[LOGO]
July 30, 1999
Dear CAI Shareholder:
I cordially invite you to attend a special meeting of the shareholders of
CAI Wireless Systems, Inc. to be held on August 31, 1999, at 10:00 a.m., Eastern
time, at The Goodwin Hotel, One Haynes Street, Hartford, Connecticut 06103.
At this meeting, shareholders of record on July 28, 1999 will vote upon a
proposal to approve an Agreement and Plan of Merger, dated as of April 26, 1999,
by and among CAI Wireless Systems, Inc., MCI WORLDCOM, Inc. and Cardinal
Acquisition Subsidiary Inc., a wholly-owned subsidiary of MCI WorldCom, and the
transactions contemplated by the merger agreement. The merger agreement
provides, among other things, that:
- Cardinal Acquisition Subsidiary will merge with and into CAI;
- CAI will continue as the surviving corporation and will become a
wholly-owned subsidiary of MCI WorldCom; and
- each CAI common share issued and outstanding at the effective time of the
merger (other than shares held by MCI WorldCom, Cardinal Acquisition
Subsidiary, CAI, and shareholders, if any, who properly exercise their
dissenters' rights under Connecticut law) will convert into the right to
receive $28.00 per share in cash, without interest.
Consummation of the merger is subject to certain conditions, including
approval of the merger agreement by the affirmative vote of the holders of at
least two-thirds of the outstanding CAI common shares. MCI WorldCom held
approximately 62.0% of the outstanding CAI common shares as of the record date.
MCI WorldCom has agreed to vote all CAI common shares held by it on the record
date in favor of the merger. The merger agreement and the merger are more fully
described in the accompanying proxy statement.
The CAI board has reviewed and considered the terms and conditions of the
merger agreement, has determined that the merger is in the best interests of CAI
and its shareholders and has approved the merger agreement. CAI's financial
advisor, BT Alex. Brown Incorporated, rendered to the CAI board a written
opinion dated April 26, 1999 to the effect that, as of such date and based upon
and subject to the matters stated in the opinion, the $28.00 per share price to
be received in the merger by the holders of CAI common shares was fair, from a
financial point of view, to such holders (other than MCI WorldCom and its
affiliates).
THE CAI BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE
MERGER AGREEMENT.
Please read the enclosed information carefully before completing and
returning your proxy card. Returning your proxy card as soon as possible will
ensure your vote is counted at the meeting, whether or not you plan to attend.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF CAI COMMON SHARES YOU OWN.
Sincerely,
/s/ Jared E. Abbruzzese
JARED E. ABBRUZZESE
Chairman of the Board of Directors
and Chief Executive Officer
CAI WIRELESS SYSTEMS, INC.
18 CORPORATE WOODS BOULEVARD
ALBANY, NEW YORK 12211
TELEPHONE: (518) 462-2632
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 31, 1999
To Our Shareholders:
We are contacting you to notify you that a special meeting of shareholders
of CAI Wireless Systems, Inc., a Connecticut corporation, will be held on August
31, 1999, at 10:00 a.m., Eastern time, at The Goodwin Hotel, One Haynes Street,
Hartford, Connecticut 06103, for the following purposes:
1. To consider and vote upon a proposal to approve an Agreement and Plan of
Merger, dated as of April 26, 1999, by and among CAI Wireless Systems, Inc., MCI
WORLDCOM, Inc., a Georgia corporation, and Cardinal Acquisition Subsidiary Inc.,
a Connecticut corporation and a wholly-owned subsidiary of MCI WorldCom, and the
transactions contemplated by the merger agreement. The merger agreement
provides, among other things, that:
- Cardinal Acquisition Subsidiary will merge with and into CAI;
- CAI will continue as the surviving corporation and will become a
wholly-owned subsidiary of MCI WorldCom; and
- each CAI common share issued and outstanding at the effective time of the
merger (other than shares held by MCI WorldCom, Cardinal Acquisition
Subsidiary, CAI and shareholders, if any, who properly exercise their
dissenters' rights under Connecticut law) will convert into the right to
receive $28.00 per share in cash, without interest.
2. To transact any other business that is properly brought before the
special meeting or any adjournment or postponement of the special meeting.
The CAI board fixed the close of business on July 28, 1999 as the record
date to determine the shareholders who are entitled to receive notice of and to
vote at the special meeting and any adjournment or postponement of the special
meeting. Therefore, only shareholders of record on that date are entitled to
receive notice of, and to vote at, the special meeting or any adjournment or
postponement of the special meeting.
Shareholders who do not vote in favor of the merger agreement and who
otherwise comply with the applicable procedures described in Sections 33-855
through 33-868 of the Connecticut Business Corporation Act will be entitled to
dissenters' rights under Section 33-856 of that statute. We have summarized for
you, in the section of the accompanying proxy statement called "The Merger--
Dissenters' Rights," the provisions of Sections 33-855 through 33-368 of the
Connecticut Business Corporation Act. That summary includes a description of the
procedure that dissenting shareholders must follow to assert dissenters' rights.
The entire text of Sections 33-855 through 33-868 of the Connecticut Business
Corporation Act is attached as Annex D to the accompanying proxy statement.
The proxy statement mailed with this notice describes the merger agreement,
the proposed merger and certain actions to be taken in connection with the
merger. SINCE IT IS IMPORTANT THAT YOUR CAI COMMON SHARES BE REPRESENTED AT THE
SPECIAL MEETING WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, PLEASE COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. YOU MAY REVOKE YOUR PROXY IN
THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AT ANY TIME BEFORE THE
PROXY HAS BEEN VOTED AT THE SPECIAL MEETING. Your proxy, if properly executed,
will be voted in the manner directed by you; if no direction is made, your proxy
will be voted "FOR" approval of the merger agreement.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME. IF THE MERGER IS
CONSUMMATED, WE WILL SEND YOU INSTRUCTIONS FOR SURRENDERING YOUR CERTIFICATES.
By Order of the Board of Directors,
WAYNE BARR, JR.
Secretary
Albany, New York
July 30, 1999
CAI WIRELESS SYSTEMS, INC.
18 CORPORATE WOODS BOULEVARD
ALBANY, NEW YORK 12211
------------------------
PROXY STATEMENT
------------------------
FOR A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 31, 1999
We are furnishing this proxy statement to the shareholders of CAI Wireless
Systems, Inc., a Connecticut corporation, to solicit proxies for use at a
special meeting of shareholders scheduled for 10:00 a.m., Eastern time, on
August 31, 1999, at The Goodwin Hotel, One Haynes Street, Hartford, Connecticut
06103, and at any adjournment or postponement of the special meeting.
We are mailing this proxy statement and the accompanying notice, proxy card
and letter on or about July 30, 1999, to shareholders entitled to receive notice
of, and to vote at, the special meeting.
At the special meeting, shareholders will be asked to consider and vote upon
a proposal to approve an Agreement and Plan of Merger, dated as of April 26,
1999, by and among CAI Wireless Systems, Inc., MCI WORLDCOM, Inc. and Cardinal
Acquisition Subsidiary Inc., a wholly-owned subsidiary of MCI WorldCom, and the
transactions contemplated by the merger agreement. The merger agreement
provides, among other things, that:
- Cardinal Acquisition Subsidiary will merge with and into CAI;
- CAI will continue as the surviving corporation and will become a
wholly-owned subsidiary of MCI WorldCom; and
- each CAI common share issued and outstanding at the effective time of the
merger (other than shares held by MCI WorldCom, Cardinal Acquisition
Subsidiary, CAI and shareholders, if any, who properly exercise their
dissenters' rights under Connecticut law) will convert into the right to
receive $28.00 per share in cash, without interest.
Shareholders who do not vote in favor of the merger agreement and who
otherwise comply with the applicable procedures described in Sections 33-855
through 33-868 of the Connecticut Business Corporation Act will be entitled to
dissenters' rights under Section 33-856 of that statute. We have summarized for
you, in the section of this proxy statement called "The Merger--Dissenters'
Rights," the provisions of Sections 33-855 through 33-868 of the Connecticut
Business Corporation Act. That summary includes a description of the procedure
that dissenting shareholders must follow to assert dissenters' rights.
THE CAI BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE MERGER AGREEMENT.
All information in this proxy statement about MCI WorldCom and Cardinal
Acquisition Subsidiary was supplied by MCI WorldCom, and CAI did not
independently verify it. Except as otherwise indicated, CAI supplied or prepared
all other information in this proxy statement.
Dated: July 30, 1999.
TABLE OF CONTENTS
PAGE
---------
CHAPTER I--THE MERGER...................................................................................... 1
FORWARD-LOOKING STATEMENTS............................................................................... 1
QUESTIONS AND ANSWERS ABOUT THE MERGER................................................................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS?...................................................................... 3
MERGER INFORMATION SUMMARY............................................................................... 4
The Companies (Page 13)................................................................................ 4
The Special Meeting (Page 57).......................................................................... 5
Voting Rights; Votes Required for Approval (Page 57)................................................... 6
Effects of the Merger; Merger Consideration (Page 21).................................................. 6
Our Reasons for the Merger (Page 19)................................................................... 6
Our Recommendation to Shareholders (Page 19)........................................................... 6
Opinion of CAI's Financial Advisor (Page 22)........................................................... 6
Dissenters' Rights (Page 37)........................................................................... 7
MCI WorldCom's Interests in CAI and CS Wireless Securities; Recent Events (Pages 35 and 36)............ 7
Interests of Officers, Directors and Certain Persons in the Transaction (Page 29)...................... 8
Conditions to Closing the Transaction (Page 43)........................................................ 9
Regulatory Matters (Page 28)........................................................................... 9
Termination of the Merger Agreement (Page 50).......................................................... 10
Payment of Fees (Page 50).............................................................................. 11
Restrictions on Alternative Transactions (Page 47)..................................................... 11
Accounting Treatment (Page 26)......................................................................... 11
Material Federal Income Tax Consequences (Page 27)..................................................... 11
Market Prices of CAI Common Stock (Page 115)........................................................... 11
Selected Consolidated Financial Data................................................................... 12
THE MERGER............................................................................................... 13
The Companies.......................................................................................... 13
CAI Wireless Systems, Inc............................................................................ 13
MCI WORLDCOM, Inc.................................................................................... 13
Cardinal Acquisition Subsidiary Inc.................................................................. 14
Background of the Merger............................................................................... 14
CAI's Reasons for the Merger; Recommendation of the CAI Board.......................................... 19
Effects of the Merger; Merger Consideration............................................................ 21
Opinion of CAI's Financial Advisor..................................................................... 22
Analysis of Selected Public Companies................................................................ 24
Analysis of Selected Precedent Transactions.......................................................... 24
Discounted Cash Flow Analysis........................................................................ 25
Premium Analysis..................................................................................... 25
Other Factors........................................................................................ 25
Accounting Treatment................................................................................... 26
Material Federal Income Tax Consequences............................................................... 27
Regulatory Matters..................................................................................... 28
Antitrust............................................................................................ 28
FCC Approvals........................................................................................ 28
Interests of Certain Persons in the Merger............................................................. 29
Interest in Options to Purchase Common Shares........................................................ 29
Management Options................................................................................. 29
Directors' Options................................................................................. 33
Employment Agreements and Other Arrangements......................................................... 33
Indemnification and Insurance........................................................................ 35
Description of CAI and CS Wireless Securities Owned by MCI WorldCom.................................... 35
PAGE
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CAI Common Shares.................................................................................... 35
Stock Option Agreement............................................................................... 35
Senior Secured Notes Due 2000........................................................................ 35
13% Senior Notes Due 2004............................................................................ 36
Series B 11 3/8% Senior Discount Notes of CS Wireless................................................ 36
Description of Relationship Between MCI WorldCom and CS Wireless....................................... 36
Recent Events.......................................................................................... 36
Dissenters' Rights..................................................................................... 37
SUMMARY OF THE MERGER AGREEMENT.......................................................................... 40
General................................................................................................ 40
Merger Consideration................................................................................... 40
Exchange of Shares..................................................................................... 41
Treatment of Stock Options............................................................................. 41
Representations and Warranties......................................................................... 42
Conditions to Closing.................................................................................. 43
Covenants.............................................................................................. 46
No Solicitation...................................................................................... 47
Additional Agreements.................................................................................. 48
Shareholders Meeting................................................................................. 48
Notification of Certain Matters...................................................................... 48
Access to Information; Confidentiality............................................................... 48
Efforts; Cooperation................................................................................. 48
Year 2000 Plan....................................................................................... 49
Purchase of CAI Common Shares........................................................................ 49
Conversion of Options................................................................................ 49
Indemnification and Insurance........................................................................ 49
Fees and Expenses.................................................................................... 50
Amendment............................................................................................ 50
Extension; Waiver.................................................................................... 50
Termination, Fees, Amendment and Waiver................................................................ 50
SUMMARY OF STOCK OPTION AGREEMENT........................................................................ 52
SUMMARY OF SHAREHOLDER RIGHTS PLAN....................................................................... 54
CHAPTER II--INFORMATION ABOUT THE SPECIAL MEETING.......................................................... 57
THE SPECIAL MEETING...................................................................................... 57
General................................................................................................ 57
Matters to be Considered at the Special Meeting........................................................ 57
Record Date; Voting at the Special Meeting............................................................. 57
Proxies, Revocation of Proxies......................................................................... 58
Solicitation of Proxies................................................................................ 59
CERTAIN INFORMATION REGARDING CAI........................................................................ 59
General................................................................................................ 59
CAI Chapter 11 Case.................................................................................... 59
CAI Secured Facility................................................................................... 61
General.............................................................................................. 61
Guaranties........................................................................................... 61
Fees................................................................................................. 62
Certain Covenants.................................................................................... 62
CAI Common Shares Issued to MLGAF...................................................................... 65
MCI WorldCom Acquisition of CAI Secured Facility....................................................... 65
ii
PAGE
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CAI's 13% Senior Notes Due 2004........................................................................ 65
General.............................................................................................. 65
Maturity, Interest and Principal..................................................................... 66
Optional Redemption.................................................................................. 66
Selection and Notice................................................................................. 66
Certain Covenants.................................................................................... 66
Events of Default.................................................................................... 67
Defeasance or Covenant Defeasance of Indenture....................................................... 68
Modification of the Indenture........................................................................ 68
Historical Background.................................................................................. 69
Business and Operating Strategy........................................................................ 71
CAI Markets............................................................................................ 72
CAI's Analog Subscription Video Business............................................................... 74
Digital Subscription Video............................................................................. 75
High-Speed Data Services............................................................................... 75
Telephony.............................................................................................. 76
Management............................................................................................. 76
Change of Control; Security Ownership of Certain Beneficial Owners and Management...................... 78
Employees.............................................................................................. 81
Properties............................................................................................. 81
Legal Proceedings...................................................................................... 82
CERTAIN INFORMATION REGARDING CS WIRELESS................................................................ 83
General................................................................................................ 83
CS Wireless' Series B 11 3/8% Senior Discount Notes Due 2006........................................... 84
General.............................................................................................. 84
Maturity, Interest and Principal..................................................................... 84
Optional Redemption.................................................................................. 84
Certain Covenants.................................................................................... 84
Holders' Rights upon a Change of Control............................................................. 85
Events of Default.................................................................................... 86
Defeasance or Covenant Defeasance of Indenture....................................................... 87
Modification of the Indenture........................................................................ 88
Historical Background.................................................................................. 88
Business and Operating Strategy........................................................................ 90
CS Wireless Markets.................................................................................... 91
CS Wireless' Service Offerings And Marketing........................................................... 92
Analog Subscription Video Services................................................................... 92
Digital Subscription Video Services.................................................................. 92
Internet Access...................................................................................... 93
Telephone Services................................................................................... 94
Marketing for Multiple Dwelling Units................................................................ 94
REGULATION IN THE MMDS INDUSTRY.......................................................................... 94
General................................................................................................ 94
Licensing Procedures................................................................................... 95
Change in Control Issues............................................................................... 97
Interference Issues.................................................................................... 97
The 1992 Cable Act..................................................................................... 98
The Telecommunications Act of 1996..................................................................... 98
Copyright.............................................................................................. 99
Retransmission Consent................................................................................. 99
iii
PAGE
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Regulation by the FAA.................................................................................. 99
State Mandatory Access Laws............................................................................ 100
COMPETITION.............................................................................................. 100
Hard-Wire Cable........................................................................................ 100
Direct-to-Home (DTH)................................................................................... 100
Private Cable.......................................................................................... 101
Telephone Companies.................................................................................... 101
Local Off-Air VHF/UHF Broadcasts....................................................................... 101
Local Multi-Point Distribution Service (LMDS).......................................................... 101
Other Competitive Factors.............................................................................. 102
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 103
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................... 115
RESIGNATION OF AUDITORS.................................................................................. 115
MARKET PRICES OF COMMON STOCK............................................................................ 115
DIVIDENDS................................................................................................ 117
INDEPENDENT AUDITORS..................................................................................... 117
SHAREHOLDER PROPOSALS.................................................................................... 117
CHAPTER III--WHERE YOU CAN FIND MORE INFORMATION........................................................... 118
FINANCIAL STATEMENTS....................................................................................... F-1
Financial Statements of CAI Wireless Systems, Inc. and Subsidiaries...................................... F-2
Financial Statements of CS Wireless Systems, Inc. and Subsidiaries....................................... F-48
Unaudited Pro Forma Combined Financial Statements of CAI and CS Wireless................................. F-77
AGREEMENT AND PLAN OF MERGER................................................... ANNEX A
STOCK OPTION AGREEMENT......................................................... ANNEX B
OPINION OF BT ALEX. BROWN INCORPORATED......................................... ANNEX C
SECTIONS 33-855 THROUGH 33-868 OF THE CONNECTICUT BUSINESS CORPORATION ACT..... ANNEX D
iv
CHAPTER I--THE MERGER
FORWARD-LOOKING STATEMENTS
This proxy statement contains certain forward-looking statements based on
our estimates and assumptions. Forward-looking statements include information
concerning possible or assumed future results of operations of CAI and the
surviving corporation after the merger. There are forward-looking statements
throughout this proxy statement, including but not limited to in "Questions and
Answers About the Transaction," "Merger Information Summary," "The
Merger--Background of the Merger," "The Merger--CAI's Reasons for the Merger;
Recommendation of the CAI Board," "The Merger-- Opinion of CAI's Financial
Advisor," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and in statements containing the words "believes,"
"expects," "anticipates," "intends," "estimates" or other, similar expressions.
For each of these statements, CAI claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
You should be aware that forward-looking statements involve known and
unknown risks and uncertainties which may cause:
- the actual results,
- the financial condition of CAI and the surviving corporation,
- the performance of CAI and the surviving corporation,
- the achievements of CAI and the surviving corporation, or
- industry results
to be worse than the future results, performance or achievements stated in, or
implied by, those forward-looking statements.
Do not rely on any forward-looking statements. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we
cannot assure you that the actual results or developments we anticipate will be
realized, or even if realized, that they will have the expected effects on the
business or operations of CAI and the surviving corporation. We assume no
obligation to update any forward-looking statements to reflect future events or
developments.
In addition to other factors and matters contained or incorporated in this
document, we believe the following factors could cause actual results to differ
materially from those discussed in the forward-looking statements:
- material adverse changes in the economic conditions in the markets served
by CAI and its subsidiaries and by MCI WorldCom and its subsidiaries,
- material changes in available technology,
- the extent, timing and overall effects of competition from others in the
subscription video, data transmission services and telephony industries,
and
- the timing of, and regulatory and other conditions associated with, the
completion of the merger.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q-1: WHY IS CAI PROPOSING THE MERGER?
A-1: For CAI, the merger presents an opportunity for it to implement its
business plan with the support and assistance of a strategic partner. The merger
represents the culmination of CAI's efforts to replace its former strategic
partners with a large telecommunications company interested in developing its
MMDS spectrum. The merger also provides CAI's shareholders the opportunity to
realize a significant premium over recent market prices for their shares. In
addition, the merger will enable CAI, which is currently constrained by
liquidity concerns, to realize the potential advantages of its MMDS
spectrum by becoming a wholly-owned subsidiary of one of the country's leading
telecommunications companies. Throughout this proxy statement, when we use the
term "MMDS spectrum," we mean the Multichannel Multipoint Distribution Service
channels, Multichannel Distribution Service channels, Instructional Television
Fixed Service channels and wireless communications service spectrum regulated by
the FCC that are owned or controlled by CAI and its subsidiaries, including CS
Wireless Systems, Inc., a Delaware corporation approximately 94% of the common
stock of which is owned by CAI.
Q-2: WHY IS THE CAI BOARD RECOMMENDING THAT I VOTE FOR THE MERGER AGREEMENT?
A-2: In the opinion of the CAI board, the terms and provisions of the merger
agreement and the merger are fair to and in the best interests of CAI and its
shareholders. To review the background and reasons for the merger in greater
detail, see pages 14 to 21.
Q-3: PLEASE EXPLAIN WHAT I WILL RECEIVE IN THE MERGER.
A-3: If the merger is completed, you will receive $28.00 in cash, without
interest, for each CAI common share you own.
Q-4: WHAT ARE MY TAX CONSEQUENCES AS A RESULT OF THE MERGER?
A-4: The merger will be taxable to you. You will recognize a gain or loss in an
amount equal to the difference between the adjusted tax basis of your CAI common
shares and the amount of cash you receive in the merger. If your CAI common
shares are a capital asset, your gain or loss will be long-term gain or loss if
your deemed holding period for your CAI common shares is more than one year at
the effective time of the merger. As with any transaction of this type, you
should consult your own tax advisor to understand how the merger will affect you
personally.
Q-5: WHAT RIGHTS DO I HAVE IF I OPPOSE THE MERGER?
A-5: Under Connecticut law, you are entitled to dissenters' rights. If you do
not vote in favor of the merger and you properly elect to exercise your
dissenters' rights as described under "The Merger-- Dissenters' Rights" and in
Annex D, you may receive in the merger the "fair value" of your CAI common
shares. The fair value could be equal to, less than or more than $28 per share,
and a court will determine the fair value.
Q-6: WHAT DO I NEED TO DO NOW?
A-6: PLEASE VOTE YOUR CAI COMMON SHARES AS SOON AS POSSIBLE SO THAT YOUR CAI
COMMON SHARES WILL BE REPRESENTED AT THE SPECIAL MEETING. You may grant your
proxy by signing your proxy card and mailing it in the enclosed return envelope,
or you may vote in person at the special meeting.
Q-7: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A-7: Send in a later-dated, signed proxy card to CAI's corporate secretary
before the special meeting or attend the special meeting in person and vote.
Q-8: IF MY CAI COMMON SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY CAI COMMON SHARES FOR ME?
A-8: Your broker will vote your CAI common shares only if you provide
instructions on how to vote. Your broker should contact you regarding the
procedures necessary for him or her to vote your CAI common shares. Please tell
your broker how you would like him or her to vote your CAI common
2
shares. If you do not tell your broker how to vote, your CAI common shares will
NOT be voted by your broker, which will have the effect of a vote "AGAINST" the
transaction.
Q-9: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A-9: No. Soon after the merger is completed, we will mail you written
instructions explaining how to obtain the merger consideration.
Q-10: WHEN AND WHERE IS THE SPECIAL MEETING?
A-10: The special meeting will be held on August 31, 1999 at 10:00 a.m.,
Eastern time, at The Goodwin Hotel, One Haynes Street, Hartford, Connecticut
06103.
Q-11: WHAT IS THE EFFECT IF I DO NOT VOTE?
A-11: If you do not submit a proxy card or vote in person at the special
meeting or if you abstain from voting, it will have the effect of a vote
"AGAINST" the transaction. Your proxy, when properly executed, will be voted in
the manner directed by you. If no direction is made, your proxy will be voted
"FOR" approval of the transaction.
Q-12: WHO CAN VOTE AT THE SPECIAL MEETING?
A-12: Holders of CAI common shares at the close of business on July 28, 1999
may vote at the special meeting.
Q-13: WHAT VOTE IS REQUIRED?
A-13: The merger must be approved by holders of two-thirds of the CAI common
shares outstanding on July 28, 1999, the record date. MCI WorldCom recently
completed the acquisition of approximately 62.0% of the outstanding CAI common
shares. MCI WorldCom has agreed to vote its CAI common shares in favor of the
merger.
Q-14: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A-14: We are working toward completing the merger as quickly as possible and
hope to complete the merger before the end of the third calendar quarter of
1999.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have additional questions about the merger, you should contact:
CAI Wireless Systems, Inc.
18 Corporate Woods Blvd., 3rd Floor
Albany, New York 12211
(518) 462-2632
Attention: Corporate Secretary
If you would like additional copies of this proxy statement or the proxy
card, you should contact:
The Altman Group
60 East 42(nd) Street, Suite 1241
New York, New York 10165
(212) 681-9600
Attention: Ms. Jane Sullivan
3
MERGER INFORMATION SUMMARY
THIS SECTION OF THE PROXY STATEMENT SUMMARIZES SELECTED INFORMATION ABOUT
THE MERGER AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
TO UNDERSTAND THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT, INCLUDING
THE DOCUMENTS FILED WITH SECURITIES AND EXCHANGE COMMISSION TO WHICH WE HAVE
REFERRED YOU AND THE ANNEXES ATTACHED TO THIS PROXY STATEMENT. WE HAVE INCLUDED
PAGE REFERENCES PARENTHETICALLY TO DIRECT YOU TO A MORE COMPLETE DESCRIPTION
LATER IN THIS PROXY STATEMENT OF EACH TOPIC PRESENTED IN THIS SUMMARY. A COPY OF
THE MERGER AGREEMENT IS ATTACHED AS ANNEX A TO THIS PROXY STATEMENT. WE
ENCOURAGE YOU TO READ THE MERGER AGREEMENT, SINCE IT IS THE LEGAL DOCUMENT
GOVERNING THE TRANSACTION.
THROUGHOUT THIS PROXY STATEMENT WHEN WE REFER TO THE "MERGER," WE MEAN THE
MERGER OF CARDINAL ACQUISITION SUBSIDIARY INC., A WHOLLY-OWNED SUBSIDIARY OF MCI
WORLDCOM, WITH AND INTO CAI, AS DESCRIBED IN THE MERGER AGREEMENT. FROM AND
AFTER THE CONSUMMATION OF THE MERGER, CAI WILL BE A WHOLLY-OWNED SUBSIDIARY OF
MCI WORLDCOM AND WILL NO LONGER BE AN INDEPENDENTLY-OWNED ENTITY. THROUGHOUT
THIS PROXY STATEMENT WHEN WE REFER TO "MMDS SPECTRUM," WE MEAN THE MULTICHANNEL
MULTIPOINT DISTRIBUTION SERVICE CHANNELS, MULTICHANNEL DISTRIBUTION SERVICE
CHANNELS, INSTRUCTIONAL TELEVISION FIXED SERVICE CHANNELS AND WIRELESS
COMMUNICATIONS SERVICE SPECTRUM REGULATED BY THE FEDERAL COMMUNICATIONS
COMMISSION THAT ARE OWNED OR CONTROLLED BY CAI AND ITS SUBSIDIARIES, INCLUDING
CS WIRELESS SYSTEMS, INC., A DELAWARE CORPORATION APPROXIMATELY 94% OF THE
COMMON STOCK OF WHICH IS OWNED BY CAI.
THE COMPANIES (PAGE 13)
CAI WIRELESS SYSTEMS, INC. CAI is a Connecticut corporation, with its
principal executive offices at 18 Corporate Woods Boulevard, Albany, New York
12211. CAI also maintains offices at 101 Ponds Edge Drive, Suite 300, Chadds
Ford, Pennsylvania 19317, where its accounting department is located, and at
2101 Wilson Boulevard, Suite 100, Arlington, Virginia 22201, where its
engineering and regulatory affairs departments are located.
CAI, primarily through its operating subsidiaries, provided subscription
television services to approximately 32,300 subscribers, as of March 31, 1999,
in six operating markets utilizing MMDS spectrum. CAI also provides high-speed
Internet access, utilizing its MMDS spectrum, on a wholesale basis in Boston,
New York City and Rochester, New York. CAI believes that there are a total of
approximately 16.1 million "estimated total service area households" (the
approximate number of television households within a 35-mile radius of an
operator's tower site) in the 14 primary markets where it holds significant MMDS
spectrum. CAI has endeavored to develop alternative uses of its MMDS spectrum
and has pursued development of other lines of business, including high-speed,
two-way Internet and intranet access, as well as digital video and fixed
wireless telephony services.
CAI and one of its wholly-owned subsidiaries filed voluntary petitions for
relief under Chapter 11 of Title 11 of the United States Code on July 30, 1998.
The plan of reorganization submitted by CAI and its subsidiary was confirmed by
the United States Bankruptcy Court for the District of Delaware on September 30,
1998 and was consummated on October 14, 1998. CAI's business plan since emerging
from bankruptcy has been to identify one or more strategic partners interested
in utilizing CAI's MMDS spectrum.
CS WIRELESS SYSTEMS, INC. In addition to its direct and indirect
wholly-owned operating and licensing subsidiaries, CAI owns approximately 94% of
CS Wireless Systems, Inc., a Delaware corporation with its principal executive
offices at 1101 Summit Avenue, Plano, Texas 75074. As of March 31, 1999, CS
Wireless provided subscription television services, utilizing its MMDS spectrum,
to approximately 55,900 subscribers in 11 operating markets (exclusive of the
Story City, Iowa market, contemplated to be transferred to Nucentrix Broadband
Networks, Inc. (f/k/a Heartland Wireless Communications, Inc.) pursuant to the
Master Agreement described in "Chapter II--Certain Information Regarding CS
Wireless--Historical Background," beginning on page 88 of this proxy
4
statement). CS Wireless also provides high-speed Internet access in its Dallas
and Ft. Worth markets utilizing MMDS spectrum. CS Wireless believes that there
are a total of approximately 7.7 million estimated total service area households
in the 21 primary markets where it holds significant MMDS spectrum.
CS Wireless and CAI entered into an Engineering Services and Spectrum
Management Agreement, dated as of March 1, 1999, for the purpose of coordinating
the efforts of CAI and CS Wireless with respect to the upcoming two-way
application process at the FCC, described in this proxy statement beginning on
page 96. Under the agreement, CS Wireless retained CAI's engineering staff and
conferred upon CAI, subject to certain approvals by the CS Wireless board, the
authority necessary for CAI to analyze, design and implement all aspects of the
frequency coordination necessary for the two-way application process. CS
Wireless must pay to CAI its pro rata share of the costs of the personnel
provided, including related benefits, and the facility and equipment costs
utilized by CAI in the delivery of the management services.
MCI WORLDCOM, INC. MCI WORLDCOM, Inc., a Georgia corporation, is one of the
largest telecommunications companies in the United States, serving local, long
distance and Internet customers domestically and internationally. Organized in
1983, MCI WorldCom provides telecommunications services to business, government,
telecommunications companies and consumer customers through its networks of
primarily fiber optic cables, digital microwave and fixed and transportable
satellite earth stations. Prior to September 15, 1998, MCI WorldCom was named
WorldCom, Inc.
MCI WorldCom is one of the first facilities-based telecommunications
companies with the capability to provide consumers and businesses with high
quality local, long distance, Internet, data and international communications
services over its global networks. With service to points throughout the nation
and the world, MCI WorldCom provides telecommunications products and services
including: switched and dedicated long distance and local products, dedicated
and dial-up Internet access, wireless services, 800 services, calling cards,
private lines, broadband data services, debit cards, conference calling,
messaging and mobility services, advanced billing systems, enhanced fax and data
connections, high speed data communications, facilities management, local access
to long distance companies, local access to asynchronous transfer mode-based
backbone service, web server hosting and integration services, dial-up
networking services and interconnection via Network Access Points to Internet
service providers.
MCI WorldCom's core business is communications services, which includes
voice, data, Internet, and international services. During each of the last three
years, more than 90% of operating revenues were derived from communications
services.
MCI WorldCom's principal executive offices are located at 500 Clinton Center
Drive, Clinton, Mississippi 39056, and its telephone number is (601) 460-5600.
CARDINAL ACQUISITION SUBSIDIARY INC. Cardinal Acquisition Subsidiary Inc.,
a Connecticut corporation, is a wholly-owned subsidiary of MCI WorldCom that was
created solely for the purpose of the merger described in this proxy statement.
Upon consummation of the merger, Cardinal Acquisition Subsidiary's corporate
existence will terminate, and CAI will continue as the surviving corporation,
wholly owned by MCI WorldCom.
THE SPECIAL MEETING (PAGE 57)
The special meeting of CAI shareholders will be held at 10:00 a.m., Eastern
time, on August 31, 1999, at The Goodwin Hotel, One Haynes Street, Hartford,
Connecticut 06103. At the special meeting, CAI shareholders will be asked to
approve the merger agreement providing for the merger of Cardinal Acquisition
Subsidiary with and into CAI, and the transactions contemplated thereby, after
which CAI will become a wholly-owned subsidiary of MCI WorldCom.
5
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL (PAGE 57)
You are entitled to vote at the special meeting if you owned CAI common
shares as of the close of business on the record date of July 28, 1999. On the
record date, there were 17,241,379 CAI common shares entitled to vote at the
special meeting. Shareholders will have one vote at the special meeting for each
CAI common share they owned on the record date.
The affirmative vote of at least two-thirds of the outstanding CAI common
shares is required to approve the merger agreement. MCI WorldCom recently
completed the acquisition of approximately 62.0% of the outstanding CAI common
shares. MCI WorldCom has agreed to vote its CAI common shares in favor of the
merger.
EFFECTS OF THE MERGER; MERGER CONSIDERATION (PAGE 21)
The merger agreement provides for the merger of Cardinal Acquisition
Subsidiary, a wholly-owned subsidiary of MCI WorldCom, with and into CAI, with
CAI becoming a wholly-owned subsidiary of MCI WorldCom. As a result of the
merger, each CAI common share issued and outstanding at the effective time of
the merger (other than shares held by MCI WorldCom, Cardinal Acquisition
Subsidiary, CAI and shareholders, if any, who properly exercise their
dissenters' rights under Connecticut law) will be converted into the right to
receive $28.00 in cash, without interest. We suggest that you read the merger
agreement carefully since it is the legal document governing the merger.
We are working diligently to complete the merger during the third calendar
quarter of 1999.
OUR REASONS FOR THE MERGER (PAGE 19)
We believe that combining our MMDS spectrum with MCI WorldCom's access to
capital and its other resources will result in a more complete exploitation of
the capabilities of MMDS spectrum as a video, voice and data transmission
platform. We further believe that the merger will:
- bring together a complementary blend of assets and capabilities enabling
MCI WorldCom to provide local telephony and data transmission services
competitive with the nation's local exchange carriers, and thereby
enhancing the competitive environment within which telecommunications
services are offered to consumers; and
- provide a significant return on investment to CAI's shareholders within
one year of the consummation of CAI's bankruptcy.
OUR RECOMMENDATION TO SHAREHOLDERS (PAGE 19)
The CAI board has unanimously approved the merger, believes that the merger
is in your best interest as a shareholder and unanimously recommends that you
vote "FOR" approval of the merger agreement.
OPINION OF CAI'S FINANCIAL ADVISOR (PAGE 22)
The CAI board has received an opinion of CAI's financial advisor, BT Alex.
Brown Incorporated (now merged with Deutsche Bank Securities Inc. and known as
Deutsche Banc Alex. Brown), as to the fairness, from a financial point of view,
of the merger consideration to the holders of CAI common shares, other than MCI
WorldCom and its affiliates. The full text of the written opinion of BT Alex.
Brown dated April 26, 1999 is attached to the back of this document as Annex C,
and should be read carefully in its entirety. THE OPINION OF BT ALEX. BROWN IS
DIRECTED TO THE CAI BOARD AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO MATTERS
RELATING TO THE PROPOSED MERGER.
6
DISSENTERS' RIGHTS (PAGE 37)
CAI was incorporated under Connecticut law. The Connecticut Business
Corporation Act provides that any CAI shareholder who does not vote in favor of
the merger agreement and who properly exercises his or her dissenters' rights
will be entitled to receive the court-determined "fair value" of his or her CAI
common shares. To receive the fair value of their shares, dissenting CAI
shareholders must deliver written notice of their intent to demand payment for
their shares prior to any vote taken on the merger and must not vote their
shares in favor of merger, as provided under Sections 33-855 through 33-868 of
the Connecticut Business Corporation Act, a copy of which is attached as Annex D
to this proxy statement. Any CAI shareholder who wishes to submit a notice of
his or her intent to demand payment of the fair value of his or her CAI shares
should deliver that notice to CAI, 18 Corporate Woods Boulevard, Third Floor,
Albany, New York 12211, Attention: Corporate Secretary.
MCI WORLDCOM'S INTERESTS IN CAI AND CS WIRELESS SECURITIES; RECENT EVENTS (PAGES
35 AND 36)
As of July 28, 1999, MCI WorldCom owned 10,684,140 CAI common shares,
representing approximately 62.0% of the issued and outstanding CAI common
shares. MCI WorldCom has agreed to vote its CAI common shares in favor of the
merger. On July 27, 1999, MCI WorldCom, in accordance with the Connecticut
Business Corporation Act and CAI's bylaws, demanded that CAI hold a special
meeting of shareholders for the purposes of removing CAI's current board of
directors, amending CAI's bylaws to, among other things, provide for a
two-member board of directors and electing a new CAI board consisting of two
members. The removal of CAI's existing board and the amendment to CAI's bylaws,
require the affirmative vote of the holders of a majority of the votes cast by
the CAI common shares entitled to vote at the special meeting demanded by MCI
WorldCom at which a quorum is present. The election of MCI WorldCom's nominees
to the CAI board requires the affirmative vote of a plurality of the votes cast
by the CAI common shares entitled to vote at the special meeting demanded by MCI
WorldCom at which a quorum is present. MCI WorldCom has nominated Charles T.
Cannada, Senior Vice President--Corporate Development of MCI WorldCom, and
Bernard J. Ebbers, President and Chief Executive Officer of MCI WorldCom, to
serve as the new CAI directors. Information regarding such proposals and
nominees is included in the separate notice of special meeting demanded by MCI
WorldCom forwarded to you under separate cover and is contained in a Current
Report on Form 8-K anticipated to be filed by CAI on August 2, 1999.
In response to MCI WorldCom's demand, CAI has scheduled such meeting for
11:00 a.m., Eastern time, at The Goodwin Hotel, One Haynes Street, Hartford,
Connecticut 06103, following the special meeting to which this proxy statement
relates. CAI has also set July 28, 1999 as the record date for determining CAI
shareholders entitled to notice of and to participate in the second special
meeting. Materials relating to such second special meeting will follow under
separate cover. Neither CAI, MCI WorldCom nor any other party is soliciting
proxies for such second special meeting.
In addition to demanding the special shareholders meeting described above,
MCI WorldCom has indicated, in its public filings, that in the event the merger
is not approved by CAI shareholders, MCI WorldCom expects to review its
alternatives with respect to CAI, which may include, among other things,
resubmitting the proposed merger between CAI and a wholly-owned subsidiary of
MCI WorldCom, and/or submitting a merger agreement on different terms between
CAI and MCI WorldCom or one of its subsidiaries.
MCI WorldCom has also indicated in its public filings that it may also
explore other forms of transactions with CAI or its subsidiaries, which may
include stock sales, as described below, commercial transactions, or other types
of transactions. CAI has previously reported that it believes it has sufficient
cash to fund its capital requirements through November 1999 and that, if the
merger is not approved, CAI would not have sufficient cash to implement its
business plan. In view of CAI's liquidity needs, MCI WorldCom may propose to CAI
that MCI WorldCom invest additional capital in CAI in exchange
7
for additional CAI shares of capital stock. These additional shares, if so
acquired, might result in MCI WorldCom's ownership of an aggregate number of
shares that would be sufficient to approve the merger. Further, MCI WorldCom
plans to review the businesses of CAI and make such changes as it deems
appropriate at the time, which could include causing CAI to enter into
commercial transactions, joint ventures, asset sales or other possible
transactions.
MCI WorldCom also holds:
- $119,412,609 aggregate principal amount of unsecured 13% Senior Notes of
CAI due October 14, 2004;
- $239,200,000 aggregate principal amount at maturity of unsecured 11 3/8%
Senior Discount Notes of CS Wireless due 2006; and
- $80,000,000 aggregate principal amount of outstanding Senior Secured Notes
of CAI due 2000.
In addition, CAI has granted to MCI WorldCom an option to purchase, under
certain circumstances, 6,090,481 CAI common shares at a per share exercise price
of $28.00. The Stock Option Agreement reflects CAI's and MCI WorldCom's
commitment to completing the merger. If the merger is not completed, it may, as
a result of the Stock Option Agreement, be difficult and expensive for CAI to
enter into an alternative transaction. The Stock Option Agreement is attached to
this proxy statement as Annex B.
INTERESTS OF OFFICERS, DIRECTORS AND CERTAIN PERSONS IN THE TRANSACTION (PAGE
29)
All directors and executive officers of CAI, as well as several other
members of CAI's senior management and other key employees, have interests in
the transaction as employees or directors that are different from, or in
addition to, your interests as shareholders.
STOCK OPTIONS. CAI previously granted to all outside directors, executive
officers and several key employees options to purchase CAI common shares. CAI
initially issued such options pursuant to CAI's plan of reorganization approved
by the bankruptcy court in connection with its Chapter 11 case. See "Chapter
II--Certain Information Regarding CAI--CAI Chapter 11 Case" beginning on page 59
of this proxy statement. On January 18, 1999, the Governance and Compensation
Committee of the CAI board approved the surrender of such options in exchange
for the management options outstanding as of the date hereof. See "The
Merger--Interests of Certain Persons in the Merger-- Interest in Options to
Purchase Common Shares." The merger agreement provides that all options to
purchase CAI common shares, if exercisable at the time the merger is
consummated, will convert into the right to receive cash equal to the product of
the number of shares subject to such option times the excess, if any, of $28.00
per share over the exercise price for such options. All options issued to
outside directors, executive officers and other key employees (representing
options to purchase 1,581,500 CAI common shares) vested on or before June 15,
1999. CAI expects that all such options will continue to be fully exercisable at
the time the merger is consummated, and that the total amount to be received by
all CAI option holders in connection with the merger will be $42,755,438.
No executive officer or director of CAI currently holds any CAI common
shares, and therefore, none of these individuals will be eligible to vote on the
merger at the special meeting.
EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS. CAI previously entered into
employment agreements with all of its executive officers and several of its key
employees. If, following the merger, the employment of any such individual is
terminated other than for cause (as defined in the individual agreements), CAI
will be required to pay to such terminated individual a severance payment equal
to such individual's annual base salary (except in the instance of Jared E.
Abbruzzese, chairman and chief executive officer of CAI, who would be entitled
to a severance payment equal to 1.5 times his annual
8
base salary). Severance payments under the employment agreements are also
payable in the event that CAI does not renew an individual's employment
agreement at the end of a specified term.
CAI has agreed to pay to Jared E. Abbruzzese, chairman and chief executive
officer of CAI, incentive compensation in an amount not to exceed $2.75 million,
consisting of a $500,000 retention bonus and a merger implementation bonus in
the amount of $2.25 million. The incentive compensation is payable at the
closing of the merger. All amounts owed by Mr. Abbruzzese under a promissory
note dated March 31, 1997 in the principal amount of $780,054 to CAI will be
satisfied at the time such bonus is paid. CAI has also agreed to pay, at the
closing of the merger, a $25,000 bonus to each of Geoffrey R. Simmonds, a member
of the board of directors of several CAI subsidiaries, and David Tallcott, a
member of the board of directors of CS Wireless, and CAI has agreed to award
cash retention bonuses to certain employees of CAI out of a $350,000 bonus pool.
CS Wireless has also agreed to pay a $75,000 bonus to Mr. Tallcott at the
closing of the merger.
CONDITIONS TO CLOSING THE TRANSACTION (PAGE 43)
Completion of the merger requires, among other things:
- approval of the merger by the CAI shareholders;
- the absence of any law, injunction or other order prohibiting or
preventing the merger;
- the expiration of all relevant waiting periods imposed under the antitrust
laws;
- that the representations and warranties of each party that are modified by
materiality or material adverse effect are true and correct in all
respects, and those not so modified by materiality or material adverse
effect are true and correct in all material respects, as of the date of
the merger agreement and as of the closing date of the merger, except for
such changes not prohibited under the merger agreement;
- that none of CAI's representations and warranties, disregarding any
materiality qualifications, are untrue or incorrect to the extent that
such untrue or incorrect representations or warranties, when taken
together as a whole, have had or would have a material adverse effect on
CAI; and
- that each party performs and complies with all covenants and agreements in
all material respects and satisfies in all material respects all
conditions required to be performed or complied with or satisfied by it
under the merger agreement at or prior to the closing date of the merger.
In addition, MCI WorldCom has the right not to consummate the merger if:
- all necessary approvals from governmental authorities are not obtained;
- all material contractual consents required in connection with the merger
are not obtained;
- any governmental entity or other person institutes an action or other
proceeding challenging or seeking to restrain or prohibit the merger; or
- holders of more than 10% of the outstanding CAI common shares take action
to assert dissenters' rights under Sections 33-855 through 33-868 of the
Connecticut Business Corporation Act.
In some instances, a condition to completion of the merger can be waived,
but only if the party entitled to assert that condition agrees to waive it.
REGULATORY MATTERS (PAGE 28)
CAI and MCI WorldCom have made filings and taken other actions, and will
continue to take actions, necessary to obtain approvals from certain United
States governmental authorities in
9
connection with the proposed transactions, including the United States antitrust
authorities and the FCC. The antitrust waiting period has expired. We hope to
obtain all other required governmental approvals prior to the end of the third
calendar quarter of 1999. We cannot be certain, however, that CAI and MCI
WorldCom will obtain all required governmental approvals, or that we will obtain
these approvals without conditions that would be detrimental to CAI or MCI
WorldCom.
