a member of the Board
of Directors of the Registrant, was the holder of less than 5% of the shares of
CMAX common stock at the time of the merger of Merger Sub 2 with and into CMAX.
Mr. Wheeler abstained from participating in, or voting on, the Registrant's
deliberations regarding the CMAX Merger Agreement.
Also on February 23, 1996, the Registrant acquired certain assets from
TSC representing substantially all of the assets formerly held by TechniVision.
Pursuant to the terms of the TSC Agreement, the Registrant issued to TSC
approximately 1,181,944 shares of Registrant Common Stock having an aggregate
exchange value of approximately $33.124 million. The transactions contemplated
by the TSC Agreement will be accounted for by the Registrant under the
"purchase method" of accounting. The assets previously held by TSC included
certain rights and properties held in connection with wireless cable television
markets in El Paso, Texas, Corpus Christi, Texas and Dayton, Ohio
(collectively, the "TSC Assets"). Certain of the TSC Assets constitute plant,
equipment and physical property. With the exception of the Dayton, Ohio market,
which the Registrant contributed to CS Wireless pursuant to the terms of the
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Participation Agreement, the TSC Assets will continue to be used and operated
by the Registrant in connection with its wireless cable television business.
The terms of the TSC Agreement were determined by arms-length negotiations
between the parties thereto and no material relationship existed between TSC
and the Registrant or any of its affiliates, any directors or officers of the
Registrant, or any associate of any such director of officer prior to the
consummation thereof.
On February 23, 1996, the Registrant issued a news release relating to
the Transaction, the form of which is attached as Exhibit 99.1 and incorporated
herein by reference.
Effective February 23, 1996, immediately following the closing of the
Transactions, the Registrant, CAI and CS Wireless, a Delaware corporation and
wholly owned subsidiary of CAI, consummated the Participation Agreement
pursuant to which the Registrant (or certain of its subsidiaries) contributed
or sold to CS Wireless the wireless cable assets and all related liabilities of
the following wireless cable television markets (the "Heartland Contributed
Assets"):
(1) Maysville, Missouri
(2) Sweet Springs, Missouri
(3) Grand Rapids/Moline, Michigan
(4) Bloom Center/Napoleon, Indiana
(5) Dallas, Texas
(6) Fort Worth, Texas
(7) San Antonio, Texas
(8) Dayton, Ohio
(9) Salt Lake City, Utah
(10) Minneapolis, Minnesota
Simultaneously with the contribution and sale of the Heartland
Contributed Assets to CS Wireless, CAI (or certain of its subsidiaries)
contributed to CS Wireless (directly or by contribution of stock of
subsidiaries) the wireless cable television assets associated with the
following markets (the "CAI Contributed Assets"):
(1) Stockton/Modesto, California
(2) Bakersfield, California
(3) Cleveland, Ohio
(4) Charlotte, North Carolina
The combination of the Heartland Contributed Assets and the CAI Contributed
Assets in CS Wireless (the "CS Transaction") created a company with
approximately 5.7 million line-of-sight households and approximately 55,800
subscribers.
In connection with the CS Transaction, the Registrant (or its
subsidiaries) received (i) shares of CS Wireless common stock constituting
approximately 39.76% of the outstanding shares of CS Wireless (35.4% following
dilution for certain additional stock issuances) (ii) approximately $28.3
million in cash paid at the closing (iii) a promissory note in the principal
sum of $25,000,000 payable on or before nine (9) months from the closing and
secured by
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proceeds of a contemplated issuance by CS Wireless of senior discount notes
(which notes have been prepaid by their terms) and (iv) a promissory note in
the sum of $15,000,000 payable ten (10) years from the closing and prepayable
from asset sales and certain other events. Following the closing, CAI and the
Registrant will complete certain 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 CS Wireless
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,
payments will be made to or by the parties, depending upon such calculations.
Also, in connection with the closing of the CS Transaction, CAI, the
Registrant and CS Wireless have entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement provides, among other
things, that the Registrant and CAI will vote their shares of CS Wireless
common stock in favor of a Board of Directors of CS Wireless having nine (9)
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 Registrant);
(ii) up to three members designated by the Registrant (provided at least one of
whom may not be an affiliate of either CAI or the Registrant); (iii) the Chief
Executive Officer of CS Wireless; and (iv) the Chief Financial Officer of CS
Wireless. The Stockholders Agreement and CS Wireless' bylaws further provide
that certain major transactions will require the affirmative approval of at
least 70% (or seven of nine) of the directors of CS Wireless. The CS
Transaction was consummated immediately following consummation of the
Transactions.
The terms of the Participation Agreement were determined by arms
length negotiations between the parties thereto and no material relationship
existed between CAI, CS Wireless and the Registrant or any of its affiliates,
any directors or officers of the Registrant or any associates of any such
director or officer prior to the consummation thereof.
On February 23, 1996, the Registrant issued a news release relating to
the CS Transaction, the form of which is attached as Exhibit 99.2 and
incorporated herein by reference.
On February 27, 1996, the Registrant issued a supplemental news
release providing further detail on the Transactions and the CS Transaction,
the form of which is attached as Exhibit 99.3 and incorporated herein by
reference.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired
Audited balance sheets of American Wireless Systems, Inc. as of
December 31, 1994 and 1995, and related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1993, 1994 and 1995.
Audited consolidated balance sheets of Fort Worth Wireless Cable T.V.
Associates as of December 31, 1994 and 1995, and related consolidated
statements of operations, partners' equity and cash flows for the years ended
December 31, 1993, 1994 and 1995.
Audited consolidated balance sheets of Wireless Cable TV Associates
#38 as of December 31, 1994 and 1995, and related consolidated statements of
operations, partners' equity and cash flows for the years ended December 31,
1993, 1994 and 1995.
Audited 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 of CableMaxx, Inc. for the period of
December 18, 1992 to June 30, 1993 and the years ended June 30, 1994 and 1995
and consolidated statements of operations and cash flows of Supreme Cable Co.
and subsidiaries for the period from July 1, 1992 to December 17, 1992.
Unaudited consolidated balance sheets of CableMaxx, Inc. as of
December 31, 1995, and consolidated statements of operations and cash flows for
the six months ended December 31, 1994 and 1995.
Audited balance sheets of Technivision, Inc. as of May 31, 1994 and
1995 and related statements of operations, stockholders' deficit and cash flows
for the years ended May 31, 1993, 1994 and 1995.
Unaudited balance sheets of Technivision, Inc. as of November 30,
1995, and related statements of operations and cash flows for the six months
ended November 30, 1994, and statements of operations, stockholders' deficit
and cash flows for the six months ended November 30, 1995.
Audited consolidated balance sheets of Cross Country Division as of
December 31, 1993 and 1994, and related statements of operations, 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.
Unaudited consolidated balance sheets of Cross County Division as of
June 30, 1995, and related statements of operations and division equity and
cash flows for the six months ended June 30, 1994 and 1995.
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(b) Pro Forma Financial Information
Unaudited pro forma condensed combined balance sheet of Heartland
Wireless Communications, Inc. as of December 31, 1995, and related unaudited
pro forma condensed combined statement of opearions for the year then ended.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Document Description
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated
as of September 11, 1995, by and among American Wireless
Systems, Inc., the Registrant and Heartland Merger Sub,
Inc. (incorporated by reference from Exhibit 2.22 to the
Registrant's Registration Statement on Form S-4, File No.
33-65357 (the "Form S-4") dated January 26, 1996).
2.2 Amended and Restated Asset Purchase Agreement, dated as of
October 4, 1995, by and between the Registrant and Fort
Worth Wireless Cable T.V. Associates (incorporated by
reference from Exhibit 2.23 to the Registrant's
Registration Statement on Form S-4).
2.3 Amended and Restated Asset Purchase Agreement, dated as of
October 4, 1995, by and between the Registrant and
Wireless Cable TV Associates No. 38 (incorporated by
reference from Exhibit 2.24 to the Registrant's
Registration Statement on Form S-4).
2.4 Amended and Restated Agreement and Plan of Merger, dated
as of September 11, 1995, by and among the Registrant,
CableMaxx, Inc., and Heartland Merger Sub 2, Inc.
(incorporated by reference from Exhibit 2.25 to the
Registrant's Registration Statement on Form S-4).
2.5 Amended and Restated Asset Purchase Agreement, dated as of
October 19, 1995, by and among the Registrant, Three Sixty
Corp., and Technivision,
</TABLE>
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<TABLE>
<S> <C>
Inc. (incorporated by reference from Exhibit 2.26 to the
Registrant's Registration Statement on Form S-4).
2.6 Participation Agreement dated as of December 12, 1995, by
and among the Registrant, CAI Wireless Systems, Inc. and
CS Wireless Systems, Inc. (without exhibits except
Stockholders Agreement) (the "Participation Agreement")
(incorporated by reference from Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, dated December
12, 1996).
2.7* Amendment No. 1 to Participation Agreement dated February
22, 1996.
23.1** Consent of KPMG Peat Marwick LLP, independent certified
public accountants (TechniVision, Inc.)
