EXHIBIT 99.1
CS WIRELESS SYSTEMS, INC.
ITEMS 8 AND 14(A)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CS Wireless Systems, Inc. and Subsidiaries:
Independent Auditors' Report F-2
Consolidated Balance Sheet as of December 31, 1998 and 1997 F-3
Consolidated Statement of Operations for the years ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statement of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996 F-6
Consolidated Statement of Cash Flows for the years ended December 31, 1998,
1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CS Wireless Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CS Wireless
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits{ }in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CS
Wireless Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
As discussed in note 1(f) to the consolidated financial statements, the
Company changed its method of accounting for the costs of start-up activities
in 1998 to adopt the provisions of Statement of Accounting Position 98-5,
"Reporting on the Costs of Start-up Activities."
KPMG LLP
Dallas, Texas
April 12, 1999
F-2
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(dollars in thousands, except share data)
ASSETS 1998 1997
----------- --------
Current assets:
Cash and cash equivalents $ 41,839 74,564
Restricted cash (note 4) - 5,030
Subscriber receivables, less allowance for doubtful accounts
of $339 and $257 in 1998 and 1997, respectively 1,542 1,026
Prepaid expenses and other 638 939
-------- -------
Total current assets 44,019 81,559
Property and equipment, net (note 5) 43,645 50,519
License and leased license investment, net of accumulated
amortization of $25,481 and $16,159 in 1998 and 1997,
respectively (notes 2 and 3) 157,269 170,689
Goodwill, net of accumulated amortization of $7,707 in 1997
(notes 2 and 3) - 48,243
Assets held for sale (note 3) 2,102 -
Investments in and loans to equity affiliates 3,884 8,503
Debt issuance costs, net of accumulated amortization of
$2,101 and $1,286 in 1998 and 1997, respectively 7,444 8,260
Other assets, net 454 2,930
-------- --------
$ 258,817 370,703
See accompanying notes to consolidated financial statements
F-3
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1998 and 1997
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
---------- ----------
Current liabilities:
Accounts payable and accrued expenses, including payable
to affiliates of $282 in 1997 (note 6) $ 5,490 8,652
Current portion of long-term debt (note 7) 199 217
Current portion of BTA auction payable to affiliates including
accrued interest payable (note 7) 354 1,122
Deferred revenue 1,237 628
Other current liabilities - 895
Total current liabilities 7,280 11,514
Long-term debt, excluding current portion (note 7) 316,720 283,686
BTA auction payable to affiliates, excluding current portion
(note 7) 3,505 3,274
--------- --------
Total liabilities 327,505 298,474
Stockholders' equity (deficit) (notes 3 and 9):
Preferred stock, $.01 par value; authorized 5,000,000 shares
in 1997; none in 1998 - -
Common stock, $.001 par value; authorized 40,000,000
shares in 1997, 15,000,000 in 1998; issued and
outstanding 10,702,609 shares in 1998 and 1997 11 11
Treasury stock, at cost; 3,838,138 and 2,103 shares
in 1998 and 1997, respectively (1,574) (40)
Additional paid-in capital 154,557 154,557
Accumulated deficit (221,682) (82,299)
--------- --------
Total stockholders' equity (deficit) (68,688) 72,229
Commitments and contingencies (notes 8 and 13)
---------- --------
$ 258,817 370,703
=========== =========
See accompanying notes to consolidated financial statements.
F-4
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated statements of Operations
Years ended December 31, 1998, 1997 and 1996
(in thousands, except share data)
1998 1997 1996
--------- ------- -------
Revenues $ 26,259 26,920 22,738
Operating expenses:
Systems operations 16,409 14,976 13,258
Selling, general and administrative 18,984 15,849 13,934
Depreciation and amortization 29,222 26,858 20,345
Impairment of long-lived assets (note 2) 63,907 - -
-------- -------- -------
Total operating expenses 128,522 57,683 47,537
-------- -------- -------
Operating loss (102,263) (30,763) (24,799)
-------- -------- -------
Other income (expense):
Interest expense (34,679) (31,995) (24,959)
Interest income 3,399 5,469 6,600
Equity in net losses of affiliates (note 4) (2,553) (1,349) -
Other (1,419) 644 -
-------- ------- -------
Other income (expense), net (35,252) (27,231) (18,359)
-------- ------- -------
Loss before income taxes and
cumulative effect of change in
accounting principle (137,515) (57,994) (43,158)
Income tax benefit (note 10) - 5,429 14,631
--------- -------- -------
Loss before cumulative effect of
change in accounting principle (137,515) (52,565) (28,527)
Cumulative effect of change in accounting
principle (1,868) - -
---------- -------- -------
Net loss $ (139,383) (52,565) (28,527)
========== ======== =======
Basic and diluted loss per common share
before cumulative effect of change in
accounting principle $ (13.23) (4.94) (3.06)
========= ========= =========
Basic and diluted loss per common share $ (13.41) (4.94) (3.06)
========= ========= =========
Weighted average basic and dilutive
shares outstanding $ 10,395,558 10,639,190 9,170,169
=========== ========== =========
See accompanying notes to consolidated financial statements.
F-5
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998, 1997 and 1996
(in thousands, except share data)
ADDITIONAL
COMMON STOCK PAID-IN DIVISION TREASURY ACCUMULATED
SHARES AMOUNT CAPITAL EQUITY STOCK DEFICIT TOTAL
------ ------ ---------- -------- -------- ----------- -------
Balance,
December 31,
1995 1,000 $ 1 $ 15,950 $ 45,572 $ - $ (1,207) $ 60,316
Contribution to
Company - true-
up adjustment
(note 3) 9,999,000 9 131,503 (45,572) - - 85,940
Issuance of
common stock
pursuant to
Unit offering 110,000 - 800 - - - 800
Issuance of
common stock
in acquistion 335,408 - 6,305 - - - 6,305
Net loss - - - - - (28,527) (28,527)
--------- ------ ------- -------- ------- ---------- -------
Balance,
December 31,
1996 10,445,408 10 154,558 - - (29,734) 124,834
Contribution to
Company -
true-up
adjustment
(note 3) 257,201 1 (1) - - - -
Treasury stock
purchases
(note 3) - - - - (40) - (40)
Net loss - - - - - (52,565) (52,565)
---------- ------ ------- ------- ------- -------- -------
Balance,
December 31,
1997 10,702,609 11 154,557 - (40) (82,299) 72,229
Treasury stock
purchases
(note 3) - - - - (1,534) - (1,534)
Net loss - - - - - (139,383) (139,383)
---------- ------ ------- ------- ------- -------- -------
Balance,
December 31,
1998 10,702,609 $ 11 $ 154,557 $ - $ (1,574) $ (221,682) $ (68,688)
========== ====== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-6
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net loss $ (139,383) (52,565) (28,527)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes - (5,429) (14,631)
Depreciation and amortization 29,222 26,858 20,345
Accretion on discount notes and amortization of debt
issuance costs 33,934 30,395 23,483
Non-cash interest expense on other long term debt 770 1,524 1,275
Impairment of long-lived assets (note 2) 63,907 - -
Discount and provision for long-term notes receivable (note 4) 1,770 - -
Write-off of start-up and organizational costs (note 1 (f)) 1,868 - -
Gain on sale of assets, net - (644) -
Equity in losses of affiliates 2,553 1,349 -
Changes in assets and liabilities, net of effects of contributions,
acquisitions and assets held for sale:
Subscriber receivables, net (516) 63 (115)
Prepaid expenses and other 301 41 (345)
Accounts payable, accrued expenses and other liabilities (2,485) 1,545 928
-------- ------- ------
Net cash provided by (used in) operating activities (8,059) 3,137 2,413
-------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (18,930) (22,685) (13,243)
Additions to intangible assets (4,853) (4,329) (3,816)
Subscriber acquisition, net of property and equipment - (448) -
Investment in assets held for sale (423) (943) (8,766)
Proceeds from sale of assets - 16,350 -
Issuance of notes receivable - - (1,510)
Utilization of (investment in) in restricted cash 5,030 (5,030) -
Investment in equity affiliates (1,257) (6,555) -
Other (895) (540) 81
-------- ------- -------
Net cash used in investing activities (21,328) (24,180) (27,254)
-------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt - 500 -
Payments of capital lease obligations (139) (95) (198)
Payments on BTA auction payable and other (1,665) (493) (20,125)
Payment in settlement of USA acquisition - (2,103) -
Payments on Heartland Short-Term Note - - (25,000)
Payments on Heartland Long-Term Note - (15,274) -
Purchase of shares into treasury (note 3(c)) (1,534) - -
Proceeds from Unit Offering - - 229,484
Debt issuance costs - - (9,793)
Cash distributed pursuant to Contributions (note 3) - - (36,639)
-------- ------- -------
Net cash provided by (used in) financing activities (3,338) (17,465) 137,729
-------- ------- -------
Increase (decrease) in cash and cash equivalents (32,725) (38,508) 112,888
Cash and cash equivalents at beginning of year 74,564 113,072 184
-------- ------- -------
Cash and cash equivalents at end of year $ 41,839 74,564 113,072
======== ======= =======
Cash paid for interest $ 446 263 114
======== ======= =======
See accompanying notes to consolidated financial statement
F-7
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 1998, 1997 and 1996
(tables in thousands, except per share data)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
CS Wireless Systems, Inc. and subsidiaries (the "Company" or "CS
Wireless") develop, own and operate a network of wireless cable
television systems providing subscription television and high-speed
Internet access services. The Company has a portfolio of wireless
cable channel rights in various markets in the United States. The
Company currently has systems in operation in eleven markets, and it
owns or holds lease rights in several other markets.