CAI and MCI WorldCom have jointly filed applications with the FCC to
transfer control of specified licenses and authorizations. In connection with
such applications, the FCC considered whether MCI WorldCom is qualified to
control the licenses and authorizations and whether the transfer of control is
consistent with public interest, convenience and necessity.
The FCC granted the application relating to the multichannel multipoint
distribution service channels and multichannel distribution service channels on
June 28, 1999, with one condition. On June 30, 1999, the FCC publicly announced
that the condition had been fulfilled. The FCC has also granted several
applications consenting to MCI WorldCom's acquisition of control of CAI with
respect to wireless communications service and certain auxiliary spectrum. Under
the FCC rules, interested parties may file a petition for reconsideration of any
license grant at any time up to 30 days after public notice of the grant. The
filing of a reconsideration petition does not stay the effectiveness of the
grant, but would require the FCC to review its initial decision granting the
application. To date, no parties have opposed the applications. On July 19,
1999, CAI and MCI WorldCom advised the FCC by letters that MCI WorldCom had
consummated transactions resulting in MCI WorldCom owning a majority of CAI's
common shares. CAI and MCI WorldCom intend to advise the FCC further upon
consummation of the merger.
TERMINATION OF THE MERGER AGREEMENT (PAGE 50)
CAI and MCI WorldCom may agree to terminate the merger agreement at any
time. In addition, either party may terminate the merger agreement if:
- the parties do not complete the merger by February 1, 2000; provided,
however, that if CAI or MCI WorldCom determines that additional time is
necessary in connection with obtaining certain specified consents from
governmental authorities, such date may be extended by CAI or MCI WorldCom
to a date no later than May 1, 2000; provided, further, that the right to
terminate the merger agreement will not be available to any party whose
failure to perform any of its obligations under the merger agreement
results in the failure of the merger to be completed by such time;
- CAI shareholders do not approve the merger agreement;
- there is any order, decree or ruling permanently enjoining, restraining or
otherwise prohibiting the transaction that has become final and
nonappealable; or
- the other party breaches its representations, warranties or obligations
under the merger agreement in certain respects and does not or cannot cure
the breach within a specified period.
In addition, MCI WorldCom may terminate the merger agreement if:
- the CAI board withdraws, modifies or proposes publicly to withdraw its
approval of, or its recommendation that you vote in favor of, the merger
agreement;
- the CAI board recommends another transaction to you;
- the CAI board announces an intention to enter into an alternative
transaction with another person; or
- CAI otherwise breaches the non-solicitation or shareholder recommendation
provisions of the merger agreement.
10
PAYMENT OF FEES (PAGE 50)
CAI must pay MCI WorldCom a fee of $18 million if the merger agreement:
- is terminated after a Takeover Proposal (as that term is defined in the
merger agreement and described in this proxy statement beginning on page
47), or an intention to make a Takeover Proposal, has been made known to
CAI or its shareholders or announced publicly; or
- is terminated by MCI WorldCom as a result of a breach by CAI of the
prohibitions against soliciting a Takeover Proposal, as described in this
proxy statement beginning on page 47.
RESTRICTIONS ON ALTERNATIVE TRANSACTIONS (PAGE 47)
The merger agreement generally limits the ability of the CAI board to
solicit or participate in discussions with any third party about alternative
transactions to the merger.
ACCOUNTING TREATMENT (PAGE 26)
MCI WorldCom will account for the merger as a "purchase" in accordance with
generally accepted accounting principles.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 27)
The receipt of cash by a CAI shareholder as a result of the merger will be a
taxable transaction for federal income tax purposes and may also be taxable
under applicable state, local and foreign income and other tax laws. A CAI
shareholder will recognize a gain or loss in an amount equal to the difference
between the adjusted tax basis of his or her CAI common shares and the amount of
cash received in exchange for the CAI common shares in the merger. Such gain or
loss will be a capital gain or loss if the CAI common shares are a capital asset
in the hands of the shareholder and will be a long-term capital gain or loss if
the holding period exceeds one year. See "The Merger--Material Federal Income
Tax Consequences" beginning on page 27 of this proxy statement.
MARKET PRICES OF CAI COMMON STOCK (PAGE 115)
The CAI common shares issued in connection with the CAI bankruptcy are
traded in the over-the-counter market on the electronic bulletin board under the
ticker symbol "CWSS." On July 26, 1999, the last day CAI common shares traded
before the printing of this proxy statement, the high and low bid quotations for
CAI common shares were $28.375 and $28.28125, respectively, per share. On April
26, 1999, the last trading day before the public announcement of the merger
agreement, the high and low bid quotations for CAI common shares were $23.75 and
$23.50, respectively, per share. On April 16, 1999, the last trading day before
public announcement of the letter of intent, the high and low bid quotations for
CAI common shares were $23.25 and $20.75, respectively, per share. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions. SHAREHOLDERS ARE
URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR CAI COMMON SHARES.
The following table sets forth, on a per share basis, the range of reported
high and low bid quotations on the over-the-counter electronic bulletin board,
as derived from the National Association of Securities Dealers, Inc. for the
first quarter and second quarter (through July 27, 1999) of CAI's fiscal year
ending March 31, 2000. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily reflect actual
transactions. Additional bid quotations and closing sale prices for prior
periods are set forth in this proxy statement beginning on page 115.
BID QUOTATIONS
----------------------
HIGH LOW
---------- ----------
Fiscal Year Ended March 31, 2000
First Quarter:.......................................................................... $ 28.8750 $ 7.1875
Second Quarter (through July 27, 1999).................................................. $ 28.8750 $ 26.9375
11
SELECTED CONSOLIDATED FINANCIAL DATA
We are providing the following selected consolidated financial data for CAI,
as of the dates and for the periods indicated, to aid you in your analysis of
the financial aspects of the merger. This information is only a summary, and you
should read it in conjunction with CAI's historical consolidated financial
statements (and related notes) contained in this proxy statement beginning on
page F-1 (in thousands, except per share data):
REORGANIZED
COMPANY PREDECESSOR ENTITY
PERIOD FROM PERIOD FROM
OCTOBER 15, APRIL 1,
1998 TO 1998 TO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, OCTOBER 14, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999(1)(2) 1998(2) 1998 1997 1996(3) 1995(4)
----------- ----------- ----------- ----------- ----------- -----------
Summary of Operations:
Revenue.................................. $ 15,433 $ 11,481 $ 28,622 $ 36,327 $ 30,682 $ 5,148
Interest expense......................... (30,938) (18,243) (47,227) (40,806) (24,608) (1,734)
Equity in losses of affiliates........... (38,741) (45,484) (31,747) (17,600) -- --
Write-down of assets..................... -- -- (73,500) -- -- --
Reorganization expense................... -- (17,101) -- -- -- --
Write-down equity investment............. -- -- (23,570) -- -- --
Loss before extraordinary item........... (110,648) (99,906) (231,261) (82,298) (40,986) (14,107)
Extraordinary net gain from early
extinguishment of debt................. -- 85,356 5,346 -- -- --
Net loss................................. (110,648) (14,550) (225,915) (82,298) (40,986) (14,107)
Preferred stock dividends................ -- -- (13,891) (13,011) (5,879) (328)
Basic and diluted loss per new common
share(5)............................... (6.42)
Weighted average number of common shares
outstanding(5)........................... 17,241
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999(1)(2) 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Financial Condition:
Wireless channel rights.................. $ 307,182 $ 194,051 $ 207,681 $ 205,974 $ 46,192
Investment in CS Wireless................ -- 43,338 88,535 113,054 --
Property and equipment................... 68,436 49,898 69,767 52,569 21,840
Total assets............................. 483,454 351,466 542,340 698,795 78,461
Long-term debt........................... 353,140 312,089 311,787 318,435 29,532
Redeemable preferred stock............... -- -- 87,821 92,883 18,378
Shareholders' equity (deficit)........... 34,643 (23,402) 114,690 192,611 22,115
- ------------------------------
(1) The selected consolidated financial data include the accounts of CAI and its
wholly-owned subsidiaries and, effective as of December 2, 1998, its
approximately 94% ownership of CS Wireless and its 60% interest in TelQuest
Satellite Services LLC. All significant intercompany accounts and
transactions have been eliminated in consolidation. The financial position
and results of operations for CS Wireless and TelQuest are consolidated into
the Company's financials as of and for the four months ended March 31, 1999.
All acquisitions of companies have been accounted for on the purchase method
of accounting, and the purchase prices have been pushed down to the acquired
companies, primarily to wireless channel rights and goodwill.
(2) During the period from July 30, 1998, the date of CAI's Chapter 11
bankruptcy petition, through October 14, 1998, the date of bankruptcy
consummation, contractual interest of $4,956 was not recorded because it was
an unsecured, unallowed charge in the bankruptcy proceeding. In addition,
financial accounting of CAI and its subsidiaries during the Chapter 11
proceeding utilized the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." The emergence from the Chapter 11
proceeding resulted in the creation of a new reporting entity without any
accumulated deficit and with assets and liabilities of CAI and its
subsidiaries restated to their estimated fair values. Due to the application
of fresh-start reporting, the financial statements for periods after the
reorganization are not comparable in all respects to the financial
statements for periods prior to the reorganization, primarily with respect
to depreciation and amortization. Accordingly, this period is separated in
the selected consolidated financial data by a vertical black line.
(3) CAI acquired ACS Enterprises, Inc. and Eastern Cable Networks of Washington,
Inc. on September 29, 1995. On February 23, 1996, CAI closed a series of
transactions with Nucentrix Broadband Networks, Inc., wherein CS Wireless
received certain assets from Nucentrix in exchange for CS Wireless common
stock, cash and notes.
(4) CAI acquired the assets constituting its New York system on January 9, 1995.
(5) Per share data for the pre-reorganized periods are not presented as such
amounts are not meaningful.
12
THE MERGER
THE DESCRIPTION IN THIS PROXY STATEMENT OF THE MERGER AND THE PRINCIPAL
TERMS OF THE MERGER AGREEMENT IS SUBJECT TO, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO, THE MERGER AGREEMENT, THE LEGAL DOCUMENT GOVERNING THE MERGER. WE
HAVE ATTACHED A COPY OF THE MERGER AGREEMENT TO THIS PROXY STATEMENT AS ANNEX A,
AND RECOMMEND THAT YOU READ IT CAREFULLY.
THE COMPANIES
CAI WIRELESS SYSTEMS, INC. CAI is a Connecticut corporation, with its
principal executive offices at 18 Corporate Woods Boulevard, Albany, New York
12211. CAI also maintains offices at 101 Ponds Edge Drive, Suite 300, Chadds
Ford, Pennsylvania 19317, where its accounting department is located, and at
2101 Wilson Boulevard, Suite 100, Arlington, Virginia 22201, where its
engineering and regulatory affairs departments are located. CAI, primarily
through its operating subsidiaries, provided subscription television services to
approximately 32,300 subscribers, as of March 31, 1999, in six operating markets
utilizing MMDS spectrum. CAI also provides high-speed Internet access utilizing
its MMDS spectrum, on a wholesale basis in Boston, New York City and Rochester,
New York. CAI believes that there are a total of approximately 16.1 million
estimated total service area households in the 14 primary markets where it has
significant MMDS spectrum.
In addition to its wholly-owned operating subsidiaries, CAI owns
approximately 94% of CS Wireless Systems, Inc., a Delaware corporation with its
principal executive offices at 1101 Summit Avenue, Plano, Texas 75074. As of
March 31, 1999, CS Wireless provided subscription television services, utilizing
its MMDS spectrum, to approximately 55,900 subscribers in 11 operating markets
(exclusive of the Story City, Iowa market, contemplated to be transferred to
Nucentrix Broadband Networks, Inc. (f/k/a Heartland Wireless Communications,
Inc.) pursuant to the Master Agreement described in "Chapter II--Certain
Information regarding CS Wireless--Historical Background" beginning on page 88
of this proxy statement). CS Wireless also provides high-speed Internet access
in its Dallas and Ft. Worth markets utilizing MMDS spectrum. CS Wireless
believes that there are a total of approximately 7.7 million estimated total
service area households in the 21 primary markets where it has significant MMDS
spectrum.
MCI WORLDCOM, INC. MCI WORLDCOM, Inc., a Georgia corporation, is one of the
largest telecommunications companies in the United States, serving local, long
distance and Internet customers domestically and internationally. Organized in
1983, MCI WorldCom provides telecommunications services to business, government,
telecommunications companies and consumer customers through its networks of
primarily fiber optic cables, digital microwave, and fixed and transportable
satellite earth stations. Prior to September 15, 1998, MCI WorldCom was named
WorldCom, Inc.
MCI WorldCom is one of the first facilities-based telecommunications
companies with the capability to provide consumers and businesses with high
quality local, long distance, Internet, data and international communications
services over its global networks. With service to points throughout the nation
and the world, MCI WorldCom provides telecommunications products and services
including: switched and dedicated long distance and local products, dedicated
and dial-up Internet access, wireless services, 800 services, calling cards,
private lines, broadband data services, debit cards, conference calling,
messaging and mobility services, advanced billing systems, enhanced fax and data
connections, high speed data communications, facilities management, local access
to long distance companies, local access to asynchronous transfer mode-based
backbone service, web server hosting and integration services, dial-up
networking services and interconnection via Network Access Points to Internet
service providers.
MCI WorldCom's core business is communications services, which includes
voice, data, Internet, and international services. During each of the last three
years, more than 90% of operating revenues were derived from communications
services.
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MCI WorldCom's principal executive offices are located at 500 Clinton Center
Drive, Clinton, Mississippi 39056, and its telephone number is (601) 460-5600.
CARDINAL ACQUISITION SUBSIDIARY INC. Cardinal Acquisition Subsidiary Inc.,
a Connecticut corporation, is a wholly-owned subsidiary of MCI WorldCom which
was created solely for the purpose of the merger described in this proxy
statement. Upon consummation of the merger, Cardinal Acquisition Subsidiary's
corporate existence will terminate, and CAI will continue as the surviving
corporation, wholly owned by MCI WorldCom.
BACKGROUND OF THE MERGER
CAI has, since its formation, focused on the development and operation of
MMDS spectrum concentrated in major northeast and mid-Atlantic metropolitan
areas in the United States. The development and operation of the MMDS spectrum
has expanded from the provision of one-way, analog, subscription video service
to the potential for fixed, flexible two-way uses of MMDS spectrum for digital
subscription video, data transmission and telephony services. CAI recognized
that the full potential of MMDS spectrum could best be realized through
strategic relationships with significant telecommunications companies and, in
1995, consummated a strategic business relationship with two regional bell
operating companies. Although that strategic relationship terminated without the
commercial roll-out of a digital MMDS system as originally contemplated, CAI
partially constructed digital systems in Boston, Massachusetts and Hampton
Roads, Virginia. Following the termination of the joint venture, CAI was able to
reconfigure such systems and has used the Boston facility to demonstrate
expanded two-way uses of MMDS spectrum to several large telecommunications
companies in search of strategic alternatives to permit such companies to
compete effectively with other telecommunications concerns. During such time,
CAI also designed, constructed and operated a two-way demonstration system in
northern New Jersey for a large telecommunications company. The system was
developed to transmit primarily data over the Internet and such company's
corporate intranet. The demonstration was terminated in conjunction with the
April 16, 1999 signing of the letter of intent with MCI WorldCom.
Following the termination of its first strategic relationship, CAI committed
its limited resources to improving its capital structure in an effort to better
position itself to implement a two-way business plan. Consequently, CAI embarked
upon a three-pronged strategy:
- to seek expanded regulatory authority for fixed flexible two-way use of
MMDS spectrum,
- to increase the development of head-end and customer premises equipment
for such expanded uses, and
- to enter into one or more strategic partnerships intended to fully exploit
CAI's significant MMDS spectrum.
CAI led the MMDS industry's efforts to obtain regulatory authority to use
MMDS spectrum for fixed, flexible two-way uses and demonstrated such uses to
potential strategic partners. Facing continuing financial losses and the
inability to repay outstanding, long-term indebtedness incurred in connection
with the 1995 strategic business relationship, CAI sought protection under
Chapter 11 of the United States Bankruptcy Code in July 1998. Pursuant to its
plan of reorganization, CAI restructured its long-term indebtedness and,
following its emergence from bankruptcy on October 14, 1998, CAI aggressively
sought one or more strategic partners interested in developing and utilizing its
MMDS spectrum.
In light of preliminary discussions between representatives of CAI and
various telecommunications entities expressing interest in post-bankruptcy CAI
and its business, Jared E. Abbruzzese, chairman and chief executive officer of
CAI, requested that BT Alex. Brown, CAI's financial advisor, review with the CAI
board, at a meeting held on January 18, 1999, various strategic alternatives for
CAI. At such meeting, BT Alex. Brown outlined alternative strategies with
respect to the possible sale of CAI to a
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third party, a strategic investment in CAI by a third party or a "take-or-pay"
arrangement whereby CAI would provide MMDS spectrum capacity on a wholesale
basis to one or more strategic partners.
In connection with discussions between CAI and MCI WorldCom regarding a
proposed take-or-pay arrangement, the CAI board, at its January 18, 1999
meeting, reviewed the terms of the then-current take-or-pay proposal. Mr.
Abbruzzese informed the CAI board that CAI management, with the assistance of
its advisors, would continue to develop the take-or-pay proposal and that he
would keep the CAI board apprised of further developments. No board action was
taken in connection with any strategic partner efforts at this time.
Following this review, Mr. Abbruzzese updated the CAI board on the status of
discussions with various potential strategic partners. He indicated that CAI, in
consultation with BT Alex. Brown, continued to approach several major
telecommunications companies and potential financial partners since the
consummation of its Chapter 11 case in October 1998. Since that time, CAI's
discussions had increasingly focused on three of the largest telecommunications
companies in the country. CAI's discussions with these entities were
wide-ranging and included several different business structures, including
possible equity investments and take-or-pay arrangements pursuant to which a
strategic partner would purchase all or a portion of the MMDS spectrum capacity
on CAI's network for the purposes of transmitting video, voice or data services.
He reiterated to the CAI board that the economics of any take-or-pay proposal
would have to be sufficient to support CAI as a stand-alone entity. During that
time, CAI also continued to demonstrate two-way data and telephony services and
was conducting a two-way data trial for one of the telecommunications companies.
Late in February 1999, CAI and MCI WorldCom continued to discuss the
possible terms of a potential take-or-pay arrangement. Simultaneously with these
discussions, BT Alex. Brown was approached by the financial advisor to another
of the three telecommunications companies regarding a potential acquisition of
CAI. During these discussions, CAI was advised that a series of verbal offers to
purchase CAI common shares may have been made to certain significant CAI common
shareholders. CAI was advised that the offers ranged from $1.25 to $1.75 per CAI
common share and were conditioned on other industry acquisitions. Also at that
time, CAI was discussing with the third telecommunications company a possible
joint venture that would include interim financing coupled with the acquisition
of certain channel rights in CAI's markets.
On March 1, 1999, CAI received a letter from Robert Finch, Vice President,
Strategic Development of MCI WorldCom, expressing MCI WorldCom's continued
interest in pursuing a take-or-pay arrangement with CAI. The March 1, 1999
letter also expressed MCI WorldCom's interest in negotiating a possible minority
equity position in CAI. At a telephonic meeting of the CAI board held on March
2, 1999, CAI management updated the CAI board regarding the status of
discussions with various potential strategic partners and discussed the March 1,
1999 MCI WorldCom letter. The CAI board encouraged management to continue its
efforts to negotiate a take-or-pay arrangement with MCI WorldCom. No formal CAI
board action was taken at that time.
Later in March, as a result of the progress of the take-or-pay discussions
at that time, CAI concluded that MCI WorldCom's existing proposal would not
alone be sufficient to support all of CAI's financial needs. CAI then informed
MCI WorldCom that MCI WorldCom would either have to increase the minimum
take-or-pay commitment or make an equity investment in CAI. The parties then
discussed various strategic alternatives. On or about March 15, 1999,
discussions between CAI and MCI WorldCom ended without agreement on the terms of
any arrangement between the companies. MCI WorldCom then terminated all direct
discussions with CAI. At a March 16, 1999 telephonic meeting of the CAI board,
Mr. Abbruzzese informed the CAI board about the events leading up to the
termination of discussions with MCI WorldCom.
On March 29, 1999, unconfirmed financial press reports appeared indicating
that MCI WorldCom had purchased securities of certain MMDS operators, including
CAI and CS Wireless, from certain large institutional holders. CAI had not been
consulted with respect to any such sale and, at that time,
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CAI was not aware that any such sale had occurred. Neither MCI WorldCom nor any
alleged seller confirmed the reports. Subsequent to the reports, however, a
major institutional holder advised CAI that its CAI securities were no longer
for sale. CAI and MCI WorldCom continued to have no direct contact at that time.
On April 1, 1999, CAI convened a telephonic board meeting, in which all CAI
directors participated, at which the CAI board was apprised of these events. No
formal action was taken by the CAI board at that time.
During the first week of April 1999, another of the telecommunications
companies that had previously approached certain CAI investors approached CAI
and BT Alex. Brown. That telecommunications company expressed its desire to make
an acquisition bid and sought the support of CAI. CAI and its advisors discussed
the scope of the other telecommunications company's proposal with this entity
and its advisors.
On April 8, 1999, the other telecommunications company outlined for Mr.
Abbruzzese and CAI's financial advisor a possible proposal that it might have
been prepared to make, which proposal could have included an offer to purchase
all of CAI's common shares for $6.00 per share. The discussions were followed by
an unsolicited, unsigned draft letter of intent from the other
telecommunications company, which letter contemplated the purchase of all of
CAI's common shares and contained usual and customary conditions, including but
not limited to the satisfactory completion of a due diligence investigation. The
draft letter did not include a proposed price for CAI common shares.
On April 9, 1999, CAI convened a telephonic board meeting, in which all CAI
directors participated, to discuss the interest expressed by the other
telecommunications company. Representatives from each of Day, Berry & Howard
LLP, CAI's regular outside legal counsel, Skadden, Arps, Slate, Meagher & Flom
LLP, counsel to the CAI outside directors, and BT Alex. Brown participated in
portions of the meeting. Mr. Abbruzzese and BT Alex. Brown reviewed with the CAI
board the terms of the unsolicited proposal. Following this review, counsel to
CAI and CAI's outside directors reviewed certain legal aspects of the
unsolicited proposal, including a review of the CAI board's fiduciary duties in
the context of the other telecommunications company's indication of interest.
Counsel reminded the CAI board that an offer to acquire all of CAI's outstanding
shares for $6.00 per share had not yet been made and that CAI could not confirm
whether MCI WorldCom or anyone else might have acquired substantial rights in
CAI securities. There followed a thorough discussion of the anticipated offer
and draft letter of intent, including questions from various CAI board members.
No formal action was taken by the CAI board at that time.
On April 12, 1999, Mr. Abbruzzese, on behalf of CAI, informed the other
telecommunications company that the CAI board was not prepared to entertain a
potential proposal to acquire CAI at a $6.00 per share price. At that time, CAI
and its advisors made additional attempts to contact MCI WorldCom and its
advisors to determine the scope of any rights MCI WorldCom might have in CAI's
securities.
Also on April 12, 1999, another MMDS company announced that it had agreed to
be acquired by a large telecommunications company. The per share price to be
paid in connection with that acquisition was estimated by CAI to result in a per
line-of-sight household value in the range of $50 to $54. At the direction of
CAI, BT Alex. Brown met with the financial advisor to the telecommunications
company that made the prior proposal to discuss its pricing methodology for the
announced transaction. During this period, CAI's common share closing prices
ranged from $9.50 on April 1, 1999 to $21.94 on April 14, 1999.
Advisors to the other telecommunications company made it clear to CAI and
its advisors that the other telecommunications company was interested only in a
proposal for an acquisition of all and not less than all of the outstanding CAI
common shares and in a transaction structure that would assure it of such an
acquisition, whether by way of merger or otherwise. These advisors expressly
indicated that the magnitude of the other telecommunciations company's offer
would be conditioned on such an acquisition and that its offer would be
considerably less, if it would be forthcoming at all, were CAI to
16
propose a structure that merely eliminated the existence of any majority
shareholder. In response to an inquiry from advisors to CAI, advisors to the
other telecommunications company indicated that it would not consider under any
circumstances a structure that would involve the other telecommunications
company acquiring less than two-thirds voting control of CAI, the percentage
needed to approve a merger.
On April 14, 1999, MCI WorldCom informed CAI that it had previously entered
into one or more contracts providing for its purchase, subject to regulatory
approval, of more than half of the issued and outstanding CAI common shares from
certain institutional holders. At that time, MCI WorldCom also confirmed to CAI
that it had acquired a significant amount of CAI's 13% Senior Notes due 2004 and
CAI's entire secured credit facility.
Later that afternoon, CAI convened a telephonic meeting of the CAI board, in
which all CAI directors participated. Representatives from each of Day, Berry &
Howard, Skadden, Arps and BT Alex. Brown also participated in the meeting. The
CAI board engaged in lengthy discussions regarding MCI WorldCom's interests in
CAI's securities, the discussions among representatives of CAI and its advisors
and the other telecommunications company regarding such company's interest in
acquiring CAI, and the previously-announced acquisition of another MMDS company.
While no formal action was taken by the CAI board at that time, the CAI board
recommended that management continue its discussions with representatives of MCI
WorldCom in an effort to determine MCI WorldCom's intentions with respect to its
investment in CAI. The CAI board also recommended that management continue its
discussions with the other telecommunications company to determine whether the
other telecommunications company would be prepared to make an offer to CAI
valued on an equivalent basis to the previously-announced acquisition of the
other MMDS company.
Also on April 14, 1999, the other telecommunications company made an
unsolicited verbal offer to CAI to acquire all of the outstanding CAI common
shares for $24.00 per share. The offer was conditioned on completion of a
satisfactory due diligence investigation and contained usual and customary
closing conditions. CAI informed the other telecommunications company that it
was not prepared to consider a transaction that would be subject to completion
of a satisfactory due diligence investigation. In response, at CAI's invitation,
the other telecommunications company immediately began to perform its due
diligence investigation of CAI. During that time, CAI management, together with
CAI's legal and financial advisors, began to consider alternative transaction
structures that might be pursued in connection with an acquisition by the other
telecommunications company.
On April 15, 1999, Mr. Finch of MCI WorldCom contacted Mr. Abbruzzese and
arranged a discussion among Mr. Abbruzzese and certain members of MCI WorldCom's
senior management. Following such discussion, Mr. Abbruzzese updated members of
CAI's senior management and legal counsel. Mr. Abbruzzese arranged to have CAI
management update the CAI board members telephonically. Later that day, John
Sidgmore, Vice Chairman of MCI WorldCom, contacted Mr. Abbruzzese to discuss a
possible acquisition of the balance of CAI's outstanding common shares not
subject to MCI WorldCom's contractual rights to purchase CAI common shares from
certain institutional holders. Mr. Sidgmore concluded with an unsolicited verbal
offer to purchase all of such remaining outstanding CAI common shares for $24.00
in cash.
Subsequently, after the close of business on April 15, 1999, each of MCI
WorldCom and the other telecommunications company transmitted letters of intent
to CAI containing the terms of their respective offers.
On April 16, 1999, at a special telephonic meeting in which all CAI
directors participated, the CAI board engaged in a lengthy discussion regarding
the two letters of intent, including a discussion by outside legal counsel of
the differences between the transactions contemplated by the letters of intent
and the CAI board's fiduciary duties associated with a merger, in general, and
in the context of each transaction outlined in the respective letters of intent.
17
Counsel for CAI also reviewed with the CAI board the material terms of the
shareholders' rights plan that was contemplated by each letter of intent. A
representative of BT Alex. Brown participated in the discussions, reviewing with
the CAI board certain financial parameters typically followed in connection with
the approval of a shareholders' rights plan. CAI had been advised that MCI
WorldCom had the right to acquire in excess of 50% of CAI's common shares,
subject to regulatory approval, and counsel advised the CAI board with respect
to the rights that attach to a majority shareholder under applicable law.
Following thorough discussions of both letters of intent (including the fact
that the termination fee proposed by MCI WorldCom was $18 million, while the
termination fee proposed by the other telecommunications company was $35
million), the rights plan contemplated by each letter of intent, and related
matters, during which discussions the directors asked numerous questions
responded to by representatives of management and CAI's legal and financial
advisors, the CAI board approved the execution of the MCI WorldCom letter of
intent and implemented the shareholders' rights plan contemplated by such letter
of intent.
The MCI WorldCom letter of intent contemplated that MCI WorldCom would
immediately begin a due diligence investigation and CAI would grant MCI WorldCom
a 10 day exclusive dealing period during which CAI would be prohibited from
having further discussions with potential strategic partners. Pursuant to the
CAI board's actions following the April 16 meeting, CAI executed the MCI
WorldCom letter of intent and issued a press release announcing the letter of
intent, adoption of the rights plan, agreements of MCI WorldCom with third
parties to acquire more than half of CAI's common shares, and the purchase by
MCI WorldCom of a significant amount of CAI's debt securities. In accordance
with CAI's exclusivity obligations contained in the MCI WorldCom letter of
intent, CAI broke off discussions with all other strategic entities at that
time.
Shortly after the execution of the letter of intent, MCI WorldCom began its
due diligence investigation. The due diligence investigation included on-site
visits by MCI WorldCom representatives at CAI's Albany, New York, Chadds Ford,
Pennsylvania and Arlington, Virginia facilities, and at CS Wireless' Plano,
Texas facility. Simultaneously, the respective legal counsel to CAI and MCI
WorldCom negotiated the terms of a definitive merger agreement.
On April 21, 1999, the CAI board held a special meeting in New York, New
York attended by all CAI directors except Mr. Fotheringham, who participated
telephonically, and by representatives of each of Day, Berry & Howard, Skadden,
Arps and BT Alex. Brown. BT Alex. Brown reviewed with the CAI board the
valuation methodologies to be employed by BT Alex. Brown in its evaluation of
the per share consideration proposed to be paid by MCI WorldCom pursuant to the
MCI WorldCom offer. Counsel to CAI reviewed the material terms of the draft
merger agreement that had been previously distributed to the CAI board and
discussed various aspects of the directors' fiduciary duties under Connecticut
law in the context of the merger. Thereafter, the CAI board once again discussed
at length the MCI WorldCom merger proposal, including its request for an option
to acquire, in certain events, approximately 6,000,000 authorized but unissued
CAI common shares for the proposed merger consideration of $24.00 per share.
During the meeting, the directors asked numerous questions that were responded
to by representatives of management and by CAI's financial and legal advisors.
At the conclusion of this meeting, a decision on the MCI WorldCom merger
proposal was postponed pending the completion of the negotiation of, and the CAI
board's receipt and review of, the definitive merger agreement.
After the close of business on Friday, April 23, 1999, CAI received an
unsolicited written offer from the other telecommunications company to acquire
all of the outstanding CAI common shares for $28.00 per share and to re-finance
CAI's senior secured indebtedness, which offer was communicated to MCI WorldCom
as required by the terms of its letter of intent with CAI. CAI then advised its
financial advisor and members of the CAI board of the new offer. On Monday
afternoon, April 26, 1999, MCI WorldCom informed the CAI board that it was
increasing its offer from $24.00 to $28.00 per CAI common share, subject to the
definitive merger agreement being executed before the end of
18
the day, the expiration of the exclusive dealing period. A special telephonic
meeting of the CAI board was held later that afternoon in which all CAI
directors participated, and in which representatives of each of Day, Berry &
Howard, Skadden, Arps and BT Alex. Brown also participated. During the meeting,
counsel to CAI reviewed the material changes to the proposed merger agreement
that had been made since the April 21st meeting, including further discussions
of the proposed issuance by CAI to MCI WorldCom of an option to purchase, in
certain events, all remaining authorized and unissued CAI common shares, and the
restrictions that would be imposed upon CAI with respect to considering any
other acquisition proposal following the execution of the merger agreement. BT
Alex. Brown rendered to the CAI board an oral opinion (subsequently confirmed by
delivery of a written opinion dated April 26, 1999) to the effect that, as of
the date of the opinion and based upon and subject to the matters stated in the
opinion, the $28.00 per share merger consideration was fair, from a financial
point of view, to the holders of CAI common shares (other than MCI WorldCom and
its affiliates). Following further discussion, during which the directors asked
numerous questions that were responded to by representatives of management and
by CAI's financial and legal advisors, the CAI board unanimously approved the
definitive merger agreement and stock option agreement and authorized the
officers of CAI to execute and deliver such agreements. Following the
adjournment of the CAI board meeting, MCI WorldCom and CAI executed the merger
agreement and stock option agreement, and CAI issued a press release on April
26, 1999 announcing the merger.
CAI'S REASONS FOR THE MERGER; RECOMMENDATION OF THE CAI BOARD
CAI believes that combining its MMDS spectrum with MCI WorldCom's access to
capital and its other resources will result in a more complete exploitation of
the capabilities of MMDS spectrum as a video, voice and data transmission
platform. CAI further believes that the merger will:
- bring together a complementary blend of assets and capabilities enabling
MCI WorldCom to provide local telephony and data transmission services
competitive with the nation's local exchange carriers, and thereby
enhancing the competitive environment within which telecommunications
services are offered to consumers; and
- provide a significant return on investment to CAI's shareholders within
one year of the consummation of CAI's bankruptcy.
Prior to approving the merger agreement, the CAI board consulted with CAI's
management and legal and financial advisors, and carefully considered a variety
of factors. After consideration of these factors and other relevant factors, the
CAI board concluded that the merger and the transactions contemplated by the
merger agreement are fair to and in the best interests of CAI and its
shareholders. Other factors the CAI board considered include the following:
- the CAI board's knowledge of the business, operations, properties, assets,
financial condition and operating results of CAI;
- a review of the possible alternatives to the merger, including the
prospects of continuing to operate CAI as an independent company, the
value to shareholders of such alternatives and the timing and likelihood
of achieving additional value from these alternatives, as well as other
expressions of interest conveyed to CAI;
- discussions with other bidders and possible acquirors of CAI;
- the amount and type of consideration offered to CAI's shareholders, which
represents an implied premium of 19.1%, 23.8% and 1180.0%, over the
average price per CAI common share for one day, one week and one month
prior to the public announcement of the merger;
- MCI WorldCom's binding agreements with third parties to acquire more than
50% of the outstanding CAI common shares upon receipt of regulatory
approvals, its statements to CAI that it intended to acquire, and to
continue to hold, such shares upon receipt of such required approvals, the
likelihood of MCI WorldCom's obtaining such approvals and the likely
timing thereof;
19
- the belief of CAI's management that the only other potential bidder for
CAI was the other telecommunications company, and any transaction with
that telecommunications company would have been subject to the same
approval processes;
- MCI WorldCom's status as the holder of CAI's secured facility, and its
agreement to consent, as such holder, to the merger;
- MCI WorldCom's disclosure to CAI that it had acquired a significant
portion of CAI's 13% senior notes due 2004;
- that the $28.00 per share offer from MCI WorldCom would expire upon the
expiration of the exclusivity period contemplated by the letter of intent;
- that (a) CAI had gone through a public bankruptcy process in which CAI's
business plan reaffirmed CAI's need for a strategic partner, (b) following
the bankruptcy, CAI had discussions with each of the major
telecommunications companies likely to have an interest in utilizing MMDS
spectrum and capable of becoming a suitable strategic partner, (c) only
three major telecommunications companies continued to have meaningful
discussions with CAI about a strategic relationship of a potentially
sufficient magnitude to be consistent with the requirements of CAI's
business plan, (d) two of those telecommunications companies had made
offers to acquire all and not less than all of the outstanding CAI common
shares and (e) the third telecommunications company with whom CAI had
meaningful discussions, while capable of entering into a joint venture or
take-or-pay arrangement with CAI, was barred by law from acquiring CAI;
- the opinion of BT Alex. Brown as to the fairness, from a financial point
of view, of the merger consideration to the holders of CAI common shares
(other than MCI WorldCom and its affiliates) and the financial analyses
performed by BT Alex. Brown in reaching its opinion, as described under
"The Merger--Opinion of CAI's Financial Advisor;"
- the interest of CAI's employees, customers, creditors and suppliers;
- the community and societal considerations, including those of any
community in which CAI or any of its subsidiaries has an office;
- the terms and conditions of the merger agreement and the stock option
agreement, including MCI WorldCom's obligation to vote any CAI common
shares directly or indirectly beneficially owned by it in favor of the
merger, the $28.00 price at which the stock issuable pursuant to the stock
option agreement would be purchased if exercised, the number of shares
subject to the stock option in relation to the number of shares needed to
approve a merger under applicable law, and the ability of CAI to satisfy
the conditions to closing the merger contained in those agreements;
- the provisions of the merger agreement related to the prohibition on other
Takeover Proposals, and the penalties applicable to a violation thereof,
including the magnitude of the termination fee of $18 million, which was
approximately equal to $1 per outstanding share;
- the possibility and scope of litigation that CAI management believed might
arise in the event that the acquisition proposal of the other
telecommunications company was pursued, the resources required to manage
any such litigation, the finite financial resources of CAI and the
potential distraction to management in dealing with any such litigation;
and
- the availability of dissenters' rights.
The CAI board also considered certain disadvantageous factors in its
deliberations concerning the merger, including:
- the potential disruption of CAI's business that might result from the
announcement of the merger;
20
- the uncertainty regarding shareholders', license holders', customers' and
employees' perceptions of the merger;
- the possibility that the merger may not be consummated;
- the fact that shareholders will not participate in the future growth of
CAI;
- the required payment by CAI in certain circumstances of a termination fee
under the merger agreement. See "Summary of the Merger
Agreement--Termination, Fees, Amendment and Waiver;"
- the fact that the termination fee of $18 million, while approximately
one-half the termination fee contemplated by and included as a condition
of the offer of the other telecommunications company, is approximately $1
per outstanding CAI common share if CAI considers other offers following
the execution of the merger agreement; and
- the fact that, upon exercise of the proposed stock option, in the event
another offer was considered, MCI WorldCom might not have sufficient
shares alone to control more than two-thirds of the outstanding CAI common
shares.
The CAI board may have discussed other factors in addition to those
described above, but we believe our description includes all material factors
considered by the CAI board. The CAI board did not quantify or attach any
particular weight to the various factors it considered. Rather, the position and
recommendation of the CAI board was, in the view of the CAI board, based on the
totality of the information presented to and considered by it.
THE CAI BOARD BELIEVES THAT THE TERMS OF THE MERGER, AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT, ARE FAIR TO AND IN THE BEST INTERESTS OF
CAI AND ITS SHAREHOLDERS, HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
EFFECTS OF THE MERGER; MERGER CONSIDERATION
The merger agreement provides, on and subject to its terms and conditions:
- for the merger of Cardinal Acquisition Subsidiary with and into CAI with
CAI surviving the merger as a wholly-owned subsidiary of MCI WorldCom, and
- that each CAI common share outstanding immediately prior to the effective
time of the merger (other than shares owned by MCI WorldCom, Cardinal
Acquisition Subsidiary, CAI or shareholders, if any, who properly exercise
their dissenters' rights under Connecticut law) be converted into the
right to receive $28.00 in cash, without interest.
The effective time of the merger will be when a certificate of merger is filed
with the Secretary of the State of Connecticut (or at such later time as
specified in the certificate of merger), which we believe will occur before the
end of the third calendar quarter of 1999, after the last of the conditions
precedent to the merger set forth in the merger agreement has been satisfied or
waived. See "Summary of the Merger Agreement--Conditions to Closing."
The merger will have the effects set forth under Connecticut law.
Specifically, at the effective time of the merger:
- Cardinal Acquisition Subsidiary will merge into CAI, and the separate
existence of Cardinal Acquisition Subsidiary will cease;
- title to all real estate and other property owned by CAI and Cardinal
Acquisition Subsidiary will vest in the surviving corporation without
reversion or impairment;
- the surviving corporation will have all liabilities of CAI and Cardinal
Acquisition Subsidiary; and
21
- any proceeding pending against CAI or Cardinal Acquisition Subsidiary may
be continued as if the merger did not occur, or the surviving corporation
may be substituted in any proceeding for Cardinal Acquisition Subsidiary.
The directors and officers of Cardinal Acquisition Subsidiary immediately
prior to the effective time of the merger will be the directors and officers of
the surviving corporation, respectively, until the earlier of their death,
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
Pursuant to Rule 12g-4(a)(1)(i) under the Securities Exchange Act of 1934,
as amended, on April 29, 1999, CAI filed a Form 15 with the SEC to deregister
the CAI common shares under Section 12(g) of the Exchange Act, which Form 15
became effective on July 29, 1999. As a result, persons subject to the insider
trading rules of Section 16 of the Exchange Act or the filing requirements of
Section 13(d) of the Exchange Act, and CAI, with respect to, among other things,
the proxy and information statement rules of Section 14 the Exchange Act, are no
longer subject to such rules or requirements. In addition, after completion of
the merger, CAI intends to file a Form 15 with regard to its reporting
obligations under Section 15(d) of the Exchange Act. Once that Form 15 is
effective, CAI will no longer be required to file periodic and other reports
required under the Exchange Act and the rules promulgated thereunder.
Notwithstanding CAI's intent to be relieved from the filing requirements under
the federal securities laws, the indenture governing CAI's 13% senior notes due
2004 requires CAI to make certain filings so long as such notes remain
outstanding.
OPINION OF CAI'S FINANCIAL ADVISOR
CAI engaged BT Alex. Brown to provide financial advisory services, including
acting as exclusive financial advisor to CAI in connection with the merger. On
April 26, 1999, at a meeting of the CAI board held to evaluate the proposed
merger, BT Alex. Brown rendered an oral opinion, which opinion was subsequently
confirmed by delivery of a written opinion dated April 26, 1999, to the effect
that, as of that date and based upon and subject to matters stated in the
opinion, the merger consideration was fair, from a financial point of view, to
the holders of CAI common shares, other than MCI WorldCom and its affiliates.
The full text of BT Alex. Brown's written opinion dated April 26, 1999,
which describes the assumptions made, matters considered and limitations of the
review undertaken, is attached as Annex C to this document and is incorporated
herein by reference. BT ALEX. BROWN'S OPINION IS DIRECTED TO THE CAI BOARD,
ADDRESSES ONLY THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT
OF VIEW, DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY CAI TO ENGAGE
IN THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO
HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO MATTERS RELATING TO THE
PROPOSED MERGER. The summary of BT Alex. Brown's opinion described below is
qualified in its entirety by reference to the full text of such opinion.
In connection with BT Alex. Brown's role as CAI's financial advisor, and in
arriving at its opinion, BT Alex. Brown:
- reviewed publicly available financial and other information concerning CAI
and internal analyses and other information furnished to or discussed with
BT Alex. Brown by CAI and its advisors;
- held discussions with members of the senior management of CAI regarding
the business and prospects of CAI;
- reviewed the reported prices and trading activity for CAI common shares;
- compared financial and stock market information for CAI with similar
information for other companies whose securities are publicly traded;
22
- reviewed the financial terms of recent business combinations which BT
Alex. Brown deemed comparable in whole or in part;
- reviewed the terms of the merger agreement and certain related documents;
and
- performed other studies and analyses and considered other factors as BT
Alex. Brown deemed appropriate.
In addition, prior to CAI's execution of a letter of intent with MCI
WorldCom in April 1999, BT Alex. Brown, in connection with its engagement, was
authorized to approach, and held discussions with, third parties to solicit
indications of interest with respect to a joint venture or business combination
with CAI.
BT Alex. Brown did not assume responsibility for independent verification
of, and did not independently verify, any information, whether publicly
available or furnished to BT Alex. Brown, concerning CAI, including, without
limitation, any financial information, forecasts or projections considered in
connection with the rendering of its opinion. For purposes of its opinion, BT
Alex. Brown assumed and relied upon the accuracy and completeness of all
information reviewed and BT Alex. Brown did not conduct a physical inspection of
any of the properties or assets and did not prepare or obtain any independent
evaluation or appraisal of any of the assets or liabilities of CAI. With respect
to the financial forecasts and projections made available to BT Alex. Brown and
used in its analyses, BT Alex. Brown assumed that they were reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
management of CAI as to the matters covered thereby. In rendering its opinion,
BT Alex. Brown expressed no view as to the reasonableness of the forecasts and
projections or the assumptions on which they were based. BT Alex. Brown's
opinion was necessarily based upon economic, market and other conditions
existing on, and the information made available to BT Alex. Brown as of, the
date of its opinion.
For purposes of rendering its opinion, BT Alex. Brown assumed that, in all
respects material to its analysis, the representations and warranties of CAI,
MCI WorldCom and Cardinal Acquisition Subsidiary contained in the merger
agreement are true and correct, CAI, MCI WorldCom and Cardinal Acquisition
Subsidiary will each perform all of the covenants and agreements to be performed
by it under the merger agreement and all conditions to the obligations of each
of CAI, MCI WorldCom and Cardinal Acquisition Subsidiary to consummate the
merger will be satisfied without any waiver. BT Alex. Brown also assumed that
all material governmental, regulatory or other approvals and consents required
in connection with the consummation of the merger will be obtained and that in
connection with obtaining any necessary governmental, regulatory or other
approvals and consents, or any amendments, modifications or waivers to any
agreements, instruments or orders to which either CAI or MCI WorldCom is a party
or is subject or by which it is bound, no limitations, restrictions or
conditions will be imposed or amendments, modifications or waivers made that
would have a material adverse effect on CAI or MCI WorldCom or materially reduce
the contemplated benefits of the merger to CAI. No instructions or limitations
were imposed by the CAI board upon BT Alex. Brown with respect to the
investigations made or the procedures followed by it in rendering its opinion.
The following is a summary of the material analyses performed by BT Alex.