23.2** Consent of Arthur Andersen LLP, independent certified
public accountants (American Wireless Systems, Inc.,
Wireless Cable TV Associates #38, and Fort Worth Wireless
Cable T.V. Associates).
23.3** Coopers & Lybrand LLP, independent public accountants
(CableMaxx, Inc.)
23.4** Consent of KPMG Peat Marwick LLP, independent certified
public accountants (Cross Country Division)
99.1* February 23, 1996 Heartland Wireless Communications, Inc.
News Release (relating to the Transactions).
99.2* February 23, 1996 Heartland Wireless Communications, Inc.
News Release (relating to CS Transaction).
99.3* February 27, 1996 Heartland Wireless Communications, Inc.
News Release (providing further detail on the Transactions
and CS Transaction).
</TABLE>
_______________
* Previously filed
** Filed herewith
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ARTHUR ANDERSEN LLP
AMERICAN WIRELESS SYSTEMS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994 AND 1995
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-1
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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, 1994 and 1995, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1993, 1994 and 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 American Wireless Systems,
Inc. as of December 31, 1994 and 1995, and the results of its operations and
its cash flows for the years ended December 31, 1993, 1994 and 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 1 to the
financial statements, the Company has incurred losses since inception and
expects to incur additional losses until it is able to generate sufficient
income to cover operating expenses. The Company currently does not have
sufficient cash reserves to cover such anticipated losses. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company'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,
February 23, 1996.
F-2
<PAGE> 11
AMERICAN WIRELESS SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 2) $ 376,621 $ 342,329
Prepaid expenses and other current assets 186,242 71,230
------------- -------------
Total current assets 562,863 413,559
PROPERTY AND EQUIPMENT, at cost, net (Note 2) 431,790 205,920
INVESTMENT IN AND ADVANCES TO JOINT VENTURES
(Notes 1, 2 and 4) 3,436,048 2,985,654
INVESTMENT IN WIRELESS CABLE SYSTEMS
(Notes 1, 2 and 4) 2,430,866 3,179,852
LICENSE DEPOSITS AND OTHER ASSETS (Note 2) 88,333 165,350
------------- -------------
$ 6,949,900 $ 6,950,335
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 482,342 $ 412,266
Accrued liabilities 170,237 242,621
Severance liability, current (Note 6) 174,826 354,636
Note payable, current - 35,000
------------- -------------
Total current liabilities 827,405 1,044,523
Severance liability, long-term (Note 6) 354,636 -
Note payable, long-term - 1,830,695
------------- -------------
Total liabilities 1,182,041 2,875,218
------------- -------------
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, 5,709,187 shares outstanding in 1994 and 1995 57,092 57,092
Additional paid-in capital 20,239,069 20,239,069
Accumulated deficit (14,528,302) (16,221,044)
------------- -------------
Total stockholders' equity 5,767,859 4,075,117
------------- -------------
$ 6,949,900 $ 6,950,335
============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
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AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE:
Management fees $ - $ 83,333 $ 100,000
------------- ------------- -------------
GENERAL AND ADMINISTRATIVE
EXPENSES:
Compensation 1,502,006 1,920,002 767,889
Outside services 476,008 1,111,104 552,449
Other 780,920 1,127,356 885,472
------------- ------------- -------------
Total expenses 2,758,934 4,158,462 2,205,810
------------- ------------- -------------
LOSS FROM OPERATIONS (2,758,934) (4,075,129) (2,105,810)
------------- ------------- --------------
LOSS FROM OPERATIONS OF JOINT
VENTURES (184,906) (200,436) (188,381)
------------- ------------- -------------
OTHER INCOME (EXPENSE), net
Interest expense (775,525) (976,867) (161,324)
Exclusivity fees (Notes 1 and 9) - - 210,000
Gain on sale of wireless cable television assets
(Notes 1 and 4) - - 748,851
Other (Note 7) 69,205 (474,348) (196,078)
------------- ------------- -------------
(706,320) (1,451,215) 601,449
------------- ------------- -------------
NET LOSS $ (3,650,160) $ (5,726,780) $ (1,692,742)
============= ============= =============
NET LOSS PER SHARE $ (1.16) $ (1.26) $ (.30)
============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,159,397 4,540,362 5,709,187
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 13
AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-in Accumulated
Shares Par Value Capital Deficit Total
------------ --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
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 issued 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 - - - (1,692,742) (1,692,742)
------------ --------- ----------- ------------- ------------
BALANCE, December 31, 1995 5,709,187 $ 57,092 $20,239,069 $ (16,221,044) $ 4,075,117
============ ========= =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
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AMERICAN WIRELESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,650,160) $(5,726,780) $ (1,692,742)
Adjustments to reconcile net loss to cash used for operating activities-
Depreciation and amortization 442,933 637,049 83,100
Loss on disposal of assets 16,136 55,043 205,444
Gain on sale of wireless cable television assets - - (748,851)
Loss from operations of joint ventures 184,906 200,436 188,381
Repricing of common stock warrants (Note 7) - 425,000 -
Changes in assets and liabilities-
Decrease (increase) in prepaid expenses and other assets (198,332) 438,793 115,012
Increase in accounts payable and accrued liabilities 530,142 232,831 2,308
Increase(decrease) in severance liability - 529,462 (174,826)
----------- ----------- ------------
Net cash used for operating activities (2,674,375) (3,208,166) (2,022,174)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (77,055) (287,291) (43,308)
Investment in wireless cable systems (755,271) (3,820,312) (932,488)
Purchases of marketable securities (2,318,252) - -
Proceeds from sale of wireless cable television assets - - 1,250,000
Proceeds from sales of marketable securities - 2,438,604 -
Deposits made on license acquisitions (69,122) - (77,017)
----------- ----------- ------------
Net cash (used for) provided by investing activities (3,219,700) (1,668,999) 197,187
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes payable 8,736,000 - -
Proceeds from issuance of notes payable - - 2,800,000
Proceeds from sale of common stock 2,550,877 2,009,511 -
Redemption of common stock (2,170,000) - -
Deferred debt issuance costs (1,083,371) - -
Cash received from affiliates 525,000 - -
Payment of notes payable - - (1,009,305)
----------- ----------- ------------
Net cash provided by financing activities 8,558,506 2,009,511 1,790,695
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,664,431 (2,867,654) (34,292)
CASH AND CASH EQUIVALENTS, beginning of year 579,844 3,244,275 376,621
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 3,244,275 $ 376,621 $ 342,329
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ - $ 351,510 $ 186,221
=========== =========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS:
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.
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 15
AMERICAN WIRELESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) BACKGROUND, ORGANIZATION AND OPERATIONS:
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.
OPERATIONS
The Company currently owns an interest in and manages the operations of
wireless cable television systems in Minneapolis, Minnesota and Fort Worth,
Texas 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).
F-7
<PAGE> 16
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 the 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 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 totaling $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 as consideration for a nonsolicitation covenant contained
in the Merger Agreement ("exclusivity fees") and a loan for $1,800,000 (the AWS
loan). 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. The Merger Agreement provides that
specified amounts are to be periodically offset against the AWS loan as
additional consideration for the nonsolicitation covenant contained in the
Merger Agreement. As of December 31, 1995, the AWS loan has been reduced by
$800,000 pursuant to the provisions of the Merger Agreement. However, due to
certain contingencies, no amounts have been recognized as income in the
accompanying statement of operations in accordance with Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies, (SFAS No. 5) (Note
9).
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 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).
F-8
<PAGE> 17
(2) SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements reflect the application of the following
accounting policies:
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.
DEBT ISSUANCE COSTS
The costs associated with the issuance of debt are deferred and amortized over
the life of the respective debt using the effective interest rate method.
Amortization of debt issuance costs for the years ended December 31, 1993 and
1994, was approximately $405,000 and $592,000, respectively.
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.
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
Depreciable
Life (Years) 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Computer equipment 5 $ 112,083 $ 105,072
Furniture and fixtures 7 58,093 26,369
Office and other equipment 5-7 384,782 213,507
------------ ------------
554,958 344,948
Less- Accumulated depreciation (123,168) (139,028)
------------ ------------
$ 431,790 $ 205,920
============ ============
</TABLE>
INVESTMENT IN JOINT VENTURES
The Company accounts for its investments in joint ventures under the equity
method of accounting.
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 once placed
in service.
F-9
<PAGE> 18
LICENSE DEPOSITS
License deposits represent deposits made under agreements to acquire FCC
frequency rights.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes.
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.
(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
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 (Note 5).
F-10
<PAGE> 19
(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>
1994 1995
------------- -------------
<S> <C> <C>
Jointly Owned Systems:
Minneapolis/St. Paul, Minnesota $ 436,446 $ 308,233
Advances to Minneapolis/St. Paul, Minnesota 2,050,882 2,101,203
Ft. Worth, Texas 243,054 182,888
Advances to Ft. Worth, Texas 253,177 393,330
Pittsburgh, Pennsylvania 452,489 -
------------- -------------
$ 3,436,048 $ 2,985,654
============= =============
Wholly-Owned Systems:
Los Angeles, California $ 972,653 $ 1,645,274
Memphis, Tennessee 733,153 819,263
Dallas, Texas 725,060 715,315
------------- -------------
$ 2,430,866 $ 3,179,852
============= =============
</TABLE>
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.