Wireless cable television is a relatively new industry within the
highly competitive subscription television industry. The Company's
principal subscription television competitors in each of its markets
are traditional hard-wire cable companies, direct broadcast satellite,
private cable companies and other alternate methods of distributing
and receiving television transmissions. Hard-wire cable companies
generally are well-established and known to potential customers and
have significantly greater financial and other resources than the
Company. As the telecommunications industry continues to evolve, the
Company may face additional competition from new providers of
entertainment and data services. In addition, until the Company can
increase its channels offered through the deployment of digital
compression technology, the Company's existing competitors generally
have more channels to offer subscribers. There can be no assurance
that the Company will be able to compete successfully with existing or
potential competitors in the subscription television industry.
In addition to wireless cable television services, the Company intends
to expand the use of wireless channel rights spectrum to include
telecommunications services. These new services are expected to
include two-way data transmission services and telephony services,
possibly through the participation of a strategic partner.
The Company has incurred significant operating losses since inception
and has negative stockholders' equity at December 31, 1998. Losses
are expected for at least the next year as the Company continues to
develop its wireless communications businesses. The Company has
approximately $41,800,000 in cash and cash equivalents at December 31,
1998, and, based on its current operating plan, believes that it has
sufficient cash to fund its anticipated capital expenditures and
operating losses through at least the first quarter of 2000. However,
the growth of the Company's wireless communications businesses may
require substantial continuing investment to finance capital
expenditures related to the acquisition of channel rights and
infrastructure development of digital video programming, two-way
frequency utilization and telephony systems. Additionally,
significant debt service begins in September 2001. Without additional
funding through debt or equity offerings, joint ventures, the sale or
exchange of its wireless cable channel rights or the participation of
a strategic partner, or the restructuring of its
debt agreements, the Company may not be able to meet its future debt
and interest payments. There can be no assurance that the Company
will achieve positive cash flow from operations, that the Company will
consummate the sale of any wireless cable channel rights or that
sufficient debt or equity financing will be available to the Company.
In addition, subject to restrictions under its outstanding debt, the
Company may pursue other opportunities to acquire additional wireless
cable channel rights and businesses that may utilize the capital
currently expected to be available for its current markets.
The amount and timing of the Company's future capital requirements
will depend upon a number of factors, including programming, equipment
costs and marketing costs, staffing levels, subscriber growth,
competitive conditions, and the presence of a strategic partner, many
of which are beyond the control of the Company. Failure to obtain any
required additional financing could materially affect the growth, cash
flow or operating results of the Company.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying consolidated financial information for the period
from January 1, 1996 through February 23, 1996 reflects the combined
financial position and results of operations for the Company's
wireless cable system serving the Cleveland, Ohio market, which is
comprised of the accounts of the Company and certain assets of
Atlantic Microsystems, Inc. For the period subsequent to February
23, 1996, the Company's consolidated financial statements include the
results of operations of the entities and assets contributed to the
Company on February 23, 1996 (see note 3).
On September 29, 1995, ACS Enterprises, Inc. (including ACS Ohio,
Inc., the predecessor of the Company and a wholly-owned subsidiary of
ACS Enterprises, Inc.) was acquired by CAI Wireless Systems, Inc.
("CAI") in a business combination accounted for as a purchase.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including all direct labor
costs of new customer installations. Depreciation and amortization of
property and equipment are computed using the straight-line method
over the estimated useful lives of the assets. Repairs and
maintenance costs are charged to expense when incurred; renewals and
betterments are capitalized.
(d) License and Leased License Investment
License and leased license investment includes costs incurred to
acquire and/or develop wireless cable channel rights. Costs incurred
to acquire channel rights issued by the Federal Communications
Commission ("FCC") are deferred and amortized ratably over estimated
useful lives of 15 years beginning with inception of service in each
respective market. As of December 31, 1998 and 1997, $17,900,000 and
$54,800,000, respectively, of the license and leased license
investment was not yet subject to amortization.
(E) GOODWILL
Goodwill represents excess purchase price of acquisitions over
identifiable net tangible and intangible assets. Goodwill is
amortized ratably over an estimated useful life of 15 years beginning
with the acquisition of the market.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured
based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved (note 2).
(F) OTHER ASSETS
Other assets includes a non-compete agreement with a former officer
and certain other intangible assets, including organizational costs at
December 31, 1997, totaling approximately $469,000 and $2,085,000 at
December 31, 1998 and 1997, respectively, net of accumulated
amortization of approximately $240,000 and $486,000, respectively.
These assets are being amortized over the respective lives of the
underlying agreements.
The Company adopted the provisions of Statement of Position 98-5 ("SOP
98-5"), REPORTING ON THE COSTS OF START-UP ACTIVITIES, effective
January 1, 1998. This pronouncement requires that costs of start-up
activities, including organizational costs, should be expensed as
incurred. As a result of adopting SOP 98-5, the Company recorded a
charge of $1,868,000 as a cumulative effect of the change in
accounting principle as of January 1, 1998.
(g) Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell or
otherwise dispose of (note 2).
(H) INCOME TAXES
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable
earnings. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the total of tax payable for the
period and the change in deferred tax assets and liabilities during
the period.
(I) REVENUE RECOGNITION
Revenues from subscribers are recognized in the period of service.
Amounts paid in advance are recorded as deferred revenue.
(J) SYSTEMS OPERATIONS
Systems operations expenses consist principally of programming fees,
channel lease costs, tower rental and other costs for providing
service.
The Company is party to several contract arrangements with related
parties to provide programming, installation and other services (see
note 11).