Brown in connection with its opinion to the CAI board dated April 26, 1999. THE
FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION PRESENTED IN TABULAR
FORMAT. IN ORDER TO FULLY UNDERSTAND BT ALEX. BROWN'S FINANCIAL ANALYSES, THE
TABULAR PRESENTATION MUST BE READ TOGETHER WITH THE TEXT OF THE SUMMARY. THE
TABULAR PRESENTATION ALONE DOES NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE
FINANCIAL ANALYSIS. CONSIDERING THE DATA SET FORTH BELOW WITHOUT CONSIDERING THE
FULL NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING THE
METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING
OR INCOMPLETE VIEW OF BT ALEX. BROWN'S FINANCIAL ANALYSES.
23
ANALYSIS OF SELECTED PUBLIC COMPANIES. BT Alex. Brown compared financial
and stock market information for CAI and the following four selected publicly
held companies in the wireless cable industry, otherwise known as the MMDS
industry:
- American Telecasting, Inc.
- Nucentrix Broadband Networks, Inc. (formerly Heartland Wireless
Communications, Inc.)
- People's Choice TV Corp.
- Wireless One, Inc.
The analytic work performed included, among other things, a comparison of each
company's markets, channels, line of sight households, liquidity and leverage.
In order to provide wireless broadband services, MMDS spectrum requires an
unobstructed line of sight from a transmission facility to a receiving antenna.
A company's line of sight households serves as a proxy for the potential market
size of a company's services and provides a basis for comparison of valuations
of companies in the MMDS industry. BT Alex. Brown calculated total enterprise
values, calculated as equity market value, plus debt, preferred stock and
minority interests, less cash and cash equivalents, as a multiple of line of
sight households based on closing stock prices on April 15, 1999, the last
trading day prior to CAI's execution of a letter of intent with MCI WorldCom to
be acquired for $24.00 per share, and on April 23, 1999, the last trading day
prior to MCI WorldCom's final offer of $28.00 per share. Applying an implied
range of total enterprise value per line of sight households for the selected
companies to CAI's line of sight households resulted in an implied reference
range for CAI of approximately $6.87 to $20.02 per share based on closing stock
prices on April 15, 1999 and approximately $16.30 to $24.76 per share based on
closing stock prices on April 23, 1999, as compared to the merger consideration
of $28.00 per share.
ANALYSIS OF SELECTED PRECEDENT TRANSACTIONS. BT Alex. Brown reviewed the
implied transaction multiples for over 60 acquisitions in the MMDS industry over
the last five years. BT Alex. Brown focused on the following nine proposed,
pending or completed acquisition transactions announced between May 1996 and
April 26, 1999, the date of its opinion, involving large markets in which a
change of control of most of the MMDS channels occurred or in which the acquiror
was an established telecommunications company:
ACQUIROR TARGET OR MARKET
- ----------------------------------------- -----------------------------------------
Sprint Corporation People's Choice TV Corp.
Prime One Los Angeles/Orange County
BellSouth Corporation Florida
BellSouth Corporation Wireless Cable of Atlanta
BellSouth Corporation Miami
BellSouth Corporation Adairsville, Atlanta BTA
CS Wireless Systems, Inc. Kansas City, Missouri
People's Choice TV Corp. Salt Lake City/Provo, Utah
BellSouth Corporation New Orleans, Louisiana
BT Alex. Brown calculated total enterprise values in the selected
transactions as a multiple of line of sight households based on publicly
available information at the time of announcement of the relevant transaction.
Applying an implied range of total enterprise value per line of sight household
for
24
the selected transactions to CAI's line of sight households resulted in an
implied reference range for CAI of approximately $12.79 to $26.46 per share, as
compared to the merger consideration of $28.00 per share.
DISCOUNTED CASH FLOW ANALYSIS. BT Alex. Brown performed a discounted cash
flow analysis on CAI's business plan to estimate the present value of the
unlevered, after-tax free cash flows that CAI could generate based on internal
estimates of the management of CAI for fiscal years 2000 through 2009. The range
of estimated terminal values for CAI was calculated by applying terminal value
multiples ranging from 9.0x to 11.0x to CAI's projected fiscal year 2009
earnings before interest, taxes, depreciation and amortization. The present
value of the cash flows and terminal values were calculated using discount rates
ranging from 15% to 20%. Based on a sensitivity analysis around the value
derived by utilizing a terminal value multiple of 10.0x and a discount rate of
17.5%, this analysis yielded an implied reference range for CAI of approximately
$2.63 to $13.37 per share, as compared to the merger consideration of $28.00 per
share.
PREMIUM ANALYSIS. BT Alex. Brown analyzed the premiums paid in 142 selected
transactions effected since January 1, 1995 with transaction values of between
$750 million and $1.25 billion, based on the target company's stock price one
day, one week and one month prior to public announcement of the transaction.
This analysis indicated the following average, average adjusted to exclude the
high and low, and median premiums in the selected transactions, as compared to
the implied premiums in the CAI merger one day, one week and one month prior to
public announcement of the merger:
PREMIUM PREMIUM PREMIUM
ONE DAY PRIOR TO ONE WEEK PRIOR TO ONE MONTH PRIOR TO
PUBLIC ANNOUNCEMENT PUBLIC ANNOUNCEMENT PUBLIC ANNOUNCEMENT
----------------------- ----------------------- ---------------------
Average..................... 27.3% 29.9% 33.5%
Adjusted Average............ 27.7% 28.6% 32.4%
Median...................... 19.7% 23.0% 30.1%
Implied Premiums in
the Merger for CAI........ 19.1% 23.8% 1180.0%
OTHER FACTORS. In rendering its opinion, BT Alex. Brown also reviewed and
considered, among other things:
- historical and projected financial data for CAI, and
- historical market prices and trading volumes for CAI common shares and the
common stock of the selected companies and the relationship between
movements in CAI common shares and movements in the common stock of
selected companies.
The above summary is not a complete description of the opinion of BT Alex.
Brown to the CAI board or the financial analyses performed and factors
considered by BT Alex. Brown in connection with its opinion. The preparation of
a fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, a fairness opinion is not readily susceptible to summary
description. BT Alex. Brown believes that its analyses and the summary above
must be considered as a whole and that selecting portions of its analyses and
factors or focusing on information presented in tabular format, without
considering all analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the processes
underlying BT Alex. Brown's analyses and opinion.
25
In performing its analyses, BT Alex. Brown considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion, many of which are beyond the control of
CAI. No company, transaction or business used in such analyses as a comparison
is identical to CAI or the proposed merger, nor is an evaluation of the results
of those analyses entirely mathematical; rather, the analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the merger, public trading or other values
of the companies, business segments or transactions being analyzed. The
estimates contained in BT Alex. Brown's analyses and the ranges of valuations
resulting from any particular analysis are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
those suggested by its analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, BT
Alex. Brown's analyses and estimates are inherently subject to substantial
uncertainty.
BT Alex. Brown is an internationally recognized investment banking firm and,
as a customary part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, private placements and valuations for
estate, corporate and other purposes. CAI selected BT Alex. Brown based on BT
Alex. Brown's reputation, expertise and familiarity with CAI. BT Alex. Brown and
its affiliates have provided financial services in the past to CAI and MCI
WorldCom unrelated to the proposed merger, including having acted as financial
advisor to CAI in connection with its Chapter 11 bankruptcy proceeding in 1998,
for which services BT Alex. Brown received approximately $2.75 million and
warrants to purchase 86,640 CAI common shares, as described in the following
paragraph. BT Alex. Brown also acted as managing agent in connection with MCI
WorldCom's senior bank debt financing in August 1998.
BT Alex. Brown currently holds warrants to purchase 86,640 shares of CAI
common shares and will receive in the merger $2,374,802 in respect of such
warrants (net of the aggregate exercise price). BT Alex. Brown maintains a
market in the securities of CAI and MCI WorldCom and regularly publishes
research reports regarding MCI WorldCom and the businesses and securities of
other publicly traded companies in the telecommunications industry. In the
ordinary course of business, BT Alex. Brown and its affiliates may actively
trade or hold the securities and other instruments and obligations of CAI and
MCI WorldCom for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities,
instruments or obligations.
The type and amount of consideration payable in the merger was determined
through negotiation between CAI and MCI WorldCom. Although BT Alex. Brown
provided financial advice to CAI during the course of negotiations, the decision
to enter into the merger was solely that of the CAI board. BT Alex. Brown's
opinion and financial analyses were only one of many factors considered by the
CAI board in its evaluation of the proposed merger and should not be viewed as
determinative of the views of the CAI board or management with respect to the
merger consideration or the merger.
Pursuant to the terms of BT Alex. Brown's engagement, CAI has agreed to pay
BT Alex. Brown upon completion of the merger a substantial financial advisory
fee based on a percentage of the aggregate consideration, including liabilities
assumed, payable in connection with the merger. In addition, CAI has agreed to
reimburse BT Alex. Brown for its reasonable out-of-pocket expenses, including
reasonable fees and expenses of counsel, and to indemnify BT Alex. Brown and
related parties against liabilities, including liabilities under the federal
securities laws, relating to, or arising out of, its engagement.
ACCOUNTING TREATMENT
MCI WorldCom will account for the merger as a "purchase" in accordance with
generally accepted accounting principles. Consequently, the aggregate
consideration MCI WorldCom pays in connection with the merger will be allocated
to CAI's assets and liabilities based upon their fair values and any excess will
be treated as goodwill.
26
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes material United States federal income tax
consequences relevant to the merger. The discussion is based on the Internal
Revenue Code of 1986, as amended, existing and proposed Treasury regulations,
rulings, administrative pronouncements and judicial decisions, changes to which
could materially affect the tax consequences described herein and could be made
on a retroactive basis.
The receipt of cash in exchange for CAI common shares pursuant to the merger
will be a taxable transaction for federal income tax purposes and also may be a
taxable transaction under applicable state, local and foreign income and other
tax laws. The tax consequences may vary depending upon, among other things, your
particular circumstances. In general, you will recognize a gain or a loss for
federal income tax purposes equal to the difference between the adjusted tax
basis of your CAI common shares and the amount of cash received in exchange for
your CAI common shares in the merger. Such gain or loss generally will be (a)
calculated separately for each block of shares (I.E., shares acquired at the
same cost in a single transaction) sold or exchanged pursuant to the merger, (b)
a capital gain or loss if the CAI common shares are a capital asset of yours and
(c) a long-term gain or loss if the holding period for your CAI common shares is
more than one year at the effective time of the merger.
The holding period for federal income tax purposes of a shareholder that
received its shares in connection with the satisfaction of its note claims upon
consummation of CAI's bankruptcy plan depends primarily on whether the exchanged
claim was an obligation that constitutes a "security" for federal income tax
purposes. The term "security" is not defined in the Internal Revenue Code of
1986, as amended, or the Treasury regulations promulgated thereunder. Whether
the note claim constituted a "security" is based on the facts and circumstances
surrounding the origin and nature of the note claim, including its maturity
date. Generally, stock and bonds or debentures with an original term of at least
ten years have been considered to be "securities." In contrast, instruments with
terms of five years or less rarely qualify as "securities." CAI believes that it
is likely, although not entirely free from doubt, that the notes the claims with
respect to which were satisfied, in part, by receipt of new CAI common shares
should be treated as "securities." Consequently, CAI believes that the holding
period for the CAI common shares received by such shareholders in exchange for
the note claims upon consummation of the CAI bankruptcy should include such
shareholders' holding periods for the notes underlying those claims.
Your receipt of cash pursuant to the merger may be subject to backup
withholding at the rate of 31% unless you provide a certified taxpayer
identification number on Form W-9 and you otherwise comply with the backup
withholding rules or demonstrate an exemption from backup withholding. Backup
withholding is not an additional tax; any amounts withheld may be credited
against your federal income tax liability subject to the withholding.
The foregoing discussion does not address all aspects of federal income
taxation that may be relevant to you and may not apply to you if you (a)
acquired your CAI common shares pursuant to the exercise of employee stock
options or other compensation arrangements with CAI, (b) are not a citizen or
resident of the United States, (c) exercise your dissenters' rights under
Connecticut law or (d) are subject to special tax treatment under the Internal
Revenue Code (such as if you are a dealer in securities, a tax-exempt entity, an
insurance company, another financial institution, or a regulated investment
company or you hold your shares as part of a hedge, straddle, conversion or
other special transaction).
This tax discussion is for your general information only. Due to the
individual nature of tax consequences, you are strongly urged to consult with
your tax advisor as to the specific tax consequences of the merger to you,
including the effects of applicable state, local or foreign income or other tax
laws or federal tax laws other than those pertaining to income tax.
27
REGULATORY MATTERS
Before the merger can be completed, we must receive the approvals of certain
governmental agencies. It is possible that those authorities may seek various
concessions as conditions for granting approval. We are not aware of any other
material governmental consents or approvals that are required for the merger,
other than those described below. If such additional governmental consents and
approvals are required, we will seek them. Although we expect to obtain all
required regulatory approvals, we cannot assure you that we will obtain the
required regulatory approvals within the time frame contemplated by the merger
agreement or on terms satisfactory to us or to MCI WorldCom.
ANTITRUST. We must comply with the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and the rules and regulations thereunder, which provide that certain
acquisition transactions may not be consummated until (1) certain information
has been furnished to the Antitrust Division of the Department of Justice and to
the Federal Trade Commission and (2) certain waiting periods have been
terminated or have expired. MCI WorldCom and CAI filed Notification and Report
Forms with the Antitrust Division and the Federal Trade Commission on April 29,
1999. The waiting period under the HSR Act expired at 11:59 p.m., May 30, 1999.
Despite the expiration of the Hart-Scott-Rodino waiting period, the
Antitrust Division, the Federal Trade Commission or any state may still
challenge the merger on antitrust grounds. Any time before or after the
effective time of the merger, the Antitrust Division, the FTC or any state could
take such action under the antitrust laws as it deems necessary or desirable in
the public interest. In addition, certain other persons, including private
parties, could take action under the antitrust laws and could seek to enjoin the
consummation of the merger, to rescind the merger or to seek divestiture of CAI
or the businesses of CAI or MCI WorldCom as a result of the merger. Based on
information available to us, we believe we can effect the merger in compliance
with federal and state antitrust laws. We cannot assure you, however, that there
will not be a challenge to the merger or that, if such a challenge is made, we
will prevail.
FCC APPROVALS. The Federal Communications Commission must approve the
transfer of control to MCI WorldCom of those subsidiaries of CAI that hold FCC
licenses and authorizations. The FCC must decide whether MCI WorldCom is
qualified to control such licenses and authorizations and whether the transfer
of control is consistent with public interest, convenience and necessity. The
FCC may examine, among other things, the competitive effects of the merger and
other benefits and alleged harms to the public.
Although the FCC retains broad discretion with regard to the proposed
transaction, there are relatively few well-established bases upon which an
interested party can successfully challenge a transfer-of-control application in
the MMDS industry. Generally, unless the prospective owners of the licensed
entity (1) are not citizens of the United States or (2) hold significant
interests in hard-wire cable companies whose franchises overlap with the
licensed entity's areas of operation, the FCC will approve the subject
transaction. Thus, absent a challenge, and upon concluding that the proposed
transaction is in the public interest, the FCC will generally grant a
transfer-of-control application within approximately two to four months from the
date it is filed.
On June 28, 1999, the FCC granted the transfer-of-control application
relating to CAI's Multichannel Multipoint Distribution Service channels and
Multichannel Distribution Service channels with one condition. On June 30, 1999,
the FCC publicly announced that such condition had been fulfilled. The FCC has
also granted several applications consenting to MCI WorldCom's acquisition of
control of CAI with respect to wireless communications service and certain
auxiliary spectrum. Although the grants are effective, the FCC's rules allow
interested parties, as well as the FCC on its own motion, to request
reconsideration of any grant within thirty days of the FCC's announcement of the
grant. Given that the applications were not challenged by any party prior to
their grant, CAI does not expect that any challenges will now be filed; however,
we cannot assure you that there will not be a
28
challenge to any grant or that, if such a challenge is made, we will prevail. On
July 19, 1999, CAI and MCI WorldCom advised the FCC by letters that MCI WorldCom
had consummated transactions resulting in MCI WorldCom owning a majority of
CAI's common shares, CAI and MCI WorldCom intend to advise the FCC further upon
the consummation of the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the CAI board with respect to the
merger, you should be aware that the directors, executive officers and several
key employees of CAI have certain interests in the merger that may be different
from, or in addition to, yours. The CAI board was aware of such interests,
summarized below, as they existed on April 26, 1999, and considered them, among
other factors, in approving the merger agreement. In addition, MCI WorldCom has
certain interests in CAI and its securities. See "Description of CAI and CS
Wireless Securities Owned by MCI WorldCom" beginning on page 35 of this proxy
statement.
INTEREST IN OPTIONS TO PURCHASE COMMON SHARES. As of April 26, 1999,
directors, executive officers and several key employees of CAI owned options to
purchase an aggregate of 1,581,500 CAI common shares. Upon the consummation of
the merger, all holders of CAI stock options that have not been exercised prior
to the merger will be entitled to receive, for each exercisable option, an
amount in cash equal to the excess of $28.00 per share over the exercise price
per share of such option. The aggregate consideration that will be received in
the merger by the directors, executive officers and key employees of CAI in
respect of such stock options (net of the aggregate exercise price) is
$42,755,438.
MANAGEMENT OPTIONS. In connection with the consummation of CAI's
bankruptcy, CAI adopted the 1998 Stock Option Plan for key employees. The 1998
Stock Option Plan is intended to provide key employees with a meaningful
incentive to pursue CAI's strategic business plan. The 1998 Stock Option Plan
also is intended to align the interests of those employees with those of CAI's
shareholders. CAI has reserved 1,500,000 CAI common shares for issuance upon the
exercise of options granted pursuant to the 1998 Stock Option Plan.
All options granted under the 1998 Stock Option Plan are intended to be
10-year options. Options may lapse, however, and expire prior to the expiration
of such 10-year period in certain circumstances more fully described in the 1998
Stock Option Plan. The vesting terms and exercise price of options granted under
1998 Stock Option Plan are determined by a committee designated by the CAI board
to administer the 1998 Stock Option Plan.
On October 14, 1998, as part of the consummation of CAI's bankruptcy,
options to purchase 1,500,000 CAI common shares were granted with the following
exercise prices:
- 20% of the options granted to an individual had an exercise price of
$4.76;
- 20% of the options granted to an individual had an exercise price of
$6.78;
- 20% of the options granted to an individual had an exercise price of
$8.79; and
- 40% of the options granted to an individual had an exercise price of
$10.81.
The options granted in October were to vest and become exercisable upon
the occurrence of one or more "trigger events", including:
- a material third-party acquisition or merger,
- a material equity investment in CAI,
- a material joint venture and/or a material take-or-pay arrangement,
- any other material third-party transaction with respect to the use of
CAI's spectrum, and/or
29
- any other material third-party transaction having a substantially similar
economic effect as the foregoing, as determined by the CAI board in its
good faith, reasonable judgment.
Vesting of the options granted in October would accelerate for 50% of the
options if the average trading price of CAI's common shares after the
consummation of the bankruptcy was at or above $12.82 per share, corresponding
to a 100% recovery for the holders of CAI's 12 1/4% Senior Notes due 2002, which
were restructured in the CAI bankruptcy, for 60 consecutive trading days
following October 14, 1998 (assuming an appropriate average trading volume). The
unvested portion of the options granted in October would decrease by 50% (on a
pro rata basis from each price tranche) after April 14, 2000. The unvested
portion of the options granted in October would decrease by 100% after October
14, 2000.
On January 18, 1999, the Governance and Compensation Committee of the CAI
board approved the surrender of the options granted in October and approved the
issuance of new options having different exercise prices and different vesting
events. Although the total number of employees receiving options in January was
greater than the number of employees who received options in October, the
aggregate number of options granted in January was less than the aggregate
number of options granted in October and, for the most part, officers were
awarded fewer new options than the number of options surrendered. All of the
options granted in January have an exercise price of $0.875, the closing price
of the CAI common shares on January 19, 1999. CAI subsequently issued options to
certain additional employees with exercise prices equal to the closing share
price of CAI common shares on the date such options were granted, ranging from
$0.875 per share to $1.625 per share.
The CAI options outstanding as of April 26, 1999 are 10-year options and
are subject to a variety of vesting provisions that vary depending upon the
department in which the option holder is employed. The vesting provisions fall
into four categories, each of which is summarized below.
EXECUTIVE VESTING EVENTS. Options in this category provided that they
would vest and become exercisable in their entirety on the earlier to occur of:
- a change of control of CAI;
- the consummation of:
-- a material third-party acquisition or merger,
-- a material equity investment in the Company,
-- a material joint venture, and/or a take-or-pay arrangement,
-- any other material third-party transaction with respect to the
use of CAI's MMDS spectrum, and/or
-- any other material third-party transaction having a substantially
similar economic effect as the foregoing, as determined by the
CAI Governance and Compensation Committee, in its good faith,
reasonable judgment; provided that, in the case of any such event
OTHER THAN an acquisition, merger or equity investment, when
considered together with any other such event in which CAI is
participating, such event(s) taken together, in the good faith
judgment of the Governance and Compensation Committee, based upon
the advice of CAI's financial advisors, would permit the
financing of CAI's business plan;
- to the extent of one-half ( 1/2) of the number of options when the
average trading price of CAI's common shares has been at or above
$12.82 per share for 60 consecutive trading days; and
30
- in whole, when the average trading price of CAI's common shares has
been at or above $19.23 per share for 45 consecutive trading days.
CAI granted such options to purchase 645,000 CAI common shares to five
individuals, including Jared E. Abbruzzese, chairman and chief executive officer
of CAI, and James P. Ashman, executive vice president and chief financial
officer of CAI.
REGULATORY AND ENGINEERING VESTING EVENTS. Options in this category
provided that they would will vest and become exercisable on the earlier to
occur of:
- in their entirety, on the one hundred twentieth (120(th)) day following
a change of control;
- to the extent of 60% of the unvested options, on the one hundred
twentieth (120(th)) day after a determination has been made by CAI's
Governance and Compensation Committee, in its sole discretion, that the
optionee has worked effectively with a team of colleagues at the
direction of CAI's senior management to substantially complete a set of
two-way filings for one primary market, and time permitting, one or
more secondary markets (specific markets to be identified by CAI's
senior management) and has made such filings with the FCC by the first
FCC two-way filing window;
- to the extent of 40% of the unvested options, on the one hundred
twentieth (120(th)) day after a determination has been made by CAI's
Governance and Compensation Committee, in its sole discretion, that,
following the close of the first FCC filing window, and during the
period allocated by the FCC, the optionee has substantially completed
the analysis of competing applications, the preparation and filing of
amendments to CAI's applications and/or petitions to deny competing
applications, as well as all other steps reasonably necessary and
appropriate to maximize the prospects of achieving a grant of the
applications for the optionee's applicable market(s) on a timely basis,
under the direction of CAI's senior management;
- to the extent of one-half ( 1/2) of the number of options, when the
average trading price of CAI's common shares has been at or above
$12.82 per share for 60 consecutive trading days; and
- in whole, when the average trading price of CAI's common shares has
been at or above $19.23 per share for 45 consecutive trading days.
CAI granted such options to purchase 480,000 CAI common shares to 21
individuals, including Gerald Stevens-Kittner, senior vice president--spectrum
management of CAI, and Bruce Kostreski, senior vice president--engineering and
chief technical officer of CAI.
OPERATIONS VESTING EVENTS. Options in this category provided that they
would vest and become exercisable as follows:
- with respect to 80% of the options granted to such individuals, on the
earlier to occur of:
-- the one hundred twentieth (120(th)) day following a change of
control,
-- December 31, 1999,
-- to the extent of one-half ( 1/2) of the number of options, when
the average trading price of CAI's common shares has been at or
above $12.82 per share for 60 consecutive trading days, and
-- in whole when the average trading price of CAI's common shares
has been at or above $19.23 per share for 45 consecutive trading
days; and
- 20% of such options will vest and become exercisable on the same terms
as those options described in "REGULATORY AND ENGINEERING VESTING
EVENTS" described above.
31
CAI granted such options to purchase 206,500 CAI common shares to 12
individuals, including Derwood (Roddy) Edge, senior vice president and chief
systems officer of CAI.
FINANCE AND ACCOUNTING VESTING EVENTS. Options in this category, provided
that they would vest and become exercisable in their entirety on the earlier to
occur of:
- the one hundred twentieth (120(th)) day following the earlier to occur
of:
-- a change of control, and
-- the relocation of CAI's accounting department from Chadds Ford,
Pennsylvania to a location designated by the CAI board, which
relocation shall include the maintenance, through retention or new
hiring, of an accounting staff that, in the opinion of the Audit
Committee of the CAI board, is sufficient to perform the day-to-day
accounting duties necessary for the operation of the business of CAI,
and the timely filing of the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999 with the SEC;
- to the extent of one-half ( 1/2) of the number of options, when the
average trading price of CAI's common shares has been at or above $12.82
per share for 60 consecutive trading days; and
- in whole, when the average trading price of CAI's common shares has been
at or above $19.23 per share for 45 consecutive trading days.
CAI granted such options to purchase 125,000 CAI common shares to four
individuals, including George Parise, senior vice president-finance of CAI, and
Arthur J. Miller, vice president and controller of CAI.
Of the options to purchase CAI common shares issued to key employees and
outstanding on the date hereof, options to purchase 645,000 CAI common shares
vested on June 4, 1999, the date on which MCI WorldCom acquired 48% of the
issued and outstanding CAI common shares from a third party. All of the
remaining outstanding CAI options vested, and became exercisable, on June 15,
1999, the 46(th) consecutive trading day that the average trading price of CAI's
common shares was at or above $19.23 per share.
The following table provides information on certain executive officers'
options to purchase CAI common shares, granted on January 19, 1999, as described
above. (Each of the option holders set forth below was required to surrender to
CAI all options previously granted to him by CAI in connection with the
consummation of CAI's reorganization plan.)
% OF TOTAL
OPTIONS GRANTED
NUMBER OF TO EMPLOYEES EXERCISE
SECURITIES BETWEEN 1/19/99 PRICE
NAME UNDERLYING OPTIONS VESTING TYPE AND 3/31/99 ($/SHARE) EXPIRATION DATE
- ----------------------------------- ------------------ ------------------ ----------------- ----------- ---------------
Jared E. Abbruzzese................ 300,000 Executive 20.60% $ 0.875 01/19/09
James P. Ashman.................... 150,000 Executive 10.30% $ 0.875 01/19/09
Bruce W. Kostreski................. 110,000 Regulatory & 7.55% $ 0.875 01/19/09
Engineering
Gerald Stevens-Kittner............. 110,000 Regulatory & 7.55% $ 0.875 01/19/09
Engineering
George Parise...................... 80,000 Finance & 5.49% $ 0.875 01/19/09
Accounting
Executive Officers as a Group (6
persons)......................... 775,000 Various 53.21% $ 0.875 01/19/09
32
DIRECTORS' OPTIONS. As of April 26, 1999, there were outstanding options
to purchase 125,000 CAI common shares granted under CAI's 1998 Outside
Directors' Stock Option Plan. Under the Outside Directors' Plan, which was
adopted on November 17, 1998, each CAI director who is not an officer or
employee of CAI is entitled to an initial grant of options to purchase 25,000
CAI common shares at an exercise price equal to the closing trading price on the
day on which such individual is deemed to have become a CAI director. The
initial options vest over a one-year period, with options to purchase 10,000 CAI
common shares vesting on the date that is three months after such individual
becomes a CAI director, options to purchase 7,500 CAI common shares vesting on
the date that is eight months after such individual becomes a CAI director and
the remaining options to purchase 7,500 CAI common shares vesting on the
one-year anniversary of the date such individual becomes a CAI director.
In addition to the initial grant of option, each individual who has been a
CAI director for at least six months prior to each April 1, beginning on April
1, 2000, shall receive options to purchase 7,500 CAI common shares at an
exercise price equal to the closing trading price on the date of grant, which
options vest on the one-year anniversary of the date of grant.
All options granted under the Outside Directors' Plan are intended to be
10-year options; however, options may lapse and expire prior to the expiration
of such 10-year period in certain circumstances more fully described in the
Outside Directors' Plan. Options granted under the Outside Directors' Plan
become immediately exercisable upon certain events, including certain business
combinations. In addition, options under the Outside Directors' Plan vest in
their entirety upon a change of control of CAI, as defined in the stock option
agreements. The acquisition by MCI WorldCom of 48% of the CAI common shares from
a third party on June 4, 1999 (see "Description of CAI and CS Wireless
Securities Owned by MCI WorldCom" beginning on page 35 of this proxy statement)
constituted a change of control under the Outside Directors' Plan that caused
all outstanding options to become vested in their entirety.
The following table provides information on Outside Directors' options to
purchase CAI common shares, granted during the fiscal year ended March 31, 1999.
NO. OF
VESTED
EXERCISE OPTIONS AS
NUMBER OF SHARES DATE WHEN PRICE OF
NAME UNDERLYING OPTIONS GRANTED ($/SHARE) JUNE 4, 1999 EXPIRATION DATE
- ---------------------------------- ------------------ ----------- ------------- ------------ ---------------
Paul M. Albert, Jr................ 25,000 12/09/98 $ 0.8125 25,000 12/09/08
Vernon Fotheringham............... 25,000 12/09/98 $ 0.8125 25,000 12/09/08
Robert D. Happ.................... 25,000 10/14/98 $ 0.01 25,000 10/14/08
Martin G. Mand.................... 25,000 12/16/98 $ 1.4375 25,000 12/16/08
John B. Newman.................... 25,000 12/09/98 $ 0.8125 25,000 12/09/08
Totals:........................... 125,000 Various Various 125,000 Various
EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS. CAI previously entered into
employment agreements with all CAI executive officers and certain key CAI
employees. The agreements are one-year agreements beginning on October 14, 1998
(the date on which CAI consummated its bankruptcy) and automatically renewing
for successive one-year terms, unless otherwise terminated by either party. Each
agreement provides for a severance payment equal to the employee's annual base
salary if such individual's employment with CAI is terminated other than for
cause (as defined in the employment agreement and described below). In the case
of Mr. Abbruzzese, however, severance is equal to 1.5 times his annual base
salary. The severance amount payable in the event of termination of employment
as a result of an individual's death or disability is also equal to the annual
base salary, except in the case of Mr. Abbruzzese, for whom the severance amount
is equal to 1.5 times his annual base salary. Any severance payment made to an
individual as a result of disability will be reduced by
33
the amount of disability insurance proceeds received by the individual pursuant
to a policy provided by CAI. Severance payments under the employment agreements
are also payable in the event CAI does not renew an individual's employment
agreement.
The employment agreements define "cause" to mean a finding by the CAI board
that the employee has:
- acted with gross negligence or willful misconduct in connection with the
performance of his duties under the employment agreement,
- engaged in a material act of insubordination or of common law fraud
against CAI or its employees, or
- acted against the best interests of CAI in a manner that has or could have
a material adverse affect on the financial condition of CAI.
The employment agreements also provide for the same severance payments if
the employee voluntarily terminates his or her employment for "Good Reason"
within 18 months after the consummation of CAI's Chapter 11 case on October 14,
1998. "Good Reason" means, with respect to the employee:
- the assignment to the employee of any material duties materially
inconsistent with the employee's position, authority, duties or
responsibilities immediately before October 14, 1998, the consummation
date of CAI's bankruptcy, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith that is
remedied by CAI promptly after receipt of notice of such action given by
the affected employee;
- any material reduction in the employee's base salary, opportunity to earn
annual bonuses or other compensation or employee benefits, other than as a
result of an isolated and inadvertent action not taken in bad faith that
is remedied by CAI promptly after receipt of notice of such action given
by the affected employee;
- CAI's requiring the employee to relocate his or her principal place of
business to a place that is more than thirty-five miles from his or her
previous principal place of business; or
- any purported termination of the agreement other than as expressly
permitted by the agreement.
Under the terms of their respective employment agreements: Mr. Abbruzzese
serves as chairman and chief executive officer of CAI and is entitled to an
annual base salary of $350,000; Mr. Ashman serves as executive vice president
and chief financial officer of CAI and is entitled to an annual base salary of
$183,000; Mr. Stevens-Kittner serves as senior vice president-spectrum
management and is entitled to an annual base salary of $180,000; Mr. Kostreski
serves as a senior vice president-engineering and chief technical officer and is
entitled to an annual base salary of $180,000; and Mr. Parise serves as senior
vice president-finance and is entitled to an annual base salary of $165,000. The
aggregate annual base salary of the executive officers of CAI as a group (6
persons) equals $1,150,400. There is a potential, in certain circumstances, for
a bonus payment, as a prescribed percentage of such employee's annual salary,
under each of the employment agreements.
In April 1999, CAI agreed to pay to Jared E. Abbruzzese, chairman and chief
executive officer of CAI, incentive compensation in an amount not to exceed
$2.75 million, consisting of a $500,000 retention bonus and a merger
implementation bonus in the amount of $2.25 million. The incentive compensation
is payable at the closing of the merger. All amounts owed by Mr. Abbruzzese
under a promissory note dated March 31, 1997 in the aggregate principal amount
of $780,054 to CAI will be satisfied at the time such bonus is paid. CAI has
also agreed to pay at the closing of the merger, a $25,000 bonus to each of
Geoffrey R. Simmonds, a member of the board of directors of several CAI
subsidiaries, and David Tallcott, a member of the board of directors of CS
Wireless. CAI also agreed to award cash retention bonuses to certain employees
of CAI out of a $350,000 bonus pool. CS Wireless also has agreed to pay a
$75,000 bonus to Mr. Tallcott at the closing of the merger.
34
INDEMNIFICATION AND INSURANCE. The merger agreement requires MCI WorldCom
or the surviving corporation to continue to provide, for a period of six years
after the merger, indemnification to directors and officers of CAI and its
subsidiaries (determined as of the effective time of the merger) for actions
based on matters and events occurring prior to the merger to the same extent as
currently provided in the applicable charter documents of CAI. The merger
agreement requires MCI WorldCom or the surviving corporation to provide to the
current and former officers and directors of CAI, for a period of six years
after the merger, director and officer liability insurance substantially similar
to such insurance currently provided by CAI, provided that neither MCI WorldCom
nor the surviving corporation will be required to pay premium for such insurance
in excess of 175% of the last annual premium paid prior to April 26, 1999. In
that event, MCI WorldCom or the surviving corporation would be required to
purchase as much coverage as possible for such amount. See "Summary of Merger
Agreement--Additional Agreements--Indemnification and Insurance" on page 49 of
this proxy statement.
DESCRIPTION OF CAI AND CS WIRELESS SECURITIES OWNED BY MCI WORLDCOM
MCI WORLDCOM HAS SUPPLIED ALL INFORMATION CONTAINED IN THIS SECTION, AND CAI
HAS NOT INDEPENDENTLY VERIFIED SUCH INFORMATION, OTHER THAN PURSUANT TO ITS
REVIEW OF MCI WORLDCOM'S SCHEDULE 13D AND THE AMENDMENTS THERETO.
CAI COMMON SHARES. On March 23, 1999, MCI WorldCom entered into certain
separate agreements to acquire, among other things, an aggregate of
approximately 10,555,140 CAI common shares, constituting approximately 61.2% of
the outstanding CAI common shares eligible to vote at the special meeting. The
purchase price for such CAI common shares under the agreements is less than the
purchase price of $28 per share to be paid to CAI shareholders in connection
with the merger described in this proxy statement. On June 4, 1999, following
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (see "Regulatory Matters" on page 28 of this proxy
statement), MCI WorldCom acquired 8,284,425 of the outstanding CAI common
shares. Additionally, on July 9, 1999, MCI WorldCom acquired 2,270,715 CAI
common shares pursuant to one of the separate agreements described above. Taking
into account certain other acquisitions of CAI common shares, MCI WorldCom
beneficially owned 10,684,140 CAI common shares, constituting approximately
62.0% of the outstanding CAI common shares eligible to vote at the special
meeting as of July 28, 1999. MCI WorldCom, directly or indirectly, may purchase
additional CAI common shares, subject to certain conditions, in open market or
privately negotiated transactions, to the extent permitted by applicable law,
including federal securities laws, in order to facilitate its efforts to
consummate the merger.
STOCK OPTION AGREEMENT. On April 26, 1999, CAI entered into a stock option
agreement granting to MCI WorldCom an option to acquire, under certain
circumstances, up to 6,090,481 CAI common shares, at a price of $28.00 per
share. See "Summary of Stock Option Agreement," beginning on page 52 of this
proxy statement, and Annex B attached to this proxy statement.
SENIOR SECURED NOTES DUE 2000. MCI WorldCom holds the $80,000,000 aggregate
principal amount of outstanding Senior Secured Notes of CAI due 2000. The Senior
Secured Notes of CAI were issued under a Note Purchase Agreement dated as of
October 14, 1998 between CAI and the purchasers named therein. MCI WorldCom and
the original purchasers closed the acquisition of the Senior Secured Notes of
CAI on March 26, 1999, at which time MCI WorldCom was assigned all right, title
and interest in and to the Senior Secured Notes of CAI, and assumed all of the
sellers' obligations under the Senior Secured Notes of CAI and the Note Purchase
Agreement. The closing of the merger requires the consent of the holders of
CAI's Senior Secured Notes, which consent MCI WorldCom has agreed to give under
the merger agreement. For additional information regarding the Note Purchase
Agreement, see "Chapter II--Certain Information Regarding CAI--CAI Secured
Facility" beginning on page 61 of this proxy statement.
35
13% SENIOR NOTES DUE 2004. MCI WorldCom holds $119,412,609 aggregate
principal amount of unsecured 13% Senior Notes of CAI due October 14, 2004,
issued pursuant to the Indenture dated October 14, 1998 between CAI and State
Street Bank and Trust Company, as trustee thereunder. For additional information
regarding CAI's indenture, see "Chapter II--Certain Information Regarding
CAI--CAI's 13% Senior Notes Due 2004" beginning on page 65 of this proxy
statement.
SERIES B 11 3/8% SENIOR DISCOUNT NOTES OF CS WIRELESS. MCI WorldCom also
holds $239,200,000 aggregate principal amount of unsecured Series B 11 3/8%
Senior Discount Notes of CS Wireless due 2006, issued pursuant to an Indenture
dated February 15, 1996 between CS Wireless and State Street Bank and Trust
Company, as trustee thereunder. For additional information regarding the
indenture of CS Wireless, see "Chapter II--Certain Information Regarding CS
Wireless--CS Wireless' Series B 11 3/8% Senior Discount Notes Due 2006"
beginning on page 84 of this proxy statement.
DESCRIPTION OF RELATIONSHIP BETWEEN MCI WORLDCOM AND CS WIRELESS
CS Wireless is an authorized representative of TTI National, Inc., a
wholly-owned subsidiary of MCI WorldCom, for the purpose of selling certain
long-distance services, including switched and dedicated (outbound and inbound)
and calling card services. The terms of the relationship are described in a
Representation Agreement executed by CS Wireless on December 12, 1997. To date,
CS Wireless has not sold any services pursuant to the agreement, which has a
term of five years. Additionally, CS Wireless utilizes, on a month-to-month
basis, dedicated circuits and other basic telephony services offered by MCI
WorldCom and its affiliates at the headquarters and each of the operating
systems of CS Wireless. CS Wireless has entered into a two-year contract with
UUNet Technologies, Inc., a subsidiary of MCI WorldCom, for the provision of
tiered T-3 internet backbone service. CS Wireless is obligated to pay to UUNet
approximately $6,000 per month through January, 2001.
RECENT EVENTS
DIRECTORS AND OFFICERS LIABILITY INSURANCE. CAI maintains a directors,
officers and corporate liability insurance policy provided by National Union
Fire Insurance Company of Pittsburgh, Pennsylvania. The July 9, 1999 acquisition
by MCI WorldCom of 2,270,715 CAI common shares resulted in MCI WorldCom owning
more than 50% of the voting power with respect to the election of CAI directors.
This acquisition constituted a change of control under CAI's insurance policy. A
change of control under CAI's insurance policy cancels insurance coverage for
any actual or alleged wrongful act occurring after the change of control.
Accordingly, as of July 9(th), CAI's insurance policy will cover only those acts
occurring prior to that date. MCI WorldCom has confirmed that, as of July 9,
1999, CAI will be treated as a subsidiary under MCI WorldCom's directors and
officers liability insurance policy and, therefore, CAI's directors and officers
will be covered under that policy. In addition, under the merger agreement,
either MCI WorldCom or the surviving corporation is required, for a period of
six years after the effective time of the merger, to maintain officers' and
directors' liability insurance, to the extent available, with respect to those
individuals covered by CAI's insurance policy. The policy required under the
merger agreement must be on terms and in amounts no less favorable than those in
effect on the date of the merger agreement. MCI WorldCom is not required,
however, to expend in any one year an amount in excess of 175% of the annual
premiums paid by CAI for the insurance.
MCI WORLDCOM'S DEMAND FOR SPECIAL MEETING OF CAI SHAREHOLDERS. On July 27,
1999, MCI WorldCom, in accordance with the Connecticut Business Corporation Act
and CAI's bylaws, demanded that CAI hold a special meeting of shareholders for
the purposes of removing CAI's current board of directors, amending CAI's bylaws
to, among other things, provide for a two-member board of directors and electing
a new CAI board consisting of two members. The removal of CAI's existing board
and the amendment to CAI's bylaws require the affirmative vote of the holders of
a majority of the votes cast by the CAI common shares entitled to vote at the
special meeting demanded by MCI WorldCom at which a quorum is present. The
election of MCI WorldCom's nominees to the CAI board requires the
36
affirmative vote of a plurality of the votes cast by the CAI common shares
entitled to vote at the special meeting demanded by MCI WorldCom at which a
quorum is present. MCI WorldCom has nominated Charles T. Cannada, Senior Vice
President--Corporate Development of MCI WorldCom, age 40, and Bernard J. Ebbers,
President and Chief Executive Office of MCI WorldCom, age 57, to serve as the
new CAI directors. Information regarding such proposals and nominees is included
in the separate notice of special meeting demanded by MCI WorldCom forwarded to
you under separate cover and is contained in a Current Report on Form 8-K
anticipated to be filed by CAI on August 2, 1999.
In response to MCI WorldCom's demand, CAI has scheduled such meeting for
11:00 a.m., Eastern time, at The Goodwin Hotel, One Haynes Street, Hartford,
Connecticut 06103, following the special meeting to which this proxy statement
relates. CAI has also set July 28, 1999 as the record date for determining CAI
shareholders entitled to notice of and to participate in the second special
meeting. Materials relating to such second special meeting will follow under
separate cover. Neither CAI, MCI WorldCom nor any other party is soliciting
proxies for such second special meeting.
In addition to demanding the special shareholders meeting described above,
MCI WorldCom has indicated in its public filings, that in the event the merger
is not approved by shareholders, MCI WorldCom expects to review its alternatives
with respect to CAI, which may include, among other things, resubmitting the
proposed merger between CAI and a wholly-owned subsidiary of MCI WorldCom,
and/or submitting a merger agreement on different terms between CAI and MCI
WorldCom or one of its subsidiaries.
MCI WorldCom has also indicated in its public filings that it may also
explore other forms of transactions with CAI or its subsidiaries, which may
include stock sales, as described below, commercial transactions, or other types
of transactions. CAI has previously reported that it believes it has sufficient
cash to fund its capital requirements through November 1999 and that, if the
merger is not approved, CAI would not have sufficient cash to implement its
business plan. In view of CAI's liquidity needs, MCI WorldCom may propose to CAI
that MCI WorldCom invest additional capital in CAI in exchange for additional
CAI shares of capital stock. These additional shares, if so acquired, might
result in MCI WorldCom's ownership of an aggregate number of shares that would
be sufficient to approve the merger. Further, MCI WorldCom plans to review the
businesses of CAI and make such changes as it deems appropriate at the time,
which could include causing CAI to enter into commercial transactions, joint
ventures, asset sales or other possible transactions.
DISSENTERS' RIGHTS
Holders of CAI common shares are entitled to relief as dissenting
shareholders under Sections 33-855 through 33-868 of the Connecticut Business
Corporation Act. You will be entitled to such relief, however, only if you
comply strictly with all of the procedural and other requirements of Sections
33-855 through 33-868. The following summary is qualified in its entirety by
reference to Sections 33-855 through 33-868, a copy of which is attached to this
proxy statement as Annex D.
Throughout this section of the proxy statement, when we refer to the "CBCA,"
we mean the Connecticut Business Corporation Act as in effect on the date of
this proxy statement. In accordance with the provisions of Sections 33-855 to
33-872 of the CBCA, a copy of which is set forth in Annex D to this proxy
statement, you are entitled to dissent from, and shall have the right to be paid
the fair value of all CAI common shares you own in the event of consummation of
the merger. As provided in CBCA Section 33-861(a), any CAI shareholder who
wishes to assert dissenters' rights:
- must deliver to CAI before the vote is taken on the merger written notice
of such shareholder's intent to demand payment for such shareholder's CAI
common shares if the merger is consummated; and
- must not vote such CAI common shares in favor of the merger.
37
That notice may be addressed to CAI's registered agent at its registered office
or to CAI or its corporate secretary at the following address: 18 Corporate
Woods Boulevard, Third Floor, Albany, New York 12211. Your rights to be paid the
value of your CAI common shares pursuant to Sections 33-855 to 33-872 of the
CBCA are your exclusive remedy as a holder of such CAI common shares with
respect to the merger, whether or not you proceed as provided in the statute.