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%.
F-11
<PAGE> 20
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
was paid in October 1995.
The Minneapolis system does not have enough subscribers to provide positive
cash flow. Additionally, neither the joint venture nor the Minneapolis
Partnership has sufficient funds to support the installation of additional
subscribers to enable the joint venture to reach positive cash flow.
On October 4, 1995, the Company's joint venture partner signed a contract to
sell its 75% interest in AWS-Minneapolis to Heartland (the Minneapolis
Agreement) (Note 11). As part of the Minneapolis Agreement, Heartland agreed
to loan AWS- Minneapolis up to $1,575,000, of which $575,000 was used to repay
Tsunami and the remainder can be used 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 $393,330 through December 31, 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 (the Fort
Worth Agreement). Pursuant to the Fort Worth 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 (Note 11).
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.
F-12
<PAGE> 21
Selected combined balance sheet data related to the Company's jointly owned
operating systems is as follows as of December 31 (in 000's):
<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
Current assets $ 402 $ 470
Total assets 10,846 9,388
Total liabilities 790 2,201
Members equity 10,056 7,187
AWS' interest 525 335
</TABLE>
Selected combined operating data related to the Company's jointly owned
operating systems is as follows for the years ended December 31 (in 000's):
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- ----------
<S> <C> <C> <C>
Revenues $ 1,064 $ 1,187 $ 1,577
Operating expenses (3,814) (4,363) (4,830)
----------- ----------- ----------
Net loss $ (2,750) $ (3,176) $ (3,253)
=========== =========== ==========
AWS' interest $ (185) $ (200) $ (188)
=========== =========== ==========
</TABLE>
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:
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. reimbursed the Company $35,000 in February 1996 after the sale of the
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.
F-13
<PAGE> 22
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 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 32% of the
Company's common stock.
In 1993 and 1994, payments were made by the Company, Wireless California and
the joint ventures to WTI of $924,054 and $74,449, respectively, for
installation services and related subscriber equipment. In 1993 and 1994,
payments were made by WTI to Micom of $114,644 and $2,766, respectively, for
subscriber equipment. No payments were made by the Company or the joint
ventures to WTI during 1995.
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 totaling $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.
F-14
<PAGE> 23
(6) SEVERANCE LIABILITY:
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. 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 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 certain affiliates of the placement agent to acquire 169,333 shares of
common stock. 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).
F-15
<PAGE> 24
(8) STOCKHOLDERS' EQUITY:
OUTSTANDING WARRANTS
As of December 31, 1995, the Company had outstanding warrants 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 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 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>
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) which was paid in February 1996.
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.
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.
F-16
<PAGE> 25
Activity in the Plan is as follows:
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
----------- ------------
<S> <C> <C>
Options outstanding at December 31, 1993 151,666 $6.75-$15.75
Granted 25,000 $15.75
Canceled (13,333) $6.75-$15.75
----------- ------------
Options outstanding at December 31, 1994 163,333 $6.75-$15.75
Canceled (48,338) $6.75-$8.40
-----------
Options outstanding at December 31, 1995 114,995 $6.75-$15.75
===========
Options available for grant 301,671
===========
Exercisable at end of year 103,746
===========
</TABLE>
Prior to the completion of the merger with Heartland, the Company intends to
terminate the Plan.
(9) COMMITMENTS AND CONTINGENCIES:
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>
1996 $ 370,000
1997 366,000
1998 344,000
1999 48,000
2000 48,000
Thereafter 24,000
-------------
$ 1,200,000
=============
</TABLE>
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 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.
F-17
<PAGE> 26
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 1933 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.
The Company is currently attempting to amend the Arizona 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 currently provides that
if the rescission offers 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
order.
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 December 31, 1995, approximately
1,170 of the approximately 1,930 purchasers of general partnership interests
had been offered 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
F-18
<PAGE> 27
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.
GAIN CONTINGENCY
As discussed in Note 1, the Merger Agreement provides that specified amounts
are to be periodically offset against the AWS loan as additional consideration
for the nonsolicitation covenant contained in the Merger Agreement. As of
December 31, 1995, the AWS loan has been reduced by $800,000 pursuant to the
provisions of the Merger Agreement. However, due to certain contingencies, no
amounts have been recognized as income in the accompanying statement of
operations in accordance with SFAS No. 5.
F-19
<PAGE> 28
OTHER CONTINGENCIES
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. Subsequent to December 31, 1995, the Company paid Mr. Jenkins
$120,000 to settle this lawsuit. This amount is included in accrued
liabilities and other expense in the accompanying financial statements.
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 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 new
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
F-20
<PAGE> 29
August 13, 1993, of approximately $1,000,000 were utilized by Wireless
California to reduce its tax obligations and to recapture approximately
$310,000 of previously paid taxes. In exchange, Wireless California agreed to
contribute this refund to the capital of the Company. 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, 1995, the Company has approximately $7,897,000 in net
operating loss carryforwards available for financial reporting and income tax
purposes which expire in 2010.
In 1995 there were no material temporary differences between financial
reporting and income tax reporting. As a result, at December 31, 1995, the
Company has a net deferred tax asset of approximately $3,159,000 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.
(11) SUBSEQUENT EVENT:
Effective February 23, 1996, the Merger Agreement described in Note 1 and the
Minneapolis and Fort Worth Agreements described in Note 4 were consummated.
F-21
<PAGE> 30
ARTHUR ANDERSEN LLP
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994 AND 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
F-22
<PAGE> 31
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) as of December 31,
1994 and 1995, and the related consolidated statements of operations, partners'
equity and cash flows for the years ended December 31, 1993, 1994 and 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 audit.
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, 1994
and 1995, and the results of operations and their cash flows for the years then
ended December 31, 1993, 1994 and 1995, 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,
February 23, 1996.
F-23
<PAGE> 32
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A General Partnership)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 21,836 $ 108,527
Accounts receivable 51,750 10,730
Prepaid expenses and other current assets 23,923 16,602
----------- -----------
Total current assets 97,509 135,859
INVESTMENT IN WIRELESS SYSTEMS AND
EQUIPMENT, at cost, net (Notes 1 and 4) 3,763,423 2,986,566
----------- -----------
$ 3,860,932 $ 3,122,425
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 300,047 $ 442,473
Advances from affiliates (Note 1) 471,613 710,661
Notes payable (Note 1) -- 355,657
----------- -----------
Total current liabilities 771,660 1,508,791
----------- -----------
MINORITY INTEREST (Note 1) 143,792 84,329
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
PARTNERS' EQUITY (Note 2):
General partners' equity 6,064,497 4,648,322
Less- syndication costs (3,119,017) (3,119,017)
----------- -----------
Total partners' equity 2,945,480 1,529,305
----------- -----------
$ 3,860,932 $ 3,122,425
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-24
<PAGE> 33
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A General Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Subscriber $ 646,745 $ 650,214 $ 581,799
Installation 84,554 7,517 6,408
Other 60,578 9,529 9,281
-------------- -------------- --------------
Total revenues 791,877 667,260 597,488
-------------- -------------- --------------
OPERATING EXPENSES:
Operating and installation 594,747 567,461 525,908
Selling and marketing 101,089 3,206 4,501
General and administrative 412,652 692,784 764,186
Depreciation and amortization 754,116 786,572 778,532
-------------- -------------- --------------
Total operating expenses 1,862,604 2,050,023 2,073,127
-------------- -------------- --------------
NET LOSS FROM OPERATIONS (1,070,727) (1,382,763) (1,475,639)
MINORITY INTEREST IN LOSSES 57,689 62,281 59,464
-------------- -------------- --------------
NET LOSS $ (1,013,038) $ (1,320,482) $ (1,416,175)
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-25
<PAGE> 34
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A General Partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
General Total
Partners' Syndication Partner's
Equity Costs Equity
-------------- -------------- --------------
<S> <C> <C> <C>
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 (1,416,175) -- (1,416,175)
------------- -------------- --------------
BALANCE, December 31, 1995 $ 4,648,322 $ (3,119,017) $ 1,529,305
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE> 35
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A General Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,013,038) $ (1,320,482) $ (1,416,175)
Adjustments to reconcile net loss to net cash
used for operating activities-
Depreciation and amortization 754,116 786,572 778,532
Gain on sale of equipment -- -- (9,049)
Minority interest in losses (57,689) (62,281) (59,464)
Changes in assets and liabilities-
(Increase) decrease in accounts receivable (42,123) 36,708 41,020
Decrease (increase) in prepaid expenses and
other current assets 5,940 (5,693) 7,321
(Decrease) increase in accounts payable and
accrued liabilities (155,594) 214,596 142,426
-------------- ------------- --------------
Net cash used for operating
activities (508,388) (348,580) (515,389)
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in wireless systems and equipment (738,967) (86,365) (23,028)
Proceeds from sale of equipment -- -- 30,403
-------------- ------------- --------------
Net cash (used for) provided by
investing activities (738,967) (86,365) 7,375
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash returned to partners (12,500) -- --
Proceeds from issuance of notes payable
and accrued interest -- -- 355,657
Net advances from affiliates 366,984 361,883 239,048
-------------- ------------- --------------
Net cash provided by
financing activities 354,484 361,883 594,705
-------------- ------------- --------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (892,871) (73,062) 86,691
CASH AND CASH EQUIVALENTS, beginning
of year 987,769 94,898 21,836
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of
year $ 94,898 $ 21,836 $ 108,527
=============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE> 36
FORT WORTH WIRELESS CABLE T.V. ASSOCIATES
(A General Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION:
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.