(K) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers
temporary cash investments purchased with original maturities of three
months or less and which are available for use in operations to be
cash equivalents. The Company had cash equivalents of $41,520,000 and
$75,352,000 at December 31, 1998 and 1997, respectively.
(l) Investments in Affiliates
Investments in affiliates are accounted for under the equity method as
the Company's investment in each of three companies represents greater
than 20% interest and the Company has the ability to exercise
significant influence over each of the entities. Under this method,
the investment originally recorded at cost is adjusted to recognize
the Company's share of net earnings or losses of the affiliate as they
occur. The Company's share of net earnings or losses of affiliates
includes the amortization of purchase adjustments.
(m) Net Loss Per Common Share
The Company adopted SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"),
in 1997. Accordingly, the Company has presented basic loss per share,
computed on the basis of the weighted average number of common shares
outstanding during the year, and diluted loss per share, computed on
the basis of the weighted average number of common shares and all
dilutive potential common shares outstanding during the year.
The potentially dilutive effect of the Company's stock options has not
been considered in the computation of diluted net loss per common
share since their effect would be antidilutive.
(N) ACCOUNTING FOR STOCK OPTIONS
On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS No. 123"), which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995
and future years as if the fair value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma
disclosures of SFAS No. 123. Under APB Opinion No. 25, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
(O) COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," in
the first quarter of 1998, which required companies to disclose
comprehensive income separately from net income. Comprehensive income
is defined as the change in equity during a period from transactions
and other events and circumstances from non-ownership sources. It
includes all changes in equity during a period, except those resulting
from investments by owners and distributions to owners. The adoption
of this statement had no effect on the Company at December 31, 1998,
because the Company has no elements of other comprehensive income.
Accordingly, compensation income and net income are the same amount for
each period presented.
(P) SEGMENT REPORTING
In January 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS No. 131").
SFAS No. 131 requires that public companies report operating segments
based upon how management allocates resources and assesses
performance. Based on the criteria outlined in SFAS No. 131, the
Company is comprised of a single reportable segment - distribution of
wireless cable television subscription services. No additional
disclosure is required by the Company to conform to the requirements
of SFAS No. 131.
(q) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(R) RECLASSIFICATIONS
Certain reclassifications have been made to prior year consolidated
financial statements to conform to the current year presentation.
(2) IMPAIRMENT OF LONG-LIVED ASSETS
During the second and third quarters of 1998, CAI and a wholly-owned
subsidiary announced their intention to file a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code and
Heartland Wireless Communications, Inc. ("Heartland") announced
its intent not to pay interest on certain of its bonds. As a
result of these negative industry events, combined with continuing
net losses, the Company reassessed its business strategy and evaluated its
long-lived assets for impairment based on these bankruptcy petitions
and determined that cash flows from operations would not be adequate
to fund the capital outlay required to build out non-operating markets
while continuing the build out of the digital market in Dallas,
Texas. Thus, in accordance with SFAS No. 121, the Company began the
process of estimating the fair values of the long-lived assets.
Although this process was not complete prior to filing the
June 30, 1998 Quarterly Report on Form 10-Q, the Company recorded a non-
cash impairment charge of $46,378,000 to write off the carrying value of
the Company's goodwill based on preliminary estimates of fair value.
During the third quarter, the Company engaged a third party to assist in
completing the recoverability analysis in conjunction with a Company-wide
valuation analysis. This process was completed during the fourth quarter
of 1998. In assessing the fair value of its long-lived assets, the
Company and the third party considered relevant cash flows, estimated
future operating results, trends, management's strategic plans,
competition and other available information including the fair value of
wireless channel rights owned and leased. Based on the results of this
internal analysis and the third-party valuation, the Company recorded
additional impairment charges to certain operating and non-operating
markets' long-lived assets in the fourth quarter of 1998. This impairment
charge, combined with the second quarter charge, totaled $63,907,000, as
follows:
DESCRIPTION OF WRITE-DOWNS
Property and equipment $ 9,400
License and leased license investment 8,129
Goodwill 46,378
---------
$ 63,907
=========
The Company's estimates of future gross revenues and operating cash flows,
the remaining estimated lives of long-lived assets, or both, could be
reduced in the future due to changes in, among other things, technology,
government regulation, available financing, interference issues or
competition. As result, the carrying amounts of long-lived assets could
be reduced by additional amounts which would be material to the
Company's financial position and results of operations.
(3) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS
(a) Contributions to Company
On February 23, 1996, CAI and Heartland contributed to the Company
(the "Contributions") certain wireless cable television assets
comprising various markets in the United States. In connection with
the Contributions, CAI and Heartland received approximately 5.4
million and 3.6 million shares, respectively, of the Company's newly-
issued common stock. In addition, CAI received approximately $750,000
in cash and Heartland received approximately $30.9 million in cash, a
nine-month note for $25 million (the "Heartland Short-Term Note") and
a 10-year note for $15 million (the "Heartland Long-Term Note"). The
Heartland Short-Term Note was repaid on March 1, 1996 with a portion
of the net proceeds from the Unit Offering (see note 7).
Additionally, in connection with the Contributions, MMDS Holdings II,
Inc., an affiliate of Bell Atlantic, and NYNEX MMDS Holding Company,
an affiliate of NYNEX, each received 500,000 shares of common stock of
the Company for certain non-cash consideration.
The consummation of the Contributions has been accounted for at CAI's
and Heartland's historical cost basis, reduced by the amount of cash
and notes distributed to CAI and Heartland in connection with the
Contributions. A substantial portion of the net assets contributed by
Heartland were purchased by Heartland on February 23, 1996.
Accordingly, Heartland's cost basis with respect to such net assets
was determined based on Heartland's allocation of the purchase price
to the net assets acquired and liabilities assumed. On November 8,
1996, the Company distributed an additional $5 million in cash to
Heartland as part of the equity true-up per the provisions of the
agreement governing the contributions. Effective March 31, 1997, an
additional 257,201 shares of common stock of the Company were issued
to Heartland in satisfaction of certain post-closing adjustments. The
net assets contributed to the Company consist primarily of plant and
equipment and various wireless cable channel rights. The following is
a summary of the net assets contributed to the Company on February 23,
1996 (in thousands):
Working capital deficit $ (141)
Plant and equipment, net 25,755
License and leased license investment and goodwill 144,340
Deferred income taxes (6,982)
Other liabilities (393)
---------
162,579
Cash and notes distributed to CAI and Heartland 76,639
---------
Net assets contributed $ 85,940
=========
(B) ACQUISITIONS
On October 11, 1996, the Company acquired all of the issued and
outstanding common stock ("USA Common Stock") of USA Wireless
Cable, Inc. ("USA") in a transaction (the "USA Wireless
Acquisition") accounted for under the purchase method. USA
provided wireless cable service in certain Midwest markets,
including but not limited to the Effingham and Wellsville, Kansas;
Radcliffe, Iowa; Scottsbluff, Nebraska; Kalispell, Montana; and
Rochester, Minnesota markets (the "USA Markets"). At the effective
time of the USA Wireless Acquisition, the outstanding shares of USA
Common Stock were converted into rights to receive an aggregate
$17,635,000 of which approximately $6,305,000 was paid in the form
of CS Wireless common stock and approximately $11,330,000 of
indebtedness and payables assumed by the Company. In connection
with this acquisition, the Company extended two notes receivable to
affiliates of USA. A note receivable for $1,260,000 with an
interest rate of 12% was settled in February 1997, and a note
receivable for $250,000 with an interest rate of 12% was July 1,
1998. However, the affiliates of USA defaulted on this note and
the Company wrote-off the balance as uncollectible during the year
ended December 31, 1998.