As provided in CBCA Section 33-862, if the merger is approved and the merger
is consummated, we must deliver a written dissenters' notice to all shareholders
who have satisfied the above-described requirements of CBCA Section 33-861(a) no
later than ten days after such consummation. That dissenters' notice must:
- state where the payment demand must be sent and where and when
certificates for certificated CAI common shares must be deposited;
- inform holders of uncertificated CAI common shares to what extent transfer
of the CAI common shares will be restricted after the payment demand is
received;
- supply a form for demanding payment that both includes the date of the
first announcement to news media or to shareholders of the terms of the
merger agreement and requires that each shareholder asserting dissenters'
rights certify whether or not such shareholder acquired beneficial
ownership of the CAI common shares before that date;
- set a date by which we must receive the payment demand, which date may not
be fewer than 30 nor more than 60 days after the date we deliver the
written dissenters' notice; and
- be accompanied by a copy of CBCA Sections 33-855 to 33-872.
As provided in CBCA Section 33-863(a), a shareholder receiving a dissenters'
notice must:
- demand payment;
- certify whether such shareholder acquired beneficial ownership of his or
her CAI common shares before the date of the first announcement to news
media or to shareholders of the terms of the merger agreement as set forth
in the dissenters' notice; and
- deposit the certificate or certificates representing such shareholder's
CAI common shares in accordance with the terms of the dissenters' notice.
A shareholder who does not demand payment or deposit his or her CAI common
share certificates, each by the date set forth in the dissenters' notice,
will not be entitled to payment for his or her CAI common shares under
CBCA Sections 33-855 to 33-872.
Except as provided below, upon receipt of a payment demand, we will pay each
shareholder who makes a proper demand for payment pursuant to CBCA Section
33-863(a) the amount we estimate to be the fair value of such shareholder's CAI
common shares, plus accrued interest, as provided in CBCA Section 33-865(a).
That payment must accompanied by:
- our balance sheet as of the end of a fiscal year ending not more than
sixteen months before the date of payment, an income statement for that
year and a statement of changes in shareholders' equity for that year, and
the latest available interim financial statements, if any;
- a statement of our estimate of the fair value of the CAI common shares;
- an explanation of how the interest was calculated;
- a statement of the shareholder's right to demand payment under CBCA
Section 33-868; and
- a copy of CBCA Sections 33-855 to 33-872.
38
Pursuant to CBCA Section 33-868, a dissenting shareholder may notify us in
writing of such shareholder's own estimate of the fair value of his or her CAI
common shares and the amount of interest due, and demand payment of his or her
estimate, less any payment we make under CBCA Section 33-865, if:
- such shareholder believes that the amount paid under CBCA Section 33-865
is less than the fair value of such shareholder's CAI common shares or
that the interest due is incorrectly calculated;
- we fail to make payment under CBCA Section 33-865 within 60 days after the
date set for such shareholder's demand payment; or
- we fail to close the merger and do not return the deposited certificates
or release the transfer restrictions imposed on uncertificated CAI common
shares within 60 days after the date set for demanding payment.
A dissenting shareholder will waive his or her right to demand payment under
CBCA Section 33-868 if such shareholder does not notify us of his or her demand
in writing within 30 days after we make payment for such shareholder's CAI
common shares.
Pursuant to CBCA Section 33-871(a) and (b), if a dissenting shareholder's
demand for payment under CBCA Section 33-868 remains unsettled, we must commence
a proceeding within 60 days after receipt of such shareholder's demand for
payment and petition the superior court for the judicial district where our
registered office in the State of Connecticut is located to determine the fair
value of such shareholder's CAI common shares and accrued interest. If we fail
to timely commence such proceeding, we must pay each dissenting shareholder
whose demand remains unsettled the amount demanded. All dissenting shareholders
making such demand for payment as described above, whose demands remain
unsettled, shall be made parties to the proceeding, and all parties must be
served with a copy of the petition. Dissenting shareholders not resident in
Connecticut may be served by registered or certified mail or by publication as
provided by law. The jurisdiction of the court is plenary and exclusive. The
court may, but need not, appoint one or more appraisers to receive evidence and
recommend a decision on the question of fair value. If appointed, the appraiser
will have the powers described in the order appointing them, or in any amendment
to it. The dissenting shareholders will be entitled to the same discovery rights
as parties in other civil proceedings. Each CAI shareholder made a party to the
proceeding will be entitled to judgment for the amount, if any, by which the
court finds the fair value of such shareholder's CAI common shares, plus
interest, exceeds the amount paid by CAI.
The costs and expenses, including the reasonable compensation and expenses
of court-appointed appraisers, of any such proceeding will be determined by the
court and will be assessed against CAI, except that the court may assess costs
against all or some dissenting shareholders, in amounts the court finds
equitable, to the extent the court finds that they acted arbitrarily,
vexatiously or not in good faith in demanding payment under CBCA Section 33-868.
The court may also assess the fees and expenses of counsel and experts employed
by any party, in amounts the court finds equitable:
- against us in favor of any or all dissenting shareholders if the court
finds that we failed to substantially comply with the requirements of CBCA
Sections 33-860 to 33-868, inclusive, or
- against either us or a dissenting shareholder, in favor of any other
party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith
with respect to rights provided by CBCA Sections 33-855 to 33-872,
inclusive.
If the court finds that the services of counsel for any dissenting shareholder
were of substantial benefit to other dissenting shareholders similarly situated,
and that such fees should not be assessed against CAI, the court may award to
those counsel reasonable fees to be paid out of the amounts awarded to the
dissenting shareholders who were benefitted.
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The foregoing is only a summary of the dissenters' rights of holders of CAI
common shares. Any CAI shareholder who intends to exercise dissenters' rights
should carefully review the text of the applicable provisions of the CBCA set
forth in Annex D to this proxy statement and should also consult with his or her
attorney. The failure of a holder of CAI common shares to follow precisely the
procedures summarized above and set forth in Annex D may result in loss of
dissenters' rights. No further notice of the events giving rise to dissenters'
rights or any steps associated therewith will be furnished to holders of CAI
common shares, except as otherwise required by law.
SUMMARY OF THE MERGER AGREEMENT
WE BELIEVE THAT THIS SUMMARY DESCRIBES ALL MATERIAL TERMS OF THE MERGER
AGREEMENT. HOWEVER, WE RECOMMEND THAT YOU READ CAREFULLY THE COMPLETE TEXT OF
THE MERGER AGREEMENT FOR THE PRECISE LEGAL TERMS OF THE MERGER AGREEMENT AND
OTHER INFORMATION THAT MAY BE IMPORTANT TO YOU. A COPY OF THE MERGER AGREEMENT
IS ATTACHED TO THIS PROXY STATEMENT AS ANNEX A.
GENERAL
Pursuant to the merger agreement, at the effective time of the merger, MCI
WorldCom will acquire CAI through the merger of Cardinal Acquisition Subsidiary
with and into CAI. At the effective time of the merger, Cardinal Acquisition
Subsidiary will cease to exist, and CAI will be the surviving corporation and a
wholly-owned subsidiary of MCI WorldCom.
MERGER CONSIDERATION
At the effective time of the merger, by virtue of the merger and without any
action on the part of any shareholder, each issued and outstanding CAI common
share held by CAI shareholders will be converted into the right to receive
$28.00 in cash, without interest, except for shares canceled as described below
and shares as to which dissenters' rights are exercised by a dissenting
shareholder.
All CAI common shares held as treasury shares will automatically be canceled
and retired at the effective time of the merger and will cease to exist. No
consideration will be delivered in exchange for these shares. Each CAI common
share issued and outstanding immediately prior to the effective time of the
merger that is owned by MCI WorldCom, Cardinal Acquisition Subsidiary, CAI or a
subsidiary of CAI will be canceled as of the effective time of the merger, and
no merger consideration will be payable with respect to such CAI common shares.
As of the effective time of the merger, certificates representing all CAI
common shares issued and outstanding immediately prior to the effective time
(except for shares as to which dissenters' rights are exercised by a dissenting
shareholder) will cease to have any rights with respect to those CAI common
shares, except the right to receive the merger consideration in accordance with
the terms of the merger agreement.
As of the effective time of the merger, all shares of Cardinal Acquisition
Subsidiary issued and outstanding immediately prior to the effective time of the
merger will be converted into one CAI common share and will represent all of the
issued and outstanding CAI common shares after the merger.
No dissenting shareholder will be entitled to any portion of the merger
consideration or other distributions unless and until the dissenting shareholder
fails to exercise or otherwise effectively withdraws or loses his or her rights
to payment under Connecticut law. CAI common shares as to which dissenters'
rights have been exercised will be treated in accordance with Sections 33-855
through 33-868 of the Connecticut Business Corporation Act. If any person, who
otherwise would be deemed a dissenting shareholder, fails to properly exercise
or effectively loses dissenters' rights with respect to any CAI common shares,
those CAI common shares will be treated as though they had been converted
40
as of the effective date of the merger into the right to receive the merger
consideration, without interest. See "The Merger--Dissenters' Rights."
EXCHANGE OF SHARES
Prior to the effective time of the merger, MCI WorldCom will appoint an
exchange agent, and immediately prior to the effective time of the merger, MCI
WorldCom will deposit with the exchange agent funds in an amount sufficient to
make the payments contemplated by the merger agreement. Soon after the
completion of the merger, MCI WorldCom or the exchange agent will send a letter
to each person who was a CAI shareholder as of the date the merger became
effective. The letter will contain instructions on how to surrender CAI common
share certificates to the exchange agent and receive the merger consideration.
CAI shareholders have no right to any interest on the cash payable upon the
surrender of CAI common share certificates.
Any time following the sixth month after the effective time of the merger,
CAI, as the surviving corporation, may require the exchange agent to deliver to
it any portion of the funds deposited by MCI WorldCom with the exchange agent
not already disbursed to CAI shareholders. In the event CAI requires the
exchange agent to deliver such funds, CAI shareholders must thereafter look to
CAI, as the surviving corporation, for payment of any merger consideration that
may be payable to them upon surrender of their CAI common share certificates.
Any such shareholders will be deemed general creditors of CAI, as the surviving
corporation, for such purpose.
MCI WorldCom, CAI (as the surviving corporation) and the exchange agent will
be entitled to withhold from the merger consideration payable to any CAI
shareholder those amounts required to be deducted under tax law. All amounts so
withheld will be deemed to have been paid to the applicable CAI shareholder.
TREATMENT OF STOCK OPTIONS
Prior to the effective time of the merger, each outstanding and unexpired
option to purchase CAI common shares issued pursuant to our 1998 Stock Option
Plan or our 1998 Outside Directors' Stock Option Plan that is exercisable on the
effective date of the merger in accordance with its terms will be converted into
the right to receive for each share subject to such option an amount in cash,
subject to any applicable withholding tax, equal to the difference between $28
and the per share exercise price of such option to the extent such difference is
a positive number. At the effective time of the merger, all CAI options will be
canceled. The payment of these amounts will be made by the surviving corporation
promptly following the effective time of the merger, provided that MCI WorldCom
verifies the options and the optionee delivers a written instrument setting
forth:
- his or her number of options, their respective issue dates and exercise
prices;
- certain representations by the optionee; and
- a confirmation of and consent to the conversion of the options as provided
in the merger agreement.
CAI agrees to cause all outstanding options to be amended to provide for and
give effect to the transactions contemplated by the merger agreement.
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REPRESENTATIONS AND WARRANTIES
In the merger agreement, we make representations and warranties to MCI
WorldCom and Cardinal Acquisition Subsidiary with respect to, among other
things:
- due organization and good standing of CAI and its subsidiaries;
- capitalization, ownership of subsidiaries and other investments;
- corporate authorization;
- the vote required by the shareholders of CAI in connection with the merger
agreement;
- governmental approvals;
- the opinion of BT Alex. Brown;
- absence of any breach of organizational documents or material agreements
or applicable law as a result of the contemplated transactions;
- required third-party consents under material contracts or any other
obligation of CAI or any of its subsidiaries;
- absence of any lien or encumbrance upon any asset of CAI or any of its
subsidiaries;
- accuracy of our filings with the Securities and Exchange Commission and
other regulatory entities;
- litigation, investigations or proceedings regarding violations of law;
- accuracy of financial statements;
- the absence of specified changes or events;
- compliance with applicable law;
- required licenses, permits and related FCC regulatory matters;
- engagement of and payments to brokers, investment bankers, finders and
financial advisors in connection with the merger agreement;
- material contracts;
- matters relating to compliance with the Employee Retirement Income
Security Act of 1974, as amended, and other employee benefit matters;
- tax matters;
- liabilities;
- environmental matters affecting CAI;
- intellectual property matters;
- owned and leased real property;
- corporate records;
- title to and condition of CAI's personal property;
- absence of adverse actions against CAI and its subsidiaries or challenging
the merger agreement;
- labor and employee relations matters;
- change of control agreements;
42
- insurance;
- satisfaction of Connecticut takeover statutes;
- CAI's shareholder rights plan;
- efforts to resolve any "Year 2000" computer problems;
- outstanding CAI options;
- transactions with affiliates;
- absence of existing discussions by CAI with any third party relating to an
alternative transaction;
- various matters relating to CAI's investment in TelQuest Satellite
Services LLC;
- the accuracy of other information supplied by CAI; and
- the preparation of this proxy statement.
In the merger agreement, MCI WorldCom makes representations and warranties
to us with respect to, among other things:
- due organization and good standing of MCI WorldCom and Cardinal
Acquisition Subsidiary;
- corporate authorization;
- governmental approvals;
- absence of any breach of organizational documents or material agreements
or applicable law as a result of the contemplated transactions;
- required third-party consents under any material contracts or any other
obligation of MCI WorldCom or Cardinal Acquisition Subsidiary;
- absence of any lien or encumbrance upon any asset of MCI WorldCom or
Cardinal Acquisition Subsidiary;
- engagement of and payments to brokers, investment bankers, finders and
financial advisors in connection with the merger agreement;
- MCI WorldCom's ownership of CAI debt and equity securities; and
- the accuracy of information regarding MCI WorldCom and Cardinal
Acquisition Subsidiary contained in this proxy statement, and the
preparation of this proxy statement.
CONDITIONS TO CLOSING
CAI's and MCI WorldCom's obligation to effect the merger is subject to the
satisfaction or waiver on or prior to the closing date of the following
customary closing conditions:
- the requisite approval by CAI shareholders of the merger agreement;
- no order, statute, rule, regulation, executive order, stay, decree,
judgment or injunction enacted, entered, promulgated, or enforced by any
court or other governmental authority being in effect prohibiting or
preventing the consummation of the merger or the other transactions
contemplated under the merger agreement (CAI and MCI WorldCom being
required to use their reasonable best efforts to have any of the foregoing
vacated, dismissed or withdrawn by the effective time of the merger);
43
- the waiting period, including any extensions, applicable to the
consummation of the merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 having expired or been terminated;
- the opinion of BT Alex. Brown described herein and attached as Annex C to
this proxy statement not being withdrawn; and
- all consents, approvals and actions of, filings with and notices to any
governmental authority required to consummate the merger and the other
transactions contemplated by the merger agreement having been obtained by
final order (other than those consents the failure of which to obtain, in
MCI WorldCom's judgment, would not have a material adverse effect on the
surviving corporation); the agreement providing that any approval relating
to any FCC license must be obtained; and this condition may be waived by
MCI WorldCom, in its sole judgment.
In addition, MCI WorldCom's and Cardinal Acquisition Subsidiary's obligation
to effect the merger is subject to the satisfaction or waiver of the following
conditions:
- the representations and warranties of CAI which are modified by
materiality or material adverse effect being true and correct in all
respects, and those not so modified by materiality or material adverse
effect being true and correct in all material respects, as of the date of
the merger agreement and as of the closing date, except for such changes
not prohibited under the merger agreement, and none of CAI's
representations and warranties being untrue or incorrect to the extent
that such untrue or incorrect, disregarding any materiality
qualifications, representations and warranties, when taken as a whole,
have had or would have a material adverse effect on CAI;
- CAI having performed and complied with all covenants and agreements in all
material respects and having satisfied in all material respects all
conditions required to be performed or complied with or satisfied by it
under the merger agreement at or prior to the effective time of the
merger;
- there having been no event that has or reasonably could be expected to
have a material adverse effect on CAI or the surviving corporation, except
as specified in the merger agreement;
- no action, investigation or proceeding having been instituted, pending or
threatened by any governmental authority, and there not being instituted,
pending or threatened any action or proceeding by any other person, before
any governmental authority, which is reasonably likely to be determined
adversely to MCI WorldCom or Cardinal Acquisition Subsidiary:
-- challenging or seeking to make illegal, delay materially or restrain
or prohibit the consummation of the merger or seeking to obtain
material damages or imposing any material adverse conditions in
connection with the merger or otherwise directly or indirectly
relating to the transactions contemplated by the merger,
-- seeking to restrain, prohibit or delay the exercise of full rights of
ownership or operation by MCI WorldCom or Cardinal Acquisition
Subsidiary or their affiliates of all or any portion of the business
or assets of CAI and its subsidiaries, taken as a whole, or of MCI
WorldCom or Cardinal Acquisition Subsidiary or any of their
affiliates to dispose of or hold separate all or any material portion
of the business or assets of CAI and its subsidiaries, taken as a
whole, or of MCI WorldCom or Cardinal Acquisition Subsidiary or any
of their affiliates,
-- seeking to impose or confirm material limitations on the ability of
MCI WorldCom or Cardinal Acquisition Subsidiary or any of their
affiliates to exercise full rights of ownership of the CAI common
shares,
44
-- seeking to require divestiture by MCI WorldCom or Cardinal
Acquisition Subsidiary or any of their affiliates of the CAI common
shares, or
-- that otherwise would reasonably be expected to have a material
adverse effect on CAI;
- at the effective time of the merger, holders of no more than 10% of the
outstanding CAI common shares having taken action to assert dissenters'
rights under Connecticut law;
- CAI having obtained or made the consents, approvals, waivers,
authorizations or filings required in connection with the merger under all
agreements or instruments to which it or any of its subsidiaries is a
party, on terms and conditions reasonably acceptable to MCI WorldCom, and
such consents and approvals being in full force and effect, except those
for which failure to obtain such consents and approvals would not in the
judgment of MCI WorldCom have a material adverse effect prior to or after
the effective time of the merger; PROVIDED THAT any consents relating to
channel or tower site leases the failure of which to obtain in the
aggregate are or would be material to CAI and its subsidiaries or are or
would be material to the future plans or objectives of MCI WorldCom or the
failure of which to obtain would otherwise have a material adverse effect,
must have been obtained by CAI; and
- CAI having furnished MCI WorldCom and Cardinal Acquisition Subsidiary
with:
-- a certificate dated the closing date signed on its behalf by an
executive officer to the effect that certain specified conditions
regarding accuracy of its representations and warranties and
performance of its obligations have been satisfied,
-- certificates of good standing,
-- duly adopted Board and shareholder resolutions,
-- copies of charter documents and by-laws,
-- certain Noncompete and Confidentiality Agreements with specified
executives of CAI,
-- certain resignations,
-- a list of shareholders of record,
-- comfort letters,
-- an opinion of counsel, and
-- such other documents and instruments as MCI WorldCom reasonably may
request.
In addition, CAI's obligation to effect the merger is subject to the
satisfaction or waiver of the following conditions:
- the representations and warranties of MCI WorldCom which are modified by
materiality or material adverse effect being true and correct in all
respects, and those not so modified by materiality or material adverse
effect being true and correct in all material respects, as of the date of
the merger agreement and as of the closing date, except for such changes
not prohibited under the merger agreement, and none of the representations
and warranties of MCI WorldCom being untrue or incorrect, disregarding any
materiality qualifications, to the extent that such untrue or incorrect
representations or warranties, when taken as a whole, have had or would
have a material adverse effect on MCI WorldCom;
- MCI WorldCom having performed and complied with all covenants and
agreements in all material respects and having satisfied in all material
respects all conditions required to be performed or complied with or
satisfied by it under the merger agreement at or prior to the effective
time of the merger; and
- MCI WorldCom having furnished CAI with a certificate dated the closing
date signed on its behalf by an authorized officer to the effect that
certain specified conditions have been satisfied.
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COVENANTS
The merger agreement provides that, until the merger is completed, we will
conduct our business in the ordinary course and consistent with past practice.
We have agreed to use our reasonable business efforts to:
- preserve our business organizations;
- maintain and protect our FCC assets and channel leases;
- maintain our insurance;
- pay our accounts payable when due;
- comply with all laws;
- retain the services of our officers, agents and employees; and
- maintain satisfactory existing business relationships.
During the interim period between signing the merger agreement and the
completion of the merger, we have agreed that we will not take certain actions
without the consent of MCI WorldCom. More specifically, we have agreed not to:
- amend our organizational documents or shareholder rights plan or merge
with any person;
- issue, sell, dispose of or encumber any shares of capital stock, options
or warrants to acquire any shares of such capital stock;
- declare or pay dividends or recapitalize or redeem capital shares;
- incur any indebtedness, except for debt set forth in certain approved
budgets;
- assume or guarantee any obligations of another person;
- make any capital expenditures or loans, advances or investments in another
person, except as provided in the merger agreement;
- acquire the stock or assets of, or merge or consolidate with, any other
person or business;
- voluntarily incur any material liability or obligation;
- sell, lease or encumber property or assets;
- increase any compensation or benefits payable, except for changes that are
required under certain material contracts and increases in the ordinary
course consistent with past practice of the lesser of 8% of the current
compensation or $10,000 per annum, or increase in any manner the
compensation of any director;
- approve, enter into or otherwise increase, reprice or accelerate the
payment or vesting of amounts, benefits or other rights payable or accrued
under any employee benefit plan or terminate any employment, consulting or
related arrangement;
- enter into any employment agreement;
- make certain elections with respect to taxes;
- compromise, settle, forgive, cancel, grant any waiver or release relating
to or otherwise adjust any debts, claims, rights or litigation owed to or
involving CAI or its subsidiaries, other than in the ordinary course of
business consistent with past practice, subject to certain limitations;
- enter into or amend any lease as to real property;
46
- enter into or amend certain agreements;
- terminate any channel lease;
- enter into, amend, modify or waive any rights under any channel lease
other than in the ordinary course of business and subject to certain
limitations and requirements;
- enter into, amend, modify, terminate or waive any rights under any
material contract, other than channel leases and FCC licenses, any
material agreement or material obligation that restricts in any material
respect our activities or the activities of our subsidiaries, or any
agreement or obligation that restricts in any material respect any other
person;
- enter into any leasing or licensing arrangements, take-or-pay arrangements
or other affiliations, arrangements or agreements with respect to any
channel lease, subject to certain limitations;
- take any action with respect to indemnification of any person;
- change accounting practices or policies; and
- take any action that would reasonably be expected to result in a breach of
any of our covenants, representations or warranties or to have a material
adverse effect.
NO SOLICITATION. We agreed (1) to immediately terminate any discussions or
negotiations with any parties with respect to a Takeover Proposal (as described
below) and (2) that neither CAI nor any of its officers, directors, employees,
subsidiaries or advisors will, directly or indirectly through another person:
- solicit, initiate or encourage or take any other action designed to
facilitate any Takeover Proposal; or
- participate in any discussions or negotiations regarding any Takeover
Proposal.
A "Takeover Proposal" means any inquiry, proposal or offer relating to:
- any direct or indirect acquisition or purchase of 15% or more of the
assets of CAI or any of its subsidiaries or 5% or more of any class of
equity securities of CAI or any of its subsidiaries;
- any tender offer or exchange offer that could result in any person owning
15% or more of any class of equity securities of CAI or any of its
subsidiaries; or
- any merger, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution or similar transaction
involving CAI or any of its subsidiaries (other than the merger described
in this proxy statement); or
- any other transaction reasonably expected to impede, interfere with,
prevent or materially delay the merger or which could reasonably be
expected to dilute materially the benefits to MCI WorldCom of the
transactions contemplated by the merger agreement.
The merger agreement requires us to recommend to you that you approve the
merger agreement and the transactions contemplated by the merger agreement. The
CAI board and its committees are prohibited from:
- withdrawing or modifying, or proposing publicly to withdraw or modify, the
approval of the CAI board or its recommendation to you;
- approving or recommending, or proposing publicly to approve or recommend,
any Takeover Proposal; and
- causing CAI to enter into any letter of intent, agreement in principal,
acquisition agreement or other agreement related to any Takeover Proposal.
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In addition, we are required to immediately advise MCI WorldCom of any
request for information or of any Takeover Proposal, the material terms and
conditions of any such request or Takeover Proposal and the identity of the
person making such request or Takeover Proposal. We are also required to keep
MCI WorldCom fully informed of the status and details of any such request or
Takeover Proposal.
The merger agreement does not prohibit us from (1) taking and disclosing to
our shareholders a position consistent with our obligations under the merger
agreement with respect to a tender offer required by law or (2) making any
disclosure consistent with our obligations under the merger agreement to our
shareholders if, in the good faith judgment of the board of directors, after
receipt of advice from outside counsel, failure to disclose would be
inconsistent with applicable law. The board of directors, however, cannot
withdraw or modify our position or recommendation of the merger contemplated by
the merger agreement.
ADDITIONAL AGREEMENTS
SHAREHOLDERS MEETING. We have agreed to hold a meeting of our shareholders
to vote on the merger and to use our reasonable best efforts to obtain your
approval. The board of directors has unanimously recommended the merger and the
merger agreement.
NOTIFICATION OF CERTAIN MATTERS. We are required to notify MCI WorldCom
promptly if:
- we receive any notice of, or other communication relating to, a default or
an event which, with notice or lapse of time or both, would become a
default under any material contract of CAI;
- we receive any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection
with the transactions contemplated by the merger agreement;
- we receive any material notice or other communication from any
governmental authority in connection with the transactions contemplated by
the merger agreement;
- an event occurs which would have a material adverse effect on CAI;
- any litigation commences or is threatened involving or affecting CAI or
any of its subsidiaries or affiliates, or any of their respective
properties or assets, or, to our knowledge, any employee, agent, director
or officer of CAI or any of its subsidiaries, in his or her capacity as
such or as a fiduciary under a benefit plan of CAI, which, if pending on
the date of the merger agreement, would have been required to have been
disclosed or which relates to the consummation of the merger, or any
material development occurs in connection with any litigation previously
disclosed by CAI; and
- any event occurs that would cause a breach by CAI of any provision of the
merger agreement or a related agreement, including any such breach that
would occur if such event had taken place on or prior to the date of the
merger agreement.
ACCESS TO INFORMATION; CONFIDENTIALITY. We have agreed to give MCI WorldCom
and its officers, employees, accountants, counsel, financial advisors and other
representatives full access during normal business hours, upon reasonable
notice, during the period prior to the effective time of the merger, to all of
CAI's properties, books, contracts, commitments, personnel and records and all
other information concerning its business, properties and personnel as MCI
WorldCom reasonably requests.
EFFORTS; COOPERATION. Subject to the terms and conditions provided in the
merger agreement, we have agreed to cooperate and use reasonable efforts to
make, or cause to be made, all filings necessary or proper under applicable laws
and regulations to consummate and make effective the transactions contemplated
by the merger agreement, including cooperation in the preparation and filing of
this
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proxy statement, any required filings under the Hart-Scott-Rodino Act or other
filings and any amendments. We have also agreed that if, at any time after the
effective time of the merger, any further action is necessary or desirable to
carry out the purposes of the merger agreement, including the execution of
additional instruments, we will take all such necessary action.
We have agreed to use reasonable efforts to obtain as promptly as
practicable all required consents and approvals of any governmental entity or
any other person required in connection with, the consummation of the
transactions contemplated by the merger agreement. In addition, we have agreed
to coordinate with MCI WorldCom in advance of sending any communications to or
scheduling any meetings with any governmental entity relating to the merger
agreement or the merger and agreed to promptly share all correspondences or
other communications received from any governmental entity relating to the
merger agreement or the merger.
YEAR 2000 PLAN. We are required to use all commercially reasonable efforts
to ensure that our "Year 2000" plan is completed in a timely manner. We must:
- allow MCI WorldCom to monitor our Year 2000 compliance issues and our Year
2000 plan;
- notify MCI WorldCom if we do not achieve, or if we reasonably expect that
we will not achieve, milestones and objectives identified in our Year 2000
plan; and
- cooperate in good faith with MCI WorldCom's efforts to cause CAI to be
Year 2000 compliant.
PURCHASE OF CAI COMMON SHARES. We may not prohibit MCI WorldCom or any of
its affiliates or associates from purchasing CAI common shares or entering into
option, lock-up, voting or proxy agreements or any other similar agreements with
respect to CAI common shares at any time prior to the consummation of the
merger.
CONVERSION OF OPTIONS. Subject to certain limitations and requirements, we
must:
- modify each outstanding option exercisable on or prior to the effective
time of the merger, and cause each such option either to be exercised (if
otherwise exercisable) prior to the effective time of the merger, or to be
canceled as of the effective time of the merger, in exchange for the
option consideration previously described in this proxy statement (see
page 41 of this proxy statement); and
- modify each outstanding option not exercisable on or prior to the
effective time of the merger to be converted, as of the effective time of
the merger, to the right to receive solely the option consideration
previously described in this proxy statement (see page 41 of this proxy
statement), with such option otherwise becoming exercisable following the
effective time of the merger, in accordance with its terms.
INDEMNIFICATION AND INSURANCE. The merger agreement provides that the
certificate of incorporation and bylaws of the surviving corporation must
contain similar provisions with respect to indemnification and exculpation from
liability set forth in the certificate of incorporation and bylaws of CAI. MCI
WorldCom may not, and shall cause the surviving corporation not to, amend,
repeal or otherwise modify these provisions for a period of six years from the
effective time of the merger in any manner that would materially and adversely
affect the rights of individuals who at the effective time of the merger were
directors, officers, employees or agents of CAI, unless such modification is
required by law.
MCI WorldCom has agreed to indemnify and hold each director and officer of
CAI (determined as of the effective time of the merger) harmless against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the effective time of the
49
merger, whether asserted or claimed prior to, at or after such time, to the
fullest extent that CAI would have been permitted to indemnify such person under
Connecticut law and CAI's certificate of incorporation or bylaws in effect on
April 26, 1999.
The merger agreement also provides that for six years after the effective
time of the merger, and to the extent available, the surviving corporation or
MCI WorldCom will maintain officers' and directors' liability insurance with
respect to those persons who were covered by CAI's directors' and officers'
liability insurance policy on terms and in amounts no less favorable than those
in effect on the date of the merger agreement. MCI WorldCom, however, is not
required to expend in any one year an amount in excess of 175% of the annual
premiums currently paid by CAI for the insurance.
If MCI WorldCom, the surviving corporation or any of its successors or
assigns (1) consolidates with or merges into any other corporation or entity and
is not the continuing or surviving corporation or entity of such consolidation
or merger, or (2) transfers all or substantially all of its properties and
assets to any person, corporation or entity, then, and in each case, proper
provisions will be made so that the successors and assigns of MCI WorldCom or
the surviving corporation, as the case may be, assume the indemnification and
insurance obligations set forth in the merger agreement.
FEES AND EXPENSES. Except as described below under "Termination, Fees,
Amendment and Waiver," whether or not the merger is completed, all fees and
expenses incurred in connection with the merger, the merger agreement and the
transactions contemplated thereby will be paid by the party incurring these fees
or expenses.
AMENDMENT. To the extent permitted by law, the merger agreement may be
amended by the parties at any time before or after the approval of the merger
agreement by the CAI shareholders. After approval, however, the parties may not
make any amendment that by law requires further approval by the CAI
shareholders.
EXTENSION; WAIVER. At any time prior to the effective time of the merger, a
party may (a) extend the time for the performance of any of the obligations or
other acts of the other party, (b) waive any inaccuracies in the representations
and warranties of the other party contained in the merger agreement or in any
document delivered pursuant to the merger agreement or (c) subject to the second
sentence of the immediately preceding paragraph, waive compliance by the other
party with any of the agreements or conditions contained in the merger
agreement. Any agreement on the part of a party to any extension or waiver will
be valid only if set forth in writing signed on behalf of the party extending or
waiving the condition or agreement. The failure of any party to the merger
agreement to assert its rights under the merger agreement or otherwise will not
constitute a waiver of these rights.
TERMINATION, FEES, AMENDMENT AND WAIVER
The merger agreement may be terminated at any time prior to the effective
time of the merger, whether before or after shareholder approval:
- by mutual written consent of MCI WorldCom and CAI;
- by either MCI WorldCom or CAI:
-- if the merger has not been completed by February 1, 2000; PROVIDED,
HOWEVER, that either party may extend such date to a date no later than
May 1, 2000, if such party determines that additional time is necessary
in connection with obtaining certain specified consents from
governmental authorities; AND PROVIDED, FURTHER, that the right to
terminate the merger agreement will not be available to any party whose
failure to perform any of its obligations under the merger agreement
results in the failure of the merger to be completed by such time;
50
-- if the special meeting has concluded and the approval of the
shareholders of CAI has not been obtained; or
-- if any court of competent jurisdiction or other governmental authority
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the
consummation of the merger and such order, decree or ruling or other
action shall have become final and nonappealable;
- by MCI WorldCom, if CAI:
-- breaches any of its representations modified by materiality or material
adverse effect,
-- materially breaches any of its representations not modified by
materiality or material adverse effect, or
-- breaches or fails to perform any material covenant or agreement
contained in the merger agreement about which MCI WorldCom notifies
CAI, if CAI fails to cure or otherwise resolve such breach or failure
to perform to the reasonable satisfaction of MCI WorldCom within 20
days after CAI receives MCI WorldCom's notice;
- by CAI, if MCI WorldCom:
-- breaches any of its representations modified by materiality or material
adverse effect,
-- materially breaches any of its representations not modified by
materiality or material adverse effect, or
-- breaches or fails to perform any material covenant or agreement
contained in the merger agreement about which CAI notifies MCI
WorldCom, if MCI WorldCom fails to cure or otherwise resolve such
breach or failure to perform to the reasonable satisfaction of CAI
within 20 days after MCI WorldCom receives CAI's notice; or
- by MCI WorldCom, if CAI breaches the no solicitation and shareholder
recommendation provisions of the merger agreement described in this proxy
statement beginning on page 47.
If either CAI or MCI WorldCom terminates the merger agreement, the merger
agreement will become void and have no effect, without any liability or
obligation on the part of CAI, MCI WorldCom or Cardinal Acquisition Subsidiary,
other than the following provisions, which survive termination:
- the obligation of CAI and MCI WorldCom to keep all non-public information
connected with the merger confidential;
- the agreement between CAI and MCI WorldCom to each pay their own fees and
expenses, and CAI's obligation to pay MCI WorldCom a termination fee in
certain circumstances;
- the agreement among CAI, MCI WorldCom and Cardinal Acquisition Subsidiary
to consult with each other before issuing press releases or other public
statements and to only issue press releases or other public statements if
required by law or a national securities exchange; and
- the effects of termination as described under this "Termination, Fees,
Amendment and Waiver" section.
We are obligated to pay to MCI WorldCom a termination fee of $18,000,000 if
the merger agreement:
- is terminated after a Takeover Proposal (or an announced intention to make
a Takeover Proposal) has been made known to us or our shareholders or
announced publicly; or
- is terminated by MCI WorldCom as a result of a breach by us of the
prohibitions against soliciting a Takeover Proposal, as described in this
proxy statement beginning on page 47.
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SUMMARY OF STOCK OPTION AGREEMENT
WE BELIEVE THAT THIS SUMMARY DESCRIBES ALL MATERIAL TERMS OF THE STOCK
OPTION AGREEMENT. HOWEVER, WE RECOMMEND THAT YOU READ CAREFULLY THE COMPLETE
TEXT OF THE STOCK OPTION AGREEMENT FOR THE PRECISE LEGAL TERMS OF THE STOCK
OPTION AGREEMENT AND OTHER INFORMATION THAT MAY BE IMPORTANT TO YOU. A COPY OF
THE STOCK OPTION AGREEMENT IS INCLUDED IN THIS PROXY STATEMENT AS ANNEX B.
On April 26, 1999, CAI entered into a stock option agreement granting to MCI
WorldCom an option to acquire up to 6,090,481 CAI common shares, at a price of
$28.00 per share. The number of CAI common shares subject to the option
represents all of the authorized but unissued CAI common shares available to CAI
to be issued and is subject to adjustment in particular instances. The remaining
terms of the stock option agreement are summarized below.
MCI WorldCom may exercise its option only upon the occurrence of any of the
following "purchase events":
- if CAI recommends to its shareholders, or it or any person other than MCI
WorldCom or its affiliates publicly proposes or publicly announces a
Takeover Proposal (as defined on page 47 of this proxy statement) that is
not withdrawn at the time of the option exercise;
- if any person other than MCI WorldCom or its affiliates acquires
beneficial ownership of 15% or more of the voting securities of CAI; or
- if the CAI board withdraws or modifies in any adverse manner its
recommendation with respect to the merger agreement and the merger.
The option terminates:
- if the merger is consummated, upon the completion of the merger;
- if the merger agreement is terminated for any reason and a purchase event
(described above) has occurred prior to such termination, 18 months after
the occurrence of such purchase event;
- if the merger agreement is terminated:
-- by mutual consent of the parties,
-- because the merger has not occurred within the time frame
contemplated by the merger agreement,
-- as a result of a final, non-appealable order, decree or ruling
enjoining or otherwise prohibiting the consummation of the merger,
-- as a result of breach by MCI WorldCom of any of its representations
modified by materiality or material adverse effect,
-- as a result of material breach by MCI WorldCom of any of its
representations not modified by materiality or material adverse
effect, or
-- as a result of breach or failure to perform by MCI WorldCom of any
material covenant or agreement contained in the merger agreement
about which CAI notifies MCI WorldCom, if MCI WorldCom fails to cure
or otherwise resolve such breach or failure to perform to the
reasonable satisfaction of CAI within 20 days after MCI WorldCom
receives CAI's notice;
- if the merger agreement is terminated for any reason other than those
specified in the immediately preceding bullet point, 18 months after such
termination; or
- 30 months from the date of the stock option agreement.
52
We are required to notify MCI WorldCom if:
- we recommend to you, or we or any person (other than MCI WorldCom or any
affiliate or associate of MCI WorldCom) publicly proposes or publicly
announces a bona fide Takeover Proposal that is not withdrawn at the time
of the exercise of the option;
- any person (other than MCI WorldCom or any affiliate or associate of MCI
WorldCom) acquires beneficial ownership (as such term is defined in Rule
13d-3 under the Securities Exchange Act of 1934) of or has the right to
acquire beneficial ownership of, or any "group" (as such term is defined
in Section 13(d)(3) of the Securities Exchange Act), other than a group of
which MCI WorldCom or any affiliate or associate of MCI WorldCom is a
member, is formed which beneficially owns, or has the right to acquire
beneficial ownership of, 15% or more of the voting power of CAI; or
- the CAI board withdraws or modifies in a manner adverse to MCI WorldCom
its recommendation with respect to the merger agreement and the merger.
MCI WorldCom's right to exercise the option will not be affected if we fail
to notify MCI WorldCom of any such event.
MCI WorldCom will send us notice if it wishes to exercise the option. If
prior notification to or approval of any governmental authority is required in
connection with MCI WorldCom's purchase of the CAI common shares, we must
cooperate in the filing of the required notice or application for approval and
the obtaining of such approval. MCI WorldCom's purchase of the CAI common shares
will close immediately after such regulatory approvals are obtained (and any
mandatory waiting periods expire or are terminated).
MCI WorldCom granted us, or a nominee of ours, a power of attorney to vote,
at any meeting of our shareholders called to consider the merger agreement, any
option shares acquired by it on or prior to the record date. The power of
attorney and proxy granted by MCI WorldCom lasts from the date of the stock
option agreement to the earlier to occur of the termination of the merger
agreement or the effective time of the merger and includes the right to sign its
name (as shareholder) to any consent, certificate or other document relating to
CAI that the law of the State of Connecticut may permit or require:
- in favor of the merger agreement and the merger; and
- against any proposal for any recapitalization, merger (other than the
merger described in this proxy statement), sale of assets or other
business combination between CAI and any person or entity (other than MCI
WorldCom or Cardinal Acquisition Subsidiary or other permitted assignee
thereof under the merger agreement) or any other action or agreement that
would result in a breach of any covenant, representation or warranty or
any other obligation or agreement of MCI WorldCom under the merger
agreement, or which could result in any of the conditions to the merger
agreement not being fulfilled.
The stock option agreement contains representations and warranties of CAI,
including:
- corporate authority;
- beneficial ownership;
- capitalization and shares reserved for issuance upon exercise of the
option; and
- absence of any breach of organizational documents or material agreements
as a result of the contemplated transactions.
The stock option agreement also contains representations and warranties of
MCI WorldCom, including corporate authority and investment representations.
53
The stock option agreement also contains standard demand and piggyback
registration rights relating to the CAI common shares underlying the option
represented by the stock option agreement, as well as certain other customary
terms.
SUMMARY OF SHAREHOLDER RIGHTS PLAN
On April 16, 1999, the CAI board adopted a shareholder rights plan in
connection with the execution and delivery on the same date of a letter of
intent with MCI WorldCom with respect to the merger. In connection with the
rights plan, the CAI board declared a dividend on April 16, 1999 of one
preferred share purchase right for each outstanding CAI common share. The
dividend was payable on April 27, 1999 to the shareholders of record on that
date. Subject to certain terms and conditions contained in the Shareholders
Rights Agreement dated as of April 16, 1999 between CAI and ChaseMellon
Shareholder Services, L.L.C., as rights agent, each right entitles the
registered holder to purchase from CAI one one-hundredth of a share of Series A
Preferred Stock, $.01 par value, of CAI at a price of $96.00 per one
one-hundredth of a share of CAI Series A Preferred Stock, subject to adjustment.
Until the earlier to occur of:
- 10 days following a public announcement that a person or group of
affiliated or associated persons have become an "acquiring person" (as
defined) by acquiring "beneficial ownership" (as defined) of 15% or more
of the outstanding CAI common shares, and
- 10 business days (or such later date as may be determined by the CAI board
prior to the time any person or group of affiliated persons becomes an
acquiring person) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of
affiliated persons of 15% or more of the outstanding CAI common shares (we
refer to the earlier of such dates as the "distribution date"),
the rights will be evidenced, with respect to any of the CAI common share
certificates outstanding as of April 27, 1999, by such CAI common share
certificate together with a copy of the summary of rights distributed to such
holders of CAI common shares. The rights agreement specifically provides that
MCI WorldCom and its affiliates and associates and transferees of all of its CAI
common shares will not be considered to be an "acquiring person."
The rights agreement provides that, until the "distribution date" (or
earlier redemption or expiration of the rights), the rights will be transferred
with and only with the CAI common shares. Until the distribution date (or
earlier redemption or expiration of the rights), new CAI common share
certificates issued after April 27, 1999 upon transfer or new issuances of CAI
common shares will contain a notation incorporating the rights agreement by
reference. Until the distribution date (or earlier redemption or expiration of
the rights), the surrender for transfer of any certificates for CAI common
shares outstanding as of April 27, 1999, even without such notation or a copy of
the summary of rights, will also constitute the transfer of the rights
associated with the CAI common shares represented by such certificate. As soon
as practicable following the distribution date, separate certificates evidencing
the rights will be mailed to holders of record of the CAI common shares as of
the close of business on the distribution date and such separate right
certificates alone will evidence the rights.
The rights are not exercisable until the distribution date. The rights will
expire on April 15, 2009 (which we refer to as the "final acquisition date"),
unless the final expiration date is advanced or extended or unless the rights
are earlier redeemed or exchanged by CAI, in each case as described below.
54
The purchase price payable, and the number of shares of CAI Series A
Preferred Stock or other securities or property issuable, upon exercise of the
rights are subject to adjustment from time to time to prevent dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the CAI Series A Preferred Stock,
- upon the grant to holders of the CAI Series A Preferred Stock of certain
rights or warrants to subscribe for or purchase CAI Series A Preferred
Stock at a price, or securities convertible into CAI Series A Preferred
Stock with a conversion price, less than the then-current market price of
the CAI Series A Preferred Stock, or
- upon the distribution to holders of the CAI Series A Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash
dividends or dividends payable in CAI Series A Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
The number of outstanding rights is also subject to adjustment in the event
of a stock split of CAI common shares or a stock dividend on CAI common shares
payable in CAI common shares or subdivisions, consolidations or combinations of
CAI common shares occurring, in any such case, prior to the distribution date.
Shares of CAI Series A Preferred Stock purchasable upon exercise of the
rights will not be redeemable. Each share of CAI Series A Preferred Stock will
be entitled, when, as and if declared, to a minimum preferential quarterly
dividend payment of $1 per share but will be entitled to an aggregate dividend
of 100 times the dividend declared per CAI common share. In the event of
liquidation, dissolution or winding up of CAI, the holders of the CAI Series A
Preferred Stock will be entitled to a minimum preferential liquidation payment
of $100 per share (plus any accrued but unpaid dividends) but will be entitled
to an aggregate payment of 100 times the payment made per CAI common share. Each
share of CAI Series A Preferred Stock will have 100 votes, voting together with
CAI common shares. Finally, in the event of any merger, consolidation or other
transaction in which CAI common shares are converted or exchanged, each share of
CAI Series A Preferred Stock will be entitled to receive 100 times the amount
received per CAI common share. These rights are protected by customary
antidilution provisions.
Because of the nature of the CAI Series A Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of CAI Series A Preferred Stock purchasable upon exercise of each right
should approximate the value of one CAI common share.
In the event that any person or group of affiliated or associated persons
becomes an acquiring person, each holder of a right, other than rights
beneficially owned by the acquiring person (which will then become void), will
then have the right to receive upon exercise of a right at the then-current
exercise price of the right, that number of CAI common shares having a market
value of two times the exercise price of the right.