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 Services Agreement) with American Wireless Systems, Inc., a
California corporation (Wireless California). Under the terms of the Services
Agreement, Wireless California was obligated to provide various services
including assistance with 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.
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 contributions of 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.
F-28
<PAGE> 37
OPERATIONS
The system had approximately 1,800 and 1,500 subscribers at December 31, 1994
and 1995, 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. 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 $471,613 from May 1,
1993 to December 31, 1994, and an additional $239,048 during 1995 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 (the Merger Agreement),
pursuant to which a wholly- owned subsidiary of Heartland would be merged into
AWS and AWS would become a wholly-owned subsidiary of Heartland (Note 7). On
October 4, 1995, the Partnership and Heartland executed an Asset Purchase
Agreement (the Fort Worth Agreement or the Asset Purchase Agreement) pursuant to
which Heartland would purchase the Partnership's 79.99% interest in AWS-Ft.
Worth. Pursuant to the Fort 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 ten-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 (Note 7).
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 agreed to loan the
Partnership up to $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. As of December 31, 1995, the amount outstanding on the loan, plus accrued
interest, was $355,657.
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.
F-29
<PAGE> 38
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.
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.
FREQUENCY RIGHTS
Included in investment in wireless systems and equipment is $3,231,364 of
frequency rights as of December 31, 1994 and 1995, which are being amortized
over a ten-year period.
REVENUE RECOGNITION
Subscription revenues are recognized in the period of service. Installation fees
are recognized as revenues upon subscriber hook-up.
INCOME TAXES
No income tax liability or benefit is presented in the accompanying consolidated
financial statements as it will accrue to the partners.
(2) PARTNERS' EQUITY:
In 1991, WCTVA sold 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 (see 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.
F-30
<PAGE> 39
(3) JOINT VENTURE:
As indicated in Note 1, AWS-Ft. Worth has been operated through an informal
joint venture agreement (the Joint Venture Agreement). Key aspects of the Joint
Venture Agreement utilized in the development of the accompanying consolidated
financial statements are as follows.
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 initial
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.
ALLOCATIONS OF PROFIT 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).
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 $100,000 has been recorded as general and administrative expense in the
accompanying consolidated financial statements for the years ended December 31,
1993, 1994 and 1995.
(4) INVESTMENT IN WIRELESS SYSTEMS AND EQUIPMENT:
Investment in wireless systems and equipment consists of the following at
December 31:
<TABLE>
<CAPTION>
Estimated
Useful Life
in Years 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Frequency rights 10 $ 3,231,364 $ 3,231,364
Broadcast equipment and inventory 3-7 2,166,958 2,162,017
Vehicles 5 48,689 48,173
Office equipment 5-7 101,582 93,054
Leasehold improvements 7 5,534 8,770
-------------- --------------
5,554,127 5,543,378
Less - Accumulated depreciation and
amortization (1,790,704) (2,556,812)
-------------- --------------
$ 3,763,423 $ 2,986,566
============== ==============
</TABLE>
F-31
<PAGE> 40
(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 general 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 is 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 32% of
AWS-Delaware.
In 1993, payments of $542,521 were made to WTI for installation services and
related subscriber equipment. Effective July 1993, AWS-Ft. Worth ceased
utilizing the services of WTI.
(6) COMMITMENTS AND CONTINGENCIES:
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>
1996 $ 60,500
1997 61,200
1998 15,300
-------------
$ 137,000
=============
</TABLE>
Lease expense of $62,347, $55,830 and $57,730 has been recorded for the years
ended December 31, 1993, 1994 and 1995, respectively.
F-32
<PAGE> 41
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 the years ending
December 31:
<TABLE>
<S> <C>
1996 $ 108,300
1997 60,500
1998 1,200
1999 1,200
2000 1,200
Thereafter 1,700
-------------
$ 174,100
=============
</TABLE>
Lease expense of $93,013, $90,460 and $108,300 has been recorded for the years
ended December 31, 1993, 1994 and 1995, respectively.
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, 1995, securities administrators in 22 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 and 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 results of operations.
(7) SUBSEQUENT EVENT:
Effective February 23, 1996, the Asset Purchase and Merger Agreements discussed
in Note 1 were consummated.
F-33
<PAGE> 42
ARTHUR ANDERSEN LLP
WIRELESS CABLE T.V. ASSOCIATES #38
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994 AND 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
F-34
<PAGE> 43
ARTHUR ANDERSEN LLP
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) as of December 31, 1994 and
1995, and the related consolidated statements of operations, partners' equity
and cash flows for the years ended December 31, 1993, 1994 and 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 WCTVA as of December 31, 1994
and 1995, and the results of their operations and their cash flows for the
years ended December 31, 1993, 1994 and 1995, 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,
February 23, 1996.
F-35
<PAGE> 44
WIRELESS CABLE T.V. ASSOCIATES #38
(A General Partnership)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 620,058 $ 301,887
Accounts receivable 111,848 31,677
Prepaid expenses and other current assets 13,840 125,935
-------------------- --------------------
Total current assets 745,746 459,499
INVESTMENT IN WIRELESS SYSTEMS AND
EQUIPMENT, at cost, net (Notes 1 and 5) 6,679,478 5,931,061
-------------------- --------------------
$ 7,425,224 $ 6,390,560
==================== ====================
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 162,033 $ 270,998
Advances from affiliates 49,112 100,538
Notes payable and obligations under capital lease
(Notes 1 and 4) 2,016,692 3,081,432
-------------------- --------------------
Total current liabilities 2,227,837 3,452,968
-------------------- --------------------
MINORITY INTEREST (Note 1) 380,365 249,451
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' EQUITY (Note 2):
General partners' equity 9,433,022 7,304,141
Less- syndication costs (4,616,000) (4,616,000)
-------------------- --------------------
Total partners' equity 4,817,022 2,688,141
-------------------- --------------------
$ 7,425,224 $ 6,390,560
==================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-36
<PAGE> 45
WIRELESS CABLE T.V. ASSOCIATES #38
(A General Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
REVENUES:
Subscriber $ 220,537 $ 459,215 $ 863,266
Installation 31,584 11,360 15,635
Other 20,031 64,471 102,827
-------------- -------------- ---------------
Total revenues 272,152 535,046 981,728
-------------- -------------- ---------------
OPERATING EXPENSES:
Operating and installation 690,835 1,187,795 1,434,557
Selling and marketing 70,881 71,317 15,527
General and administrative 443,772 391,839 719,850
Depreciation and amortization 738,860 977,471 1,071,589
-------------- -------------- ---------------
Total operating expenses 1,944,348 2,628,422 3,241,523
-------------- -------------- ---------------
NET LOSS FROM OPERATIONS (1,672,196) (2,093,376) (2,259,795)
MINORITY INTEREST IN LOSSES 127,217 138,155 130,914
-------------- -------------- ---------------
NET LOSS $ (1,544,979) $ (1,955,221) $ (2,128,881)
============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-37
<PAGE> 46
WIRELESS CABLE T.V. ASSOCIATES #38
(A General Partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
General Total
Partners' Syndication Partner's
Equity Costs Equity
-------------- -------------- ---------------
<S> <C> <C> <C>
- -
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 (2,128,881) - (2,128,881)
-------------- -------------- ---------------
BALANCE, December 31, 1995 $ 7,304,141 $ (4,616,000) $ 2,688,141
============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-38
<PAGE> 47
WIRELESS CABLE T.V. ASSOCIATES #38
(A General Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,544,979) $ (1,955,221) $ (2,128,881)
Adjustments to reconcile net loss to net cash
used for operating activities-
Depreciation and amortization 738,860 977,471 1,071,589
Minority interest in losses (127,217) (138,155) (130,914)
Changes in assets and liabilities-
(Increase) decrease in accounts
receivable (14,222) (93,986) 80,171
(Increase) decrease in prepaid expenses and
other current assets (64,098) 56,159 (112,095)
(Decrease) increase in accounts payable and
accrued liabilities (103,166) 87,343 108,965
-------------- -------------- ------------
Net cash used for
operating activities (1,114,822) (1,066,389) (1,111,165)
-------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in wireless systems and equipment (1,214,519) (520,967) (323,172)
-------------- -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributed by partners, net 920,576 - -
Proceeds from issuance of notes payable
and accrued interest - 2,000,000 1,624,336
Payments on notes payable - - (550,000)
Net advances from affiliates 178,844 49,112 51,426
Payments on capital lease (2,445) (9,595) (9,596)
-------------- -------------- ------------
Net cash provided by financing
activities 1,096,975 2,039,517 1,116,166
-------------- -------------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,232,366) 452,161 (318,171)
CASH AND CASH EQUIVALENTS, beginning
of year 1,400,263 167,897 620,058
-------------- -------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 167,897 $ 620,058 $ 301,887
============== ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-39
<PAGE> 48
WIRELESS CABLE T.V. ASSOCIATES #38
(A General Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) ORGANIZATION:
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 Services Agreement) with Wireless California. Under the terms
of the Services Agreement, Wireless California provided various services
including assistance with 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 32% of
AWS-Delaware.