On July 17, 1996, the Company acquired from Heartland (i) leases
and licenses for wireless cable channel rights in Adairsville,
Powers Crossroads and Rutledge, Georgia (the "Atlanta (suburbs)
markets") and (ii) leases for four tower sites. The purchase price
was $7.2 million in cash.
The acquisitions discussed above were accounted for as purchases.
Accordingly, the accompanying consolidated financial statements
include the results of operations of the acquired entities from the
dates of acquisition. A summary of the net assets acquired
follows:
Working capital deficit $ (1,155)
Property and equipment 1,354
Assets held for sale 11,800
Intangible assets 13,959
Deferred tax liability (2,333)
Notes payable assumed (10,120)
---------
Total purchase price $ 13,505
=========
(C) DISPOSITION AND EXCHANGE
On December 2, 1998, the Company, CAI and Heartland entered into a
Master Agreement providing for, among other things, the termination
of Heartland's rights in, and claims against, the Company. As part
of the Master Agreement, in December 1998, CAI purchased from
Heartland Heartland's ownership in the Company, or 3,836,035 shares
of CS Wireless common stock, for $1,534,000. The Company
subsequently purchased those shares from for the same price. At
December 31, 1998, these shares are recorded as treasury stock.
Additionally, the Company agreed to lease certain channel rights
and sell the net operating assets of its Radcliffe, Iowa market to
Heartland primarily in exchange for the forgiveness by Heartland of
the outstanding balance owed by the Company of $2,335,000 under the
Heartland Long-Term Note (see note 7) and additional cash payments
by the Company to Heartland of $466,000. In December 1998, under
the terms of the Master Agreement, the Company made a deposit of
$366,000 to Heartland in anticipation of the exchange. This
deposit, along with the carrying value of the net assets of the
Radcliffe, Iowa market, are classified as assets held for sale at
December 31, 1998 in the accompanying consolidated balance sheet.
On September 3, 1997, pursuant to an agreement dated as of November
6, 1996, the Company consummated an exchange with Peoples Choice TV
Corp. of wireless cable channel rights and related assets in Salt
Lake City, Utah for wireless cable channel rights and related
assets in Kansas City, Missouri. This transaction was accounted
for as a non-monetary exchange and, accordingly, the recorded
amounts of the assets relinquished were allocated to the assets
acquired. In connection with this transaction, the Company
exchanged the rights to the BTA license in Salt Lake City with
related indebtedness of approximately $330,000 for the rights to a
BTA license in Kansas City with related indebtedness of
approximately $216,000.
On May 22, 1997 the Company sold to BellSouth Corporation, pursuant
to the July 25, 1996 purchase agreement, (i) certain leases and
licenses for wireless cable channel rights in Adairsville, Power
Crossroads and Rutledge, Georgia (Atlanta Suburbs markets) and
leases for four tower sites; (ii) the BTA license relating to
Atlanta, Georgia and (iii) certain other assets and reimbursable
expenses for approximately $16.4 million, resulting in a gain of
approximately $0.7 million.
(4) INVESTMENTS IN AND LOANS TO AFFILIATES
TelQuest Satellite Services LLC
ON AUGUST 4, 1997 THE COMPANY ACQUIRED A 25% OWNERSHIP INTEREST IN
TELQUEST SATELLITE SERVICES LLC ("TELQUEST"), FOR AN INITIAL
CONTRIBUTION OF $2.5 MILLION IN CASH (PAYABLE IN QUARTERLY INSTALLMENTS
BEGINNING AUGUST 1997) AND, $2.5 MILLION OF EQUIPMENT LEASED TO
TELQUEST UNDER A BARGAIN LEASE. THE COMPANY MADE QUARTERLY PAYMENTS OF
APPROXIMATELY $1,394,000 DURING 1997. AS PART OF THE CONTRIBUTIONS, THE
COMPANY CONVERTED A NOTE RECEIVABLE FROM TELQUEST ENTERED INTO DURING
MARCH 1997 IN THE AMOUNT OF $200,000 PRINCIPAL INTO AN INVESTMENT IN
TELQUEST OF $211,000. DURING 1998, THE COMPANY MADE PAYMENTS OF
$895,000 WHICH FULFILLED THE CASH CONTRIBUTION REQUIREMENT OF
$2,500,000. TELQUEST WAS FORMED TO PROVIDE DIGITAL VIDEO PROGRAMMING
SIGNALS THROUGH ITS HEADEND IN THE SKY SATELLITE SERVICE. THE COMPANY
ENTERED INTO A TEN-YEAR AFFILIATION AGREEMENT WITH TELQUEST THROUGH
WHICH THE COMPANY RECEIVED TELQUEST'S HEADEND IN THE SKY SERVICE AS
WELL AS OTHER SERVICES OFFERED BY TELQUEST. TELQUEST SATELLITE
SERVICES LLC'S OTHER MEMBERS ARE TELQUEST COMMUNICATIONS, INC. AND CAI.
BOTH CAI AND TELQUEST COMMUNICATIONS, INC. ARE AFFILIATED ENTITIES.
CAI ACQUIRED A 25% OWNERSHIP IN TELQUEST FOR THE SAME CONSIDERATION
GIVEN BY CS WIRELESS.
IN JULY 1998, THE COMPANY PURCHASED THE LEASEHOLD RIGHTS OF TELQUEST IN
CERTAIN HEADEND EQUIPMENT OWNED BY CAI FOR $1,900,000 AS PART OF A
CONTINGENCY PLAN TO ENSURE UNINTERRUPTED PROGRAMMING SERVICE. IN
OCTOBER 1998, THE COMPANY COMMENCED THE RELOCATION OF CERTAIN OF THE
LEASED HEADEND EQUIPMENT FROM THE TELQUEST FACILITIES AS TELQUEST
CEASED ITS HEADEND IN THE SKY SERVICE. ACCORDINGLY, THE COMPANY HAS
CLASSIFIED THE CARRYING VALUE OF THE PREVIOUSLY LEASED EQUIPMENT OF
$2,125,000 AND THE EQUIPMENT ACQUIRED THROUGH THE $1,900,000 LEASE
PAYMENT AS PROPERTY AND EQUIPMENT AT DECEMBER 31, 1998. SUCH AMOUNTS
WILL BE DEPRECIATED OVER THE ESTIMATED REMAINING USEFUL LIVES OF THE
RELATED EQUIPMENT.
DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY RECORDED
EQUITY IN LOSSES OF $1,719,000 AND $1,159,000, RESPECTIVELY, RELATED TO
ITS INVESTMENT IN TELQUEST. IN 1998 AND 1997, THESE LOSSES WERE
COMPRISED OF: (I) THE COMPANY'S EQUITY IN LOSSES OF TELQUEST OF
$146,000 AND $1,107,000; (II) AMORTIZATION OF THE COST IN EXCESS OF THE
COMPANY'S BASIS IN THE UNDERLYING ASSETS OF TELQUEST OF $1,198,000 AND
$52,000, RESPECTIVELY; AND (III) AMORTIZATION OF $375,000 AND $0,
RESPECTIVELY, RELATED TO THE COMPANY'S $2,500,000 INVESTMENT IN THE
LEASEHOLD RIGHTS IN CERTAIN HEADEND EQUIPMENT. THE CARRYING VALUE OF
THE COMPANY'S INVESTMENT IN AND ADVANCES TO TELQUEST WAS $0 AND
$3,842,000 AT DECEMBER 31, 1998 AND 1997, RESPECTIVELY.