In the event that, after a person or group of affiliated persons has become
an acquiring person, CAI is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power is sold,
proper provision will be made so that each holder of a right (other than rights
beneficially owned by an acquiring person which will have become void) will then
have the right to receive, upon their exercise at then-current exercise price of
the right, that number of shares of common stock of the person with whom CAI has
engaged in the transaction (or its parent), which number of shares at the time
of that transaction will have a market value of two times the exercise price of
the right.
55
At any time after any person or group of affiliated persons becomes an
acquiring person and prior to the occurrence of an event described in the prior
paragraph, the CAI board may exchange the rights (other than rights owned by
that person or group of affiliated persons which will have become void), in
whole or in part, at an exchange ratio of one CAI common share, or one
one-hundredth of a share of CAI Series A Preferred Stock (or of a share of a
class or series of the CAI Series A Preferred Stock or preferred stock having
equivalent rights, preferences and privileges), per right (subject to
adjustment).
With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments require an adjustment of at least 1% in
the purchase price. No fractional shares of CAI Series A Preferred Stock will be
issued (other than fractions which are integral multiples of one one-hundredth
of a share of CAI Series A Preferred Stock, which may, at the election of CAI,
be evidenced by depositary receipts) and in lieu of fractions, an adjustment in
cash will be made based on the market price of the CAI Series A Preferred Stock
on the last trading day prior to the date of exercise.
At any time prior to the earlier of:
- the close of business on the tenth day following the "stock acquisition
date" (defined as a public announcement that a person or group of
affiliated persons has become an "acquiring person"), subject to extension
by the CAI board, or
- the close of business on the final expiration date of the rights,
the CAI board may redeem the rights in whole, but not in part, at a price of
$.001 per right.
The redemption of the rights may be made effective at that time, on any
basis and with any conditions as the CAI board in its sole discretion may
establish. Immediately upon any redemption of the rights, the right to exercise
the rights will terminate, and the only right of the holders will be to receive
the redemption price.
For so long as the rights are then redeemable, CAI may, except with respect
to the redemption price, amend the rights in any manner. After the rights are no
longer redeemable, CAI may, except with respect to the redemption price, amend
the rights in any manner that does not adversely affect the interests of holders
of the rights.
Until a right is exercised, the holder, as such, will have no rights as a
shareholder of CAI, including, without limitation, the right to vote or to
receive dividends.
The foregoing summary description of the rights does not purport to be
complete and is qualified in its entirety by reference to the rights agreement,
which has been filed as an exhibit to a Current Report on Form 8-K filed with
the SEC by CAI on April 28, 1999.
56
CHAPTER II--INFORMATION ABOUT THE SPECIAL MEETING
THE SPECIAL MEETING
GENERAL
This proxy statement is being furnished to holders of CAI common shares in
connection with the solicitation of proxies by and on behalf of the CAI board
for use at the special meeting to be held at 10:00 a.m., Eastern time, on August
31, 1999, at The Goodwin Hotel, One Haynes Street, Hartford, Connecticut 06103,
and at any adjournment or postponement thereof. We mailed this proxy statement,
the accompanying notice, proxy card and letter on or about July 30, 1999, to
holders of CAI common shares entitled to notice of, and to vote at, the special
meeting.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, shareholders will be asked to consider and vote on
the merger agreement and the transactions contemplated thereby. The CAI board
has unanimously determined that the merger agreement and the merger and the
other transactions contemplated thereby are fair to and in the best interests of
CAI and its shareholders and has approved the merger agreement. THEREFORE, THE
CAI BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. See "The
Merger--Background of the Merger" and "The Merger--CAI's Reasons for the Merger;
Recommendation of the CAI Board."
WE REQUEST THAT YOU COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY
CARD PROMPTLY TO CAI IN THE ENCLOSED POSTAGE-PAID ENVELOPE. FAILURE TO RETURN A
PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL MEETING WILL HAVE THE
SAME EFFECT AS A VOTE "AGAINST" THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
RECORD DATE; VOTING AT THE SPECIAL MEETING
July 28, 1999 has been fixed as the record date for the determination of the
holders of CAI common shares entitled to receive notice of, and to vote at, the
special meeting. Only shareholders of record at the close of business on that
date will be entitled to receive notice of, and to vote at, the special meeting.
At the close of business on the record date, there were 17,241,379 CAI common
shares outstanding, held by approximately 100 shareholders of record as
determined in accordance with Rule 12g5-1 under the Securities Exchange Act of
1934, as amended.
Shareholders of record on the record date are entitled to one vote per CAI
common share, exercisable in person or by properly executed proxy, upon each
matter properly submitted for the vote of shareholders at the special meeting.
The presence, in person or by properly executed proxy, of the holders of the
outstanding CAI common shares entitling them to exercise a majority of the
voting power is necessary to constitute a quorum at the special meeting.
Abstentions and broker non-votes will be counted as present for the purpose of
determining the presence of a quorum at the special meeting.
The affirmative vote of the holders of two-thirds ( 2/3) of the outstanding
CAI common shares is required to approve the merger agreement. The required vote
of the shareholders on the merger agreement is based on the total number of CAI
common shares outstanding as of the record date. Abstentions and broker
non-votes with respect to voting on the merger will have the effect of a
negative vote.
MCI WorldCom recently completed the acquisition of 10,684,140 CAI common
shares, representing approximately 62.0% of the outstanding CAI common shares
entitled to vote on the merger. MCI WorldCom has agreed to vote its CAI common
shares in favor of the merger. Accordingly, the approval of the holders of only
an additional approximately 4 2/3% of the outstanding CAI common shares will be
required to approve the merger.
57
Holders of CAI common shares on the record date who do not vote in favor of
approving the merger agreement and who otherwise comply with the applicable
procedures of Sections 33-855 through 33-868 of the Connecticut Business
Corporation Act will be entitled to dissenters' rights under Connecticut law in
connection with the merger. Shareholders of CAI who vote in favor of approving
the merger agreement, however, will thereby waive their dissenters' rights. See
"The Merger-- Dissenters' Rights."
The CAI board is not aware of any matters other than the approval of the
merger agreement that may be brought before the special meeting. IF ANY OTHER
MATTERS PROPERLY COME BEFORE THE SPECIAL MEETING, THE PERSONS NAMED IN THE
ACCOMPANYING PROXY CARD WILL VOTE THE SHARES REPRESENTED BY ALL PROPERLY
EXECUTED PROXIES ON SUCH MATTERS IN SUCH MANNER AS IS DETERMINED BY THE PROXY
COMMITTEE. Members of the Proxy Committee are Messrs. Jared E. Abbruzzese and
John B. Newman of the CAI board.
PROXIES, REVOCATION OF PROXIES
Because many of CAI's shareholders are unable to attend shareholders'
meetings, the CAI board solicits proxies to give each shareholder an opportunity
to vote on the proposal to approve the merger agreement, which is set forth in
this proxy statement. You are urged to read carefully the material in this proxy
statement; specify your choice on the proposal by marking the appropriate box on
the enclosed proxy card; and sign, date and return the card in the enclosed
postage-paid envelope. If you do not specify a choice and the card is properly
executed and returned, the shares will be voted by the Proxy Committee "FOR" for
the proposal to approve the merger agreement and the transactions contemplated
thereby. The Proxy Committee will vote "FOR" the approval of the merger
agreement and the transactions contemplated thereby with respect to all properly
executed proxies that are not timely revoked unless it receives contrary
instructions.
You can revoke your proxy by:
- delivering to the corporate secretary of CAI, at or before the special
meeting, a written instrument bearing a later date than the proxy, which
instrument, by its terms, revokes the proxy,
- duly executing a subsequent proxy relating to the same shares and
delivering it to the corporate secretary of CAI at or before the special
meeting or
- attending the special meeting and casting a contrary vote.
Attendance at the special meeting without taking other affirmative action as
previously described will not constitute a revocation of a proxy. Any written
instrument revoking a proxy should be sent to: CAI Wireless Systems, Inc., 18
Corporate Woods Boulevard, Third Floor, Albany, New York 12211, Attention:
Corporate Secretary.
If a quorum is not obtained, or if fewer CAI common shares than the number
required are voted in favor of approving the merger agreement, it is expected
that the special meeting will be postponed or adjourned in order to permit
additional time for soliciting and obtaining additional proxies or votes. At any
subsequent reconvening of the special meeting, all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the special meeting, except for any proxies that have been revoked or withdrawn.
In the absence of a quorum, the special meeting may be adjourned from time to
time by the holders of a majority of the shares represented at the special
meeting in person or by proxy.
The obligations of CAI and MCI WorldCom to consummate the merger are subject
to, among other things, the condition that the shareholders of CAI, by a
two-thirds vote, approve the merger agreement and the transactions contemplated
thereby. See "Summary of the Merger Agreement-- Conditions to Closing."
58
DO NOT FORWARD ANY CERTIFICATES REPRESENTING COMMON SHARES WITH YOUR PROXY
CARD. IF THE MERGER IS CONSUMMATED, DELIVER YOUR CERTIFICATES IN ACCORDANCE WITH
INSTRUCTIONS SET FORTH IN A LETTER OF TRANSMITTAL, WHICH MCI WORLDCOM WILL SEND
TO YOU PROMPTLY AFTER THE EFFECTIVE TIME OF THE MERGER.
SOLICITATION OF PROXIES
CAI will pay all costs of soliciting proxies in the accompanying form from
shareholders. In addition to soliciting proxies by mail, directors, officers and
employees of CAI may solicit proxies by telephone, by telegram, or in person,
but will not receive additional compensation for doing so. In addition, CAI has
retained The Altman Group, 60 East 42nd Street, Suite 1241, New York, New York
10165, to assist CAI in the solicitation of proxies from brokerage firms and
other custodians, nominees and fiduciaries. The Altman Group, Inc. will be paid
a fee estimated at $20,000, plus reimbursement of expenses. We will arrange with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of CAI common shares held of
record by such persons, and CAI will reimburse such brokerage firms, custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection therewith. In addition, certain directors, officers, employees and
representatives of MCI WorldCom, who may include financial advisors, may solicit
proxies by telephone, telegram or in person but will not receive additional
compensation for doing so.
CERTAIN INFORMATION REGARDING CAI
THIS SECTION OF THE PROXY STATEMENT SUMMARIZES THE BUSINESS OF CAI. TO FULLY
UNDERSTAND THE BUSINESS, WE STRONGLY ENCOURAGE YOU TO READ CAREFULLY THE
DOCUMENTS WE HAVE IDENTIFIED IN "CHAPTER III" AS DOCUMENTS WHICH CAI PREVIOUSLY
FILED WITH THE SEC. FOR INFORMATION ON HOW TO OBTAIN THE DOCUMENTS WE HAVE FILED
WITH THE SEC, SEE "WHERE YOU CAN FIND MORE INFORMATION" IN "CHAPTER III."
GENERAL
CAI is a Connecticut corporation, with its principal executive offices at 18
Corporate Woods Boulevard, Albany, New York 12211. CAI also maintains offices at
101 Ponds Edge Drive, Suite 300, Chadds Ford, Pennsylvania 19317, where its
accounting department is located, and at 2101 Wilson Boulevard, Suite 100,
Arlington, Virginia 22201, where its engineering and regulatory affairs
departments are located. CAI, primarily through its operating subsidiaries,
provided subscription television services to approximately 32,300 subscribers,
as of March 31, 1999, in six markets utilizing MMDS spectrum. Additionally, CAI
provides high-speed Internet access on a wholesale basis in Boston, New York
City and Rochester, New York, utilizing MMDS spectrum. CAI believes that there
are a total of approximately 16.1 million estimated total service area
households in 14 primary markets where it has significant MMDS spectrum.
CAI CHAPTER 11 CASE
On July 30, 1998, CAI and one of its wholly-owned subsidiaries, Philadelphia
Choice Television, Inc., a Delaware corporation, filed voluntary petitions for
relief under Chapter 11, Title 11 of the United States Code with the United
States Bankruptcy Court for the District of Delaware, Wilmington, Delaware. The
bankruptcy cases of CAI and Philadelphia Choice were jointly administered, for
procedural purposes only, before the bankruptcy court under Case No. 98-1765
(JJF). Pursuant to Sections 1107 and 1108 of the bankruptcy code, CAI and
Philadelphia Choice, as debtors and debtors-in-possession, managed and operated
their assets and businesses pending the September 30, 1998 confirmation of a
joint reorganization plan under the supervision and orders of the bankruptcy
court. The companies filed the plan of reorganization with the bankruptcy court
on July 30, 1998 and with the SEC on a Current Report on Form 8-K on July 2,
1998.
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The primary purpose of the CAI plan of reorganization was to restructure
CAI's capital structure in order to align its capital with its present and
future operating prospects. In addition, CAI anticipated that the restructuring
would serve as the vehicle for the prompt and efficient sale by CAI, and
distribution of the proceeds of the sale and assignment by Philadelphia Choice
Television pursuant to Section 363(b) of the United States Bankruptcy Code, of
approximately 64 contracts (16 by CAI and 48 by Philadelphia Choice) to provide
cable television programming to certain multi-dwelling units in the
Philadelphia, PA market to an unaffiliated third party.
Prior to the commencement of CAI's reorganization, the funds generated by
CAI were insufficient to meet its then-existing debt service requirements. The
restructuring reduced significantly the principal amount of CAI's outstanding
indebtedness by converting a substantial portion of CAI's indebtedness into new
CAI common shares. By offering the holders of its 12 1/4% Senior Notes due 2002
ninety-one percent (91%) of the equity of CAI on a post-bankruptcy basis, CAI
intended that such holders would participate in the long-term appreciation of
CAI's business, which CAI expected would be enhanced by the reduction of its
debt service and the implementation of the new business plan focusing on
identifying one or more strategic partners interested in utilizing CAI's MMDS
spectrum in a take-or-pay or other business relationship. The CAI plan of
reorganization contemplated that CAI's general unsecured creditors, including
trade creditors and MMDS spectrum lessors, would not be impaired by the CAI
bankruptcy. Consequently, during the CAI bankruptcy case, CAI paid in the
ordinary course all general unsecured claims, including the claims of trade
creditors, and continued to operate its business in the ordinary course.
CAI implemented a "pre-packaged" bankruptcy, which means that CAI solicited
and received the required impaired creditor approvals prior to filing a
bankruptcy petition. Specifically, CAI sought and received the requisite
approval of the holders of its 12 1/4% Senior Notes due 2002 and the holders of
certain subordinated indebtedness of CAI. CAI did not solicit the vote of its
shareholders, for whom CAI's plan of reorganization provided no right to receive
or retain any property of CAI post-reorganization. Once CAI received the
requisite acceptances, it filed a bankruptcy petition on July 30, 1998.
A confirmation hearing was held in the bankruptcy court on September 9,
1998. CAI's plan of reorganization was confirmed on September 30, 1998 and
consummated on October 14, 1998. Under CAI's confirmed plan of reorganization,
each holder of the 12 1/4% Senior Notes received a pro rata portion of
$212,909,624 aggregate principal amount at maturity ($100,000,000 aggregate
principal amount at issuance) of 13% Senior Notes due 2004, 91% of the equity of
reorganized CAI and approximately $17,000,000 in cash. Holders of subordinated
indebtedness claims against CAI received a pro rata portion of 9% of the equity
of reorganized CAI. All equity received by the CAI debtholders was subsequently
diluted by equity reserved for issuance upon the exercise of options granted to
members of CAI's senior management and for equity of reorganized CAI issued in
connection with the senior secured credit facility CAI then obtained. See "CAI
Secured Facility" beginning on page 61 below.
Because the CAI plan of reorganization did not contemplate any recovery for
equity-based claims against, or interests in, CAI, the U.S. Bankruptcy Code
deemed such class to have rejected CAI's plan of reorganization, without the
necessity of soliciting the vote of such class. Equity holders included all
holders of CAI common stock immediately prior to the bankruptcy, as well as
holders of options, warrants, preferred stock and claims against CAI that were
based upon or arose out of the purchase and sale of equity securities of CAI at
any time prior to the bankruptcy. The confirmation of CAI's plan of
reorganization by the bankruptcy court on September 30, 1998 extinguished all
such equity claims against CAI, and on October 14, 1998, in connection with
consummating the bankruptcy, CAI amended its certificate of incorporation to
delete the existence of the old common stock and authorized 25,000,000 shares of
new common stock, par value $.01 per share, for issuance in accordance with the
plan of reorganization.
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In connection with the CAI bankruptcy, CAI consummated a $60,000,000
Debtor-in-Possession, or DIP, financing provided by Merrill Lynch Global
Allocation Fund, Inc. ("MLGAF"). The DIP financing was governed by an Amended
and Restated Note Purchase Agreement dated as of July 30, 1998 between CAI and
MLGAF, a copy of which was filed as an exhibit to CAI's Current Report on Form
8-K dated August 3, 1998 and filed with the SEC on August 4, 1998. Indebtedness
under the DIP facility was evidenced by certain promissory notes, which accrued
interest at 13% per annum and had a maturity date of January 29, 1999.
Of the $60,000,000 provided to CAI under the DIP facility, $49,105,894
represented the outstanding principal, interest and fees due to the MLGAF under
a prior note purchase agreement among CAI, certain of its subsidiaries and
MLGAF. All such amounts outstanding under that note purchase agreement were
converted into DIP notes as if there had been a purchase thereof under the DIP
agreement in the amount of $49,105,894. The remaining $10,894,106 was made
available to CAI for its use during the CAI bankruptcy, in accordance with the
terms of an approved budget.
On October 14, 1998, in connection with consummating CAI's plan of
reorganization, all outstanding amounts under the DIP facility, including the
$60,000,000 aggregate principal amount, accrued and unpaid interest in the
amount of $1,646,667 and a $600,000 commitment fee, were repaid out of the
proceeds of the senior secured credit facility described below.
Although CAI has emerged from bankruptcy, there continues to be substantial
doubt as to its ability to continue as a going concern. Reference is made to
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" beginning on page 103 of this proxy statement and the Report of
Independent Auditors and the Report of the Independent Public Accountants
included with the CAI financial statements herein.
CAI's consolidated financial statements included herein have been prepared
on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities and commitments in the
normal course of business. The appropriateness of reporting on a going concern
basis is dependent upon, among other things, future operations and the ability
to generate sufficient cash from operations and financing sources to meet
obligations.
CAI SECURED FACILITY
GENERAL. On October 14, 1998, in connection with consummating the CAI
bankruptcy, CAI obtained an $80,000,000 secured credit facility from MLGAF. CAI
realized net proceeds from that secured facility of $15,953,000, after repaying
all outstanding amounts under its financing and certain commitment fees
associated with the facility. The secured facility is governed by the terms of a
Note Purchase Agreement dated October 14, 1998. CAI filed a copy of the note
purchase agreement with the SEC as an exhibit to CAI's Current Report on 8-K
dated October 15, 1998. The secured facility consists of two tranches: Tranche A
and Tranche B. Tranche A is a $30,000,000 senior secured loan due October 14,
2000 bearing interest at 10.5% compounded semi-annually and evidenced by a
Senior Secured A Note. CAI granted a first priority lien on and security
interest in and to all of its assets to secure performance of CAI's obligations
with respect to Tranche A. Tranche B is a $50,000,000 senior secured loan due
October 14, 2000 bearing interest at 13% per annum and evidenced by a Senior
Secured B Note. When we refer in this section to the "Senior Secured Notes" we
mean both the Senior Secured A Note and the Senior Secured B Note. CAI granted a
second priority lien on and security interest in and to all of its assets to
secure performance of its obligations with respect to Tranche B.
GUARANTIES. In addition to the liens granted by CAI, substantially all of
CAI's subsidiaries have guaranteed the obligations of CAI with respect to the
secured facility. The subsidiaries have granted a lien on and security interest
in and to all of their respective assets to secure their performance under such
subsidiary guaranties.
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FEES. The secured facility is a two-year credit facility, maturing on
October 14, 2000. CAI was required to pay a 1% facility fee equal to $300,000 on
the Tranche A amount at the closing of the CAI secured facility. In addition,
CAI is required to pay an 8% facility fee equal to $4,000,000 on the Tranche B
amount. CAI paid $1,500,000 of that 8% facility fee at the closing of the
secured facility. The remaining $2,500,000 balance of the Tranche B facility fee
is payable at maturity of the CAI secured facility (by its term, acceleration,
or otherwise).
CERTAIN COVENANTS. The CAI secured facility contains, among others, the
following affirmative covenants:
- notice and copies of financial and business information, including but not
limited to requested information about CAI and its subsidiaries, auditor's
reports, SEC and other reports, notice of default or events of default,
material adverse change in CAI and its subsidiaries, litigation, and
Employee Retirement Income Security Act of 1974 matters;
- compliance with law;
- maintenance of insurance;
- maintenance of properties and assets;
- payment of taxes and claims;
- performance of material obligations;
- preservation of corporate existence;
- maintenance and inspection of books and records;
- use of proceeds;
- capital stock;
- full cooperation;
- obligations of additional obligors;
- payment of fees;
- maintenance of separateness of the obligors and subsidiaries;
- performance of material contracts;
- maintenance of accounts;
- tower site leases, channel leases and programming agreements; and
- blue sky survey.
The CAI secured facility contains certain restrictive covenants that may
have a negative effect on CAI's business or results of operations. Specifically,
the CAI secured facility prohibits CAI from: incurring additional indebtedness
or issuing capital stock, granting liens on or pledging any of its property to
secure repayment of indebtedness, declaring dividends to the CAI shareholders or
redeeming or purchasing any of its own stock, making investments that are not
previously approved by the secured lender, canceling or terminating any MMDS
spectrum license or material contract (including contracts relating to MMDS
spectrum), and making any capital expenditures that are not previously
contemplated by a budget submitted by CAI to the secured lender from time to
time throughout the term of the secured facility. In addition, the CAI secured
facility contains, among others, the following negative, restrictive covenants
which limit:
- transactions with affiliates;
- lease obligations;
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- mergers, consolidations, sales of assets and other, similar transactions;
- prepayments of indebtedness;
- changes in fiscal year;
- speculative real estate investments;
- asset purchases;
- line of business;
- termination of employer plans;
- Investment Company Act;
- press releases;
- creation of subsidiaries;
- employment contracts;
- amendment to confirmation order; and
- becoming a general partner.
The note purchase agreement provides that certain events are "events of
default," including if:
- CAI defaults in the payment of any principal on any secured note when the
same becomes due and payable, whether by scheduled maturity or at a date
fixed for prepayment or repurchase or by declaration, demand or otherwise;
or
- CAI defaults in the payment of any interest on any secured note, or any
obligor thereon defaults in the payment of any other amount owing under
any of the note documents, when the same becomes due and payable, whether
by scheduled maturity or at a date fixed for prepayment or repurchase or
by declaration, demand or otherwise; or
- CAI defaults in the performance of or compliance with any term, covenant
or agreement contained in the note purchase agreement on its part to be
performed or complied with; or
- any obligor defaults in the performance of or compliance with any term,
covenant or agreement contained in any of the note documents (other than
specified terms, covenants and agreements) on its part to be performed or
complied with and such default remains unremedied for 5 days after the
earlier of the first date on which (i) a responsible officer of the
obligor becomes aware of such default and (ii) CAI receives written notice
of such default from any holder of a secured note; or
- any representation or warranty made or deemed made by or on behalf of any
obligor or by any officer of any obligor under or in connection with the
note purchase agreement or any other note document or in any writing
furnished in connection with the issuance of the secured notes proves to
have been false or incorrect in any material respect on the date as of
which it was made or deemed to have been made; or
- CAI or any of its subsidiaries fails to pay any principal of, premium or
interest on or any other amount payable in respect of, any indebtedness
that is outstanding in a principal or notional amount of at least
$1,500,000 (or the equivalent thereof in one or more other currencies),
either individually or in the aggregate (but excluding indebtedness
outstanding under the note purchase agreement), of CAI and its
subsidiaries, when the same becomes due and payable (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise), and
such failure continues after the applicable grace period, if any,
specified in the agreement or instrument
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relating to such indebtedness; or any other event occurs or condition
exists under any agreement or instrument evidencing, securing or otherwise
relating to any such indebtedness and continues after the applicable grace
period, if any, specified in such agreement or instrument, if the effect
of such event or condition is to accelerate, or to permit the acceleration
of, the maturity of such indebtedness or otherwise to cause, or to permit
the holder or holders thereof (or a trustee or agent on behalf of such
holders) to cause such indebtedness to mature; or any such indebtedness is
declared to be due and payable or required to be prepaid or redeemed
(other than by a regularly scheduled required prepayment or redemption),
purchased or defeased, or an offer to prepay, redeem, purchase or defease
such indebtedness is required to be made, in each case prior to the stated
maturity thereof; or
- CAI or any of its subsidiaries generally does not pay its debts as such
debts become due, or admits in writing its inability to pay its debts
generally, or makes a general assignment for the benefit of creditors; or
any proceeding is instituted by or against CAI or any of its subsidiaries
seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation,
winding up, reorganization, arrangement, adjustment, protection, relief,
or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry of
an order for relief or the appointment of a receiver, trustee or other
similar official for it or for any substantial part of its property and
assets and, in the case of any such proceeding instituted against it (but
not instituted by it) that is being diligently contested by it in good
faith, either such proceeding remains undismissed or unstayed for a period
of 30 days or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against, or the
appointment of a receiver, trustee, custodian or other similar official
for, it or any substantial part of its property and assets) occurs, or CAI
or any of its subsidiaries takes any corporate action to authorize certain
specified actions; or
- one or more judgments or orders for the payment of money aggregating
$1,000,000 (or the equivalent thereof in one or more other currencies) or
more are rendered against one or more of CAI and its subsidiaries and
remain unsatisfied and either (i) enforcement proceedings are commenced by
any creditor upon any such judgment or order or (ii) there is a period of
at least 30 days after entry thereof during which a stay of enforcement of
any such judgment or order, by reason of a pending appeal or otherwise, is
not in effect; PROVIDED, HOWEVER, that any such judgment or order shall
not give rise to an event of default if and for so long as (A) the amount
of such judgment or order is covered by a valid and binding policy of
insurance between the defendant and the insurer covering full payment
thereof and (B) such insurer has been notified, and has not disputed the
claim made for payment, of the amount of such judgment or order; or
- any provision of any note document after delivery thereof for any reason
(other than pursuant to the express terms thereof) ceases to be valid and
binding on or enforceable against any obligor intended to be a party to it
or to give the lender or its agent any of the rights, powers or privileges
purported to be created thereunder, or any such obligor so states in
writing; or
- any document relating to collateral pledged by CAI and its subsidiaries in
connection with the secured notes after delivery thereof for any reason
(other than pursuant to the terms thereof) ceases to create a valid and
perfected first priority lien on and security interest in the collateral
purported to be covered thereby; or
- certain events occur relating to plans governed by ERISA; or
- any event occurs after October 14, 1998, the date on which CAI consummated
its reorganization plan, which results in a material adverse change to CAI
and its subsidiaries; or
- a material disruption occurs in the senior management of CAI or a material
change occurs in the composition of the CAI board; or
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- the confirmation order entered in connection with CAI's bankruptcy case
fails to be in full force and effect; or
- any person (other than any holder of more than 50% of the aggregate
principal amount of secured notes outstanding at such time) or two or more
persons (other than two or more holders of more than 50% of the aggregate
principal amount of secured notes outstanding at such time) acting in
concert acquires beneficial ownership (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934), directly or indirectly, of
voting stock of CAI (or other securities convertible into voting stock)
representing 35% or more of the combined voting power of all voting stock
of CAI; or (ii) any person (other than any holder of more than 50% of the
aggregate principal amount of secured notes outstanding at such time) or
two or more persons (other than two or more holders of more than 50% of
the aggregate principal amount of the secured notes outstanding at such
time) acting in concert acquires by contract or otherwise, or enters into
a contract or arrangement that, upon consummation, will result in its or
their acquisition of the power to exercise, directly or indirectly, a
controlling influence over the management or policies of CAI; or
- any default occurs under the 13% senior note indenture.
CAI COMMON SHARES ISSUED TO MLGAF. CAI issued 2,241,379 CAI common shares
to MLGAF as additional consideration to MLGAF for providing the secured
facility. The additional CAI common shares issued to MLGAF represented 13% of
the total CAI common shares issued and outstanding on October 14, 1998, and
increased the ownership percentage of MLGAF to approximately 48% of the
outstanding CAI common shares. (The foregoing is a summary of certain terms of
the secured facility and is qualified in its entirety by reference to the note
purchase agreement, which CAI filed as an exhibit to its Current Report Form 8-K
dated October 15, 1998.) See the information with respect to beneficial
ownership of CAI common shares beginning on page 79 of this proxy statement.
MCI WORLDCOM ACQUISITION OF CAI SECURED FACILITY. MCI WorldCom currently
holds the $80,000,000 aggregate principal amount of Senior Secured Notes of CAI.
MCI WorldCom closed its acquisition of the Senior Secured Notes on March 26,
1999, at which time MCI WorldCom was assigned all rights, title and interest in
and to the Senior Secured Notes, and assumed all of the seller's obligations
under the Senior Secured Notes and the Note Purchase Agreement. See "Chapter
I--The Merger--Interests of Certain Persons in the Merger-Description of CAI and
CS Wireless Securities Owned by MCI WorldCom--Senior Secured Notes Due 2000"
beginning on page 35 of this proxy statement.
CAI'S 13% SENIOR NOTES DUE 2004
In connection with the consummation of the CAI bankruptcy, CAI issued
$212,909,624 aggregate principal amount at maturity of 13% Senior Notes due
2004. The senior notes were issued under an indenture dated as of October 14,
1998 between CAI and State Street Bank and Trust Company, as Trustee. The
following summary of the material provisions of the indenture does not purport
to be complete, and we strongly encourage you to read the indenture, as it is
the legal document that governs the CAI senior notes. A copy of the indenture is
filed as Exhibit 4.1 to CAI's Current Report on Form 8-K filed with the SEC on
October 15, 1998.
GENERAL. The senior notes are unsecured senior obligations of CAI and rank
PARI PASSU with all unsecured indebtedness of CAI which is not by its terms
expressly subordinated to the senior notes. The senior notes are effectively
subordinated to all indebtedness and other liabilities (including trade
payables) of CAI's subsidiaries, and are effectively subordinated to all secured
indebtedness of CAI to the extent of the value of the assets securing such
indebtedness.
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MATURITY, INTEREST AND PRINCIPAL. The senior notes are limited to an
aggregate principal amount at maturity of $212,909,624 and will mature on
October 14, 2004. The senior notes accrete in value from October 14, 1998 to
October 14, 2004, at a rate of 13% per annum, compounded semi-annually. Cash
interest on the senior notes will neither accrue nor be payable prior to
maturity. CAI will pay interest on overdue principal from time to time on demand
at the rate of 15% per annum. CAI shall, to the extent lawful, pay interest on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the rate of 15% per annum. Interest is
computed on the basis of a 360-day year comprised of twelve 30-day months, and,
in the case of a partial month, the actual number of days elapsed.
The senior notes are not entitled to the benefit of any mandatory sinking
fund.
OPTIONAL REDEMPTION. The senior notes are redeemable, at the option of CAI,
in whole or in part, at any time on not less than 30 nor more than 60 days'
prior notice, at a redemption price equal to the accreted value of the senior
notes.
SELECTION AND NOTICE. The indenture provides that in the event that less
than all of the senior notes are to be redeemed at any time, selection of such
senior notes for redemption will be made by the Trustee PRO RATA, by lot or by
such method as the Trustee shall deem fair and appropriate.
CERTAIN COVENANTS. The indenture contains certain restrictive covenants
that may have a negative effect on CAI's business or results of operations.
Specifically, the indenture prohibits CAI from: incurring additional
indebtedness or issuing certain types of capital stock prior to raising at least
$25,000,000 in equity financing and maintaining a specific debt ratio, granting
liens on or pledging any of its property to secure repayment of indebtedness,
declaring dividends to the CAI shareholders or redeeming or purchasing any of
its own stock, making certain investments, and selling assets, unless such asset
sale is conducted in accordance with the indenture and the proceeds from such
sale are applied in the manner specified by the indenture, which application
requires the redemption of 13% senior notes in certain circumstances. In
addition, the indenture contains, among others, covenants relating to the
following:
- payment of securities;
- maintenance of office or agency;
- corporate existence;
- payment of taxes and other claims;
- maintenance of properties; insurance; books and records; compliance with
law;
- compliance certificate;
- SEC reports;
- limitation on issuance and sale of capital stock of restricted
subsidiaries and permitted joint ventures;
- limitation on transactions with affiliates;
- limitation on restricted and unrestricted subsidiaries;
- limitation on dividends and other payment restrictions affecting
restricted subsidiaries and permitted joint ventures;
- limitation on sale and leaseback transactions;
- limitation on line of business; and
- waiver of stay, extension or usury laws.
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EVENTS OF DEFAULT. The indenture provides that certain events are "events
of default," including:
- the failure to pay the principal or accreted value of any senior note when
such principal or accreted value becomes due and payable, at maturity,
upon acceleration, redemption, pursuant to a required offer to purchase or
otherwise;
- a default in the observance or performance of any other covenant or
agreement contained in the senior notes or the indenture which default
continues for a period of 60 days after CAI receives written notice
thereof from the Trustee;
- default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any indebtedness
for money borrowed by CAI or certain of its subsidiaries (or the payment
of which is guaranteed by CAI or certain of its subsidiaries), whether
such indebtedness or guarantee now exists, or is created after the issue
date of the senior notes, which default:
-- is caused by a failure to pay when due principal on such indebtedness
within the grace period provided in such indebtedness (which failure
continues beyond any applicable grace period), or
-- results in the acceleration of such indebtedness prior to its express
maturity and, in each case, the principal amount of any such
indebtedness, together with the principal amount of any other such
indebtedness under which there has been a payment default or the
maturity of which has been so accelerated, aggregates $5,000,000 or
more;
- one or more judgments in an aggregate amount in excess of $5,000,000
(unless covered by insurance by a reputable insurer as to which the
insurer has acknowledged coverage) being rendered against CAI or certain
of its subsidiaries and such judgments remain undischarged or unstayed for
a period of 60 days after such judgment or judgments become final and
non-appealable;
- certain events of bankruptcy, insolvency or reorganization affecting CAI
or any of its subsidiaries; or
- if any holder of at least $5,000,000 in aggregate principal amount of
indebtedness of CAI or certain of its subsidiaries shall foreclose upon
assets of CAI or certain of its subsidiaries having an aggregate fair
market value, individually or in the aggregate, of at least $5,000,000 or
shall have exercised any right under applicable law or applicable security
documents to take ownership of any such assets in lieu of foreclosure.
The indenture provides that in the event of an event of default, the Trustee
may, or the holders of at least 25% in principal amount of outstanding senior
notes may, declare the accreted value of all the senior notes to be due and
payable by notice in writing to CAI and the Trustee specifying the respective
event of default and that it is a "notice of acceleration" and upon such
declaration the same shall become immediately due and payable, notwithstanding
anything contained in the senior notes or the indenture to the contrary. If an
event of default with respect to bankruptcy proceedings relating to CAI occurs
and is continuing, then such amount will automatically become and be immediately
due and payable without any declaration or other act on the part of the Trustee
or any holder of the senior notes. Holders of the senior notes may not enforce
the indenture or the senior notes except as provided in the indenture. Subject
to certain limitations, holders of not less than a majority in aggregate
principal amount of the then-outstanding senior notes may direct the Trustee in
its exercise of any trust or power. If an event of default occurs and is
continuing and is known to the Trustee, the Trustee must mail to each holder of
the senior notes notice of the event of default within 10 days. The Trustee may
withhold from holders of the senior notes notice of any continuing event of
default (except
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an event of default relating to the payment of principal or interest or a
failure to comply with certain covenants) if it determines that withholding
notice is in their interest.
The indenture provides that, at any time after a declaration of acceleration
as described in the preceding paragraph but before a judgment or decree of money
due in respect of the senior notes has been obtained, the holders of not less
than a majority in principal amount of the senior notes then outstanding by
written notice to CAI and the Trustee may rescind such declaration and its
consequences if:
- CAI has paid or deposited with the Trustee a specified sum of money
sufficient to pay all amounts then due under the indenture;
- the rescission would not conflict with any court judgment or decree; and
- all events of default, other than the non-payment of principal of,
premium, if any, and interest on the senior notes that have become due
solely by such declaration of acceleration, have been cured or waived.
Prior to the declaration of acceleration, the holders of not less than a
majority in principal amount of the senior notes may waive any existing event of
default under the indenture, and its consequences, except a default in the
payment of the principal of or interest on any senior notes or any default in
respect of any covenant which cannot be amended without the consent of each
holder affected.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE. The indenture provides that
CAI may, at its option and at any time, terminate the obligations of CAI with
respect to the outstanding senior notes, a right called "defeasance," which
means that CAI will be deemed to have paid and discharged the entire
indebtedness represented by the outstanding senior notes, except for:
- the rights of holders of outstanding senior notes to receive payment in
respect of the principal of, premium, if any, and interest on those senior
notes when such payments are due,
- CAI's obligations to issue temporary senior notes, register the transfer
or exchange of any senior notes, replace mutilated, destroyed, lost or
stolen senior notes and maintain an office or agency for payments in
respect of the senior notes,
- the rights, powers, trusts, duties and immunities of the Trustee, and
- the defeasance provisions of the indenture.
In addition, CAI may, at its option and at any time, elect to terminate its
obligations with respect to certain covenants, a right called "covenant
defeasance," that are set forth in the indenture, and any subsequent failure to
comply with those obligations will not constitute an event of default with
respect to the senior notes.
The indenture contains specific requirements that CAI must meet to exercise
either defeasance or covenant defeasance.
MODIFICATION OF THE INDENTURE. The indenture provides that CAI, when
authorized by a board resolution, and the Trustee may amend, waive or supplement
the indenture or the senior notes without notice to or consent of any holder in
certain circumstances. However, the Trustee and CAI may not make any change that
adversely affects the rights of any holder under the indenture. Other
modifications and amendments of the indenture or the senior notes may be made
with the consent of the holders of not less than a majority in aggregate
principal amount of the then-outstanding senior notes, except that the consent
of each holder of the senior notes affected thereby is required for amendments
to, or waivers of, certain provisions of the indenture, including provisions
relating to the amount of senior notes outstanding, the applicable interest rate
and the timing of any payments due under the senior notes and the indenture.
68
HISTORICAL BACKGROUND
CAI was formed in 1991 to invest in and operate MMDS subscription television
systems. Initially, CAI focused on the development of analog MMDS subscription
television systems in major metropolitan markets, primarily in the northeast and
mid-Atlantic regions of the United States. Starting with an operating analog
system in Albany, NY, and systems planned for Rochester, NY, Norfolk, VA,
Hartford, CT and Boston, MA, CAI made its initial public offering of common
stock on February 17, 1994, raising $34,782,000, after deduction of underwriting
discounts and commissions. CAI used the proceeds of the initial public offering
for capital expenditures and operating expenses incurred in connection with the
construction, launch, and development of the Rochester system, the acquisition,
construction, launch and development of the Norfolk system, the upgrading and
further development of the Albany system, and the launch and development of the
Hartford system.
Prior to the CAI bankruptcy, CAI's common stock was listed under the symbol
"CAWS" on various Nasdaq markets until trading of that common stock was
transferred to the Electronic Bulletin Board system on January 13, 1998.
Immediately prior to filing for bankruptcy, CAI had 40,543,039 shares of common
stock issued and outstanding, which shares were canceled in connection with the
consummation of the bankruptcy. The CAI common shares currently trade in the
over-the-counter market on the electronic bulletin board under the symbol
"CWSS." As of the date of this proxy statement, there are 17,241,379 CAI common
shares issued and outstanding.
CAI believed that the MMDS spectrum had greater potential than simply the
delivery of analog subscription video services. It also recognized that expanded
use of MMDS spectrum presented several challenges, including substantial
development costs, lack of brand identity and infrastructure, and the absence of
head-end and customer premises equipment designed and manufactured for use with
MMDS spectrum. To address many of these issues, CAI devised a business plan that
required one or more strategic partners that would purchase MMDS spectrum
capacity from CAI. CAI identified the regional bell operating companies
("RBOCs") as likely partners. CAI believed that RBOCs would be interested in
developing a digital video strategy using a delivery platform that could be
implemented faster than the contemplated plant upgrades many RBOCs faced in
order to offer enhanced services. CAI targeted Bell Atlantic Corporation and
NYNEX Corporation and began to negotiate a strategic relationship.
Simultaneously with these negotiations, CAI began to acquire additional MMDS
spectrum to attempt to replicate the Bell Atlantic/NYNEX operating territories.
Through a series of acquisitions culminating in the September 29, 1995
acquisition of ACS Enterprises, Inc., an MMDS operator based in Philadelphia,
Pennsylvania (with operating systems in Philadelphia, Cleveland, Ohio and
Bakersfield, California), and Eastern Cable Networks of Washington, Inc., which
operated the Washington, D.C. MMDS system, CAI aggregated a significant amount
of owned and leased MMDS spectrum in the Bell Atlantic/NYNEX operating
territories. CAI enhanced its spectrum capacity during 1996 by being the top
bidder in an FCC auction with bids totaling $36.2 million for the Basic Trading
Area ("BTA") rights for its existing markets as well as for certain new markets.
Joint venture negotiations with Bell Atlantic and NYNEX culminated in the
March 1995 execution of a Business Relationship Agreement and a Securities
Purchase Agreement with affiliates of Bell Atlantic and NYNEX. By the end of
September 1995, CAI completed the transactions contemplated by these agreements,
including the purchase on May 9, 1995 by Bell Atlantic and NYNEX of $30 million
of convertible debt and warrants to purchase convertible voting preferred stock
of CAI. On September 29, 1995, Bell Atlantic and NYNEX purchased $70 million of
14% senior convertible preferred stock and additional warrants. The CAI
securities purchased by Bell Atlantic and NYNEX entitled them to own
approximately 45% of CAI if Bell Atlantic and NYNEX had exercised all of the
conversion rights of the securities and made an additional investment in CAI, at
that time, of approximately $202 million.
69
Simultaneous with the consummation of these transactions, CAI raised
approximately $266 million, through an offering of $275 million in aggregate
principal amount of its 12 1/4% Senior Notes due 2002. The proceeds from the
issuance and sale of the 12 1/4% Senior Notes were used by CAI to fund the cash
portion of certain acquisitions, to fund a debt service escrow account required
under the indenture governing the terms of the 12 1/4% Senior Notes, to fund
capital expenditures, and for working capital and other general corporate
purposes.
In connection with the Bell Atlantic/NYNEX joint venture, CAI substantially
completed the construction of digital video delivery systems in Boston, MA and
Hampton Roads, VA. Through December 12, 1996, however, neither Bell Atlantic nor
NYNEX elected to launch a video service in these or any other CAI market. During
the construction of these systems, the environment in which the RBOCs decided to
pursue a subscription video strategy was changing dramatically. CAI believes
that Bell Atlantic and NYNEX decided to alter their video strategy as a result
of (a) the Telecommunications Act of 1996 which, among other things, permitted
RBOCs to enter the long distance business under certain circumstances, (b) Bell
Atlantic's and NYNEX's announced plans to merge, and (c) the acknowledgment by
certain cable companies that their plans to deploy the "Information
Superhighway" complete with phone service and expanded cable services, were
substantially behind anticipated schedules. With these changes, CAI began to
realize that Bell Atlantic/ NYNEX's priorities were shifting away from
subscription video, and any commitment these entities had to the CAI joint
venture. In response, CAI devised a plan that would allow it to re-focus its
efforts and seek to sever all relationships it then had with Bell
Atlantic/NYNEX.
On December 12, 1996, CAI and Bell Atlantic and NYNEX reached an agreement
modifying certain terms of the joint venture and providing CAI or its designee
with the right to acquire the securities originally issued to Bell Atlantic and
NYNEX. This agreement was subsequently amended on April 29, 1997 to provide CAI
with an option to repurchase the $100 million face amount of CAI securities held
by Bell Atlantic and NYNEX. The repurchase consideration contemplated was $40
million in cash and a new class of non-voting convertible junior preferred stock
of CAI. The repurchase option was exercisable through February 28, 1998.
As part of the amendment, Bell Atlantic and NYNEX also immediately released
CAI from its joint venture obligation to make CAI's wireless MMDS spectrum in
Boston, MA, Pittsburgh, PA and Albany, Syracuse and Buffalo, NY available to
them at a future date. Further, upon a repurchase of the securities by CAI, the
joint venture would terminate. Bell Atlantic and NYNEX also suspended or
released CAI from a number of covenant restrictions and governance rights and
provided CAI with a blanket proxy on the approximately 10% interest in CS
Wireless they held. The parties also exchanged mutual releases and reached an
agreement to share certain patent and intellectual property rights related to
their digital wireless venture.
On February 17, 1998, CAI consummated a series of transactions, including
the purchase of the remaining contractual rights Bell Atlantic and NYNEX had
under the joint venture. CAI also acquired the approximately 10% equity interest
in CS Wireless held by Bell Atlantic and NYNEX. The parties exchanged general
releases in connection with the transaction.
As part of the transactions comprising the termination of the joint venture,
MLGAF advised CAI that it had completed the purchase from Bell Atlantic and
NYNEX of all of the CAI securities held by them. On March 3, 1998, CAI exchanged
these securities for a new $30 million subordinated 12% note due October 1,
2005. As a result of the exchange transaction, CAI (i) eliminated approximately
$117 million of senior preferred stock, accumulated preferred stock dividends
thereon, and accrued interest on the indebtedness originally issued to Bell
Atlantic and NYNEX, of which approximately $102 million was reclassified as
paid-in capital, and (ii) recorded a $10.0 million extraordinary gain from the
early extinguishment of debt net of related costs. CAI also exchanged 2,500
shares of common
70
stock for all warrants to purchase CAI stock that were held by Bell Atlantic and
NYNEX and acquired by MLGAF on February 17, 1998.