F-40
<PAGE> 49
OPERATIONS
The system, which was launched in March 1993, had approximately 2,200 and 2,900
subscribers at December 31, 1994 and 1995, 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 (the Merger Agreement)
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 (Note 8). 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 (the Asset Purchase
Agreement or the Minneapolis Agreement). In addition, pursuant to the
Minneapolis Agreement, Heartland has agreed to assume the obligation to repay
the $2,000,000 note owed 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 $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 (Note 8).
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 remaining $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.
F-41
<PAGE> 50
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Partnership and AWS-Minneapolis. All significant intercompany accounts have
been eliminated in consolidation.
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, 1994, cash equivalents include a $105,000 restricted deposit
collateralizing the AWS-Minneapolis office lease.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
FREQUENCY RIGHTS
Included in investment in wireless systems and equipment are $6,204,332 and
$6,214,331 of frequency rights as of December 31, 1994 and 1995, respectively,
which are being amortized over a ten-year period.
REVENUE RECOGNITION
Subscription revenues are recognized in the period of service. Installation
fees are recognized as revenue upon subscriber hook-up.
INCOME TAXES
No income tax liability or benefit is presented in the accompanying
consolidated financial statements as it will accrue to the partners.
(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.
F-42
<PAGE> 51
(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.
INITIAL CAPITAL CONTRIBUTIONS
Each member contributed their respective interests in the wireless cable
system assets to AWS-Minneapolis 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.
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.
ALLOCATIONS OF PROFIT 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).
CASH DISTRIBUTIONS
Distributions of available operating cash flows are to be made in accordance
with the member's existing capital contribution percentages.
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, $83,333 and $100,000 has been recorded as general and administrative
expense in the accompanying consolidated financial statements for the years
ended December 31, 1993, 1994 and 1995, respectively.
F-43
<PAGE> 52
(4) NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASE:
Notes payable, including accrued interest, and obligations under capital lease
consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Note payable to AWS-Delaware, interest at 8%,
due February 28, 1996, or the abandonment of
the Minneapolis Agreement; secured by a 10%
interest in the joint venture, as defined $ 2,000,000 $ 2,000,000
Notes payable to Heartland, interest at prime rate
plus 2%, due upon the earlier of the consummation
or termination of the Minneapolis Agreement, or
February 28, 1997 - 1,074,336
Obligations under capital lease, aggregate monthly
payments of $810 through September 1996 16,692 7,096
------------- -------------
$ 2,016,692 $ 3,081,432
============= =============
</TABLE>
(5) INVESTMENT IN WIRELESS SYSTEMS AND EQUIPMENT:
Investment in wireless systems and equipment consists of the following at
December 31:
<TABLE>
<CAPTION>
Estimated
Useful Life
in Years 1994 1995
------------- -------------- --------------
<S> <C> <C> <C>
Frequency rights 10 $ 6,204,332 $ 6,214,331
Broadcast equipment and inventory 3-7 2,010,842 2,317,376
Vehicles 5 77,271 77,271
Office equipment 5-7 106,834 112,246
Leasehold improvements 7 1,450 1,450
-------------- --------------
8,400,729 8,722,674
Less - Accumulated depreciation and
amortization (1,721,251) (2,791,613)
-------------- --------------
$ 6,679,478 $ 5,931,061
============== ==============
</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 Fort
Worth, Texas.
F-44
<PAGE> 53
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.
WTI purchased certain of the subscriber equipment that is 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 32% 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:
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>
1996 $ 98,280
1997 98,280
1998 98,280
-------------
$ 294,840
=============
</TABLE>
Lease expense of $57,269, $43,541 and $89,480 has been recorded for the years
ended December 31, 1993, 1994 and 1995, respectively.
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
the years ending December 31:
<TABLE>
<S> <C>
1996 $ 371,488
1997 324,988
1998 303,988
1999 303,988
2000 303,988
Thereafter 163,924
-------------
$ 1,772,364
=============
</TABLE>
F-45
<PAGE> 54
Lease expense of $248,350, $317,180 and $351,380 has been recorded for the
years ended December 31, 1993, 1994 and 1995, 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 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 results of operations.
(8) SUBSEQUENT EVENT:
Effective February 23, 1996, the Asset Purchase and Merger Agreements described
in Note 1 were consummated.
F-46
<PAGE> 55
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-47
<PAGE> 56
CABLEMAXX, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1994 1995
---------- -----------
<S> <C> <C>
Cash and cash equivalents............................... $ 875,963 $ 2,206,303
Investments............................................. 13,682,358 --
Subscriber receivables, net of allowance for doubtful
accounts of approximately $211,000 and $64,000 as
of June 30, 1994 and 1995............................. 398,602 341,974
Prepaids and other...................................... 653,054 318,300
Systems and equipment, net.............................. 24,681,896 27,424,267
Intangible assets, net.................................. 12,910,798 21,663,254
----------- -----------
Total assets.................................. $53,202,671 $51,954,098
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities................ $ 5,131,799 $ 2,687,361
Due to affiliates....................................... 260,198 235,476
Subscriber deposits..................................... 262,089 207,241
Deferred revenue........................................ 262,650 307,954
Notes payable........................................... 3,200,000 10,807,500
----------- -----------
Total liabilities............................. 9,116,736 14,245,532
----------- -----------
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 and 9,507,311 shares
issued and outstanding as of June 30, 1994
and 1995........................................... 86,000 95,073
Additional paid-in capital............................ 53,274,159 57,670,727
Accumulated deficit................................... (9,274,224) (20,057,234)
----------- -----------
Total stockholders' equity.................... 44,085,935 37,708,566
----------- -----------
Total liabilities and stockholders' equity.... $53,202,671 $51,954,098
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE> 57
CABLEMAXX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR
CONSOLIDATED
------------
PERIOD FROM PERIOD FROM
JULY 1, 1992 DECEMBER 18,
TO DECEMBER 1992 TO JUNE YEAR ENDED YEAR ENDED
17, 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
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE> 58
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
== === ========= ======= =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE> 59
CABLEMAXX, INC.
CONSOLIDATED 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 period............ 502,406 -- -- 875,963
----------- ----------- ------------ ------------
Cash and cash equivalents, end of period.................. $ 44,447 $ -- $ 875,963 $ 2,206,303
=========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-51
<PAGE> 60
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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-52
<PAGE> 61
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-53
<PAGE> 62
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 installations:
Material..................... Straight-line 5.5 to 7 years Straight-line 7 years
Outside contract labor....... 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.
F-54
<PAGE> 63
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 goodwill.... Straight-line 15 years Straight-line Original term of
channel lease -- 5
to 10 years
Trademark/tradename............ Straight-line 15 years Straight-line 10 years
Loan acquisition costs......... Straight-line which 6 years -- --
approximates
interest method
</TABLE>
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>
F-55
<PAGE> 64
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
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
QUARTERLY DATES PRINCIPAL 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
F-56
<PAGE> 65
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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.
F-57
<PAGE> 66
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-58
<PAGE> 67
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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. 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.
F-59
<PAGE> 68
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
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.
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. 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.
(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.
F-60
<PAGE> 69
CABLEMAXX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The proposed merger was consummated on February 23, 1996.