Mexico Investments
ON SEPTEMBER 29, 1997, THE COMPANY ACQUIRED 39% OF THE VOTING COMMON
STOCK OF TELEVISION INTERACTIVA DEL NORTE, S.A. DE C.V. ("TELINOR")
FROM HEARTLAND FOR CASH PROCEEDS OF $915,000 AND ASSUMPTION OF A CASH
CALL OBLIGATION IN THE AMOUNT OF $145,000. THE COMPANY ALSO PURCHASED
FROM HEARTLAND TWO UNSECURED PROMISSORY NOTES PAYABLE BY TELINOR FOR
$2.56 MILLION, INCLUDING ACCRUED INTEREST. THE TWO NOTES WERE
IMMEDIATELY RESTRUCTURED INTO ONE UNSECURED NOTE ACCRUING INTEREST AT
12% AND MATURING ON SEPTEMBER 21, 2002. ADDITIONALLY, THE COMPANY
CONSUMMATED ANOTHER TRANSACTION WITH THE PRINCIPAL STOCKHOLDERS OF
TELINOR WHEREBY THE COMPANY PURCHASED 49% OF THE VOTING STOCK OF
TELEVISION INALAMBRICA, S.A. DE C.V. ("TELEVISION") FOR CASH IN THE
AMOUNT OF $1.0 MILLION AND COMMITTED TO (I) LOAN TELEVISION UP TO THE
SUM OF $5.0 MILLION IN CASH OR (II) FINANCE AN EQUIVALENT AMOUNT IN
SALES OF THE COMPANY'S EQUIPMENT TO TELEVISION. THE FUNDS COMMITTED
WERE DEPOSITED INTO ESCROW PENDING DISBURSEMENT OR REDUCTION OF THE
REQUIRED ESCROW AMOUNT THROUGH EQUIPMENT SALES TO TELEVISION. AS OF
DECEMBER 31, 1997, APPROXIMATELY $5.0 MILLION WAS HELD IN ESCROW
PURSUANT TO THIS AGREEMENT. DURING 1998, THE ESCROWED FUNDS WERE
RELEASED TO THE COMPANY.
TELINOR AND TELEVISION WERE FORMED TO DEVELOP WIRELESS CABLE TELEVISION
SYSTEMS PROVIDING SUBSCRIPTION TELEVISION SERVICES IN MEXICO. DURING
THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY INCURRED
REIMBURSABLE COSTS OF APPROXIMATELY $161,000 AND $405,000 ON BEHALF OF
TELINOR AND TELEVISION. FURTHER, THE COMPANY FUNDED $145,000 UNDER A
CASH CALL OBLIGATION AND ADVANCED ADDITIONAL FUNDS AND EQUIPMENT UNDER
THE NOTE RECEIVABLE OF $950,000.
DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY RECORDED
EQUITY IN LOSSES OF $833,000 AND $190,000, RESPECTIVELY, RELATED TO ITS
INVESTMENTS IN TELINOR AND TELEVISION (COLLECTIVELY, "TELINOR
INVESTMENTS"). IN 1998 AND 1997, THESE LOSSES WERE COMPRISED OF
$256,000 AND $173,000, RESPECTIVELY, OF THE COMPANY'S SHARE IN LOSSES
OF TELINOR INVESTMENTS, AND $577,000 AND $17,000, RESPECTIVELY, IN
AMORTIZATION OF THE COST IN EXCESS OF THE COMPANY'S BASIS IN THE
UNDERLYING ASSETS OF TELINOR INVESTMENTS. ADDITIONALLY, THE COMPANY
RECORDED AN ALLOWANCE OF $1,200,000 RELATED TO THE NOTE RECEIVABLE FROM
TELINOR DUE TO UNCERTAINTIES REGARDING ITS ULTIMATE COLLECTIBILITY.
THE CARRYING VALUE OF THE COMPANY'S INVESTMENTS IN AND ADVANCES TO
TELINOR INVESTMENTS WAS $3,844,000 AND $4,661,000 AT DECEMBER 31, 1998
AND 1997, RESPECTIVELY, INCLUDING THE COMPANY'S NOTE RECEIVABLE AT
DECEMBER 31, 1998 AND 1997 OF $2,311,000 AND $2,560,000, RESPECTIVELY,
(5) PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING AT DECEMBER 31, 1998
AND 1997:
Estimated
1998 1997 useful life
------ ------- -----------
Subscriber premises equipment and
installation costs $ 39,003 52,656 1 - 7 years
Transmission equipment and system
construction costs 21,928 16,035 5 - 10 years
Office furniture and equipment 7,434 4,106 5 years
Leasehold improvements 1,156 1,016 5 years
-------- -------
69,521 73,813
Less accumulated depreciation and
amortization (25,876) (23,294)
-------- -------
$ 43,645 50,519
======== =======
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES CONSIST OF THE FOLLOWING AT
DECEMBER 31, 1998 AND 1997:
1998 1997
------ -------
Accounts payable $ 684 4,680
Accrued programming and licenses 1,158 1,319
Accrued personnel costs 806 1,247
Accrued taxes 943 528
Other 1,899 878
-------- ------
$ 5,490 8,652
======== ======
(7) LONG-TERM DEBT
LONG-TERM DEBT CONSISTS OF THE FOLLOWING AT DECEMBER 31, 1998 AND 1997:
1998 1997
-------- --------
Senior Notes $ 314,385 281,266
Heartland Long-Term Note 2,335 2,069
BTA auction payable to affiliates 3,859 4,396
Capital leases and other 199 568
Total long-term debt 320,778 288,299
Less current portion of BTA auction payable 354 1,122
Less current portion of long term debt 199 217
------- -------
$ 320,225 286,960
======== =======
Senior Notes
ON FEBRUARY 23, 1996, THE COMPANY CONSUMMATED A PRIVATE PLACEMENT OF
100,000 UNITS (THE "UNIT OFFERING" OR "UNITS") CONSISTING OF $400
MILLION AGGREGATE PRINCIPAL AMOUNT OF 11 3/8% SENIOR DISCOUNT NOTES DUE
2006 ("SENIOR NOTES") AND 110,000 SHARES OF COMMON STOCK OF THE
COMPANY. THE SENIOR NOTES WILL MATURE ON MARCH 1, 2006. THE ISSUE
PRICE OF THE SENIOR NOTES REPRESENTS A YIELD TO MATURITY OF 11 3/8% PER
ANNUM COMPUTED ON A SEMI-ANNUAL BOND EQUIVALENT BASIS. CASH INTEREST
ON THE SENIOR NOTES WILL NOT BE PAYABLE PRIOR TO MARCH 1, 2001.
COMMENCING SEPTEMBER 1, 2001, CASH INTEREST ON THE SENIOR NOTES WILL BE
PAYABLE ON MARCH 1 AND SEPTEMBER 1 OF EACH YEAR AT A RATE OF 11 3/8%
PER ANNUM. INCLUDING AMOUNTS ATTRIBUTABLE TO THE COMMON STOCK, THE
ISSUANCE OF THE UNITS RESULTED IN NET PROCEEDS TO THE COMPANY OF
APPROXIMATELY $219.7 MILLION AFTER UNDERWRITING DISCOUNTS AND OTHER
DEBT ISSUANCE COSTS AGGREGATING APPROXIMATELY $9.8 MILLION. FOR
FINANCIAL REPORTING PURPOSES, THE SHARES OF COMMON STOCK WERE VALUED AT
$800,000.