BUSINESS AND OPERATING STRATEGY
CAI, since its formation, has focused on the development and operation of
MMDS subscription television systems concentrated in major metropolitan areas
located in the northeast and mid-Atlantic regions of the United States. With the
suspension of the joint venture with Bell Atlantic and NYNEX and the receipt of
regulatory approvals not previously sought by MMDS operators or granted by the
FCC, CAI has endeavored to develop the full capabilities of its MMDS spectrum in
addition to subscription television. CAI believes that its MMDS spectrum can be
utilized as a transport system for fixed, flexible two-way uses that eventually
could be combined into a wireless broadband network ("WBN"). Although CAI
recognizes that there are significant regulatory, technological and financial
issues surrounding the development of such a system in any of CAI's markets, CAI
believes that such systems can be deployed in a reasonable manner to develop a
commercially-viable means of delivering video, voice and data transmission
services.
CAI has been aggressively seeking one or more strategic partners interested
in developing and utilizing wireless broadband networks through either strategic
business relationships or an acquisition. As part of its efforts to secure a
strategic partner, CAI has demonstrated its technological capabilities for the
transmission of digital video, voice and data services to several potential
strategic partners and has engaged in wide-ranging discussions with several
large telecommunications companies.
CAI is in the process of preparing the necessary applications for two-way
use of its MMDS spectrum in accordance with the rules released by the FCC on
September 25, 1998 with respect to two-way transmissions. Although the FCC has
not yet announced a definitive date for filing such applications, CAI
anticipates that the first "filing window" will open at the FCC for two-way
applications late in the fourth quarter of calendar year 1999, or in the first
quarter of calendar year 2000. In accordance with the FCC's two-way rules,
following the first filing window, the FCC will accept two-way transmission
applications on an on-going, daily, first-come basis.
The application process involves the formulation of a frequency plan and
coordination of such frequency plan both with internal market, as well as
adjacent market license holders in each market in which an operator seeks
two-way approval. The FCC reviews completed applications in the order in which
they are filed at the FCC, and the granting of an application in a particular
market may limit the utilization of contiguous markets. The frequency plan is
also dependent upon the two-way uses of the MMDS spectrum proposed by the
applicant in any given market.
CAI, in consultation with other companies in the industry, developed a
generic frequency plan that can be used as a template for its markets and has
begun to adapt such template to its various markets in an effort to complete the
FCC's two-way applications. Adaptation of the generic frequency plan is
necessary because of the different channel groups and channels that are
available to CAI in its various markets and the potential interference that
could result from, or be encountered by, CAI as a result of an operator's
activities in a contiguous market. Although CAI has devised such a template, CAI
cannot assure that it will be able to complete the necessary processes to enable
it to file two-way applications for each of its markets during the first filing
window, nor can its assure that applications filed after the first filing window
will not be preempted or otherwise limited by previously filed applications of
other operators. Moreover, the plan for which CAI applied may not be the
frequency plan necessary for the requirements of the business ultimately
conducted in a particular market.
CAI believes that MMDS spectrum, in general, can be utilized in a two-way
environment to provide data, telephony and video transmission services. In
accordance with certain authorizations granted specifically to CAI by the FCC
prior to the release of the FCC's two-way rules, CAI has performed certain
demonstrations and conducted limited testing of fixed, two-way data and
telephony
71
transmission as well as digital video transmission using its MMDS spectrum. Use
of MMDS spectrum in a two-way environment on a widespread basis, however,
involves the deployment of new technology and engineering, most of which will be
developed for the first time in response to the expanded authority recently
granted by the FCC to use MMDS spectrum for two-way transmissions, and the
coordinated efforts of MMDS operators in contiguous and adjacent markets.
Although CAI believes that it will be able to adapt its two-way transmission
engineering plans to provide widespread deployment of its MMDS spectrum in a
two-way environment, CAI cannot assure that new technology and such engineering
will be developed by CAI, or that it will be able to deploy MMDS spectrum in a
two-way environment in any of its markets on a competitive, cost-effective
basis. Furthermore, CAI cannot assure that MMDS operators in markets that are
contiguous or adjacent to its markets will cooperate to enable CAI to maximize
the use of its MMDS spectrum in a two-way environment.
The deployment of MMDS spectrum in a digital two-way environment requires
significant capital expenditure. Implementation of two-way operations requires
an MMDS operator to build an infrastructure that is significantly more complex
than the infrastructure necessary to operate a one-way analog or digital video
system using MMDS spectrum. CAI's business plan contemplated that CAI would
become a wholesale provider of fixed, two-way transmission services, and did not
contemplate retail distribution by CAI of wireless services. CAI's business
plan, which assumes the presence of one or more strategic partners purchasing or
otherwise utilizing its two-way capacity for consideration, also contemplates
that CAI will be able to share certain capital expenditures necessary for the
build-out of digital two-way MMDS systems with such strategic partners.
CAI owns approximately seven of the available commercial channels in each of
its markets. The balance of the commercial channels, as well as the ITFS
channels owned by educational institutions, available to CAI in its various
markets is provided to it through long-term leases. Certain of CAI's more recent
leases contain provisions that contemplate the use of the leased spectrum for
fixed, two-way transmissions. The majority of the spectrum leases to which CAI,
through wholly-owned subsidiaries, is a party do not contemplate two-way usage.
CAI is negotiating with the lessors of these MMDS spectrum leases to enable it
to use the leased spectrum for two-way services. CAI has previously completed a
series of such negotiations with spectrum lessors in its Boston market,
resulting in leases between CAI and various spectrum lessors in the Boston
market that contemplate two-way transmission services. CAI believes that these
leases are on terms and conditions that are fair and reasonable to CAI, and
believes that it will continue to be able to negotiate revised leases with
spectrum lessors in markets other than Boston on terms and conditions that are
fair and reasonable to CAI.
CAI MARKETS
CAI has assembled significant spectrum rights in the northeast and
mid-Atlantic regions of the United States. The table below outlines as of
January 31, 1999 (except as indicated in the footnotes) the characteristics of
the markets in which CAI has an operational subscription television system or in
which CAI holds significant spectrum rights:
72
ESTIMATED NUMBER OF
TOTAL ANALOG/DIGITAL NEW ANALOG/
SERVICE AREA CHANNELS DIGITAL CHANNELS NUMBER OF
MARKET HOUSEHOLDS(A) AVAILABLE(B) APPLIED FOR SUBSCRIBERS(C)
- ------------------------------------------------- -------------- ----------------- --------------------- -------------
New York City.................................... 4,997,000 40 0 4,400
Long Island(d)................................... 1,084,000 22 6 *
Philadelphia..................................... 2,154,000 37 2 17,000
Boston........................................... 1,007,000 31 2 *
Washington, DC................................... 1,479,000 25 0 400
Pittsburgh....................................... 1,011,000 32 1 *
Baltimore........................................ 1,054,000 32 1 *
Hartford......................................... 472,000 22 0 *
Buffalo.......................................... 501,000 33 0 *
Norfolk.......................................... 532,000 32 1 1,400
Providence....................................... 843,000 28 5 *
Albany........................................... 321,000 32 0 7,200
Syracuse......................................... 279,000 22 3 *
Rochester........................................ 402,000 27 6 1,500
-------------- ------
SUB TOTAL........................................ 16,136,000 32,300
BTA MARKETS (SEE TABLE BELOW).................... 3,021,000
-------------- ------
GRAND TOTAL...................................... 19,157,000 32,300
-------------- ------
-------------- ------
- ------------------------
* Market not yet in service.
(a) The Estimated Total Service Area Households in the service area
represents the approximate number of households within a 35 mile radius
of CAI's tower sites. These households may have been adjusted downward if
any of CAI's markets overlapped with a subsequently acquired market (see
table below). This information is based on estimates CAI obtained using
two EDX Engineering software programs, MSITE and POP90. Both of these
programs use 1990 Census data to compile their information. Some of these
households will be "shadowed" and therefore unable to receive CAI's
service due to line-of-sight, or "LOS," constraints. The percentage of
estimated households in the service area that CAI estimates may be
shadowed due to LOS constraints generally ranges from 10% to 60%
depending upon the market. A certain amount of these LOS constraints may
be overcome by the placement of beam benders and/or signal boosters or by
properly designing a cellular network within a service area.
(b) The Number of Analog/Digital Channels Available comprises wireless cable
channels and local broadcast channels that can be received by
subscribers. Wireless cable channels are either licensed to CAI or leased
to CAI from other license holders. There are no automatic rights to renew
ITFS leases or certain MDS leases. The Number of Analog/Digital Channels
Available includes 10 off-air channels in Philadelphia and 11 in New York
City and certain channels that are subject to FCC approvals or
third-party interference agreements. CAI has pending FCC applications
concerning co-location of transmission sites and/or an increase in
broadcast power with respect to 4 channels in Hartford, 8 channels in New
York City, 9 channels in Providence, 9 channels in Norfolk, 5 channels in
Boston and 4 channels on Long Island. The Number of Analog/Digital
Channels Available includes ITFS channels that may not be available for
commercial programming by CAI. CAI also has rights, either through
licenses or leases, to 5 channels in Greensboro (1 available and 4
applied for), 4 available channels in Memphis, 2 available channels in
Winston-Salem, 4 channels (applied for) in Raleigh/Durham and 4 channels
(applied for) in Savannah, GA.
73
(c) The Number of Subscribers represents the number of analog subscription
video subscribers as of March 31, 1999. See "--CAI's Analog Subscription
Video Business" description set forth below.
(d) The Long Island market includes Nassau and Suffolk counties in New York
State.
The table below outlines as of January 31, 1999 the characteristics of the
potential markets for which CAI was the successful bidder at the completion of
the FCC auction described below. The estimated total service area households in
the table above may have been adjusted if the 35-mile Protected Service Area
(PSA) overlapped with any of the markets identified below. To the extent there
was overlap between two PSAs, the number of estimated total service area
households in such overlapping area was divided equally between the two affected
markets.
ESTIMATED NUMBER OF NEW
TOTAL ANALOG/DIGITAL ANALOG/DIGITAL
SERVICE AREA CHANNELS CHANNELS
MARKET HOUSEHOLDS AVAILABLE(A) APPLIED FOR
- ------------------------------------------------------------------- -------------- ----------------- -----------------
Dover, DE.......................................................... 155,000 3 12
Hyannis, MA........................................................ 214,000 1 0
Manchester, NH..................................................... 316,000 1 0
Worcester, MA...................................................... 353,000 9 0
New Haven, CT...................................................... 541,000 3 6
New London, CT..................................................... 96,000 1 0
Springfield, MA.................................................... 366,000 13 0
Poughkeepsie, NY................................................... 258,000 2 4
Pittsfield, MA..................................................... 116,000 1 0
Glens Falls, NY.................................................... 142,000 4 9
Ithaca, NY......................................................... 183,000 1 8
Utica, NY.......................................................... 153,000 2 4
Summit, NJ......................................................... 128,000 8 0
--------------
TOTAL.............................................................. 3,021,000
--------------
--------------
- ------------------------
(a) The number of channels currently owned or leased by CAI.
CAI has focused on preserving these substantial channel rights in
anticipation of developing digital systems that will allow CAI to utilize higher
output power and compression technologies to increase channel capacity. CAI
began to acquire its spectrum capacity in preparation for its obligations under
the joint venture with Bell Atlantic and NYNEX, which required CAI to deliver a
minimum number of channels in each of the markets subject to the agreement
governing the joint venture. With the termination of the rights of Bell Atlantic
and NYNEX under the joint venture, CAI continued to implement a preservation
strategy that allowed CAI to utilize its significant spectrum capacity for the
delivery of video, voice and data services, or various combinations thereof,
subject to regulatory approval, as necessary for one or more strategic partners.
This preservation strategy includes the continued build-out of the transmission
facilities in conformity with the FCC license perfection regulations, as well as
the re-negotiation of spectrum leases when and as such leases mature.
CAI'S ANALOG SUBSCRIPTION VIDEO BUSINESS
CAI currently operates six analog-based subscription video systems in New
York City, Rochester and Albany, NY; Philadelphia, PA; Washington, DC, and
Norfolk/Virginia Beach, VA. As of March 31, 1999, CAI provided subscription
video services to approximately 32,300 subscribers. CAI's principal subscription
video competitors in each of its markets are the hard-wire cable companies, and
include
74
Comcast Corp., Tele-Communications, Inc., Cox Cable Communications, Time Warner
Cable and Cablevision Systems Corp.
CAI has not actively sought to increase its video subscriber base in its
existing analog operating systems. Originally, this decision was made in
connection with the joint venture, which contemplated that CAI would be required
to transfer all of its analog video subscribers to the appropriate affiliate of
Bell Atlantic or NYNEX at the time such affiliate of Bell Atlantic or NYNEX
became the provider of video programming in a particular market. CAI was not
entitled to any compensation for subscribers so transferred, and there was no
incentive for CAI to increase its subscriber base. With the suspension of the
joint venture, CAI continues to explore the full capabilities of its MMDS
spectrum, including uses for such spectrum other than subscription video
delivery. Consequently, CAI has maintained its strategy of not pursuing video
subscriber growth while it evaluates its business opportunities other than
subscription video services. The policy of not pursuing subscriber growth has
had a negative impact on CAI's revenues, which is only partially mitigated by
the cost-savings associated with reduced marketing and other efforts ordinarily
pursued in connection with increasing a subscriber base.
In each of the principal analog-based subscription video markets served by
CAI there is, and CAI believes there will continue to be, significant
competition for households from hard-wire cable operators and digital satellite
television operators. Additionally, CAI has experienced loss of subscribers to
hard-wire cable providers in markets where CAI's channel offering is
significantly less than the hard-wire cable providers, such as in CAI's New York
City market, as a result of channel capacity limitations inherent in an
analog-based MMDS operation.
DIGITAL SUBSCRIPTION VIDEO
CAI committed significant funds and substantial engineering and regulatory
efforts to the build-out of its digital MMDS system in Boston, MA. Initially,
construction of the Boston system was undertaken in fulfillment of CAI's
obligations under its agreements with Bell Atlantic and NYNEX for the provision
of subscription video services by Bell Atlantic and NYNEX using MMDS spectrum.
When Bell Atlantic and NYNEX abandoned digital video plans, CAI continued to
construct the Boston system. In its continuation of the construction, however,
CAI sought to build into the system the flexibility it believed was necessary to
offer one-way, high-speed data services, as well as two-way MMDS services. CAI's
Boston system is currently used for demonstrating digital video, voice and data
transmission services.
In connection with the build-out of the digital system in Boston, CAI, Bell
Atlantic and NYNEX converted nearly 100% of the ITFS receive sites in Boston to
enable the receive sites to receive the ITFS signals, as transmitted from CAI's
digital head-end and repeater sites located in the Boston metropolitan area. The
technology and equipment deployed and being used in Boston for digital video and
other uses was devised primarily by CAI's engineering staff, working in
conjunction with various equipment vendors.
CAI has no definitive plans to launch, on its own, a full-scale commercial
digital subscription video service in its Boston market at this time. CAI is
fully committed to ensuring that its ITFS license holders in Boston can serve
their respective receive sites with such license holders' digital video
programming, a project that CAI believes is substantially completed in Boston.
CAI has, however, delayed the full-scale launch of a commercial video service
for the immediate future.
HIGH-SPEED DATA SERVICES
CAI believes that, subject to regulatory approval, MMDS technology presents
a viable option to traditional telephony providers as a "pipeline" through which
Internet and commercial on-line services can be carried, especially for
residential and small-to-medium sized businesses seeking a cost-effective means
of accessing such on-line services. CAI also believes that the MMDS industry's
systems, which
75
can currently reach more than 50% of the nation's households, are superior to
traditional telephone lines in terms of speed. An MMDS system is capable of
transmitting data significantly faster than traditional telephony rates of 28.8
Kbps. Several MMDS operators, including CAI and CS Wireless, have successfully
tested Internet access capabilities over their existing systems, using a
traditional telephone line for the typically less data-intensive return path.
TELEPHONY
CAI also believes that, subject to regulatory approval, two-way, fixed
flexible use of its MMDS spectrum includes telephony delivery services. CAI
believes that the combination of digital compression, fiber loop and cellular
technologies can be integrated into the MMDS spectrum, resulting in a single
wireless platform capable of delivering a wide range of services, including
telephony delivery services. CAI has explored adaptation of newly available, but
as of yet commercially untested, technologies and intends to assess broadband
MMDS spectrum's ability to simultaneously provide a combination of video, voice
and data delivery services. CAI believes that an MMDS system having one main
transmitter and multiple booster sites can be designed using standard cellular
network design principles to produce a relatively low-cost telephony delivery
platform. CAI has commenced preliminary testing and has taken initial steps in
furtherance of developing a telephony application for its MMDS spectrum.
Although CAI believes that an MMDS system can be designed to provide telephony
delivery services, it cannot assure that such a system could be designed, or
that CAI would be capable of designing and constructing such a system.
Furthermore, in the event that such a system could be designed, CAI cannot
assure that it would receive the requisite regulatory approval to offer a
telephony delivery service, that it would have the financial resources, alone or
in conjunction with MCI WorldCom, necessary to design and construct a telephony
delivery service in one or more of its markets, or that such service, if it was
designed and constructed by CAI in one or more markets, could be successfully
deployed in a commercially successful manner.
MANAGEMENT
The following table sets forth certain information regarding each of CAI's
directors and executive officers.
NAME AGE POSITIONS/OFFICES WITH CAI
- ------------------------------------ --- ---------------------------------------------------------------------
Jared E. Abbruzzese................. 44 Chairman, Chief Executive Officer and Director(1)
James P. Ashman..................... 45 Executive Vice President and Chief Financial Officer
Bruce W. Kostreski.................. 48 Senior Vice President and Chief Technical Officer
Gerald Stevens-Kittner.............. 46 Senior Vice President--Spectrum Management
George Parise....................... 38 Senior Vice President--Finance
Arthur J. Miller.................... 40 Vice President and Controller
Paul M. Albert, Jr.................. 56 Director(1)(2)(3)
Vernon L. Fotheringham.............. 51 Director(1)(2)(3)
Robert D. Happ...................... 58 Director(1)(2)(3)
Martin G. Mand...................... 62 Director(1)(2)(3)
John B. Newman...................... 64 Director(1)(2)(3)
- ------------------------
(1) Member of the Finance/Strategic Partner Committee. The Finance/Strategic
Partner Committee, which is currently chaired by John B. Newman, reviews
and approves management's recommendations regarding major financial and
capital structure matters, oversees relationships with major security
holders, monitors cash flow and capital expenditures and evaluates and
recommends to the CAI board modification to CAI's strategic goals.
76
(2) Member of the Governance and Compensation Committee. The Governance and
Compensation Committee, which is currently chaired by Paul M. Albert,
Jr., reviews and approves management's recommendations as to executive
compensation, reviews, approves and administers executive compensation
and CAI's stock option plans, reviews and approves management's
recommendations for organizational structure and recommends to the CAI
board nominees for election as directors of CAI, including nominees
recommended by shareholders.
(3) Member of the Audit Committee. The Audit Committee, which is currently
chaired by Robert D. Happ, recommends to the CAI board independent
auditors to serve CAI, reviews the scope and results of the annual audit,
assures that the independent auditors act independently, reviews and
approves any substantial change in CAI's accounting policy or practices,
reviews with management and the independent auditors CAI's internal
accounting controls and reviews CAI's annual report and non-audit
professional services provided to CAI by the independent auditors.
JARED E. ABBRUZZESE has been chairman of the CAI board and chief executive
officer of CAI since its formation in August 1991. From August 1992 until
September 1993, he served in various capacities for the prior operator of a
wireless cable system in Albany, New York. Since February 1996, he also has
served as chairman of CS Wireless, and since February 1999, Mr. Abbruzzese has
been CS Wireless' acting chief executive officer.
JAMES P. ASHMAN has been executive vice president and chief financial
officer of CAI since December 1995. Prior to his appointment to these positions,
Mr. Ashman was senior vice president and treasurer of CAI, positions he held
since September 1994. From November 1992 to September 1994, Mr. Ashman was a
senior advisor of, and independent consultant affiliated with, Carolina Barnes
Capital, Inc., a registered broker dealer. Carolina Barnes served as financial
advisor to CAI from January 1993 until September 1994. Mr. Ashman was a director
of CAI from March 1994 to October 1998, and has been a director of CS Wireless
since its formation in February 1996.
BRUCE W. KOSTRESKI joined CAI as senior vice president--engineering in March
1996, and became CAI's chief technical officer in March 1997. Prior to joining
CAI, Mr. Kostreski was employed by Bell Atlantic Corporation in a variety of
capacities since 1980. Mr. Kostreski's last position with Bell Atlantic was that
of executive director--corporate development. Mr. Kostreski is the primary or
sole inventor of 13 patents relating to fiber optics, digital subscriber line
(DSL), video and wireless networks.
GERALD STEVENS-KITTNER joined CAI as senior vice president--regulatory and
governmental affairs in March 1996, and currently serves as senior vice
president--spectrum management, overseeing CAI's and CS Wireless' portfolio of
owned and leased MMDS spectrum. Prior to joining CAI, Mr. Stevens-Kittner was a
partner in the national law firm of Arter & Hadden, where he practiced
extensively in the area of telecommunications law. Mr. Stevens-Kittner holds a
Juris Doctor from George Washington University National Law Center.
GEORGE PARISE has been senior vice president--finance of CAI since May 1997
and was senior vice president and general manager of CAI's New York system from
April 1996 to May 1997. Prior to joining CAI, Mr. Parise was chief financial
officer of Bell Atlantic Corporation's CellularVision LMDS project, a position
he held from September 1993 to April 1996. Mr. Parise served as vice president
of accounting for TriCon Leasing, a financing subsidiary of Bell Atlantic from
April 1989 to September 1993. Mr. Parise is a certified public accountant.
ARTHUR J. MILLER has been a vice president and controller and chief
accounting officer of CAI since May 1997. Mr. Miller served CAI in such
capacities prior to and during CAI's 1998 Chapter 11 proceeding. Prior to
joining CAI, Mr. Miller was employed by Tyco Toys, Inc., an international toy
77
manufacturer, since June 1986, most recently as vice president of finance. Mr.
Miller is a certified public accountant and a member of the American Institute
of Certified Public Accountants and the Pennsylvania Institute of Certified
Public Accountants.
PAUL M. ALBERT, JR., a consultant and private investor, has been a director
of CAI since December 9, 1998. From 1996 to the present, Mr. Albert has been
retained as a consultant primarily for The Globecon Group and Eccles Associates.
From 1983 to 1996, Mr. Albert was a managing director, investment banking, at
Prudential Securities.
VERNON L. FOTHERINGHAM has been a director of CAI since December 9, 1998.
Mr. Fotheringham is chairman and chief executive officer of Composite Group,
Inc., a product development and venture formation firm located in Woodlinville,
WA. From November 1997 until June 1998, Mr. Fotheringham served as vice chairman
of the board of directors of Advanced Radio Telecom Corporation ("ART"). Prior
to that, Mr. Fotheringham served as chairman of the board of directors and chief
executive officer of ART from 1995 to November 1997. From 1993 to 1995, Mr.
Fotheringham served as president and chief executive officer of Norcom Networks
Corporation, a nationwide provider of mobile satellite services. He presently
serves as chairman of Angel Broadband Productions, an Internet content provider,
and as vice chairman of Angel Technology Corp.
ROBERT D. HAPP has been a director of CAI since 1995. Mr. Happ served as
senior managing partner of the Boston, Massachusetts office of KPMG LLP from
1985 until his retirement in 1994. Mr. Happ also is a director of Galileo
Corporation and Cambridgeport Bank, and since February 1996, has served as a
director of CS Wireless.
MARTIN G. MAND has been a director of CAI since December 16, 1998. Since
1995, Mr. Mand has been chairman, president and chief executive officer of Mand
Associates, Limited, a financial consulting, speaking and writing firm located
in Wilmington, Delaware. Mr. Mand previously served as executive vice president
and chief financial officer of Northern Telecom, Ltd., a global manufacturer of
telecommunications equipment from 1990 to 1994. Prior to that, Mr. Mand served
in various senior management positions at E.I. du Pont de Nemours & Co., a
chemical, allied products and energy company. Mr. Mand currently serves on the
board of directors of Sun Healthcare Group Inc. and Fuji Bank and Trust Company.
JOHN B. NEWMAN has been a director of CAI since December 9, 1998. Mr. Newman
currently serves as chairman of MBNT Financial Holdings Limited, a private
investment vehicle located in Toronto, Ontario, a position he has held since
1990. Mr. Newman is a director of a number of public and private Canadian
corporations engaged in real estate, insurance, investment, manufacturing,
distribution and financing.
MCI WorldCom has demanded that CAI hold a special shareholders meeting for
the purposes of removing CAI's current board of directors, amending CAI's bylaws
to, among other things, provide for a two-member board of directors and electing
a new CAI board consisting of two members. See "The Merger--Recent Events"
beginning on page 36.
CHANGE OF CONTROL; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
There was a change of control at CAI as a result of the consummation of the
CAI plan of bankruptcy on October 14, 1998. In connection with the consummation,
pursuant to the CAI reorganization, the then-existing, no par value CAI common
stock was canceled and its existence deleted by the filing of an amendment to
the CAI certificate of incorporation with the Secretary of the State of the
State of Connecticut. The amendment also authorized a new capital structure for
CAI consisting of 25,000,000 shares of common stock, par value $0.01 per share,
and 5,000,000 shares of preferred stock, par value $0.01 per share, the terms of
which preferred stock can be designated by the CAI board from time to time. A
total of 17,241,379 CAI common shares were issued on October 14,
78
1998 in accordance with the CAI plan of reorganization. The stock was issued to
debt holders of CAI in partial satisfaction of such holders' claims against CAI.
As part of the consummation and resulting change of control, CAI sought, and
obtained, the required regulatory approvals for such change of control from the
FCC.
In addition to the changes in stock ownership in connection with the
consummation of the CAI bankruptcy, CAI was required to appoint a new board of
directors. The CAI board was reduced from nine members to six members. Only
Jared E. Abbruzzese and Robert D. Happ remained as CAI directors from the CAI
board in place prior to the consummation of the CAI bankruptcy. Four new
members, identified to CAI by certain significant CAI securities holders, were
appointed to the CAI board in December 1998. For more information regarding the
members of the CAI board, see "--Management," above.
See also "Chapter I--The Merger--Interests of Certain Persons in the
Merger--Description of CAI and CS Wireless Securities Owned by MCI WorldCom,"
beginning on page 35 of this proxy statement.
The following table sets forth information with respect to beneficial
ownership of CAI common shares as of July 27, 1999 by each shareholder who,
based on public filings, is known to CAI to be the beneficial owner of more than
5% of CAI common shares.
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT CLASS
- ----------------------------------------------------------------------------- -------------------- -------------
MCI WORLDCOM, Inc............................................................ 10,684,140(1) 62.0%
500 Clinton Center Drive
Clinton, Mississippi 39056
James B. Rubin (2)........................................................... 1,782,514 10.3%
c/o Resurgence Asset Management LLC
10 New King Street
Suite 107
White Plains, New York 10604
Paul Tudor Jones, II(3)...................................................... 1,048,200 6.1%
c/o Tudor Investment Corporation
600 Steamboat Road
Greenwich, Connecticut 06830
- ------------------------
(1)According to a Schedule 13D, as amended, filed with the SEC by MCI
WorldCom, as amended, MCI WorldCom possesses sole voting and dispositive
power with respect to the CAI common shares listed in the above table.
See "Description of CAI and CS Wireless Securities Owned by MCI
WorldCom," beginning on page 35 of this proxy statement. In addition,
according to the Schedule 13D, as amended, filed with the SEC, MCI
WorldCom, directly or indirectly, may purchase additional CAI common
shares, subject to certain circumstances, in open market or privately
negotiated transactions, to the extent permitted by applicable law,
including federal securities laws, in order to facilitate its efforts to
consummate the merger.
MCI WorldCom has also indicated that in the event the merger is not
approved, MCI WorldCom expects to review its alternatives with respect to
CAI, which may include, among other things, resubmitting the proposed
merger between CAI and a wholly-owned subsidiary of MCI WorldCom, and/or
submitting a merger agreement on different terms between CAI and MCI
WorldCom or one of its subsidiaries. MCI WorldCom may also explore other
forms of transactions with CAI or its subsidiaries, which may include
stock sales, as described below, commercial transactions, or other types
of transactions. CAI has previously reported that it believes it has
sufficient cash to fund its capital requirements through November 1999
and that, if the merger is not approved, CAI would not have sufficient
cash to implement its business plan. In
79
view of CAI's liquidity needs, MCI WorldCom may propose to CAI that MCI
WorldCom invest additional capital in CAI in exchange for additional CAI
shares of capital stock. These additional shares, if so acquired, might
result in MCI WorldCom's ownership of an aggregate number of shares that
would be sufficient to approve the merger. Further, MCI WorldCom plans to
review the businesses of CAI and make such changes as it deems
appropriate at the time, which could include causing CAI to enter into
commercial transactions, joint ventures, asset sales or other possible
transactions. See "The Merger--Recent Events" beginning on page 36.
(2)According to an Initial Statement of Beneficial Ownership of Securities
on Form 3, filed with the Securities and Exchange Commission by
Resurgence Asset Management, L.L.C., Resurgence Asset Management
International, L.L.C., Re/Enterprise Asset Management, L.L.C.,
Kingstreet, Ltd., M.D. Sass Corporate Resurgence Partners, L.P., M.D.
Sass Corporate Resurgence International, Ltd., M.D. Sass Re/Enterprise
Partners, L.P., M.D. Sass Re/Enterprise--II, L.P., M.D. Sass
Re/Enterprise International, Ltd., M.D. Sass Associates, Inc., M.D. Sass
Management, Inc., M.D. Sass Investors Services, Inc., Resurgence Parallel
Fund LLC, M.D. Sass Re/Enterprise International Irrevocable Trust II,
M.D. Sass Associates, Inc. Employees Profit Sharing Plan. The Form 3
identifies James B. Rubin as (i) the chief investment officer of, and as
responsible for the day-to-day investment activities of Resurgence Asset
Management, L.L.C. ("RAM") and Resurgence Asset Management International,
L.L.C. ("RAMI"), and (ii) manager of and as responsible for the
day-to-day investment activities of Re/Enterprise Asset Management,
L.L.C. ("REAM"). RAM may be deemed to share voting and dispositive power
with respect to 626,994 CAI common shares, which power it exercises
solely in its capacity as sole general partner and sole investment
advisor of M.D. Sass Corporate Resurgence Partners, L.P. RAMI may be
deemed to share voting and dispositive power with respect to 417,095 CAI
common shares, which power it exercises (i) solely in its capacity as
sole special shareholder of and sole investment advisor of M.D. Sass
Corporate Resurgence International, Ltd., and (ii) pursuant to a
subadvisory agreement with M.D. Sass Management, Inc. with respect to
M.D. Sass Re/Enterprise International Ltd. REAM may be deemed to share
voting and dispositive power with respect to 700,751 CAI common shares,
which power it exercises pursuant to a subadvisory services agreement
with M.D. Sass Management, Inc. and M.D. Sass Associates, Inc. with
respect to two employee benefit or retirement plans, M.D. Sass
Re/Enterprise Partners, L.P. and M.D. Sass Re/Enterprise-II, L.P. M.D.
Sass Investors Services, Inc. may be deemed to beneficially own 485,833
CAI common shares, held of record by two employee benefit plans. M.D.
Sass Investors Services, Inc. acts as an investment advisor to both of
these plans.
The Form 3 indicates that the reporting persons beneficially own an
aggregate of 1,782,514 CAI common shares, representing 10.3% of the total
outstanding CAI common shares. The parties had previously filed a Schedule
13D with the Commission, which Schedule 13D includes an agreement of joint
filing among all reporting persons. The Schedule 13D also states that the
reporting persons have questions and concerns regarding the merger, the
stock option agreement and the shareholders rights plan, and whether the
transaction will maximize value for all CAI shareholders.
Mr. Rubin, on behalf of the reporting persons, contacted CAI requesting a
meeting to ask questions of management, as well as additional information.
CAI responded that this proxy statement would be distributed to CAI
shareholders describing the transactions and addressing related matters. In
response, the Schedule 13D states that the reporting persons are
considering further action. CAI has agreed to provide RAM with certain
information relating to the merger.
(3)According to Schedule 13G dated June 29, 1999 filed by Tudor Investment
Corporation ("TIC"), Paul Tudor Jones, II, Tudor BVI Futures, Ltd.
("Tudor BVI"), Tudor Proprietary Trading, L.L.C. ("TPT"), The Raptor
Global Fund L.P. ("Raptor L.P."), The Raptor Global Fund Ltd. ("Raptor
Ltd.") and The Upper Mill Capital Appreciation Fund Ltd. ("Upper Mill"),
Mr. Jones
80
possesses shared voting and investment power with respect to the
1,048,200 CAI common shares listed in the table above. Tudor Investment
Corporation is the sole general partner of Raptor L.P. and provides
investment advisory services to Raptor Ltd., Raptor L.P., Tudor BVI and
Upper Mill. TIC may be deemed to beneficially own the CAI common shares
owned by each of such reporting persons. TIC expressly disclaims such
beneficial ownership. In addition, because Mr. Jones is the controlling
shareholder of TIC and the indirect controlling equity holder of TPT, Mr.
Jones may be deemed to beneficially own the CAI common shares deemed
beneficially owned by TIC and TPT. Mr. Jones expressly disclaims such
beneficial ownership.
The following table sets forth certain information with respect to
beneficial ownership of CAI common shares as of July 27, 1999 by all CAI
directors, the chief executive officer and certain other executive officers of
CAI and all directors and executive officers of CAI as a group.
AMOUNT AND NATURE OF
BENEFICIAL
BENEFICIAL OWNER OWNERSHIP(1) PERCENT OF CLASS(2)
- ---------------------------------------------------------------------- ---------------------- ---------------------
Jared E. Abbruzzese................................................... 300,000 1.7%
James P. Ashman....................................................... 150,000 *
Bruce Kostreski....................................................... 110,000 *
Gerald Stevens-Kittner................................................ 110,000 *
George J. Parise...................................................... 80,000 *
Paul M. Albert, Jr.................................................... 25,000 *
Vernon L. Fotheringham................................................ 25,000 *
Robert D. Happ........................................................ 25,000 *
Martin G. Mand........................................................ 25,000 *
John B. Newman........................................................ 25,000 *
All directors and executive officers as a group (11 persons).......... 900,000 5.0%
- ------------------------
* Less than 1%
(1) Each named individual possesses sole voting and dispositive power with
respect to the CAI common shares shown for such person. The CAI common shares
shown include only shares issuable upon the exercise of options exercisable
currently or within 60 days of July 27, 1999. None of the named individuals is
the record holder of any CAI common shares as of July 28, 1999. See "The
Merger--Interests of Certain Persons in the Merger--Interests in Options to
Purchase Common Shares."
(2) Percentages of ownership are based on 17,241,379 CAI common shares
issued and outstanding as of July 27, 1999. CAI common shares that may be
acquired pursuant to options that are exercisable within 60 days of July 27,
1999 are deemed outstanding for purposes of computing the percentage ownership
of the person holding such options, but are not deemed outstanding for purposes
of computing the percentage ownership for any other person.
EMPLOYEES
As of July 27, 1999, 1999, CAI had a total of 278 employees, including 158
employees of CS Wireless. CAI has experienced no work stoppages and believes
that it has good relations with its employees.
PROPERTIES
CAI leases various office sites in Albany, New York; Arlington, Virginia;
Chadds Ford, Pennsylvania; and in each region in which an operating system
exists. CAI also leases transmission tower sites in the regions of its operating
systems. CAI believes adequate office space and tower sites are readily
available in all markets.
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CAI owns substantially all of the equipment which is necessary to conduct
its operations, except certain vehicles, test equipment, and office equipment. A
significant portion of CAI's investment in plant and equipment consists of
subscriber equipment, which includes antennas, block downs, converters and
remotes, and related installation costs, principally located at the subscribers'
premises, and the reception and transmitter equipment located at the transmitter
sites.
LEGAL PROCEEDINGS
IN RE CAI WIRELESS SYSTEMS, INC., DEBTOR, Chapter 11 Case No. 98-1766 (JJF)
and IN RE PHILADELPHIA CHOICE TELEVISION, INC., DEBTOR, Chapter 11 Case No.
98-1765 (JJF). On July 30, 1998, CAI and one of its wholly-owned subsidiaries,
Philadelphia Choice Television, Inc., filed voluntary petitions under Chapter
11, Title 11 of the United States Code with the United States Bankruptcy Court
for the District of Delaware. The reorganization plan proposed by CAI and
Philadelphia Choice Television was confirmed by the bankruptcy court on
September 30, 1998. CAI and Philadelphia Choice Television consummated the
reorganization plan and emerged from Chapter 11 on October 14, 1998. The case
remains open, with the bankruptcy court retaining limited jurisdiction, pending
the entry of a final decree closing the case.
IN RE CAI WIRELESS SYSTEMS, INC. SECURITIES LITIGATION. CAI and certain
individuals were named in six class action lawsuits alleging various violations
of the federal securities laws filed in the United States District Court for the
Northern District of New York. The actions were consolidated into one lawsuit
entitled IN RE CAI WIRELESS SYSTEMS, INC. SECURITIES LITIGATION (96-CV-1857),
which is currently pending in the Northern District of New York against Jared E.
Abbruzzese, chairman and chief executive officer of CAI, John J. Prisco, a
former president, chief operating officer and director of CAI, and Alan
Sonnenberg, a former president and director of CAI. The amended, consolidated
complaint alleges a variety of violations of the anti-fraud provisions of the
federal securities laws by CAI arising out of its alleged disclosure (or alleged
omission from disclosure) regarding its Internet and other flexible use of MMDS
spectrum, as well as its business relationship with Bell Atlantic and NYNEX.
Specifically, the complaint alleges that defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated under the Securities Exchange Act, during the specified class
period, May 23, 1996 through December 6, 1996. CAI notified the carrier of its
directors' and officers' liability insurance policy, which is intended to cover
not only CAI's officers and directors, but also CAI, itself, against claims such
as those made in the securities lawsuit. The policy covers up to $5,000,000 of
any covered liability, subject to a retention amount of $500,000. The securities
lawsuit is in its preliminary stages. A scheduling conference was held on June
3, 1997, at which the briefing schedule for defendants' motion to dismiss was
agreed upon among the parties. The defendants' motion to dismiss was heard by
the Northern District of New York on October 17, 1997 and is still pending.
While the motion is pending, all other deadlines affecting motions and discovery
have been postponed. CAI's plan of reorganization provided no recovery to any
holder of CAI's equity or to any holder of an equity-based claim, such as the
claims made against CAI in the securities lawsuit. Upon the confirmation of
CAI's plan of reorganization on September 30, 1998 and the October 14, 1998
consummation of the plan of reorganization, plaintiffs' claims against CAI in
the securities lawsuit were discharged and released by order of the bankruptcy
court. Furthermore, the securities lawsuit plaintiffs were enjoined from
continuing their action against CAI. A memorandum of understanding outlining a
settlement in the amount of $3,000,000 (all of which will be covered by the
proceeds from the above-referenced liability insurance policy) has been executed
by counsel to all parties. The parties have executed a settlement agreement and
anticipate submitting such agreement to the court for final disposition of this
action shortly. Accordingly, CAI's management believes the securities lawsuit
will not have a material adverse effect on CAI's earnings, financial condition
or liquidity.
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JOE HAND PROMOTIONS, INC. V. CAI WIRELESS SYSTEMS, INC. D/B/A POPVISION
WIRELESS CABLE and as a third party defendant in JOE HAND PROMOTIONS, INC. V.
601 L & P BAR, INC. in the U.S. District Court for the Eastern District of
Pennsylvania. These actions arise out of the alleged improper broadcasts of
certain sporting events in commercial establishments in violation of the alleged
distributor's exclusive broadcast rights. The complaints seek actual
compensatory damages in unspecified amounts, together with statutory penalties
claimed for alleged violations of federal statutes. The plaintiff, Joe Hand
Promotions, alleged that it is the exclusive distributor of certain televised
sporting events in the greater Philadelphia area for commercial establishments,
and alleged the improper broadcast by CAI of such events in approximately five
instances. The lawsuits were in the preliminary stages when CAI commenced its
Chapter 11 case. Action against CAI in these lawsuits has been suspended by the
court. CAI believes that in the event of an adverse outcome, the amount would
not be material given the nature of the claims.
OTHER LITIGATION. CAI is the defendant in two separate breach of contract
actions arising out of separate alleged marketing agreements entered into by ACS
Enterprises, Inc. prior to its merger with CAI in September 1995. The first
action, pending in the Court of Common Pleas, Montgomery County, Pennsylvania,
seeks unspecified damages in excess of $30,000. The action has been stayed as a
result of the CAI bankruptcy. The second lawsuit, pending in the Court of Common
Pleas in Philadelphia County, seeks unspecified damages in excess of $50,000.
Plaintiff is currently conducting its discovery.
On or about June 18, 1999, an action was filed in the New York Supreme Court
for the County of Albany captioned BOGDAN AND FAIST, P.C. V. CAI WIRELESS
SYSTEMS, INC., Index No. 3463-99. The complaint asserts that CAI has failed to
transfer to the plaintiff unspecified property and property rights in breach of
an alleged contract between the plaintiff and CAI. The complaint seeks to
require CAI to specifically perform under the alleged contract. CAI has removed
this action to the United States District Court for the Northern District of New
York and is seeking to transfer such action to the United States Bankruptcy
Court for the District of Delaware. Management believes that this action is
without merit and intends to vigorously defend this lawsuit.
CERTAIN INFORMATION REGARDING CS WIRELESS
THIS SECTION OF THE PROXY STATEMENT SUMMARIZES THE BUSINESS OF CS WIRELESS.
TO FULLY UNDERSTAND THE BUSINESS, WE STRONGLY ENCOURAGE YOU TO READ CS
WIRELESS'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998 AND ITS QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999,
PREVIOUSLY FILED WITH THE SEC. FOR INFORMATION ON HOW TO OBTAIN THAT ANNUAL
REPORT, SEE "WHERE YOU CAN FIND MORE INFORMATION" IN "CHAPTER III."
GENERAL
CS Wireless Systems, Inc. is a Delaware corporation, with its principal
executive offices located at 1101 Summit Avenue, Plano, Texas 75074. As of March
31, 1999, CS Wireless provided subscription television services, utilizing its
MMDS spectrum, to approximately 55,900 subscribers in eleven operating markets
(exclusive of the Story City, Iowa market, contemplated to be transferred to
Nucentrix Broadband Network, Inc. (f/k/a Heartland Wireless Communications,
Inc.) pursuant to the Master Agreement described in "--Historical Background"
below). In addition, CS Wireless provides high-speed Internet access services in
its Dallas and Ft. Worth markets utilizing MMDS spectrum. CS Wireless believes
that there are a total of approximately 7.7 million estimated total service area
households in 21 primary markets where CS Wireless holds significant MMDS
spectrum. CAI holds approximately 94% of the issued and outstanding common stock
of CS Wireless.
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CS WIRELESS' SERIES B 11 3/8% SENIOR DISCOUNT NOTES DUE 2006
In connection with the consummation of the February 23, 1996 contributions
by CAI and Heartland to CS Wireless described below, CS Wireless issued
$400,000,000 aggregate principal amount at maturity of 11 3/8% Senior Discount
Notes due 2006, which were subsequently exchanged for CS Wireless' Series B
11 3/8% Senior Discount Notes due 2006. The senior discount notes were issued
under an indenture dated as of February 15, 1996 between CS Wireless and State
Street Bank and Trust Company, successor in interest to Fleet National Bank of
Connecticut, as Trustee. The following summary of the material provisions of the
indenture does not purport to be complete, and we strongly encourage you to read
the indenture as it is the legal document that governs the CS Wireless senior
discount notes. A copy of the indenture is filed as Exhibit 4.1 to CS Wireless'
Registration Statement on Form S-1, File No. 333-3288.
GENERAL. The senior discount notes are unsecured senior obligations of CS
Wireless and rank PARI PASSU with all unsecured indebtedness of CS Wireless
which is not by its terms expressly subordinated to the senior discount notes.
The senior discount notes are effectively subordinated to all indebtedness and
other liabilities (including trade payables) of CS Wireless' subsidiaries, and
are effectively subordinated to all secured indebtedness of CS Wireless to the
extent of the value of the assets securing such indebtedness.
MATURITY, INTEREST AND PRINCIPAL. The senior discount notes are limited to
an aggregate principal amount at maturity of $400,000,000 and will mature on
March 1, 2006. The senior discount notes accrete in value from February 23, 1996
to March 1, 2001, at a rate of 11 3/8% per annum, and cash interest is payable
beginning on September 1, 2001 on the accreted value of the senior discount
notes until maturity. Interest is compounded semi-annually. CS Wireless will pay
interest on overdue principal from time to time on demand at the rate of 13 3/8%
per annum. CS Wireless will, to the extent lawful, pay interest on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the rate of 13 3/8% per annum. Interest is computed on
the basis of a 360-day year comprised of twelve 30-day months, and, in the case
of a partial month, the actual number of days elapsed.
The senior discount notes are not entitled to the benefit of any mandatory
sinking fund.
OPTIONAL REDEMPTION. The senior discount notes are redeemable, at the
option of CS Wireless, in whole or in part, at any time on or after March 1,
2001, upon not less than 30 nor more than 60 days' prior notice, at the
following redemption prices (expressed as percentages of the principal amount),
plus accrued and unpaid interest, if any, to the redemption date if redeemed
during the 12-month period beginning on March 1 of the years indicated below:
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
2001........................................................................ 105.688%
2002........................................................................ 103.792%
2003........................................................................ 101.896%
2004 and thereafter......................................................... 100.000%
The indenture provides that if less than all of the senior discount notes
are to be redeemed at any time, the Trustee will select the senior discount
notes for redemption PRO RATA, by lot or by any method the Trustee deems fair
and appropriate.