F-61
<PAGE> 70
CABLEMAXX, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
(UNAUDITED)
<S> <C>
Cash and cash equivalents........................................ $ 1,743,146
Subscriber receivables, net of allowance for doubtful accounts
of approximately $59,000 as of December 31, 1995............... 441,545
Prepaids and other............................................... 615,889
Systems and equipment, net....................................... 26,018,787
Intangible assets, net........................................... 20,965,356
------------
Total assets........................................... $ 49,784,723
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities......................... $ 3,042,625
Due to affiliates................................................ 357,324
Subscriber deposits and deferred revenue......................... 528,991
Deposit from sale of channel rights.............................. 2,400,000
Notes payable.................................................... 11,472,875
------------
Total liabilities...................................... 17,801,815
------------
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,
9,507,311 shares issued and outstanding........................ 95,073
Additional paid in capital....................................... 57,670,727
Accumulated deficit.............................................. (25,782,892)
------------
Total stockholders' equity............................. 31,982,908
------------
Total liabilities and stockholders' equity............. $ 49,784,723
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE> 71
CABLEMAXX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues........................................... $ 6,474,891 $ 7,303,447
----------- -----------
Operating expenses:
Systems operations............................... 2,904,021 3,531,402
Selling, general and administrative.............. 4,301,718 3,762,946
Depreciation and amortization.................... 3,537,340 5,139,031
----------- -----------
Total operating expenses................. 10,743,079 12,433,379
----------- -----------
Operating loss..................................... (4,268,188) (5,129,932)
Interest expense................................... (240,803) (632,938)
Other income....................................... 150,500 37,212
----------- -----------
Net loss........................................... $(4,358,491) $(5,725,658)
=========== ===========
Net loss per share................................. $ (0.51) $ (0.60)
=========== ===========
Weighted average number of shares outstanding...... 8,600,000 9,507,311
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-63
<PAGE> 72
CABLEMAXX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(4,358,491) $(5,725,658)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 3,537,340 5,139,031
Changes in assets and liabilities:
Subscriber receivables, net.................... (153,673) (99,571)
Prepaids and other............................. (444,935) (297,589)
Accounts payable and accrued liabilities....... (2,736,596) 355,264
Due to affiliates.............................. (149,869) 121,848
Subscriber deposits and deferred revenue....... 18,721 13,796
----------- -----------
Net cash used in operating activities....... (4,287,503) (492,879)
----------- -----------
Cash flows from investing activities:
Purchases of systems and equipment, net............. (6,474,374) (2,899,669)
Purchases of channel rights......................... (3,623,541) (135,984)
Proceeds from sale of channel rights................ 0 2,400,000
----------- -----------
Net cash used in investing activities....... (10,097,915) (635,653)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings............................ 7,607,500 665,375
Loan acquisition costs.............................. (108,500) 0
----------- -----------
Net cash provided by financing activities... 7,499,000 665,375
----------- -----------
Net decrease in cash and cash equivalents............. (6,886,418) (463,157)
Cash and cash equivalents, beginning of period........ 14,558,321 2,206,303
----------- -----------
Cash and cash equivalents, end of period.............. $ 7,671,903 $ 1,743,146
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-64
<PAGE> 73
CABLEMAXX, INC.
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. STATEMENT OF ACCOUNTING PRESENTATIONS AND OTHER INFORMATION
The financial statements as of December 31, 1995, are unaudited; however,
in the opinion of management, such statements include all adjustments necessary
for a fair presentation of the results for the periods presented. The interim
financial statements should be read in conjunction with the financial statements
and notes thereto for the year ended June 30, 1995. Interim results are not
necessarily indicative of results for a full year.
The accompanying unaudited financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
2. SYSTEMS AND EQUIPMENT
Systems and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Wireless cable system.................................................. $ 38,540,995
Vehicles, furniture and equipment...................................... 2,239,013
Buildings and leasehold improvement.................................... 835,276
Land................................................................... 50,030
------------
41,665,314
Accumulated depreciation and amortization.............................. (15,646,527)
------------
Systems and equipment, net............................................. $ 26,018,787
============
</TABLE>
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid $542,961 in interest (net of amounts capitalized into
principal on notes payable) for the six months ended December 31, 1995.
4. SUBLEASE AND PURCHASE AGREEMENT
On October 10, 1995, the Company received a $2.4 million non-refundable
deposit from Heartland Wireless Communications, Inc. ("Heartland"), related to a
sublease and purchase agreement with Heartland for channel rights in the unbuilt
markets in Texas (Sherman/Denison, Lubbock, Athens and Amarillo). Payment to the
Company was made by Heartland following Heartland's receipt of consent from
certain of its bondholders to the sublease agreement and related merger
agreement.
If the merger agreement between the Company and Heartland is terminated as
a result of a breach thereof by the Company or as a result of the acceptance by
the Company's board of directors of a competing acquisition proposal, Heartland
will acquire such wireless cable channel rights for nominal additional
consideration. If the merger agreement is terminated for any other reason,
Heartland shall acquire such wireless cable channel rights for an amount equal
to the difference between the appraised value of such rights and the $2.4
million previously paid by Heartland.
5. SUBORDINATED LOAN AGREEMENT
On December 26, 1995, the Company entered into a loan agreement with
Heartland for up to $1,000,000, bearing interest at a rate of prime plus 2%.
Under the loan agreement, $500,000 was advanced on
F-65
<PAGE> 74
CABLEMAXX, INC.
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
December 29, 1995 to be used for working capital purposes and the remaining
$500,000 is available to be advanced to the Company for subscriber growth at a
rate of $500 per additional subscriber.
In the event that the merger with Heartland is not consummated, the loan
and all accrued interest is payable August 29, 1996; provided, that if the
merger is terminated as a result of a competing acquisition proposal, then the
loan and interest would be immediately due and payable.
F-66
<PAGE> 75
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-67
<PAGE> 76
TECHNIVISION, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
NOVEMBER
MAY 31, MAY 31, 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-68
<PAGE> 77
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 amortization........ 1,977,352 2,371,891 2,623,736 1,323,662 1,299,603
----------- ----------- ----------- ---------- ----------
Total operating expenses..... 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-69
<PAGE> 78
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-70
<PAGE> 79
TECHNIVISION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, 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-71
<PAGE> 80
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.
F-72
<PAGE> 81
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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 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.
F-73
<PAGE> 82
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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>
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
F-74
<PAGE> 83
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
F-75
<PAGE> 84
TECHNIVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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 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-76
<PAGE> 85
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-77
<PAGE> 86
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-78
<PAGE> 87
CROSS COUNTRY DIVISION
STATEMENTS OF OPERATIONS
AND DIVISION EQUITY
<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>
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-79
<PAGE> 88
CROSS COUNTRY DIVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1, SIX MONTHS AUGUST 19, 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>
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-80
<PAGE> 89
CROSS COUNTRY DIVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
(INFORMATION AS OF JUNE 30, 1995 AND FOR THE
SIX-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-81
<PAGE> 90
CROSS COUNTRY DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1994
(INFORMATION AS OF JUNE 30, 1995 AND FOR THE
SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
(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-82
<PAGE> 91
CROSS COUNTRY DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1994
(INFORMATION AS OF JUNE 30, 1995 AND FOR THE
SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
(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-83
<PAGE> 92
CROSS COUNTRY DIVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1994
(INFORMATION AS OF JUNE 30, 1995 AND FOR THE
SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
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-84
<PAGE> 93
HEARTLAND WIRELESS COMMUNICATIONS, INC.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
consists of an unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1995 and the related unaudited Pro Forma Condensed Combined
Statement of Operations for the year then ended (collectively, the "Pro Forma
Statements"). The Pro Forma Statements reflect adjustments to the historical
consolidated financial statements of the Company to give effect to the
Transactions, the CS Transaction and certain other events which occurred during
1995. The Pro Forma Condensed Combined Balance Sheet has been prepared
assuming the Transactions and the CS Transaction occurred on December 31, 1995,
and the Pro Forma Condensed Combined Statement of Operations has been prepared
assuming the Transactions, the CS Transaction and certain other acquisitions
and transactions completed during 1995 (as discussed in the Notes to the Pro
Forma Statements) occurred on January 1, 1995.
The Transactions were 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 have been determined utilizing the historical
unaudited balance sheet of TechniVision as of November 30, 1995 and the
unaudited statement of operations for the year ended November 30, 1995. The
TechniVision historical statement of operations for the year ended November 30,
1995 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 November 30, 1994 and 1995. The CMAX
historical statement of operations for the year ended December 31, 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 1995. No material adjustments were recorded
in determining such amounts.
The Pro Forma Statements and accompanying notes should be read in conjunction
with the Company's consolidated financial statements (including notes thereto)
appearing in the Company's 1995 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. 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 management believes are
reasonable. In the opinion of management, all adjustments have been made that
are necessary to present fairly the Pro Forma Statements.