THE SENIOR NOTES WERE ISSUED PURSUANT TO AN INDENTURE WHICH CONTAINS
CERTAIN RESTRICTIVE COVENANTS AND LIMITATIONS. AMONG OTHER THINGS, THE
INDENTURE LIMITS THE INCURRENCE OF ADDITIONAL INDEBTEDNESS, LIMITS THE
MAKING OF RESTRICTED PAYMENTS (AS DEFINED) INCLUDING THE DECLARATION
AND/OR PAYMENT OF DIVIDENDS, PLACES LIMITATIONS ON DIVIDENDS AND OTHER
PAYMENTS BY THE COMPANY'S SUBSIDIARIES, PROHIBITS THE COMPANY AND ITS
SUBSIDIARIES FROM ENGAGING IN ANY BUSINESS OTHER THAN THE TRANSMISSION
OF VIDEO, VOICE AND DATA AND RELATED BUSINESSES AND SERVICES, AND
PLACES LIMITATIONS ON LIENS, CERTAIN ASSET DISPOSITIONS AND MERGER/SALE
OF ASSETS ACTIVITY.
HEARTLAND LONG-TERM NOTE
IN CONNECTION WITH THE CONTRIBUTIONS ON FEBRUARY 23, 1996, HEARTLAND
RECEIVED THE HEARTLAND LONG-TERM NOTE. THE HEARTLAND LONG-TERM NOTE
HAS A FINAL MATURITY DATE THAT IS 10 YEARS AND ONE DAY AFTER THE
CLOSING OF THE CONTRIBUTIONS. THE INTEREST RATE ON THE HEARTLAND LONG-
TERM NOTE INCREASES FROM 10% TO 15% IF THE HEARTLAND LONG-TERM NOTE IS
NOT REPAID WITHIN ONE YEAR OF ISSUANCE, WITH INTEREST ACCRUING AND
ADDED TO THE BALANCE ANNUALLY. NO CASH INTEREST WILL BE PAID ON THE
HEARTLAND LONG-TERM NOTE UNTIL AFTER THE SENIOR NOTES (SEE ABOVE) HAVE
BEEN PAID IN FULL. DURING 1997, THE COMPANY MADE A PRINCIPAL PAYMENT
OF APPROXIMATELY $15.3 MILLION WITH A PORTION OF THE PROCEEDS FROM THE
DISPOSITION OF ASSETS AND WIRELESS CHANNEL RIGHTS IN ATLANTA (SEE NOTE
3 (C)).
AS PART OF THE MASTER AGREEMENT (NOTE 3(C)), HEARTLAND AGREED TO
FORGIVE, DURING 1999, THE OUTSTANDING BALANCE OF THE HEARTLAND LONG-
TERM NOTE IN EXCHANGE FOR PRIMARILY CASH AND THE WIRELESS CABLE ASSETS
OF THE STORY CITY, IOWA MARKET. THE TRANSACTIONS ARE EXPECTED TO BE
CONSUMMATED IN LATE MAY 1999. AS AGREED, INTEREST ON THE HEARTLAND
LONG-TERM NOTE DOES NOT ACCRUE SUBSEQUENT TO NOVEMBER 30, 1998.
BTA Auction Payable to Affiliates
THE FCC CONCLUDED AUCTIONS IN 1997 FOR THE AWARD OF INITIAL COMMERCIAL
WIRELESS CABLE LICENSES FOR "BASIC TRADING AREAS" OR "BTAS" (THE "BTA
AUCTION"). PURSUANT TO AN AGREEMENT AMONG CAI, HEARTLAND AND THE
COMPANY, CAI AND HEARTLAND ARE OBLIGATED TO CONVEY TO THE COMPANY, AT
THEIR COST, AND THE COMPANY HAS AGREED TO PURCHASE, ANY RIGHTS ACQUIRED
IN THE BTA AUCTION RELATING TO THE COMPANY'S MARKETS, AS WELL AS
CERTAIN OTHER BTAS. CAI AND HEARTLAND WERE THE WINNING BIDDERS IN THE
AMOUNT OF APPROXIMATELY $17.9 MILLION WITH RESPECT TO BTAS THAT WILL BE
CONVEYED TO THE COMPANY. AS OF DECEMBER 31, 1998, THE ACCOMPANYING
CONSOLIDATED BALANCE SHEET REFLECTS A BTA AUCTION PAYABLE TO HEARTLAND
OF APPROXIMATELY $3,859,000 REPRESENTING THE REMAINING UNPAID BALANCES
WITH RESPECT TO BTAS TO BE CONVEYED TO THE COMPANY. AT DECEMBER 31,
1997, THE ACCOMPANYING CONSOLIDATED BALANCE SHEET REFLECTS A BTA
AUCTION PAYABLE TO CAI, HEARTLAND, AND OTHER AFFILIATED ENTITIES OF
APPROXIMATELY $643,000, $3,543,000, AND $210,000, RESPECTIVELY. THE
BTA AUCTION PAYABLE TO HEARTLAND BEARS INTEREST AT 9.5% AND IS BEING
PAID OVER A 10-YEAR PERIOD COMMENCING IN THE FOURTH QUARTER OF 1996.
THE COMPANY IS REQUIRED TO MAKE QUARTERLY INTEREST-ONLY PAYMENTS FOR
THE FIRST TWO YEARS AND QUARTERLY PAYMENTS OF PRINCIPAL AND INTEREST
OVER THE REMAINING EIGHT YEARS.
DURING 1997, THE COMPANY EXCHANGED AND RETURNED TO HEARTLAND CERTAIN OF
ITS RIGHTS TO BTA LICENSES RESULTING IN A DECREASE OF $614,000 IN
LICENSE COSTS AND THE CORRESPONDING BTA PAYABLE.
Aggregate maturities of long-term debt as of December 31, 1998 are
as follows:
1999 $ 553
2000 386
2001 424
2002 465
2003 511
Thereafter 318,439
(8) LEASES AND FCC LICENSES
THE COMPANY IS DEPENDENT ON LEASES WITH THIRD PARTIES FOR MOST OF ITS
WIRELESS CABLE CHANNEL RIGHTS. UNDER FCC RULES, THE BASE TERM OF EACH
LEASE CANNOT EXCEED THE TERM OF THE UNDERLYING FCC LICENSE. FCC
LICENSES FOR WIRELESS CABLE CHANNELS GENERALLY MUST BE RENEWED EVERY
TEN YEARS, AND THERE IS NO AUTOMATIC RENEWAL OF SUCH LICENSES. THE USE
OF SUCH CHANNELS BY THE LESSORS IS SUBJECT TO REGULATION BY THE FCC
AND, THEREFORE, THE COMPANY'S ABILITY TO CONTINUE TO ENJOY THE BENEFITS
OF THESE LEASES IS DEPENDENT UPON THE LESSORS' CONTINUING COMPLIANCE
WITH APPLICABLE REGULATIONS. THE REMAINING INITIAL TERMS OF MOST OF
THE COMPANY'S CHANNEL LEASES RANGE FROM 5 TO 10 YEARS, ALTHOUGH CERTAIN
OF THE COMPANY'S CHANNEL LEASES HAVE INITIAL TERMS EXPIRING IN THE NEXT
SEVERAL YEARS. MOST OF THE COMPANY'S LEASES PROVIDE THAT THE LESSOR
MAY NEGOTIATE LEASE RENEWALS WITH ONLY THE COMPANY AND, IF A RENEWAL
AGREEMENT IS NOT REACHED WITHIN A SPECIFIED TIME, GRANT THE COMPANY A
RIGHT OF FIRST REFUSAL TO MATCH ANY COMPETING OFFERS. ALTHOUGH THE
COMPANY DOES NOT BELIEVE THAT THE TERMINATION OF OR FAILURE TO RENEW A
SINGLE CHANNEL LEASE WOULD ADVERSELY AFFECT THE COMPANY, SEVERAL OF
SUCH TERMINATIONS OR FAILURES IN ONE OR MORE MARKETS THAT THE COMPANY
ACTIVELY SERVES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
CHANNEL RIGHTS LEASE AGREEMENTS GENERALLY REQUIRE PAYMENTS BASED ON THE
GREATER OF SPECIFIED MINIMUMS OR AMOUNTS BASED UPON VARIOUS SUBSCRIBER
LEVELS. ADDITIONALLY, FCC LICENSES ALSO SPECIFY CONSTRUCTION
DEADLINES, WHICH, IF NOT MET, COULD RESULT IN THE LOSS OF THE LICENSE.