CERTAIN COVENANTS. The indenture contains certain covenants that may have a
negative effect on the operation of CS Wireless' business or results of
operations. Specifically, CS Wireless will have significant debt service
payments due beginning on September 1, 2001, when interest on the senior
discount notes shall be due and payable for the preceding six-month period.
Thereafter, CS Wireless will be required to make semi-annual interest payments
at 11 3/8% per annum on the outstanding principal amount of senior discount
notes until such notes are repaid, at maturity, by acceleration or
84
otherwise. Additionally, the indenture prohibits CS Wireless from: incurring
additional indebtedness or issuing certain types of capital stock except in
limited circumstances and under specified conditions that are more fully set
forth in the indenture, granting liens on or pledging any of its property to
secure repayment of indebtedness, declaring dividends to the CS stockholders or
redeeming or purchasing any of its own stock, making certain investments, and
selling assets, unless such asset sale in conducted in accordance with the
indenture and the proceeds from such sale are applied in the manner specified by
the indenture, which application requires the redemption of Series B 11 3/8%
senior discount notes in certain circumstances. In addition, the indenture
contains, among others, the following covenants:
- payment of securities;
- maintenance of office or agency;
- corporate existence;
- payment of taxes and other claims;
- maintenance of properties; insurance; books and records;
- compliance with law;
- compliance certificate;
- SEC reports and other information;
- limitation on issuance and sale of capital stock of restricted
subsidiaries;
- change of control;
- limitation on transactions with affiliates;
- limitation on restricted and unrestricted subsidiaries;
- limitation on dividends and other payment restrictions affecting
restricted subsidiaries;
- limitation on sale and leaseback transactions;
- limitation on line of business; and
- waiver of stay, extension or usury laws.
HOLDERS' RIGHTS UPON A CHANGE OF CONTROL. The indenture provides that upon
a change of control, CS Wireless must offer to all holders of senior discount
notes to purchase their notes at 101% of the accreted value of the senior
discount notes (if prior to March 1, 2001) or 101% of the aggregate principal
amount of the senior discount notes plus accrued and unpaid interest, if any, to
the change of control payment date (if on or after March 1, 2001). A change of
control is defined in the indenture to include:
- any sale, lease, exchange, transfer or other disposition (in one
transaction or a series of related transactions) of all or substantially
all of the assets of CS Wireless and certain of its subsidiaries to any
person or group of related persons for purposes of Section 13(d) of the
Exchange Act (whether or not in compliance with the provisions of the
indenture), other than to a strategic equity investor, in any such event
pursuant to a transaction in which immediately after its consummation the
person or persons owning a majority of the voting power of the voting
stock of CS Wireless immediately prior to the consummation of the
transaction, or a strategic equity investor and the persons owning a
majority of the voting stock of CS Wireless immediately prior to the
transaction will not own, directly or indirectly, a majority of the voting
power of the voting stock of the person to whom the sale, lease, exchange
or other disposition has been made;
- if during any consecutive two-year period, individuals who at the
beginning of the period constituted the CS Wireless board (together with
any new directors whose election to such board or whose nomination for
election by the CS Wireless stockholders was approved by a vote of a
85
majority of the CS Wireless directors then still in office who were either
directors at the beginning of the period or whose election or nomination
for election was previously so approved) cease for any reason to
constitute a majority of the CS Wireless board then in office; or
- if any person or group, excluding any strategic equity investor and
permitted holder either:
-- is or becomes, by purchase, tender offer, exchange offer, open market
purchases, privately negotiated purchases or otherwise, the "beneficial
owner," directly or indirectly, of more than 50% of the total
then-outstanding voting power of the voting stock of CS Wireless (for
purposes of this definition, a person or group will be deemed to be the
beneficial owner of the voting power of the voting stock of CS Wireless
held by CAI or any other corporation if such person or group holds a
majority of the voting power of the voting stock of CAI or the other
corporation), or
-- otherwise has the ability to elect, directly or indirectly, a majority
of the members of the CS Wireless board; or
- if CS Wireless consolidates with or merges into another person (other than
a strategic equity investor), and the CS Wireless stockholders immediately
prior to the consolidation or merger, or a strategic equity investor and
the CS Wireless stockholders immediately prior to the consolidation or
merger, hold less than a majority of the voting power of the voting stock
of the resulting entity.
MCI WorldCom falls within the definition of a strategic equity investor
under the indenture. Consequently, the merger and other transactions
contemplated by the merger agreement will not constitute a change of control at
CS Wireless for purposes of the indenture.
EVENTS OF DEFAULT. The indenture provides that certain events are "events
of default" including:
- the failure to pay interest on any senior discount note when it becomes
due and payable, and the failure continues for a period of 30 days;
- the failure to pay the principal or accreted value of any senior discount
note when the principal or accreted value becomes due and payable, at
maturity, upon acceleration, redemption, pursuant to a required offer to
purchase or otherwise;
- a default in the observance or performance of any other covenant or
agreement contained in the senior discount notes or the indenture which
continues for a period of 60 days after CS Wireless receives written
notice of default from the Trustee;
- default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any indebtedness
for money borrowed by CS Wireless or certain of its subsidiaries (or the
payment of which is guaranteed by CS Wireless or certain of its
subsidiaries), whether that indebtedness or guarantee existed on the date
of the indenture, or is created after the issue date of the senior
discount notes, which:
-- is caused by a failure to pay when due principal on the indebtedness
within the grace period provided for the indebtedness (which failure
continues beyond any applicable grace period), or
-- results in the acceleration of the indebtedness prior to its express
maturity and, in each case, the principal amount of the indebtedness,
together with the principal amount of any other indebtedness under
which there has been a payment default or the maturity of which has
been accelerated, aggregates $5,000,000 or more;
- one or more judgments in an aggregate amount in excess of $5,000,000
(unless covered by insurance by a reputable insurer as to which the
insurer has acknowledged coverage) being rendered against CS Wireless or
certain of its subsidiaries and the judgments remain
86
undischarged or unstayed for a period of 60 days after the judgment or
judgments become final and non-appealable;
- certain events of bankruptcy, insolvency or reorganization affecting CS
Wireless or any of its subsidiaries; or
- if any holder of at least $5,000,000 in aggregate principal amount of
indebtedness of CS Wireless or certain of its subsidiaries forecloses upon
assets of CS Wireless or certain of its subsidiaries having an aggregate
fair market value, individually or in the aggregate, of at least
$5,000,000 or exercises any right under applicable law or applicable
security documents to take ownership of any assets in lieu of foreclosure.
The indenture provides that upon the happening of any event of default, the
Trustee may, or the holders of at least 25% in principal amount of outstanding
senior discount notes may, declare the accreted value of all the senior discount
notes to be due and payable by notice in writing to CS Wireless and the Trustee
specifying the event of default and that it is a "notice of acceleration." Upon
that declaration, the senior discount notes will become immediately due and
payable, notwithstanding anything contained in the senior discount notes or the
indenture to the contrary. If an event of default with respect to bankruptcy
proceedings relating to CS Wireless occurs and is continuing, then the amount
will automatically become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of the senior
discount notes. Holders of the senior discount notes may not enforce the
indenture or the senior discount notes except as provided in the indenture.
Subject to certain limitations, holders of not less than a majority in aggregate
principal amount of the then-outstanding senior discount notes may direct the
Trustee in its exercise of any trust or power. If an event of default occurs and
is continuing and is known to the Trustee, the Trustee must mail to each holder
of the senior discount notes notice of the event of default within 10 days. The
Trustee may withhold from holders of the senior discount notes notice of any
continuing event of default (except an event of default relating to the payment
of principal or interest or a failure to comply with certain covenants) if it
determines that withholding notice is in their interest.
The indenture provides that, at any time after a declaration of acceleration
as described in the preceding paragraph but before a judgment or decree of money
due in respect of the senior discount notes has been obtained, the holders of
not less than a majority in principal amount of the senior discount notes then
outstanding by written notice to CS Wireless and the Trustee may rescind the
declaration and its consequences if:
- CS Wireless has paid or deposited with the Trustee a specified sum of
money sufficient to pay all amounts then due under the indenture;
- the rescission would not conflict with any judgment or decree of a court
of competent jurisdiction; and
- all events of default, other than the non-payment of principal of,
premium, if any, and interest on the senior discount notes that have
become due solely by the declaration of acceleration, have been cured or
waived.
Prior to the declaration of acceleration of the senior discount notes, the
holders of not less than a majority in principal amount of the senior discount
notes may waive any existing event of default under the indenture, and its
consequences, except a default in the payment of the principal of or interest on
any senior discount notes or any default in respect of any covenant which cannot
be amended without the consent of each holder affected.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE. The indenture provides that
CS Wireless may, at its option and at any time, terminate the obligations of CS
Wireless with respect to the outstanding senior discount notes, a right called
"defeasance," which means that CS Wireless will be deemed to have paid and
discharged the entire indebtedness represented by the outstanding senior
discount notes, except for:
87
- the rights of holders of outstanding senior discount notes to receive
payment in respect of the principal of, premium, if any, and interest on
their senior discount notes when such payments are due,
- CS Wireless' obligations to issue temporary senior discount notes,
register the transfer or exchange of any senior discount notes, replace
mutilated, destroyed, lost or stolen senior discount notes and maintain an
office or agency for payments in respect of the senior discount notes,
- the rights, powers, trusts, duties and immunities of the Trustee, and
- the defeasance provisions of the indenture.
In addition, CS Wireless may, at its option and at any time, elect to
terminate its obligations with respect to certain covenants that are set forth
in the indenture, a right called "covenant defeasance," and any subsequent
failure to comply with those obligations will not constitute an event of default
with respect to the senior discount notes.
The indenture contains specific requirements that CS Wireless must meet to
exercise either defeasance or covenant defeasance.
MODIFICATION OF THE INDENTURE. The indenture provides that CS Wireless,
when authorized by a board resolution, and the Trustee may amend, waive or
supplement the indenture or the senior discount notes without notice to or
consent of any holder in certain circumstances. However, the Trustee and CS
Wireless may not make any change that adversely affects the rights of any holder
under the indenture. Other modifications and amendments of the indenture or the
senior discount notes may be made with the consent of the holders of not less
than a majority in aggregate principal amount of the then-outstanding senior
discount notes, except that the consent of each holder of the senior discount
notes affected thereby is required for amendments to, or waivers of, certain
provisions of the indenture, including provisions relating to the amount of
senior discount notes outstanding, the applicable interest rate and the timing
of any payments due under the indenture and the senior discount notes.
HISTORICAL BACKGROUND
CS Wireless was incorporated in December 1993 under the name ACS Ohio, Inc.
and was dormant until March 1994 when its then-parent company, ACS Enterprises,
Inc., acquired MetroCable, Inc. (a company organized on June 4, 1993 as the
successor in interest to a unit of Cablevision) and Metropolitan Satellite
Services, Inc., the operators of a wireless subscription television system in
Cleveland, Ohio. CAI, which presently owns approximately 94% of CS Wireless's
outstanding common stock, acquired ACS Enterprises, Inc. on September 29, 1995.
CAI and Heartland contributed to CS Wireless the majority of the assets
presently owned or leased by it pursuant to the terms of a Participation
Agreement consummated on February 23, 1996. In exchange for approximately 60% of
the common stock of CS Wireless, CAI, directly or indirectly, contributed to CS
Wireless the wireless cable television assets and all related liabilities, or
the stock of subsidiaries owning wireless cable television assets associated
with the wireless cable television markets, of Bakersfield and Stockton/Modesto,
California; Charlotte, North Carolina; and Cleveland, Ohio. Simultaneously, in
exchange for approximately 40% of the common stock of CS Wireless, cash, a
short-term note and a long-term note, Heartland, directly or indirectly,
contributed or sold to CS Wireless the wireless cable television assets and all
related liabilities associated with the wireless cable television markets of
Grand Rapids, Michigan; Minneapolis, Minnesota; Kansas City (suburbs), Missouri;
Dayton, Ohio; Dallas, Fort Worth and San Antonio, Texas; and Salt Lake City,
Utah.
88
On February 23, 1996, in connection with the consummation of the
contributions described above, CS Wireless closed a private placement of 100,000
units consisting of $400 million aggregate principal amount at maturity of
11 3/8% Senior Discount Notes due 2006 and 110,000 shares of the common stock of
CS Wireless. The original issue price for each $1,000 principal amount of the
senior discount notes of CS Wireless was $571.71. Each of the senior discount
notes of CS Wireless accretes at a rate of 11 3/8% per annum computed on a
semi-annual bond equivalent basis during the initial five years of the 10-year
term; cash interest is payable beginning in September 2001 at a rate of 11 3/8%
per annum; and the yield to maturity (compounded semi-annually) is 11.45%.
Including amounts attributable to the common stock of CS Wireless, the issuance
of the units resulted in net proceeds to CS Wireless of approximately $162.9
million after (i) underwriting discounts and other debt issuance costs, (ii)
note payments, and (iii) certain distributions made in connection with the
participation agreement.
As part of the formation of CS Wireless, each of CAI and Heartland
successfully bid on a number of BTA market authorizations on behalf of CS
Wireless. To be eligible for the BTA auction held by the FCC during the summer
of 1996, a potential bidder was required to file an application with, and make
up-front payments to, the FCC prior to the start of the FCC's BTA auction. Each
of CAI and Heartland made such filings and up-front payments, entitling each of
them to participate in the FCC's BTA auction. The closing of the participation
agreement had not occurred by the date those applications were due, and as a
consequence, CS Wireless was not an active participant in the FCC's BTA auction.
CAI and Heartland, however, agreed to convey to CS Wireless, at their cost, and
CS Wireless agreed to purchase, any rights acquired in the FCC's BTA auction
relating to CS Wireless' markets, as well as certain other BTA markets. CAI
acquired rights to BTA markets for CS Wireless' Bakersfield and
Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio
markets for approximately $5.6 million. In addition, CAI purchased BTA
authorizations relating to Atlanta, Georgia and Louisville, Kentucky for
approximately $7.0 million. CAI paid an aggregate of $12.6 million to the FCC in
accordance with the rules of the FCC's BTA auction. Heartland purchased BTA
rights relating to Little Rock, Arkansas; Oklahoma City, Oklahoma; Dayton, Ohio;
Minneapolis, Minnesota; Dallas and San Antonio, Texas; Sedallia and St. Josephs,
Missouri; Lawrence and Emporia, Kansas; and Benton Harbor, Battle
Creek/Kalamazoo, Grand Rapids and Muskegon, Michigan for approximately $4.4
million. Of this amount, Heartland has paid to the FCC approximately $1.1
million for these BTA rights. CS Wireless will continue to reimburse Heartland
for any and all costs relating to the BTA rights. Those costs are estimated to
be up to an additional $3.8 million, excluding interest expense which accrues at
9.5% per annum, in accordance with the terms of the Participation Agreement. The
FCC has approved assignment of all of CAI's BTA rights to CS Wireless. CS
Wireless and Heartland entered into a BTA lease and an option agreement pursuant
to which Heartland leases to CS Wireless rights to 10 BTA markets and portions
of four additional BTA markets, and CS Wireless has the option to purchase the
leased BTA markets.
CS Wireless acquired wireless cable television rights and related assets in
certain Midwest markets including the Effingham and Wellsville, Kansas; Story
City, Iowa; Scottsbluff, Nebraska; Kalispell, Montana and Rochester, Minnesota
markets in connection with its acquisition of USA Wireless Cable, Inc. on
October 11, 1996. On September 3, 1997, CS Wireless consummated an exchange of
its wireless cable rights and related assets in Salt Lake City, Utah for
wireless cable rights and related assets in Kansas City, Missouri pursuant to an
agreement dated as of November 6, 1996 with People's Choice TV Corp.
On December 2, 1998, CS Wireless, CAI and Heartland executed a master
agreement providing for, among other things, the termination of Heartland's
rights in, and claims against, CS Wireless. The master agreement is to be
performed in two stages. Stage I, which has been consummated, required the lease
by CS Wireless to Heartland of certain assets related to the Story City, Iowa
market, the sale to Heartland by CS Wireless of certain consumer premises
equipment at agreed upon prices and the payment by CS Wireless to Heartland of
$366,000. In consideration, Heartland leased to CS Wireless
89
certain assets related to the Portsmouth, New Hampshire market, effected a
partial satisfaction of the long-term note and agreed to various mutual
cooperation obligations relative to developmental applications filed by
Heartland or CS Wireless for two-way authority in adjacent and overlapping
markets, including Dallas-Ft. Worth. At the Stage II closing, which is to occur
following receipt of certain necessary governmental approvals, CS Wireless and
Heartland will transfer to one another their respective ownership interests in
the Story City, Iowa and Portsmouth, New Hampshire markets, the long-term note
will be canceled and CS Wireless will pay Heartland $100,000; additionally, CS
Wireless agreed to transfer certain inventory to Heartland. In connection with
the master agreement, the three Heartland designees to the CS Wireless board
resigned and the stockholders agreement among CAI, CS Wireless and Heartland was
terminated. At the Stage I closing, CAI purchased from Heartland all of its CS
Wireless common stock in consideration for $1,534,000. Subsequent to the Stage I
closing, CS Wireless redeemed the shares of CS common stock that CAI acquired
from Heartland in consideration for payment of approximately $1.5 million in
cash. CS Wireless solicited and obtained written consents and waivers from the
holders of a majority of the outstanding CS Wireless senior discount notes
relative to the transactions described in this paragraph. CS Wireless agreed to
pay to the holders of the CS Wireless senior discount notes, as of December 3,
1998, the aggregate sum of $1.25 million in connection with the consents and
waivers that were deemed by CS Wireless to be necessary under the terms of the
indenture governing the CS Wireless senior discount notes. The payment will be
made upon the latter to occur of (i) three business days following the Stage II
closing and (ii) the date on which CS Wireless may be legally permitted to make
such payment.
The redemption of the CS Wireless common stock that CAI acquired from
Heartland reduced the total number of CS Wireless common shares outstanding to
6,864,471. This reduction in outstanding shares had the effect of increasing
CAI's percentage ownership of CS Wireless to approximately 94%.
Pursuant to the master agreement, any indemnification obligations of CS
Wireless to directors previously designated by Heartland and to a certain former
employee of CS Wireless now employed by Heartland will survive the resignation
of such individuals from CS Wireless. CS Wireless' indemnification obligations
include those under its certificate of incorporation, by-laws, contracts and
insurance policies (to the extent applicable) and indemnification obligations of
CS Wireless otherwise existing as of December 2, 1998. CS Wireless expressly
agreed to assume any such indemnification obligation in any bankruptcy
proceeding filed by or against CS Wireless.
BUSINESS AND OPERATING STRATEGY
CS Wireless, in conjunction with CAI, has also developed a business plan
that contemplates the development and construction of a wireless broadband
network capable of providing various combinations of video, voice and data
transmission services to one or more strategic partners. In furtherance of
developing such a network and attracting one or more strategic partners, CS
Wireless entered into an agreement with CAI for the purpose of coordinating the
efforts of both companies with respect to two-way applications and the various
agreements required in order to submit such filings with the FCC. CS Wireless
has agreed to retain the engineering staff of CAI and has conferred upon CAI,
subject certain approvals of the CS Wireless board, the authority necessary for
CAI to analyze, design and implement all aspects of the frequency coordination
necessary for the two-way applications. The agreement calls for CS Wireless to
pay to CAI the costs of the personnel provided, including benefits, and the
facility and equipment utilized by the CAI personnel in delivering the services.
90
CS WIRELESS MARKETS
The table below outlines as of December 31, 1998 (except as indicated in the
footnotes) the characteristics of the markets in which CS Wireless has an
operational subscription television system or in which CS Wireless holds
significant spectrum rights:
ESTIMATED
TOTAL
SERVICE AREA WIRELESS CABLE NUMBER OF
MARKET HOUSEHOLDS(A) CHANNELS(B) SUBSCRIBERS(C)
- -------------------------------------------------------------------- -------------- ----------------- -------------
Bakersfield, CA..................................................... 162,000 32 7,100
Battle Creek/Kalamazoo, MI.......................................... 231,000 12 *
Cameron/Maysville, MO............................................... 65,000 33 3,100
Charlotte, NC(d).................................................... 580,000 13 *
Cleveland, OH....................................................... 1,178,000 29 18,200
Dallas, TX.......................................................... 981,000 29 1,500
Dayton, OH(e)....................................................... 610,000 33 7,500
Fort Worth, TX...................................................... 540,000 33 1,100
Grand Rapids, MI.................................................... 346,000 16 300
Kalispell, MT(d).................................................... 33,000 21 *
Kansas City, MO(f).................................................. 432,000 25 *
Minneapolis, MN..................................................... 959,000 28 3,100
Napoleon/Bloom Center, IN(e)........................................ 141,000 20 *
Nortonville/Effingham, KS........................................... 53,000 33 1,700
Rochester, MN....................................................... 57,000 25 *
San Antonio, TX..................................................... 550,000 33 10,500
Scottsbluff, NE..................................................... 25,000 20 *
Stockton/Modesto, CA................................................ 350,000 33 *
Story City, IA(g)................................................... 77,000 27 --
Sweet Springs, MO(e)................................................ 61,000 33 1,800
Wellsville, KS(e)................................................... 229,000 33 *
-------------- ------
TOTAL............................................................... 7,660,000 55,900
-------------- ------
-------------- ------
- ------------------------
* Market not yet in service.
(a) The Estimated Total Service Area Households in the service area
represents the approximate number of households within the service area
for the primary transmitter in each market based on census data. The
service area for a market varies based on a number of factors, including
transmitter height, transmitter power and the proximity of adjacent
wireless cable systems.
(b) The Number of Channels Available comprises 6 MHz of bandwidth and are
commonly referred to as wireless cable channels. Wireless cable channels
are either licensed to CS Wireless or leased to CS Wireless from other
license holders. There are no automatic rights to renew ITFS leases or
certain MDS leases. The Number of Channels also includes certain channels
that are subject to FCC approval of applications for new station
authorizations, power increases, transmitter relocations, as well as
third party interference agreements. The FCC's failure to grant one or
more new station applications could decrease the number of channels. The
FCC's failure to grant one or more power increase or transmitter
relocation applications, or the failure to obtain certain third party
interference agreements, could delay the initiation of service and/or
reduce the coverage area of the affected system or systems. CS Wireless
has the exclusive right to apply for 13 channels in the Wellsville
market, which channels are included in the above table.
91
(c) The Number of Subscribers represents the number of subscription video
subscribers as of March 31, 1999. The Number of Subscribers does not
include approximately 1,700 Story City, Iowa video subscribers. See note
(g) below.
(d) CS Wireless currently holds licenses for or leases five wireless cable
channels and also has the right to develop nine additional channels,
depending on interference considerations, in the Charlotte market as a
result of its ownership of the Charlotte BTA.
(e) When the FCC issues a station authorization, the licensee is afforded a
certain period of time to complete construction. If the licensee cannot
complete construction within the specified time frame, the licensee must
file a request with the FCC for additional time to complete construction.
The Napoleon/Bloom Center, Indiana market and the Wellsville, Kansas
market have 20 channels each, all of which are the subject of currently
pending requests for additional time to complete construction.
(f) The Kansas City, Missouri market was acquired by CS Wireless from
People's Choice TV Corp. ("PCTV") in connection with an exchange
consummated during the third quarter of 1997. The number of wireless
channels includes 4 leased channels for which a consent from the lessor
to assign the lease from PCTV to CS Wireless remains outstanding.
(g) CS Wireless assumed operational control of the Story City, Iowa market
effective December 30, 1997. CS Wireless subsequently agreed to transfer
the market to Heartland. See "Item 13--Certain Relationships and Related
Transactions--Story City, Iowa Operating Market and Heartland Exit
Transaction" in CS Wireless's Form 10-K for the fiscal year ended
December 31, 1998.
Additionally, CS Wireless owns or leases spectrum rights in Little Rock,
Arkansas; Louisville, Kentucky; Muskegon, Michigan; Portsmouth, New Hampshire;
and Oklahoma City, Oklahoma.
As of March 31, 1999, CS Wireless operated wireless cable systems in
Bakersfield, California; Cleveland and Dayton, Ohio; Dallas, Fort Worth, and San
Antonio, Texas; Grand Rapids, Michigan; Cameron/Maysville and Sweet Springs,
Missouri; Nortonville/Effingham, Kansas; and Minneapolis, Minnesota and has
acquired channel rights in other markets including Charlotte, North Carolina and
Stockton/ Modesto, California. Effective December 30, 1997, CS Wireless assumed
operational control over the Story City, Iowa market; however, CS Wireless has
agreed to transfer the market to Heartland Wireless Communications in connection
with the transactions contemplated by the December 2, 1998 master agreement
among CAI, CS Wireless and Heartland Wireless Communications. CS Wireless has
markets that do not fit with its strategy of regional concentration, and
therefore, it may sell or exchange such systems. CS Wireless had preliminary
discussions with potential buyers but has not executed any definitive agreements
with respect to the sale, trade, or other dispositions of such markets. CS
Wireless has engaged a broker to assist it with the solicitation of interest in
the purchase of certain markets.
CS WIRELESS' SERVICE OFFERINGS AND MARKETING
ANALOG SUBSCRIPTION VIDEO SERVICES. CS Wireless provides analog wireless
television services to the operational markets described in the table above.
Typically, CS Wireless offers for subscription 28 to 33 channels with
traditional off-air, cable and premium programming options. CS Wireless
generally offers the services through direct marketing to prospective
subscribers. In 1997, CS Wireless began to minimize marketing and capital
expenditures associated with analog services and equipment in order to commit
resources to digital technology. CS Wireless provided analog video programming
to approximately 55,900 subscribers (excluding the Story City, Iowa market) as
of March 31, 1999.
DIGITAL SUBSCRIPTION VIDEO SERVICES. The utilization of MMDS spectrum for
the delivery of analog television channels is limited by the capacity of the
spectrum; a full 6 MHz of spectrum is required for each analog channel. In 1996,
CS Wireless began to develop an infrastructure for the purpose of
92
delivering digital services. Compression technology allows 8-12 video signals to
be transmitted per each 6 MHz channel. CS Wireless intended to commence a full
commercial launch of digital television services in its Dallas market in 1997.
CS Wireless provided digital video programming to approximately 2,600
subscribers as of March 31, 1999. Towards that goal, in 1997, CS Wireless signed
an agreement with General Instrument Corporation for the purchase of equipment
necessary to deliver digital signals to subscribers. The timely delivery of
commercially viable equipment was an integral component of CS Wireless' plans to
offer digital video service.
Due to certain intervening events, CS Wireless and General Instrument agreed
in February 1998 to amend certain contractual obligations relating to delivery
dates, performance requirements, penalties and responsibilities in consideration
for certain pricing concessions. In connection with the amendment, CS Wireless
released General Instrument from any claims it may have had under the original
agreement. Unfortunately, due to a variety of factors, the intended full-scale
commercial launch has been indefinitely delayed. CS Wireless did commence a
controlled roll-out of its digital video product to selected areas in its Dallas
market subsequent to the end of the third quarter of 1998. CS Wireless evaluated
the results of the controlled roll-out and determined that, absent the
availability of certain equipment from General Instrument, a full-scale
commercial launch of digital video service is not presently feasible. In March
1999, CS Wireless entered into an agreement with General Instrument providing
for, among other things, the termination of the equipment purchase agreement
executed in 1997, the return of certain inventory in satisfaction of an account
receivable asserted by General Instrument, the continuing support by General
Instrument of inventory and equipment retained by CS Wireless and mutual
releases of certain claims asserted by each of General Instrument and CS
Wireless.
Additionally, in an effort to maximize the utilization of the MMDS spectrum,
CS Wireless and CAI formed TelQuest Satellite Services LLC, a Delaware limited
liability company, in August 1997. CS Wireless and CAI intended for TelQuest
Satellite Services to develop and generate satellite systems providing digital
services. CAI and CS Wireless hoped, via TelQuest Satellite Services, that they
would be required to construct only one digital compression center to service
all of the respective markets of CS Wireless and CAI. The utilization of a
single compression center would result in significant cost savings by
eliminating the need to construct compression centers in each market. In
addition, CAI and CS Wireless hoped TelQuest Satellite Services would provide a
direct-to-home service to enable delivery of services to locations that did not
fall within a LOS view and, ultimately, provide a means by which valuable MMDS
spectrum could be utilized for telephone and data delivery services. See
"Certain Relationships and Related Transactions--TelQuest Satellite Services" in
CS Wireless's Form 10-K for the fiscal year ended December 31, 1998.
CS Wireless also converted its analog system in San Antonio, Texas to a
hybrid digital format. However, the indefinite delay of the intended commercial
launch in CS Wireless' Dallas market has caused management to delay completion
of the conversion. In addition, one of CS Wireless' equipment vendors has
advised CS Wireless that it intends to phase out and discontinue certain product
lines, including products utilized by CS Wireless in its San Antonio market. CS
Wireless is currently exploring alternatives to those equipment and services.
Accordingly, CS Wireless may have to make additional expenditures with respect
to customer installation and/or conversion activities in San Antonio. CS
Wireless is evaluating its other markets to determine where and when to convert
existing analog markets to digital or offer hybrid digital services in
conjunction with existing or planned analog services. However, in the interim,
CS Wireless intends to minimize capital expenditures relative to the conversion
of analog markets to digital.
INTERNET ACCESS. The FCC has granted one way Internet access with respect
to all channels in the MMDS spectrum. CS Wireless commenced a limited commercial
offering of its Internet access services in the fall of 1997 for the purpose of
evaluating several business strategies. At this time, CS Wireless is exploring
and evaluating the costs and benefits of:
93
- serving as an Internet Service Provider to commercial and/or residential
accounts,
- providing transport services to existing or future Internet Service
Providers and
- acting in the capacity of a reseller of Internet access.
CS Wireless is presently capable of broadcasting Internet access services at
speeds significantly faster than today's traditional 28.8 Kbps modems, and
services approximately 250 subscribers in its Dallas and Ft. Worth markets as of
March 31, 1999.
TELEPHONE SERVICES. CS Wireless has entered into interconnection agreements
with Southwestern Bell Corp. and GTE for the purpose of offering consumer and/or
multiple dwelling unit operators a bundled package of video, Internet access and
telephony services. Additionally, CS Wireless entered into an agreement with MCI
WorldCom for the purpose of reselling long distance services. See "Chapter
I--The Merger--Description of Relationship Between MCI WorldCom and CS
Wireless."
MARKETING FOR MULTIPLE DWELLING UNITS. CS Wireless entered into a contract
in October 1997 with DIRECTV, Inc. for the purpose of offering enhanced
programming choices to multiple dwelling units in certain of CS Wireless' analog
markets. The contract enables CS Wireless to improve its product offering at a
relatively lower capital cost in response to competitive pressures in certain
selected markets. CS Wireless has commercially tested certain of its digital
video services in multiple dwelling units in Dallas, Texas and has entered into
service contracts with the owner and/or manager of certain multiple dwelling
units in the Dallas/Fort Worth metropolitan area.
REGULATION IN THE MMDS INDUSTRY
THE FOLLOWING SECTION IS A SUMMARY OF REGULATION IN THE MMDS INDUSTRY
GENERALLY AND APPLIES TO EACH OF CAI AND ITS SUBSIDIARIES, INCLUDING BUT NOT
LIMITED TO CS WIRELESS.
GENERAL
The wireless cable industry is subject to regulation by the FCC pursuant to
the Communications Act of 1934, as amended. The Communications Act empowers the
FCC, among other things, to issue, revoke, modify and renew licenses within the
spectrum available to wireless cable; to approve the assignment and/or transfer
of control of such licenses; to approve the location of wireless cable system
headends; to regulate the kind, configuration and operation of equipment used by
wireless cable systems; and to impose certain equal employment opportunity and
other obligations and reporting requirements on wireless cable channel license
holders and operators.
The FCC has determined that wireless cable systems are not "cable systems"
for purposes of the Communications Act. Accordingly, a wireless cable system
does not require a local franchise and is subject to fewer local regulations
than a hard-wire cable system. Moreover, all transmission and reception
equipment for a wireless cable system can be located on private property; hence,
there is no need to make use of utility poles or dedicated easements or other
public rights of way. Although wireless cable operators typically have to lease
from third parties the right to use a certain portion of the channels utilized
in any given system, unlike hard-wire cable operators they do not have to apply
for and be awarded a local franchise or pay local franchise fees. In recent
years, legislation has been introduced in some states, such as Illinois,
Maryland, Pennsylvania and Virginia, to authorize state and local authorities to
impose on all video program distributors (including wireless cable operators) a
tax on the distributors' gross receipts comparable to the franchise fees cable
operators pay. While the proposals vary among states, the bills all would
require, if passed, as much as 5% of gross receipts to be paid by wireless
distributors to local authorities. The industry opposed the state bills as they
were introduced, and, in Pennsylvania, Virginia and Maryland, wireless cable
systems were not subject to a new video gross receipts tax. However, Illinois
adopted a 5% gross receipts tax applicable to wireless cable. It is not possible
to predict whether new state laws will be proposed and enacted in other states
which impose new taxes on wireless cable operators.
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The FCC licenses and regulates the use of channels by license holders and
system operators. In the 50 largest markets, 33 6-MHz channels are available for
wireless cable delivery services (in addition to any local broadcast television
channels that can be offered to subscribers via an off-air antenna). In each
geographic service area of all other markets, 32 6-MHz channels are available
for wireless cable (in addition to any local broadcast television channels that
can be offered to subscribers via an off-air antenna). Except in limited
circumstances, 20 wireless cable channels in each of these geographic service
areas are generally licensed only to qualified non-profit educational
organizations (commonly referred to as ITFS channels). In general, each of these
channels must be used a minimum of 20 hours per week per channel for
instructional programming. The remaining "excess air time" on an ITFS channel
may be leased to wireless cable operators for commercial use, without further
restrictions (other than the right of the ITFS license holder, at its option, to
recapture up to an additional 20 hours of air time per week for educational
programming). Lessees of ITFS' "excess air time," generally have the right to
transmit to their customers the educational programming provided by the lessor
at no incremental cost. The FCC's rules permit ITFS license holders to
consolidate their educational programming on one or more ITFS channels, thereby
providing wireless cable operators leasing such channels greater flexibility in
their use of ITFS channels. The remaining 13 channels available in most of the
operating and targeted markets of each of CAI and CS Wireless are made available
by the FCC for full-time usage without programming restrictions.
LICENSING PROCEDURES
The actual number of wireless cable channels available for licensing in any
market is determined by the FCC's interference protection and channel allocation
rules. The FCC awards ITFS and MMDS licenses based upon applications
demonstrating that the applicant is legally, financially and technically
qualified to hold the license and that the operation of the proposed station
will not cause harmful interference to other stations or proposed stations
entitled to interference protection.
During the year ended March 31, 1996, CAI participated in the FCC's BTA
auction for awarding available commercial wireless spectrum in 493 markets
throughout the United States, identified as Basic Trading Areas in accordance
with material copyrighted by Rand McNally & Company. The winner of an auction
market has the right to apply for the available MMDS frequencies throughout the
auction market, consistent with certain specified interference criteria that
protect existing ITFS and MMDS channels. Existing ITFS and MMDS channel right
holders also must protect the auction market winner's spectrum from power
increases, tower relocations, or other changes to their stations. CAI was the
successful bidder for 32 auction markets, costing CAI a total of $48.8 million.
Pursuant to an agreement with CS Wireless, CAI has transferred seven auction
markets located in CS Wireless' operating regions and for which CAI was the
successful bidder, costing an aggregate of $12.6 million, to CS Wireless at
cost. For each of the auction markets in which CAI was the successful bidder,
CAI was required to submit the requisite FCC applications and make a
down-payment (20% of such successful bid offset by amounts previously paid)
within five business days of the announcement by public notice of the successful
bid. When the authorization for an auction market is ready to be issued by the
FCC, the FCC will release a public notice to that effect. Within 5 business days
of such public notice, the successful bidder is required to remit the balance of
its bid to the FCC, whereupon the auction market authorization will be issued by
the FCC. As of March 31, 1999, authorizations for all but two of the auction
markets for which CAI was the successful bidder have been issued by the FCC and
paid for by CAI.
In February 1995, the FCC amended its rules and established "windows" for
the filing of new ITFS applications or major modifications to authorized ITFS
facilities. The first filing "window" was October 16-20, 1995. (CAI supported a
number of ITFS new station and major modification applications.) Where two or
more ITFS applicants file applications for the same channels and the proposed
facilities could not be operated without impermissible interference, the FCC
employs a set of
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comparative criteria to select from among the competing applicants. More
recently, the FCC concluded a rule-making proceeding that contemplates
conducting auctions where two or more ITFS applicants file competing
applications. The FCC has yet to implement rules to govern the ITFS auction
process, nor has it set a date for an auction. Construction of ITFS stations
generally must be completed within 18 months of the date of grant of the
authorization. If construction of MMDS or ITFS stations is not completed within
the authorized construction period, the licensee must file an application with
the FCC seeking additional time to construct the station and demonstrate therein
compliance with certain FCC standards. If the extension application is not filed
or is not granted, the license will be deemed forfeited. ITFS and MMDS licenses
generally have terms of 10 years. Licenses must be renewed thereafter, and may
be revoked for cause in a manner similar to other FCC licenses. FCC rules
prohibit the sale for profit of a conditional MMDS license or a controlling
interest in the conditional licensee prior to construction of the station or, in
certain circumstances, prior to the completion of one year of operation.
However, the FCC does permit the leasing of 100% of an MMDS licensee's spectrum
to a wireless cable operator and the granting of options to purchase a
controlling interest in a license even before such holding period has lapsed.
Wireless cable transmissions are subject to FCC regulations governing
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or
digital). Until recently, FCC regulations required wireless cable systems to
transmit only analog signals and those regulations needed to be modified, either
by rule-making or by individual application, to permit the use of digital
transmissions. CAI was a party to a petition for declaratory ruling filed in
July 1995 seeking approval of interim regulations authorizing digital
transmission. This petition was granted on July 9, 1996, and allows wireless
license holders to operate digitally under current FCC interference rules. The
license holder is, however, required to file for digital authorization.
In September 1998, the FCC issued new rules that permit and regulate the
deployment of MMDS spectrum for two-way services. The new rules facilitate the
use of ITFS and MMDS channels for the distribution of voice and data services,
in addition to video services, from multiple cell sites by implementing an
expedited licensing scheme. The new licensing scheme contemplates the issuance
of authorizations to operators and licensees to install, receive, and transmit
antennas at subscriber locations within broad geographic areas around cell
sites; the creation of contiguous spectrum for upstream and downstream
transmissions by swapping and shifting channels; the creation of subchannels
(less than 6 MHz) and superchannels (greater than 6 MHz); and the use of new
modulations schemes. Furthermore, the FCC changed certain ITFS leasing rules,
including extending the maximum length of lease terms from ten to fifteen years,
broadening the definition of educational usage to include data and voice
distribution, and reducing the minimum amount of channel capacity an ITFS
licensee must reserve for its own educational purposes to five percent of the
total capacity. Several issues were appealed, and the FCC has adopted an order
revising certain aspects of the new rules. Among other matters, the order on
appeal expands the streamlined application processing system and relaxes certain
installation and notice requirements for low-power subscriber stations, making
it easier for individual customers to use the service.
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the co-location of a
commercially viable number of MMDS channels and operations with similar
transmission characteristics (such as power and polarity). In order to commence
the operations of certain markets of CAI and its subsidiaries, applications have
been or will be filed with the FCC to relocate and modify existing transmission
facilities. Under current FCC regulations, a wireless cable operator generally
may serve subscribers anywhere within the line of sight of its transmission
facility, provided that the signal complies with FCC interference standards.
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Under rules adopted by the FCC on June 15, 1995 and effective as of
September 15, 1995, an MMDS channel license holder generally has a protected
service area of 35 miles around its transmitter site. In launching or upgrading
a system, a wireless cable company may wish to relocate its transmission
facility or increase its height or power. If such changes cause the signal to
violate interference standards with respect to the protected service area of
other wireless license holders, the company desiring to relocate would be
required to obtain the consent of such other license holders; however, there can
be no assurance that such consents would be received.
CHANGE IN CONTROL ISSUES
Under federal law, the FCC must grant prior approval to any assignment or
transfer of control involving an entity that holds a FCC license. The governing
statute and the FCC's rules distinguish between minor and major changes of
control, and the FCC thus has two different processes tailored to fit the extent
to which the licensed entity undergoes changes: (a) a "short form" or pro forma
change of control process that takes approximately two weeks from filing to
grant, for use when, among other things, a licensed entity changes its form of
doing business (e.g., from a partnership to a corporation) without effectuating
any ownership changes of such entity, and (b) a "long form" change of control
process that generally takes a minimum of two to four months, for use when,
among other things, a licensed entity proposes to undergo a permanent change in
the ownership of fifty percent (50%) or more of its voting securities.
Although the FCC retains broad discretion with respect to the proposed
transaction, there are relatively few well-established bases upon which an
interested party can successfully challenge a transfer-of-control application in
the MMDS industry. Generally, unless the prospective owners of the licensed
entity (1) are not citizens of the United States or (2) hold significant
interests in hard-wire cable companies whose franchises overlap with the
licensed entity's areas of operation, the FCC will approve the subject
transaction. Thus, absent a challenge, and upon concluding that the proposed
transaction is in the public interest, the FCC will generally grant a
transfer-of-control application within approximately two to four months from the
date it is filed.
INTERFERENCE ISSUES
Interference from other wireless cable systems can limit the ability of a
wireless cable system to serve any particular site. In licensing ITFS and MMDS
systems, a primary concern of the FCC is avoiding situations where proposed
stations are predicted to cause interference with the reception of previously
authorized or proposed stations. Pursuant to FCC rules, a wireless cable system
is generally protected from interference within a radius of 35 miles of the
transmission site. In addition, modification and new station applications
submitted after the FCC's BTA auction will be required to protect BTA auction
winners from interference. The FCC's interference protection standards may make
one or more of these proposed modifications or new grants unavailable. In such
event, it may be necessary to negotiate interference agreements with the
licensees of the systems which would otherwise block such modifications or
grants. CAI cannot assure that it will be able to negotiate necessary
interference agreements on acceptable terms. If CAI cannot obtain interference
agreements required to implement acceptable plans for a market, it may have to
curtail or modify operations in that market, utilize a less optimal tower
location, or reduce the height or power of the transmission facility, any of
which could have a material adverse effect on anticipated growth in that market.
In addition, while leases with ITFS and MMDS licensees require their
cooperation, it is possible that one or more channel lessors may hinder or delay
the efforts of CAI to use the channels in accordance with its plans for the
particular market.
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THE 1992 CABLE ACT
On October 5, 1992, Congress enacted the 1992 Cable Act, which compels the
FCC to, among other things:
- approve comprehensive federal standards for the local regulation of
certain rates charged by hard-wire cable operators,
- impose customer service standards on hard-wire cable operators,
- govern carriage of certain broadcast signals by all multi-channel video
providers, and
- compel non-discriminatory access to programming owned or controlled by
vertically-integrated cable operators.
The rate regulations adopted by the FCC do not regulate cable rates once
other multi-channel video providers serve, in the aggregate, at least 15% of the
households within the cable franchise area. The FCC's customer service rules
establish certain minimum standards to be maintained by traditional hard-wire
cable operators. These standards include prompt responses to customer telephone
inquiries, reliable and timely installations and repairs, and readily
understandable billing practices. Although these rules do not apply to wireless
cable operators, CAI believes that it provides and will continue to provide
customer service superior to its hard-wire cable competitors.
Under the retransmission consent provisions of the 1992 Cable Act and the
FCC's implementing regulations, all multi-channel video providers (including
both hard-wire and wireless cable) seeking to retransmit certain commercial
broadcast signals must first obtain the permission of the broadcast station.
Hard-wire cable systems, but not wireless cable systems, are required under the
1992 Cable Act and the FCC's "must carry" rules to retransmit a specified number
of local commercial television or qualified low power television signals.
The 1992 Cable Act and the FCC's implementing regulations established cable
rate regulations, imposed limits on exclusive programming contracts and
prohibited programmers in which a cable operator has an attributable interest
from discriminating against cable competitors with respect to the price, terms
and conditions of programming. Under the Telecommunications Act of 1996,
Congress directed the FCC to eliminate cable rate regulations for "small
systems," as defined in the Telecommunications Act, and for large systems under
certain prescribed circumstances, and for all cable systems effective March 31,
1999.
While current FCC regulations are intended to promote the development of a
competitive subscription television industry, the rules and regulations
affecting the wireless cable industry may change, and any future changes in FCC
rules, regulations, policies and procedures could have a material adverse effect
on CAI. The extent to which wireless cable operators may continue to maintain a
price advantage over traditional hard-wire cable operators could be diminished
if statutory or regulatory provisions are adopted that strengthen or reimpose
cable rate regulations. Strict rate regulation of cable rates would also tend to
impede the ability of hard-wire cable operators to upgrade their cable plant and
gain a competitive advantage over wireless cable.
THE TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act, enacted in February 1996, could have a material
impact on the MMDS industry and the competitive environment in which CAI and its
subsidiaries operate. The Telecommunications Act has and will continue to result
in comprehensive changes to the regulatory environment for the
telecommunications industry as a whole. The legislation, among other things,
substantially reduced regulatory authority over cable rates. Another provision
of the
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Telecommunications Act afforded hard-wire cable operators greater flexibility to
offer lower rates to certain of its subscribers and would permit cable operators
to offer discounts on hard-wire cable service to the subscribers or prospective
CAI subscribers. The legislation also permits telephone companies to enter the
video distribution business, subject to certain conditions. The entry of
telephone companies into the video distribution business, with greater access to
capital and other resources, could provide significant competition to the
companies in the MMDS industry. In addition, the legislation afforded relief to
direct broadcast satellite providers by exempting such providers from local
restrictions on reception antennas and preempting the authority of local
governments to impose certain taxes. The FCC has issued several orders
implementing the Telecommunications Act, the most recent of which was released
on March 29, 1999.