F-85
<PAGE> 94
HEARTLAND WIRELESS COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Historical
------------------------------------------------------------------------------------
FTW Minneapolis
Assets Heartland CMAX AWS Partnership Partnership TechniVision
------ ----------- --------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 23,143 $ 1,743 $ 342 $ 109 $ 302 $ 78
Restricted investments 12,324 -- -- -- -- --
Net assets held for sale 2,200 -- -- -- -- --
Other current assets 4,127 1,058 71 27 158 477
---------- --------- -------- ----------- ----------- ------------
Total current assets 41,794 2,801 413 136 460 555
Systems and equpment, net 60,649 26,019 206 890 1,473 9,002
License and leased license investment, net 60,421 20,327 3,346 2,097 4,457 3,553
Investment in joint ventures -- -- 491 -- -- --
Investments in affiliates 14,077 -- -- -- -- --
Excess of cost over fair value of net
assets acquired 4,411 -- -- -- -- --
Restricted investments 6,415 -- -- -- -- --
Note receivable - noncurrent -- -- -- -- -- --
Other assets, net 17,638 638 2,495 -- -- 1,441
-- -- -- -- -- --
---------- --------- -------- -------- -------- -----------
$ 205,405 $ 49,785 $ 6,951 $ 3,123 $ 6,390 $ 14,551
========== ========= ======== ======== ======== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current portion of long-term debt $ 765 $ 788 $ 35 $ 356 $ 3,081 $ 13,233
Other current liabilities 10,208 6,329 1,010 1,154 372 3,642
---------- --------- -------- -------- -------- ----------
Total current liabilities 10,973 7,117 1,045 1,510 3,453 16,875
Long-term debt, less current
portion 140,887 10,685 1,831 -- -- 6,061
Deferred income taxes 1,628 -- -- -- -- --
Other liabilities 229 -- -- 84 249 --
Stockholders' equity 51,688 31,983 4,075 1,529 2,688 (8,385)
-- -- -- -- -- --
---------- --------- -------- -------- -------- ----------
$ 205,405 $ 49,785 $ 6,951 $ 3,123 $ 6,390 $ 14,551
========== ========= ======== ======== ======== ===========
<CAPTION>
Pro Forma Adjustments
-------------------------------
Purchase Investment in
Assets Accounting CS Wireless Pro Forma
------ ------------- ------------- ---------
<S> <C> <C> <C>
Cash and cash equivalents $ (3,000)(E) $(11,473)(F) $ 64,122
53,340 (H)
(462)(G)
Restricted investments -- -- 12,324
Net assets held for sale 11,150 (A) -- 13,350
Other current assets -- (731)(G) 5,187
---------- -------- ---------
Total current assets 8,150 40,674 94,983
Systems and equpment, net -- (18,280)(G) 79,959
License and leased license investment, net 120,636 (A) (105,708)(G) 109,129
Investment in joint ventures 10,560 (A) -- --
(11,051)(B)
Investments in affiliates -- (68,340)(H) 68,335
122,598 (G)
Excess of cost over fair value of net
assets acquired 22,438 (D) -- 26,849
Restricted investments -- -- 6,415
Note receivable - noncurrent -- 15,000 (H) 15,000
Other assets, net (1,441)(A) (642)(G) 12,077
(8,052)(C)
---------- -------- ---------
$ 141,240 $(14,698) $ 412,747
========== ======== =========
Liabilities and Stockholders' Equity
------------------------------------
Current portion of long-term debt $(12,664)(A) $ (788)(F) $ 1,947
(2,859)(C)
Other current liabilities (140)(A) (3,035)(G) 16,147
(3,393)(C)
-------- -------- ---------
Total current liabilities (19,056) (3,823) 18,094
Long-term debt, less current portion (5,871)(A) (10,685)(F) 140,918
(1,800)(C) (190)(G)
Deferred income taxes 22,438 (D) 24,066
Other liabilities 10,716 (A) 227
(11,051)(B)
Stockholders' equity (31,890)(A) 229,442
180,754 (A)
(3,000)(E) -- --
-------- -------- ---------
$141,240 $(14,698) $ 412,747
======== ======== =========
</TABLE>
See accompanying notes to Pro Forma Statements.
F-86
<PAGE> 95
HEARTLAND WIRELESS COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Statement of Operations
Year ended December 31, 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical
---------------------------------------------------------------------------------
FTW Minneapolis
Heartland CMAX AWS Partnership Partnership TechniVision
--------- -------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 15,300 $ 14,292 $ 100 $ 597 $ 982 $ 6,716
---------- --------- ---------- ----------- ----------- ------------
Operating expenses:
Systems operations 4,893 6,928 -- 526 1,435 3,306
Selling, general and administrative 11,887 8,512 2,123 768 735 3,029
Depreciation and amortization 6,234 9,876 83 779 1,072 2,600
---------- ---------- ---------- ----------- ----------- ------------
Total operating expenses 23,014 25,316 2,206 2,073 3,242 8,935
---------- ---------- ---------- ----------- ----------- ------------
Operating loss (7,714) (11,024) (2,106) (1,476) (2,260) (2,219)
Interest expense (13,717) (1,267) (161) -- -- (1,469)
Equity in losses of affiliates (1,369) -- (188) -- -- --
Interest income and other 2,613 142 763 59 131 3,616
---------- ---------- ---------- ----------- ----------- -----------
Loss before income taxes (20,187) (12,149) (1,692) (1,417) (2,129) (72)
Income tax benefit 4,285 -- -- -- -- --
---------- ---------- ---------- ----------- ----------- ----------
Net loss $ (15,902) $ (12,149) $ (1,692) $ (1,417) $ (2,129) $ (72)
========== ========== ========== =========== =========== ==========
Net loss per share $ (1.34)
==========
Weighted average shares outstanding 11,865,551
==========
<CAPTION>
Pro Forma Adjustments
-----------------------------------------------------------------------------
Investments in
Wireless One
Purchase and
Accounting Other CS Wireless Pro Forma
------------ ------------ ------------- ----------
<S> <C> <C> <C> <C>
Revenues $ -- $ 1,284 (N) $ (632)(T) $ 32,994
----------- --------- ---------- ----------
Operating expenses:
Systems operations -- 627 (N) (4,111)(S) 13,454
250 (O) (400)(T)
Selling, general and administrative (1,862)(I) 587 (N) (5,472)(S) 20,309
350 (J) (348)(T)
Depreciation and amortization 2,974 (K) 351 (N) (8,506)(S) 16,661
1,122 (L) 270 (P) (194)(T)
----------- --------- ---------- ----------
Total operating expenses 2,584 2,085 (19,031) 50,424
----------- --------- ---------- ----------
Operating loss (2,584) (801) 12,754 (17,430)
Interest expense -- -- 161 (S) (16,453)
Equity in losses of affiliates 188 (M) 129 (Q) (4,954)(T) (18,564)
(12,370)(S)
Interest income and other (188)(M) -- (763)(S) 6,373
----------- --------- ---------- ----------
Loss before income taxes (2,584) (672) (5,172) (46,074)
Income tax benefit -- 12,273 (R) -- 16,558
----------- --------- ---------- ----------
Net loss $ (2,584) $ 11,601 $ (5,172) $ (29,516)
=========== ========= ========== ==========
Net loss per share $ (1.53)
==========
Weighted average shares outstanding 6,757,166 (A) 623,043 (U) 78,242 (U) 19,324,002
=========== ========= ========== ==========
</TABLE>
See accompanying notes to Pro Forma Statements.
F-87
<PAGE> 96
HEARTLAND WIRELESS COMMUNICATIONS, INC.
NOTES TO PRO FORMA STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(A) Reflects the allocation of the purchase prices of the individual
acquisitions comprising the Transactions to the fair values of the
assets acquired and liabilities assumed as follows:
<TABLE>
<CAPTION>
FTW Minneapolis
CMAX AWS Partnership Partnership TechniVision Total
---- --- ----------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Company shares issued 2,883,573 1,307,692 578,261 805,695 1,181,945 6,757,166
Share price 26.75 26.75 26.75 26.75 26.75 26.75
---------- ---------- -------- -------- --------- ----------
Purchase price $ 77,136 $ 34,981 $ 15,468 $ 21,552 $ 31,617 $ 180,754
========== ========== ======== ======== ========= ==========
Historical net assets (liabilities) $ 31,983 $ 4,075 $ 1,529 $ 2,688 $ (8,385) $ 31,890
Less:
CMAX stock not acquired - - - - (1,441) (1,441)
Liabilities not assumed - - 496 215 17,964 18,675
---------- ---------- -------- -------- --------- ----------
31,983 4,075 2,025 2,903 8,138 49,124
Purchase accounting adjustments:
Net assets held for sale - 11,150 - - - 11,150
Investment in joint ventures - 10,560 - - - 10,560
License and leased license
investment 45,153 9,196 17,225 25,583 23,479 120,636
Minority interest - - (3,782) (6,934) - (10,716)
---------- ---------- -------- -------- --------- ----------
Purchase price $ 77,136 $ 34,981 $ 15,468 $ 21,552 $ 31,617 $ 180,754
========== ========== ======== ======== ========= ==========
</TABLE>
Historical balances of working capital and systems and equipment are
assumed to approximate their fair values. In addition, the Company
has evaluated the propriety of the carrying amounts of license and
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. Amounts allocated to net
assets held for sale represent the estimated fair value based on
anticipated selling prices of the net assets of the Los Angeles and
Memphis markets. Such markets have had no operations.
(B) Reflects the elimination of AWS' investment in the Fort Worth and
Minneapolis joint ventures.
(C) Reflects the elimination of the Company's intercompany loans to CMAX,
AWS and the Minneapolis Partnership of $2,900, $1,800 and $859,
respectively, and AWS' loans to the FTW and Minneapolis Partnerships
of $2,100 and $393, respectively.
(D) Reflects the recognition of deferred income taxes at an estimated 37%
effective tax rate on excess book value over tax basis relating to the
net assets acquired in the Transactions. The related increase in
excess of cost over fair value of net 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 of 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.
(E) Reflects estimated costs incurred in connection with the issuance of
the Company's Common Stock upon consummation of the Transactions.
(F) Reflects the repayment of certain indebtedness of CMAX by the Company
upon consummation of the Transactions. 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.
F-88
<PAGE> 97
HEARTLAND WIRELESS COMMUNICATIONS, INC.