REQUESTS FOR ADDITIONAL TIME TO CONSTRUCT MAY BE FILED AND ARE SUBJECT
TO REVIEW PURSUANT TO FCC RULES.
PAYMENTS UNDER THE CHANNEL RIGHTS LEASE AGREEMENTS GENERALLY BEGIN UPON
THE COMPLETION OF CONSTRUCTION OF THE TRANSMISSION EQUIPMENT AND
FACILITIES AND APPROVAL FOR OPERATION PURSUANT TO THE RULES AND
REGULATIONS OF THE FCC. HOWEVER, FOR CERTAIN LEASES, THE COMPANY IS
OBLIGATED TO BEGIN PAYMENTS UPON GRANT OF THE CHANNEL RIGHTS. CHANNEL
RIGHTS LEASE EXPENSE WAS APPROXIMATELY $1,911,000, $1,883,000 AND
$1,810,000 FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996,
RESPECTIVELY.
THE COMPANY ALSO HAS CERTAIN OPERATING LEASES FOR OFFICE SPACE,
EQUIPMENT AND TRANSMISSION TOWER SPACE. RENT EXPENSE INCURRED IN
CONNECTION WITH OTHER OPERATING LEASES WAS APPROXIMATELY $1,817,000,
$1,656,000 AND $1,405,000 FOR THE YEARS ENDED DECEMBER 31, 1998, 1997,
AND 1996 RESPECTIVELY.
FUTURE MINIMUM LEASE PAYMENTS DUE UNDER CHANNEL RIGHTS LEASES AND OTHER
NONCANCELLABLE OPERATING LEASES AT DECEMBER 31, 1998 ARE AS FOLLOWS:
CHANNEL OTHER
YEAR ENDING RIGHTS OPERATING
DECEMBER 31, LEASES LEASES
------------- -------- ---------
1999 $ 1,998 1,567
2000 2,289 1,436
2001 2,321 1,309
2002 2,321 1,252
2003 2,321 1,262
(9) Stockholders' Equity
(A) PREFERRED AND COMMON STOCK
At December 31, 1997, the Company had authorized 5,000,000 shares
of preferred stock which can be issued in series with varying
preferences and conversion features as determined by the Board of
Directors of the Company, with no shares issued. On August 21,
1998, the Company filed with the Secretary of State of Delaware a
Certificate of Amendment of Amended and Restated Certificate of
Incorporation reducing the number of authorized shares of common
stock from 40 million to 15 million and eliminating the authorized
preferred shares.
(B) TREASURY STOCK
As part of the Master Agreement (note 3(c)), the Company purchased
3,836,035 shares of its common stock from CAI for $1,534,000 on
December 3, 1998.
(c) Stock Options
In 1996, the Company established the CS Wireless Systems, Inc.
Incentive Stock Plan ("Stock Plan") which provides for the issuance
of stock options to officers and other key employees of the Company
and its subsidiaries. The Stock Plan makes available for issuance
1,500,000 shares of common stock. Options issued under the Stock
Plan have varying vesting periods as provided in separate stock
option agreements and generally carry an expiration date of ten
years subsequent to the date of issuance. Options issued are
required to have an exercise price of not less than fair market
value of the Company's common stock on the date of grant.
The Company applies APB Opinion No. 25 in accounting for its Stock
Plan and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated
below:
Net loss: 1998 1997 1996
---- ---- ----
As reported $ (139,383) (52,565) (28,527)
Pro forma (139,217) (54,616) (29,404)
Basic and diluted loss per common
share:
As reported $ (13.41) (4.94) (3.06)
Pro forma (13.39) (5.11) (3.21)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997 and
1996: dividend yield of 0%; risk-free interest rate of 6.0% and an
expected life of 5 years.
Following is a summary of activity in the employee option plan
discussed above for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
----------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- ------- -------- ------- ---------
Outstanding at beginning
of year 898,861 $ 6.88 655,161 $ 9.40 --- $ ---
Granted --- --- 833,335 6.50 655,161 9.40
Exercised --- --- --- --- --- ---
Canceled (265,044) 6.55 (589,635) (9.14) --- ---
-------- ----- -------- ----- ------- -------
Options outstanding at
end of year 633,817 $ 7.01 898,861 $ 6.88 655,161 $ 9.40
======== ====== ======= ====== ======= ======
Options exercisable at
year end 444,150 536,818 367,049
======== ======= =======
Weighted average fair
value of options
granted during year $ --- $ 6.50 $ 9.40
======= ======== =======
The following table summarizes information about stock
options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED NUMBER WEIGHTED
AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICE 1998 LIFE PRICE 1998 PRICE
-------- --------------- ----------- -------- -------------- --------
$ 6.50 521,291 7.8 years $ 6.50 331,624 $ 6.50
======== ======= ========= ========= ======= =========
$ 9.40 112,526 7.2 years $ 9.40 112,526 $ 9.40
======== ======= ========= ========= ======= =========
(10) INCOME TAXES
AS THE COMPANY HAS FULLY OFFSET ITS DEFERRED TAX ASSETS BY A
VALUATION ALLOWANCE AT DECEMBER 31, 1998, NO INCOME TAX BENEFIT
HAS BEEN RECORDED FOR THE YEAR ENDED DECEMBER 31, 1998. FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1996, INCOME TAX BENEFIT OF
$5,429,000 AND $14,631,000, RESPECTIVELY, WERE COMPRISED OF
DEFERRED TAX BENEFITS.
TOTAL INCOME TAX BENEFIT FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 DIFFERED FROM THE AMOUNT COMPUTED BY APPLYING THE U.S.
FEDERAL STATUTORY INCOME TAX RATE OF 35% TO LOSS BEFORE INCOME
TAXES AS A RESULT OF THE FOLLOWING:
1998 1997 1996
--------------- ------------- -------------
Computed "expected" tax benefit $ (48,784) (19,827) (15,105)
Amortization of goodwill 18,959 1,394 1,260
State income taxes (2,788) (1,133) (863)
Adjustment to prior year deferred
taxes 10,382 (2,019) ---
Increase in valuation allowance 22,220 16,082 ---
Other, net 11 74 77
--------- --------- ---------
$ --- (5,429) (14,631)
========= ========= =========
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
at December 31, 1998 and 1997 are presented below:
1998 1997
-------------- ----------------
Deferred tax assets:
Net operating loss carryforwards $ 18,702 14,596
Noncash interest 32,573 19,736
Investments in affiliates 0 499
Property and equipment 3,988 1,443
Other 806 ---
--------
Total gross deferred tax assets 56,069 36,274
Less valuation allowance (38,302) (16,082)
--------
17,767 20,192
========
Deferred tax liabilities:
License and leased license investment 17,767 20,143
Other 0 49
--------
Total deferred tax liabilities 17,767 20,192
--------
Net deferred tax liability $ --- ---
========
DEFERRED TAX ASSETS AND LIABILITIES ARE COMPUTED BY APPLYING THE
U.S. FEDERAL INCOME TAX RATE IN EFFECT TO THE GROSS AMOUNTS OF
TEMPORARY DIFFERENCES AND OTHER TAX ATTRIBUTES, SUCH AS NET
OPERATING LOSS CARRYFORWARDS. DEFERRED TAX ASSETS AND
LIABILITIES RELATING TO STATE INCOME TAXES ARE NOT MATERIAL.
IN ASSESSING THE REALIZABILITY OF DEFERRED TAX ASSETS, THE
COMPANY CONSIDERS WHETHER IT IS MORE LIKELY THAN NOT THAT SOME
PORTION OR ALL OF THE DEFERRED TAX ASSETS WILL NOT BE REALIZED.
THE ULTIMATE REALIZATION OF DEFERRED TAX ASSETS IS DEPENDENT
UPON THE GENERATION OF FUTURE TAXABLE INCOME DURING THE PERIODS
IN WHICH THOSE TEMPORARY DIFFERENCES BECOME DEDUCTIBLE. THE
COMPANY CONSIDERS THE SCHEDULED REVERSAL OF DEFERRED TAX
LIABILITIES, PROJECTED FUTURE TAXABLE INCOME, AND TAX PLANNING
STRATEGIES IN MAKING THIS ASSESSMENT. BASED UPON THESE
CONSIDERATIONS, THE COMPANY HAS RECOGNIZED DEFERRED TAX ASSETS
TO THE EXTENT SUCH ASSETS CAN BE REALIZED THROUGH FUTURE
REVERSALS OF EXISTING TAXABLE TEMPORARY DIFFERENCES.
AT DECEMBER 31, 1998, THE COMPANY HAS NET OPERATING LOSS
CARRYFORWARDS AVAILABLE OF APPROXIMATELY $52,695,000 WHICH BEGIN
TO EXPIRE IN 2010. APPROXIMATELY $7,520,000 OF THE NET
OPERATING LOSS CARRYOVER IS SUBJECT TO AN ANNUAL LIMITATION AND
THE SEPARATE RETURN LIMITATION YEAR RULES.
(11) OTHER RELATED PARTY TRANSACTIONS
IN 1997, THE COMPANY, CAI AND HEARTLAND (SEE NOTE 3), AND A
THIRD PARTY WIRELESS CABLE PROVIDER FORMED WIRELESS ENTERPRISES,
LLC ("WIRELESS ENTERPRISES"). WIRELESS ENTERPRISES IS A
PROGRAMMING COOPERATIVE THAT NEGOTIATES PROGRAMMING AND
MARKETING SERVICES WITH SUPPLIERS OF PROGRAMMING. DURING THE
YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY PAID
$8,293,000 AND $5,578,000, RESPECTIVELY, TO WIRELESS ENTERPRISES
FOR PROGRAMMING AND OTHER ADMINISTRATIVE SERVICES.
DURING 1998 AND 1997, THE COMPANY PURCHASED EQUIPMENT FROM CAI
FOR $300,000 AND $3,400,000.
DURING 1998, THE COMPANY HAD AN ARRANGEMENT WITH CAI WHEREBY CAI
PERSONNEL PROVIDE ENGINEERING AND OTHER TECHNICAL CONSULTING
SERVICES IN CONNECTION WITH THE DIGITAL BUILD-OUT OF THE DALLAS,
TEXAS MARKET. UNDER THIS ARRANGEMENT, CAI RECEIVES $10,000 PER
MONTH PLUS REIMBURSEMENT FOR ALL REASONABLE EXPENSES INCURRED IN
THE PERFORMANCE OF SUCH SERVICES. THE COMPANY HAS RENEGOTIATED
THE TERMS OF THIS ARRANGEMENT AND ENTERED INTO AN ENGINEERING
AND SPECTRUM MANAGEMENT AGREEMENT WITH CAI AND A WHOLLY-OWNED
SUBSIDIARY WHEREBY EFFECTIVE MARCH 1, 1999, CAI ASSUMED
SUPERVISION AND DELIVERY OF ALL ENGINEERING AND TECHNICAL
MANAGEMENT SERVICES. THE COMPANY WILL PAY CAI A FEE EQUAL TO
40% OF THE WHOLLY-OWNED SUBSIDIARY'S COSTS PLUS AN
ADMINISTRATIVE FEE OF 20% OF SUCH AMOUNT. ADDITIONALLY, THE
COMPANY PAID CAI APPROXIMATELY $139,000 AND $472,000 FOR
SERVICES RENDERED, RENT, LICENSING AND OTHER FEES DURING 1998
AND 1997, RESPECTIVELY.
IN SEPTEMBER 1997, THE COMPANY ENTERED INTO AN TWO-YEAR
INSTALLATION CONTRACTOR AGREEMENT WITH ACS TELECOMMUNICATIONS
SYSTEMS, INC. ("ACS") WHEREBY FOR A FIXED MONTHLY FEE PER MARKET
PLUS ADDITIONAL VARIABLE COSTS, ACS AGREED TO PROVIDE
INSTALLATION CONTRACTOR SERVICES IN THE DALLAS, TEXAS AREA AND
OTHER MARKETS AS MUTUALLY AGREED UPON. DURING THE YEARS ENDED
DECEMBER 31, 1998 AND 1997, THE COMPANY PAID $4,400,000 AND
$988,000, RESPECTIVELY, TO ACS UNDER THIS AGREEMENT. THE
COMPANY AMENDED THIS AGREEMENT TO SHORTEN THE TERM AND DECREASE
THE FIXED MONTHLY PAYMENT. IN CONNECTION WITH THIS AMENDMENT,
THE COMPANY HAS AGREED TO MAKE PAYMENTS TOTALING $510,000 TO ACS
PURSUANT TO THE ORIGINAL AGREEMENT. A FORMER DIRECTOR OF THE
COMPANY, WHO RESIGNED IN DECEMBER 1998, IS THE PRINCIPAL
STOCKHOLDER OF ACS.
(12) Fair Value of Financial Instruments
THE FAIR VALUE OF THE SENIOR NOTES AT DECEMBER 31, 1998 AND 1997 WAS
APPROXIMATELY $68.0 MILLION AND $96.0 MILLION, RESPECTIVELY (CARRYING
AMOUNTS OF $314.4 MILLION AND $281.2 MILLION, RESPECTIVELY) BASED ON
MARKET QUOTES OBTAINED FROM DEALERS. THE CARRYING AMOUNTS OF THE
HEARTLAND LONG-TERM NOTE, THE ACQUISITION NOTE AND THE BTA AUCTION
PAYABLES APPROXIMATE FAIR VALUE AS THESE NOTES BEAR INTEREST AT CURRENT
MARKET RATES.
THE CARRYING AMOUNT OF CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND
ACCOUNTS PAYABLE APPROXIMATE FAIR VALUE BECAUSE OF THE SHORT MATURITY OF
THESE INSTRUMENTS.
(13) COMMITMENTS AND CONTINGENCIES
THE COMPANY HAS ENTERED INTO A SERIES OF NONCANCELLABLE AGREEMENTS TO
PURCHASE ENTERTAINMENT PROGRAMMING FOR RETRANSMISSION WHICH EXPIRE THROUGH
2000. THE AGREEMENTS GENERALLY REQUIRE MONTHLY PAYMENTS BASED UPON THE
NUMBER OF SUBSCRIBERS TO THE COMPANY'S SYSTEMS, SUBJECT TO CERTAIN
MINIMUMS.
THE COMPANY IS A PARTY TO LEGAL PROCEEDINGS INCIDENTAL TO ITS BUSINESS
WHICH, IN THE OPINION OF MANAGEMENT, ARE NOT EXPECTED TO HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S CONSOLIDATED FINANCIAL POSITION, OPERATING
RESULTS OR LIQUIDITY.