NOTES TO PRO FORMA STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(G) Reflects the Company's contribution to CS Wireless of certain assets
and liabilities as follows:
<TABLE>
<CAPTION>
FTW Minneapolis
Company CMAX AWS Partnership Partnership Dayton
markets markets markets markets markets markets Total
------- ------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Cash $ 19 $ 10 $ - $ 109 $ 302 $ 22 $ 462
Other current
assets 106 245 - 27 158 195 731
Systems and
equipment 3,943 9,125 - 889 1,473 2,850 18,280
License and
leased license
investment 2,483 32,842 12,541 19,323 30,061 8,458 105,708
Other assets 4 638 - - - - 642
Current
liabilities (434) (1,041 - (442) (272) (846) (3,035)
Long-term debt - - - - - (190) (190)
------- -------- -------- -------- -------- -------- ---------
Investment in
CS Wireless $ 6,121 $ 41,819 $ 12,541 $ 19,906 $ 31,722 $ 10,489 $ 122,598
======= ======== ======== ======== ======== ======== =========
</TABLE>
(H) Reflects the receipt by the Company of (i) 35.4% of the outstanding
common shares of CS Wireless, (ii) $28,340 in cash, (iii) a $25
million promissory note (and the prepayment of such note in March
1996), and (iv) a $15,000 promissory note payable 10 years from the
closing of the CS Transaction. The Company's investment in CS
Wireless is reduced by the amount of cash and notes received in
exchange for the markets contributed to CS Wireless by the Company.
(I) Reflects the elimination of certain historical corporate general and
administrative expenses 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.
<TABLE>
<CAPTION>
CMAX TechniVision Total
---- ------------ -----
<S> <C> <C> <C>
Compensation (a) $ 513 $ - $ 513
Office, legal, BOD and other (b) 849 - 849
Management fees 230 270 500
------- ----- -------
$ 1,592 $ 270 $ 1,862
======= ===== =======
</TABLE>
(a) Represents 50% of historical corporate compensation expense of
CMAX.
(b) Represents historical expenses related to corporate office,
legal, board of director fees and shareholder costs.
(J) Reflects the additional expense from the non-competition and
consulting agreement with an AWS executive officer.
(K) Reflects incremental amortization of license and leased license
investment associated with the Transactions. Amortization of license
and leased license investment is calculated beginning with inception
of service in each respective market over an estimated useful life of
20 years.
(L) Reflects incremental amortization of excess of cost over fair value of
net assets acquired in the Transactions.
(M) Reflects the elimination of AWS' share of the losses of the Fort Worth
and Minneapolis joint ventures.
(N) Reflects the historical revenues and expenses associated with the
acquisitions of wireless cable systems in 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-89
<PAGE> 98
HEARTLAND WIRELESS COMMUNICATIONS, INC.
NOTES TO PRO FORMA STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(O) 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.
(P) Reflects the incremental amortization of license and leased license
investment associated with the acquisitions of wireless cable systems
in Lubbock, Texas; Lykens, Ohio; Paragould, Arkansas; and Sikeston,
Missouri and the incremental amortization of the excess of cost over
fair value of net assets acquired associated with the acquisitions of
certain minority interests in March 1995. The acquisition dates of
each respective system are set forth in note (N). Amortization of
license and leased license investment is calculated beginning with
inception of service in each respective market.
(Q) 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 the Company.
(R) 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 differences.
(S) Reflects the elimination of historical revenues and expenses (as
adjusted for additional amortization related to license and lease
license investment for the markets acquired in the Transactions)
associated with the net assets contributed to CS Wireless and the
Company's equity in pro forma losses of CS Wireless.
(T) 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, Inc. and
the Company's equity in pro forma losses of Wireless One, Inc.
(U) Reflects the effect of shares issued in connection with the
transaction with Wireless One, Inc. and certain other transactions as
if each had occurred as of January 1, 1995.
F-90
<PAGE> 99
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HEARTLAND WIRELESS COMMUNICATIONS,
INC.
Date: April 26, 1996 By: /s/ David D. Hagey
--------------------------------
David D. Hagey,
Vice President-Controller
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
Doc. No. Document Description
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
September 11, 1995, by and among American Wireless Systems,
Inc., the Registrant and Heartland Merger Sub, Inc.
(incorporated by reference from Exhibit 2.22 to the Registrant's
Registration Statement on Form S-4, File No. 33-65357 (the "Form
S-4") dated January 26, 1996).
2.2 Amended and Restated Asset Purchase Agreement, dated as of
October 4, 1995, by and between the Registrant and Fort Worth
Wireless Cable T.V. Associates (incorporated by reference from
Exhibit 2.23 to the Registrant's Registration Statement on Form
S-4).
2.3 Amended and Restated Asset Purchase Agreement, dated as of
October 4, 1995, by and between the Registrant and Wireless
Cable TV Associates No.38 (incorporated by reference from
Exhibit 2.24 to the Registrant's Registration Statement on Form
S-4).
2.4 Amended and Restated Agreement and Plan of Merger, dated as of
September 11, 1995, by and among the Registrant, CableMaxx,
Inc., and Heartland Merger Sub 2, Inc. (incorporated by
reference from Exhibit 2.25 to the Registrant's Registration
Statement on Form S-4).
2.5 Amended and Restated Asset Purchase Agreement, dated as of
October 19, 1995, by and among the Registrant, Three Sixty
Corp., and Technivision, Inc. (incorporated by reference from
Exhibit 2.26 to the Registrant's Registration Statement on Form
S-4).
2.6 Participation Agreement dated as of December 12, 1995, by and
among the Registrant, CAI Wireless Systems, Inc. and CS Wireless
Systems, Inc. (without exhibits except Stockholders Agreement)
(the "Participation Agreement") (incorporated by reference from
Exhibit 2.1 to the Registrant's Current Report on Form 8-K,
dated December 12, 1996).
2.7* Amendment No. 1 to Participation Agreement dated February 22,
1996.
23.1** Consent of KPMG Peat Marwick LLP, independent certified public
accountants (TechniVision, Inc.)
23.2** Consent of Arthur Andersen LLP, independent certified public
accountants (American Wireless Systems, Inc., Wireless Cable TV
Associates #38, and Fort Worth Wireless Cable T.V. Associates).
23.3** Coopers & Lybrand LLP, independent public accountants
(CableMaxx, Inc.)
23.4** Consent of KPMG Peat Marwick LLP, independent certified public
accountants (Cross Country Division)
99.1* February 23, 1996 Heartland Wireless Communications, Inc. News
Release (relating to the Transactions).
99.2* February 23, 1996 Heartland Wireless Communications, Inc. News
Release (relating to CS Transaction).
99.3* February 27, 1996 Heartland Wireless Communications, Inc. News
Release (providing further detail on the Transactions and CS
Transaction).
</TABLE>
_______________
* Previously filed
** Filed herewith
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Heartland Wireless Communications, Inc.:
We consent to the incorporation by reference in the registration statements
(No. 33-91186 and No. 33-91190) on Form S-8 of Heartland Wireless
Communications, Inc. of our report dated October 25, 1995, on the balance
sheets of TechniVision, Inc. as of May 31, 1995 and 1994, 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, which report appears in the
Form 8-K/A-2 of Heartland Wireless Communications, Inc. to be filed with the
Securities and Exchange Commission on April 26, 1996.
Our report relating to the financial statements of TechniVision, Inc. contains
an explanatory paragraph that states that TechniVision, Inc.'s 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
KPMG Peat Marwick LLP
Dallas, Texas
April 26, 1996
<PAGE> 1
EXHIBIT 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated February 23, 1996, included in this current
report on Form 8-K/A dated February 23,1996 into the Company's previously filed
Registration Statements on Forms S-8 (File Nos. 33-91190 and 33-91186).
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
April 26,1996.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Current Report on Form 8-K/A-2, and
incorporation by reference in Forms S-8 (Registration No. 33-91186 and
Registration No. 33-91190) to be filed by Heartland Wireless Communications,
Inc., of our report, which includes an explanatory paragraph which states that
specified circumstances raise substantial doubt about CableMaxx, Inc.'s ability
to continue as a going concern, dated August 25, 1995, on our audits of the
consolidated balance sheets of CableMaxx, Inc. as of June 30, 1994 and 1995,
and the related consolidated statements of operations, stockholder's equity and
cash flows for the period December 18, 1992 to June 30, 1993 and for the years
ended June 30, 1994 and 1995, and of 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.
/s/ COOPER & LYBRAND LLP
Austin, Texas
April 26, 1996
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Heartland Wireless Communications, Inc.:
We consent to the incorporation by reference in the registration statements
(No. 33-91186 and No. 33-91190) on Form S-8 of Heartland Wireless
Communications, Inc. of our report dated July 28, 1995, on the balance sheets
of Cross Country Division as of December 31, 1994 and 1993, and the related
statements of operations, 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 which report appears in the
Form 8-K/A-2 of Heartland Wireless Communications, Inc. to be filed with the
Securities and Exchange Commission on April 26, 1996.
Our report relating to 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
KPMG Peat Marwick LLP
Dallas, Texas
April 26, 1996