COPYRIGHT
Under the federal copyright laws, permission from the copyright holder
generally must be secured before a video program may be retransmitted. Under
Section 111 of the Copyright Act, certain "cable systems" are entitled to engage
in the secondary transmission of programming without the prior permission of the
holders of copyrights in the programming. In order to do so, a cable system must
secure a compulsory copyright license. Such a license may be obtained upon the
filing of certain reports with and the payment of certain fees to the U.S.
Copyright Office. In 1994, Congress enacted the Satellite Home Viewers Act of
1994 that enables operators of wireless cable television systems to rely on the
cable compulsory license under Section 111 of the Copyright Act. For the year
ended March 31, 1999, CAI paid approximately $80,000 in fees. For the year ended
December 31, 1998, CS Wireless paid approximately $148,000 in fees, $75,000 of
which it paid in March, 1999.
Direct-to-home satellite distributors rely on a compulsory license under a
different provision, Section 119 of the Copyright Act, to retransmit distant
broadcast signals to subscribers' homes in areas where local broadcast signals
are difficult to receive. The satellite compulsory license expires in 1999
unless reauthorized by Congress. Legislation has been introduced which would
renew the satellite compulsory license and increase the ability of
direct-to-home services to transmit broadcast signals into local loop areas.
Renewal of the satellite compulsory license and enactment of provisions to
retransmit local signals into local areas will enhance the ability of
direct-to-home satellite services to compete with wireless cable systems.
RETRANSMISSION CONSENT
Under the retransmission consent provisions of the 1992 Cable Act, wireless
and hard-wire cable operators seeking to retransmit certain commercial
television broadcast signals must first obtain the permission of the broadcast
station in order to retransmit their signal. However, wireless cable systems,
unlike hard-wire cable systems, are not required under the FCC's "must carry"
rules to retransmit a specified number of local commercial television or
qualified low power television signals. Although CAI cannot assure you that it
will be able to obtain requisite broadcaster consents, management believes in
most cases that CAI will be able to do so for little or no additional cost.
REGULATION BY THE FAA
In addition to regulation by the FCC, MMDS operators are subject to
regulations by the Federal Aviation Administration with respect to construction
of transmission towers and to certain local zoning regulations affecting
construction of towers and other facilities. Local authorities, neighborhood
associations and other similar organizations may impose restrictions limiting
the use of certain types of reception equipment used by companies in the
wireless cable industry. Future changes in the foregoing regulations or any
other regulations applicable to CAI could have a material adverse effect on its
results of operations and financial condition.
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STATE MANDATORY ACCESS LAWS
Certain states have legislated that each resident of a multiple dwelling
unit should not be denied access to programming provided by franchised cable
systems, notwithstanding the fact that the multiple dwelling unit entered into
an exclusive agreement with a non-franchised video program distributor. States
with such "mandatory access" laws include Connecticut, Delaware, the District of
Columbia, New Jersey, New York, Pennsylvania and Rhode Island. In several
district courts, mandatory access laws have been held unconstitutional. Such
laws could increase the competition for subscribers in multiple dwelling units.
Local authorities may also impose additional restrictions. CAI cannot assure
that it will not have to incur additional costs to comply with such regulations
or restrictions.
COMPETITION
THE FOLLOWING SECTION IS A SUMMARY OF COMPETITION IN THE MMDS INDUSTRY
GENERALLY AND APPLIES TO EACH OF CAI AND ITS SUBSIDIARIES, INCLUDING BUT NOT
LIMITED TO CS WIRELESS.
The subscription television industry is highly competitive. The principal
subscription television competitors of CAI in each market are traditional
hard-wire cable, direct-to-home satellite services and private cable operators.
In addition, home video cassettes compete with premium movie services offered by
the cable television systems. In areas where several local off-air VHF/UHF
broadcast channels can be received without the need for subscription television,
cable television systems also have faced competition from the availability of
broadcast signals generally and have found market penetration to be more
difficult. Legislative, regulatory and technological developments may result in
additional and significant competition, including competition from local
telephone companies.
HARD-WIRE CABLE
CAI's principal subscription television competitors in each market are
traditional hard-wire cable operators. Hard-wire cable companies are generally
well established and known to potential customers and have significantly greater
financial and other resources than CAI. The competing hard-wire cable companies
generally offer significantly increased channel line-ups, compared to between 22
to 42 channels (consisting of between 17 and 33 wireless cable channels and
between 5 and 10 local off-air VHF/UHF broadcast channels) generally offered
presently by CAI in its markets. According to a report issued by the FCC in
December 1998, of the approximately 98 million total households nationwide with
at least one television, approximately 95.1 million are passed by hard-wire
cable systems, and of those homes that are passed by cable, approximately 65.4
million are hard-wire cable subscribers.
DIRECT-TO-HOME (DTH)
DTH satellite television services originally were available via satellite
receivers which generally were 7-to-12 foot dishes mounted in the yards of homes
to receive television signals from orbiting satellites. Until the implementation
of encryption, these dishes enabled reception of any and all signals without
payment of fees. The requirement that customers purchase decoders and pay for
programming has reduced the popularity of DTH satellite television, although CAI
will, to some degree, compete with these systems in marketing its services.
Another form of DTH service is DBS, which involves the transmission of an
encoded signal direct from a satellite to the customer's home. Because the
signal is at a higher power level and frequency than most satellite-transmitted
signals, its reception can be accomplished with a relatively small (18-inch)
dish mounted on a rooftop or in a yard. In most areas of the country, DBS
currently cannot, for technical and legal reasons, provide local VHF/UHF
broadcast channels as part of its service, although many DBS subscribers receive
such channels via standard over-the-air receive antennas. DBS may provide
subscribers with access to broadcast network distant signals only when such
subscribers reside in areas unserved by any broadcast station. The cost to a DBS
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subscriber for equipment and service is generally substantially higher than the
cost to wireless cable subscribers. According to a report issued by the FCC in
December 1998, there are approximately 7.2 million subscribers using DBS
services.
PRIVATE CABLE
Private cable, also known as satellite master antenna television, is a
multi-channel subscription television service where the programming is received
by a satellite receiver and then transmitted via coaxial cable throughout
private property, often multiple dwelling units, without crossing public rights
of way. Private cable operates under an agreement with a private landowner to
service a specific multiple dwelling unit, commercial establishment or hotel.
The FCC amended its rules to provide point-to-point delivery of video
programming by private cable operators and other video delivery systems in the
18 GHz band. Private cable operators compete with CAI for exclusive rights of
entry into larger multiple dwelling units.
TELEPHONE COMPANIES
The Telecommunications Act of 1996 removed many of the restrictions on the
ability of local exchange carriers, including regional bell operating companies,
to provide video programming directly to subscribers in their respective
telephone service areas. Thus, while there remains a prohibition against a local
exchange carrier acquiring a hard-wire cable operator within its telephone
service area, local exchange carriers can build their own hard-wire cable
systems. In addition to having the opportunity to install traditional hard-wire
cable, local exchange carriers also have the option of installing high capacity
fiber optic facilities. CAI believes that it will continue to maintain a cost
advantage over installing hard-wire, fiber optic or open video distribution
platforms due to the high capital expenditures associated with such
technologies. Bell South Corporation has acquired wireless cable channel rights
in Atlanta, GA, New Orleans, LA, and Miami, FL and begun to offer services in
New Orleans and Atlanta. The competitive effect of the entry of telephone
companies into the subscription television business, including wireless cable,
is still uncertain.
LOCAL OFF-AIR VHF/UHF BROADCASTS
Local off-air VHF/UHF broadcast television stations (such as ABC, NBC, CBS
and Fox) provide free programming to the public. Previously, subscription
television operators could retransmit these broadcast signals without
permission. However, effective October 6, 1993, pursuant to the 1992 Cable Act,
local broadcasters may require that subscription television operators obtain
their consent before retransmitting local television broadcasts. CAI has
obtained such consents for its operating systems and CAI will be required to
obtain such consents in certain of its markets to re-broadcast any such
channels. Although management believes that it will be able to obtain such
consents, CAI cannot assure that it will be able to obtain all such consents.
The FCC also has recently permitted broadcast networks to acquire, subject to
certain restrictions, ownership interests in hard-wire cable systems. In some
areas, several low power television stations authorized by the FCC are used to
provide multi-channel subscription television service to the public. Low power
television service transmits on conventional VHF/UHF broadcast channels, but is
restricted to very low power levels, which limits the area where a high-quality
signal can be received.
LOCAL MULTI-POINT DISTRIBUTION SERVICE (LMDS)
In 1993, the FCC initially proposed to redesignate the 28 GHz band to create
a new video programming delivery service referred to as LMDS. In July 1995, the
FCC proposed to award licenses in each of 493 BTAs pursuant to auctions. Final
rules were issued by the FCC, and the auction for LMDS spectrum was conducted,
in February 1998. Bidders bid on an A-block license, consisting of
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1,150 MHz of spectrum, and a B-block license, consisting of 150 MHz of spectrum,
in each BTA. A total of 864 licenses were sold to 104 bidders for bids totaling
$578.6 million. 161 licenses were not sold, including 121 A-block licenses and
40 B-block licenses. The FCC re-auctioned the unsold licenses in April and May
of 1999 for a total of $45,069,450.
The LMDS licensees share the 28 GHz frequency band with the Mobile Satellite
Service and the 31 GHz band with state and local governments. The FCC allows the
LMDS licensees to use the spectrum for a variety of services, including
telephony, interactive video, video distribution, data transmission,
teleconferencing, and other applications. Depending on the type and number of
services offered, the cost of the customer-premises equipment could range from
$300 (for a video receive antenna) to $1,000 (for telephony, video, and data
capabilities).
OTHER COMPETITIVE FACTORS
In addition, within each market, CAI initially must compete with others to
acquire, from the limited number of MMDS channels issued or issuable, rights to
a minimum number of MMDS channels needed to establish a commercially viable
system. Digital capability is essential for MMDS to compete with hard-wire
cable, which in its current analog state offers between 36 to 90 channel
offerings depending on a given market. With the deployment of digital, hard-wire
cable is expected to offer over 150 channels. CAI has lost television
subscribers to hard-wire cable competitors in certain of its markets due to the
channel capacity limitations inherent in an analog-based MMDS operation. In
addition, within each market, CAI initially must compete with others to acquire,
from the limited number of MMDS channels issued or issuable, rights to a minimum
number of MMDS channels needed to establish a commercially viable system.
Aggressive price competition or the passing of a substantial number of presently
unpassed households by any existing or new subscription television service could
have a material adverse effect on the results of operations and financial
condition of CAI.
New and advanced technologies for the subscription television industry, such
as digital compression, fiber optic networks, DBS transmission, video dialtone,
and LMDS are in various stages of development for commercial deployment. These
technologies are being developed and supported by entities, such as hard-wire
cable companies and regional bell operating companies, that have significantly
greater financial and other resources than CAI. These new technologies could
have a material adverse effect on the demand for MMDS subscription television
services. CAI cannot assure that it will be able to compete successfully with
existing competitors or new entrants in the market for subscription television
services.
CAI will also face intense competition from other providers of data and
telephony transmission services if such services are implemented on a commercial
basis. Such competition is increased due to the fact that MMDS spectrum has not
traditionally been utilized to deliver such alternative services, and consumer
acceptance of such services delivered via MMDS technology is unknown at this
time. Many of the existing providers of data transmission and telephony
services, such as long distance and regional telephone companies, have
significantly greater financial and other resources than CAI. In addition, CAI
cannot assure that there will be consumer demand for alternative uses of the
MMDS spectrum such as data transmission, including Internet access services, and
telephony delivery services, that CAI will be able to compete successfully
against other providers of such services, or that it will be able to achieve
profitability from such services in future years.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THROUGHOUT THIS SECTION, WHEN WE REFER TO THE TERM "COMPANY," WE MEAN CAI
WIRELESS SYSTEMS, INC. AND ITS SUBSIDIARIES, INCLUDING ITS WHOLLY-OWNED
SUBSIDIARIES AND ITS PARTIALLY-OWNED SUBSIDIARIES, INCLUDING CS WIRELESS
SYSTEMS, INC., TELQUEST SATELLITE SERVICES LLC, CAI DATA SYSTEMS, INC., CAI
SATELLITE COMMUNICATIONS, INC. AND MMDS SATELLITE VENTURES, INC., ON A
CONSOLIDATED BASIS, FROM AND AFTER OCTOBER 14, 1998. WHEN WE REFER TO THE TERM
"PREDECESSOR ENTITY," WE MEAN CAI WIRELESS SYSTEMS, INC. AND ITS SUBSIDIARIES
PRIOR TO OCTOBER 14, 1998. WHEN WE REFER TO THE TERMS "CAI" AND "CS," WE MEAN
CAI WIRELESS SYSTEMS, INC. AND CS WIRELESS SYSTEMS, INC., RESPECTIVELY, EACH ON
A STAND-ALONE BASIS. WHEN WE REFER TO "MMDS SPECTRUM," WE MEAN THE MULTICHANNEL
MULTIPOINT DISTRIBUTION SERVICE CHANNELS, MULTICHANNEL DISTRIBUTION SERVICE
CHANNELS, INSTRUCTIONAL TELEVISION FIXED SERVICE CHANNEL AND WIRELESS
COMMUNICATIONS SERVICE SPECTRUM REGULATED BY THE FEDERAL COMMUNICATIONS
COMMISSION THAT ARE OWNED OR CONTROLLED BY CAI WIRELESS SYSTEMS, INC. AND ITS
SUBSIDIARIES.
THE STATEMENTS CONTAINED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS RELATING TO THE COMPANY'S
OPERATING RESULTS, AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS
AND ITS PRODUCTS AND SERVICES, CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
ACTUAL RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS AND MAY BE AFFECTED BY A NUMBER OF FACTORS INCLUDING
THE COMPANY'S ABILITY TO SATISFY THE VARIOUS CONDITIONS CONTAINED IN THE
AGREEMENT AND PLAN OF MERGER AMONG CAI, MCI WORLDCOM, INC. AND CARDINAL
ACQUISITION SUBSIDIARY INC., THE RECEIPT OF REGULATORY APPROVALS NECESSARY TO
CONSUMMATE THE MERGER, THE RECEIPT OF REGULATORY APPROVALS NECESSARY TO DEPLOY
ALTERNATIVE USES OF ITS MMDS SPECTRUM AND OTHER FACTORS CONTAINED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, ELSEWHERE IN THIS PROXY STATEMENT AND IN CAI'S SECURITIES FILINGS.
WE CANNOT ASSURE THAT THE TRANSACTIONS CONTEMPLATED BY THE AGREEMENT AND PLAN OF
MERGER WILL BE CONSUMMATED ON A TIMELY BASIS, IF AT ALL.
OVERVIEW
GENERAL. The Company provides wireless broadband and subscription video
services utilizing MMDS spectrum primarily in the northeastern, midwestern and
southcentral regions of the United States. CAI operates six analog-based
subscription video systems providing video services to approximately 32,300
subscribers as of March 31, 1999. CAI's operating systems are located in New
York City, Rochester and Albany, NY; Philadelphia, PA; Washington, D.C., and
Norfolk/Virginia Beach, VA. CS operates 11 subscription video systems providing
video services to approximately 55,900 subscribers as of March 31, 1999
(exclusive of subscribers in the Story City, Iowa market). CS' operating systems
are located in Bakersfield, CA; Grand Rapids, MI; Sweet Springs and Cameron/
Maysville, MO; Cleveland and Dayton, OH; San Antonio, Ft. Worth and Dallas, TX;
Minneapolis, MN; and Nortonville/Effingham, KS. In addition to its 17 operating
markets, the Company owns the BTA authorization from the FCC or has aggregated
MMDS spectrum rights in 30 unconstructed markets. CAI also provides high-speed
Internet access on a wholesale basis in Boston, New York City and Rochester, New
York. CS also provides high-speed Internet access in its Ft. Worth and Dallas
markets utilizing MMDS spectrum.
On July 30, 1998, CAI and Philadelphia Choice Television, Inc., one of its
wholly-owned subsidiaries, filed voluntary petitions under Chapter 11, Title 11
of the United States Code. The reorganization plan proposed by CAI and
Philadelphia Choice was confirmed by the bankruptcy court on September 30, 1998.
CAI and Philadelphia Choice consummated the reorganization plan and emerged from
Chapter 11 on October 14, 1998. The case remains open, with the bankruptcy court
retaining limited jurisdiction, pending the entry of a final decree closing the
case.
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Although CAI has emerged from bankruptcy, the recurring losses of the
Company (and the Predecessor Entity prior to the bankruptcy), restrictions on
the Company's ability to obtain additional financing and substantial commitments
for capital expenditures raise significant doubt about the Company's ability to
continue as a going concern. The Company's business plan is to maintain its MMDS
spectrum capacity while searching for a strategic partner interested in
utilizing the Company's MMDS spectrum in a two-way digital environment.
On April 26, 1999, CAI entered into an agreement and plan of merger with MCI
WORLDCOM, Inc. and Cardinal Acquisition Subsidiary Inc., a wholly-owned
subsidiary of MCI WorldCom, which agreement provides for CAI shareholders to
receive $28.00 per CAI common share in cash upon the merger of CAI with Cardinal
Acquisition Subsidiary. The transaction is subject to customary conditions,
including receipt of required regulatory approvals. In connection with the
execution of the merger agreement, CAI also granted to MCI WorldCom an option to
purchase 6,090,481 CAI common shares at $28.00 per share, subject to certain
conditions.
While the Company anticipates that the merger will be consummated during the
third calendar quarter of 1999, CAI cannot assure that the merger will be
consummated or that CAI will become a wholly-owned subsidiary of MCI WorldCom.
In the event, however, that the merger is not consummated, the Company will not
be able to meet its cash needs without additional borrowings or the issuance and
sale of equity or debt. The Company cannot assure that it would be able to
borrow or raise such additional amounts, or that the terms pursuant to which the
Company may be able to borrow or raise such funds would be on terms satisfactory
to the Company.
On March 23, 1999, MCI WorldCom entered into separate agreements to acquire,
among other things, an aggregate of approximately 10,555,140 issued and
outstanding CAI common shares owned by various third parties, representing
approximately 61.2% of the issued and outstanding CAI common shares entitled to
vote on the merger. According to MCI WorldCom, the agreements provide that each
of the sellers' and MCI WorldCom's obligations to sell or purchase, as the case
may be, the CAI common shares is subject to certain conditions. On June 4, 1999,
MCI WorldCom completed the acquisition of 8,284,425 CAI common shares pursuant
to one such agreement. Additionally, on July 9, 1999, MCI WorldCom acquired
2,270,715 CAI common shares pursuant to one of the separate agreements described
above. Taking into account certain other acquisitions of CAI common shares, MCI
WorldCom owned 10,684,140 CAI common shares as of July 28, 1999, and thereby was
a 62.0% shareholder of CAI. MCI WorldCom also holds $119,412,609 aggregate
principal amount of CAI's 13% senior notes due 2004, $80,000,000 aggregate
principal amount of CAI's senior secured notes due 2000 (issued under CAI's exit
facility, described below) and $239,200,000 aggregate principal amount of CS'
11 3/8% senior discount notes due 2006. MCI WorldCom has agreed to vote its CAI
common shares in favor of the merger.
As a result of the increase in the price per CAI common share, principally
as a result of the pending merger, CAI will incur additional compensation
expense in the fiscal quarter ended June 30, 1999 estimated to be in excess of
$30,000,000.
REORGANIZATION. As indicated above, during the fiscal year ended March 31,
1999, CAI and one of its wholly-owned subsidiaries reorganized under Chapter 11
of the United States Bankruptcy Code. The Chapter 11 case commenced on July 30,
1998 in the United States Bankruptcy Court for the District of Delaware. The
reorganization plan was confirmed by the bankruptcy court on September 30, 1998,
and CAI consummated the reorganization plan and emerged from Chapter 11 on
October 14, 1998.
In connection with the consummation of the reorganization plan, CAI recorded
an extraordinary gain of $85.4 million reflecting the extinguishment of debt.
Long-term debt totaling approximately $308 million, including accrued interest
thereon and associated issuance costs, were replaced with $100 million aggregate
principal amount at issuance of CAI's 13% senior notes due 2004, 100% of the
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equity of reorganized CAI (subject to dilution by shares issued to MLGAF in
connection with the exit facility described below) and approximately $17.0
million in cash. The extinguished debt of CAI included $275 million aggregate
principal amount of CAI's 12 1/4% senior notes due 2002, CAI's 12% subordinated
note in the principal amount of $30 million and approximately $2.8 million
aggregate principal amount of acquisition-related subordinated notes of CAI,
together with interest accrued thereon.
The CAI reorganization plan did not provide any recovery for the holders of
CAI equity, or holders of claims against CAI based upon or arising out of the
purchase or sale of CAI equity securities. Consequently, 40,543,039 shares of
CAI common stock, without par value, together with all options and warrants to
purchase such common stock, were canceled on October 14, 1998. CAI issued
15,000,000 shares of new CAI common stock, par value $.01 per share, to the
holders of the 12 1/4% senior notes, the 12% subordinated note and the
acquisition-related notes. CAI also issued 2,241,379 new CAI common shares on
October 14, 1998 to Merrill Lynch Global Allocation Fund, Inc. ("MLGAF"), in
connection with an $80 million credit facility provided by MLGAF to CAI.
IMPACT OF FRESH-START REPORTING ON RESULTS OF OPERATIONS. In connection
with its emergence from Chapter 11, CAI adopted fresh-start reporting in
accordance with Statement of Position ("SOP") 90-7 of the American Institute of
Certified Public Accountants. Under fresh-start reporting, the reorganization
value of CAI has been allocated to its assets and liabilities on a basis
substantially consistent with purchase accounting. The portion of reorganization
value not attributable to specific assets has been recorded on the balance sheet
as "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets."
Certain fresh-start reporting adjustments, primarily related to the adjustment
of CAI's assets and liabilities to fair market values as of October 14, 1998,
the date CAI consummated its Chapter 11 case, will have a significant effect on
future statements of operations. The more significant adjustments relate to
increased amortization expense relative to reorganization value in excess of
amounts allocable to identifiable assets and wireless channel rights.
CONSOLIDATION OF CS INTO CAI. On December 2, 1998, CAI acquired 3,836,035
shares of CS common stock from Nucentrix Broadband Networks, Inc.
("Nucentrix"--formerly known as Heartland Wireless Communications, Inc.) for
approximately $1.5 million. The purchase was part of a series of transactions
contemplated by a master agreement dated as of December 2, 1998 among CAI, CS
and Nucentrix. In addition to the stock purchase and certain other transfers of
assets between CS and Nucentrix, the parties agreed to terminate the
stockholders agreement dated as of February 23, 1996 among CAI, CS and
Nucentrix. Shortly after the December 2, 1998 closing of the CS stock purchase
and termination of the stockholders agreement, CS purchased the 3,836,035 shares
of CS common stock from CAI for the same price that CAI had paid Nucentrix for
such stock. As a result of these transactions, CAI became the 94% stockholder of
CS, and all agreements with respect to the control of CS among CAI, CS and
Nucentrix terminated. Accordingly, the financial condition and results of
operations of CS as of and for the four-month period ended March 31, 1999 have
been accounted for under the purchase method of accounting and consequently
consolidated into the Company's financial statements effective December 2, 1998.
Notwithstanding such consolidation, CS continues to operate as a stand-alone
entity, 94% of which is owned by CAI. The remaining 6% of the common stock of CS
is held by certain unaffiliated third parties and holders of CS' $400,000,000
aggregate principal amount of its Series B 11 3/8% senior discount notes due
2006. CS also maintains the CS Wireless Systems, Inc. Incentive Stock Plan,
pursuant to which options to purchase 521,291 CS common shares at $6.50 per
share and options to purchase 112,526 CS common shares at $9.40 per share were
outstanding at December 31, 1998.
SECURED BORROWINGS. On November 25, 1997, CAI repaid approximately $17.3
million, representing all amounts outstanding under a credit facility provided
to CAI by Foothill Capital Corporation
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("Foothill") and affiliates of Canyon Capital Management, L.P. ("Canyon"). The
repayment consisted of $15.3 million in principal amount, $1.6 million in fees
and $350,000 in interest on the outstanding amount. The repayment was made in
advance of maturity of the credit facility. Consequently, CAI recorded an
extraordinary charge in the third quarter of the fiscal year ended March 31,
1998 of approximately $4.7 million, representing the costs associated with this
credit facility that CAI was originally amortizing over the two-year term of the
credit facility.
CAI obtained the funds to repay Foothill and Canyon through the issuance and
sale to MLGAF on November 25, 1997 of $25 million aggregate principal amount of
CAI's 13% senior secured notes. CAI sold an additional $2 million of its 13%
senior secured notes on January 26, 1998, and an additional $18 million of its
13% senior secured notes on February 17, 1998. At March 31, 1998, CAI had issued
and outstanding $45 million aggregate principal amount of its 13% senior secured
notes, all of which, at that time, were held by MLGAF. The 13% senior secured
notes were short-term obligations of CAI, which matured on June 30, 1998 and
were extended. Principal and interest at a per annum rate of 13%, together with
a commitment fee of $730,000, were satisfied with the DIP facility described
below.
On July 30, 1998, in connection with the filing of its voluntary petition
under Chapter 11, CAI obtained from MLGAF a debtor-in-possession (DIP) credit
facility in the principal amount of $60 million. In accordance with the terms of
the DIP facility, the $45 million aggregate principal amount of 13% senior
secured notes, together with all interest and fees thereon, were converted into
amounts due under the DIP facility. The balance of the DIP facility of
approximately $10.9 million was made available to CAI for use during its Chapter
11 case.
On October 14, 1998, in connection with the consummation of CAI's
reorganization plan, CAI obtained from MLGAF an $80 million exit facility. All
amounts due under the DIP facility, including $60 million in principal,
approximately $1.7 million in accrued and unpaid interest, and a $600,000
commitment fee were repaid out of the proceeds from the exit facility. CAI
realized net proceeds of approximately $16 million after repaying all such
amounts and certain commitment fees associated with the exit facility.
The exit facility is governed by the terms of a note purchase agreement
dated October 14, 1998. The exit facility consists of two tranches: Tranche A
and Tranche B. Tranche A is a $30 million senior secured loan bearing interest
at 10.5% compounded semi-annually and evidenced by a senior secured A note. CAI
has granted a first priority lien on and security interest in and to all of its
assets to secure performance of CAI obligations with respect to Tranche A.
Tranche B is a $50 million senior secured loan bearing interest at 13% per annum
and evidenced by a senior secured B note. CAI has granted a second priority lien
on and security interest in and to all of its assets to secure performance of
its obligations with respect to Tranche B.
In addition to the liens granted by CAI, substantially all of CAI's
wholly-owned subsidiaries have guaranteed the obligations of CAI with respect to
the exit facility. The subsidiaries have granted a lien on and security interest
in and to all of their respective assets to secure their performance under such
subsidiary guaranties.
The exit facility is a two-year credit facility, maturing on October 14,
2000. CAI was required to pay a 1% facility fee equal to $300,000 on the Tranche
A amount at the closing of the exit facility. In addition, CAI is required to
pay an 8% facility fee equal to $4 million on the Tranche B amount, of which CAI
paid $1.5 million at the closing of the exit facility. The remaining $2.5
million balance of the Tranche B facility fee is payable at the maturity of the
exit facility (by its term, acceleration or otherwise).
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CAI issued 2,241,379 CAI common shares to MLGAF as additional consideration
for providing the exit facility.
EXCHANGE OF BELL ATLANTIC SECURITIES. On March 3, 1998, MLGAF exchanged $30
million of CAI's 14% term notes and $70 million of CAI's 14% senior preferred
stock for a $30 million CAI 12% subordinated note due 2005. As a result of the
exchange, $15.7 million of interest on the term notes and $32.4 million of
accrued dividends on the preferred stock were forgiven. CAI reclassed
approximately $102 million of the total amount of surrendered securities to
paid-in capital and recorded an approximately $10.0 million extraordinary gain
on the early extinguishment of debt, net of certain related costs. MLGAF also
exchanged warrants to purchase CAI equity for 2,500 shares of CAI common stock,
having a value of $1,350. The 12% subordinated note and the CAI common stock
were canceled in connection with the consummation of CAI's reorganization plan.
LIQUIDITY AND CAPITAL RESOURCES
Although CAI has emerged from bankruptcy, CAI's recurring losses,
restrictions on its ability to obtain additional financing and substantial
commitments raise substantial doubt about its continuation as a going concern.
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. Reporting on a going concern basis is dependent upon, among other
things, future operations and the ability to generate sufficient cash from
operations and financing sources to meet obligations.
The wireless broadband network business is capital intensive. Since its
inception, the Company has expended funds to purchase, lease or otherwise
acquire MMDS spectrum rights in its intended operating territory, to construct
operating systems and to finance initial operating losses. Since inception, the
Company has believed that the MMDS spectrum has greater potential than simply
the delivery of analog subscription video services and has recognized that
expanded use of the MMDS spectrum presents several challenges, including
substantial development costs.
To address this and other issues surrounding expanded use of MMDS spectrum,
CAI devised a business plan that required one or more strategic partners to
purchase MMDS spectrum capacity from CAI. CAI believed that such commitments to
purchase MMDS capacity would enable CAI to raise the capital necessary to
construct a wireless broadband network within its operating territories. CAI
implemented this business plan through the 1995 joint venture with affiliates of
Bell Atlantic Corporation, which joint venture was terminated without the launch
of a commercial digital MMDS system in any of the Company's markets. In
connection with the failed joint venture, CAI expended significant amounts of
capital to construct digital MMDS systems in Boston, MA and Norfolk/Virginia
Beach, VA. The Company has continued to pursue one or more strategic partners
following the departure of Bell Atlantic and has committed significant resources
to its effort to enter into a business relationship with a strategic partner,
including resources used to design, test and demonstrate two-way MMDS
capabilities, which the Company did for several potential strategic investors
prior to April 1999, when it entered into an agreement and plan of merger with
MCI WorldCom.
The Company's primary sources of capital have been a combination of proceeds
from the issuance of debt and equity securities, secured financings and
assumption of debt and other liabilities in connection with acquisitions. The
Company has approximately $53.7 million in cash and cash equivalents at March
31, 1999, of which $17.5 million is available to CAI and $36.0 million is
available to CS. Based on current operating budgets, CAI believes that it has
sufficient cash to fund its anticipated capital requirements through November
1999, and CS believes that it has sufficient cash to fund its anticipated
capital requirements through March 2000. The Company believes that it has
sufficient cash to fund capital requirements until the merger with MCI WorldCom
has been
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consummated. Although the Company believes that the merger should be consummated
during the third quarter of calendar year 1999, it cannot assure that the merger
will be completed within such quarter, or that the merger will be completed at
all. In the event that the merger is not completed, the Company will not have
sufficient cash to implement its business plan.
The Company and the Predecessor Entity have incurred net losses since
inception in 1991 through March 31, 1999, inclusive of an $85.4 million gain
from the early extinguishment of debt. The Company expects to continue to
realize additional net losses on a consolidated basis while it pursues its
business plan. For the year ending March 31, 2000, the Company is obligated to
pay approximately $12.6 million in minimum license fees and operating lease
payments and approximately $6.2 million in MMDS license obligations, including
approximately $4.9 million in wireless channel license payments due to the
Federal Communications Commission, in addition to funding operating losses. The
Company projects that operating cash requirements will be approximately $40.6
million for the year ending March 31, 2000. Additionally, as of March 31, 1999,
the Company had outstanding consolidated debt of approximately $419 million, net
of a $282.3 million discount and trade payables of approximately $12.1 million.
Beginning in fiscal year 2001, the Company will have significant debt service
requirements. On a short-term basis, the Company has $4.0 million in debt
service maturing within one year of the date of its balance sheet.
The Company's existing debt instruments limit or restrict completely its
ability to raise capital from the sale of equity, incur additional indebtedness
(other than indebtedness incurred in connection with the purchase of goods and
services in the ordinary course of business and certain other permitted
indebtedness), grant liens to secure repayment of indebtedness, make investments
(other than investments specifically permitted), pay dividends, dispose of
assets, enter into any merger, consolidation, reorganization or recapitalization
plan, retire long-term debt or make any acquisitions without the prior written
consent of the lenders.
During the period from October 15, 1998 to March 31, 1999 and April 1, 1998
to October 14, 1998, the Company and the Predecessor Entity expended
approximately $15.0 million and $26.2 million, respectively, to fund operating
activities, $2.1 million and $1.0 million, respectively, for equipment
purchases, and $.9 million and $2.1 million, respectively, to pay wireless
channel rights obligations and other debt. During the period October 15, 1998 to
March 31, 1999 and April 1, 1998 to October 14, 1998, the Company and the
Predecessor Entity funded their cash requirements primarily out of existing cash
balances, net proceeds from the issuance of senior secured notes of $26.8
million, and the disposition of equipment generating net proceeds of
approximately $0.2 million and $4.8 million, respectively. At March 31, 1999,
the Company had available funds of approximately $36.8 million as well as
restricted cash balances totaling approximately $16.9 million, which will be
used to fund the operations of the Company.
During the year ended March 31, 1998, the Predecessor Entity expended
approximately $47.9 million to fund operating activities, $7.2 million for
equipment purchases, $4.4 million to invest in TelQuest, $4.7 million to obtain
interim financing, $3.1 million to pay wireless channel rights obligations and
other debt, and $2.0 million to acquire wireless channel rights. The Predecessor
Entity funded its cash requirements out of existing cash balances, net proceeds
from the issuance of $33.7 million of senior secured notes, and the disposal of
equipment generating net proceeds of approximately $1.8 million. At March 31,
1998, the Predecessor Entity had available funds of approximately $1.3 million
and restricted cash of approximately $9.1 million.
During the year ended March 31, 1997, the Predecessor Entity expended
approximately $37.1 million to purchase equipment, $34.8 million to fund
operating activities, $3.7 million to acquire wireless channel rights and $45.3
million to pay senior and other debt, including $34.0 million due to the Federal
Communication Commission for the purchase of MMDS licenses at the 1996 auction.
The
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Predecessor Entity funded its cash requirements out of existing cash balances.
At March 31, 1997, the Predecessor Entity had cash and cash equivalents of
approximately $10.5 million.
OPERATIONS
The Company currently operates 17 subscription video systems. The Company
has operated these systems within the confines of a cash conservation strategy
while pursuing a strategic alliance with one or more strategic partners
interested in fully developing the Company's MMDS spectrum. This cash
conservation strategy requires the Company to limit or curtail entirely analog
video subscriber growth, which has had an adverse effect on the Company's
operating results.
The cash conservation strategy also includes the continued implementation of
cost-cutting measures and the periodic sales of non-core assets in an effort to
maximize the value of assets that are no longer used or useful to the Company's
long-term operating strategy, which is to be a wholesale provider of two-way
transmission services to one or more strategic partners. In addition to limiting
the analog subscription video business growth, the Company has sold
Multi-dwelling Unit ("MDU") assets in certain of its markets. Assets typically
involved in providing analog subscription video services to residents of MDUs
include the tangible assets necessary to transmit and receive the video
programming signal, and a right of entry agreement with the property owner or
manager, pursuant to which a CAI operating subsidiary is granted the right to
provide subscription video services to residents of the MDU.
In March 1998, the Predecessor Entity sold assets relating to MDUs located
in its Washington, DC operating market. Most recently, in September 1998, the
Predecessor Entity completed the sale of assets relating to approximately 60
MDUs located in its Philadelphia system (the "Philadelphia MDU Sale") to
Mid-Atlantic Telcom Plus, LLC d/b/a OnePoint Communications, a leading operator
of Satellite Master Antenna Television ("SMATV") systems. Consummated under the
auspices of the bankruptcy court, the Philadelphia MDU Sale generated net
proceeds of approximately $5 million, of which $785,000 was held in escrow
pending certain post-closing adjustments. The net proceeds from the Philadelphia
MDU Sale, as well as proceeds from subsequent sales of non-core assets, are
being used for working capital purposes.
The limitation on analog video subscriber growth, coupled with the sale of
MDU assets, has had an adverse impact on analog video subscriber base. As of
March 31, 1999, the Company had approximately 85,600 analog video subscribers
compared to the Predecessor Entity's 52,000 subscribers as of March 31, 1998.
The 33,600 net increase in subscribers is primarily due to the consolidation of
CS subscribers as of December 2, 1998, offset by decreases primarily due to the
Philadelphia MDU Sale and subscriber churn. In addition, various systems are
losing subscribers to other cable operators primarily due to limited channel
capacity and lack of marketing efforts. This trend is likely to continue.
The churn rate, as defined and measured in the subscription television
industry, is the net result of disconnects minus reconnects divided by the
number of subscribers at the beginning of the period being considered. CAI's
average monthly churn rate for the year ended March 31, 1999 was 3.6% overall
compared to 4.1% for the year ended March 31, 1998. The improvement in the churn
rate is indicative of the prior year's retention strategy of charging increased
installation fees which translated into increased commitment and therefore
retention. The average monthly churn rate for CS for its year ended December 31,
1998 was 4.4% overall.
Long-lived assets and certain identifiable intangibles, including wireless
channel rights, are periodically reviewed by the Company 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
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be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
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 a number of factors including, without limitation, changes in
technology, the Company's ability to obtain permission for flexible use of the
wireless channel rights, government regulation, available financing or
competition. The Company's estimate of future gross revenues and operating cash
flows assumes that the Company will successfully develop and provide digital
wireless delivery systems including video, voice and data transmission such as
Internet access and telephony. Since these alternative uses of the MMDS spectrum
are in the early stages of development, the Company cannot assure that it can
commercially deploy such alternatives or that it will be able to achieve
positive cash flow from any operating activities. As a result of valuations
completed for the year ended March 31, 1998, the Predecessor Entity reduced the
carrying value of goodwill by $73.5 million, net of accumulated amortization of
$14.7 million, which was associated with the Philadelphia and Washington
companies purchased by the Predecessor Entity in September 1995. Similarly, CS,
as a result of valuations made, recorded write-downs of $46.4 million in
goodwill, $9.4 million in property and equipment and $8.1 million in wireless
channel rights during its year ended December 31, 1998.
Based on the December 2, 1998 purchase of CS common shares from Nucentrix,
CS was consolidated into the Company's financial statements as of that date
under the purchase method of accounting which required adjusting the CS assets
and liabilities to their respective fair values as of that date. Accordingly,
the net book value of wireless channel rights was reduced by approximately $25.6
million, property and equipment by approximately $.8 million, deferred debt
costs by approximately $2.6 million, a note receivable by $1.2 million, TelQuest
equipment purchase option by $1.9 million and long term debt by $87.9 million.
The net book values of wireless channel rights and property and equipment were
further reduced by $19.4 million and $6.1 million, respectively, to eliminate
negative goodwill created in the consolidation.
COMPARISON OF OPERATING RESULTS
PERIOD FROM OCTOBER 15, 1998 TO MARCH 31, 1999 (REORGANIZED COMPANY) AND
PERIOD FROM APRIL 1, 1998 TO OCTOBER 14, 1998 (PREDECESSOR ENTITY) COMPARED TO
YEAR ENDED MARCH 31, 1998 (PREDECESSOR ENTITY). The following discussion
provides an analysis of the Company's and the Predecessor Entity's results of
operations and reasons for material changes therein for the periods October 15,
1998 to March 31, 1999 and April 1, 1998 to October 14, 1998 (also referred to
as "Combined Periods") and the year ended March 31, 1998. The Company's results
of operations for the period subsequent to October 15, 1998 have not been
prepared on a basis of accounting consistent with its results of operations for
periods prior to October 15, 1998 due to the implementation of fresh-start
reporting upon CAI's emergence from bankruptcy. The reorganization adjustments
primarily affect amortization and interest expense.
The Company's and the Predecessor Entity's revenues for the Combined Periods
($15.4 million for October 15, 1998 to March 31, 1999 and $11.5 million for
April 1, 1998 to October 14, 1998; $28.6 million fiscal year 1998) decreased
$1.7 million for the twelve months ended March 31, 1999 compared to the prior
year. The overall decrease resulted primarily from the sale of MDU's in the
Philadelphia system and subscriber churn offset by the acquisition of CS
revenues for the four months ended March 31, 1999. In addition, the Company's
strategy not to pursue analog-based television had a negative impact on the
Company's subscription revenues.
The Company's and the Predecessor Entity's television subscription revenues
were $13.5 million and $10.6 million for the periods October 15, 1998 to March
31, 1999 and April 1, 1998 to October 14,
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1998, respectively, compared to $26.1 million for the Predecessor Entity's year
ended March 31, 1998. The $2.0 million reduction is primarily attributable to
the effect of the sale of the Philadelphia MDU's and subscriber churn offset by
the consolidation of four months of CS' television subscription revenue of $6.6
million in the Combined Periods.
Operating expenses were $92.3 million for the Combined Periods ($57.9
million and $34.4 million for October 15, 1998 to March 31, 1999 and April 1,
1998 to October 14, 1998, respectively) versus $161.8 million for the year ended
March 31, 1998. The overall $69.5 million decrease is attributable to the $73.5
million write-down of goodwill and $7.1 million of project write-offs in fiscal
year 1998, the $4.9 million reduction in technical, customer service, and
marketing reflecting the effects of the decline in subscribers offset, in part,
by the inclusion of CS results including $5.6 million in depreciation and
amortization and operating expenses of $17.0 million, CAI stock option
compensation expense of $7.4 million and a $2.6 million overall increase in
programming and licensing fees. CAI's programming and license fees did not
decrease commensurate with its revenue decrease due to minimum monthly payment
requirements and certain channel payments previously capitalized and currently
being expensed.
The Company and the Predecessor Entity recorded equity losses of $38.7
million and $45.5 million for the periods October 15, 1998 to March 31, 1999 and
April 1, 1998 to October 14, 1998, respectively, relating to its 60% investment
in CS and 30% investment in TelQuest through December 2, 1998. The consolidated
statements of operations for the current year reflects the Company's and the
Predecessor Entity's pro-rata share of the $130.5 million net loss reported by
CS for the eleven months ended December 2, 1998, including a write-down of
assets of $63.9 million, compared to the aggregate loss reported by CS of $52.5
million for 1997. In addition, based on the current depressed industry
conditions of the wireless industry and the continuing losses of CS, CAI's
management re-evaluated the goodwill associated with its investment in CS that
resulted in a write-down of $23.6 million during the year ended March 31, 1998.
Subsequently, CS also recorded a write-down of its assets of $63.9 million
during the year ended December 31, 1998. The investment in TelQuest has been
reduced to zero, reflecting the Predecessor Entity's and the Company's pro-rata
share of the losses reported by TelQuest since its inception through December 2,
1998, plus amortization of leased equipment and associated goodwill. Results of
operations of CS and TelQuest since December 2, 1998 are consolidated with CAI.
CS and TelQuest contributed $24.6 million and $1.5 million to the consolidated
operating losses, respectively.
CAI's ownership interest in CS increased to approximately 94% from 60% based
on the December 2, 1998 purchase of Nucentrix's 34% share of CS and subsequent
sale of those shares to CS. The reduction of CAI's investment in CS reflects the
Company's and the Predecessor Entity's pro-rata share of the net loss reported
by CS for the eleven months ended December 2, 1998. The aggregate decrease in
this investment was $29.9 million for the same period last year, reflecting
CAI's 50.7% ownership at that time.
Other income, primarily interest income on the debt escrow funds and gains
(losses) on asset sales, for the periods October 15, 1998 to March 31, 1999 and
April 1, 1998 to October 14, 1998 was $1.5 million and $3.9 million,
respectively, compared to $4.5 million for last year. Interest income decreased
from $2.6 million in 1998 to $1.8 million in 1999 (including $.7 million for
CS), primarily due to declining interest income on the debt escrow and money
market investments as funds were used to make the semi-annual interest payments
on the Senior Notes (totaling $16.8 million during the period April 1, 1998 to
October 14, 1998) and for capital expenditures. The debt service escrow funds
were paid pursuant to CAI's reorganization plan. The decline in interest income
was offset by the Philadelphia MDU Sale which generated a net gain of $2.6
million versus a $1.2 million gain on sale of assets for 1998. The remaining
amount was miscellaneous other non-recurring income.
111
Other expense includes $17.1 million of expenses relating to the
reorganization of CAI as of October 14, 1998.
Interest expense increased $2.0 million ($49.2 million fiscal year 1999;
$47.2 million fiscal year 1998) for the year ended March 31, 1999 for the
Combined Periods, resulting from the inclusion of the results of operations and
financial position of CS which more than offset the net reduction in debt due to
the Chapter 11 bankruptcy (with respect to CAI). The amount of interest-bearing
debt for the last half of the year ended March 31, 1999 was approximately $208
million less than the same period last year. This reduced the Company's interest
expense by $13.6 million primarily in the October 15, 1998 to March 31, 1999
period over last year. However, this reduction was more than offset by the
consolidation of CS, which added $15.6 million, including $3.5 million accretion
on the fair market value of CS debt.
The Predecessor Entity realized a net extraordinary gain of $85.4 million
for the period April 1, 1998 to October 14, 1998 due to the filing of a
prepackaged Chapter 11 bankruptcy by CAI and one of its wholly-owned
subsidiaries, which resulted in a cancellation of approximately $308 million of
debt plus related accrued interest in exchange for $100 million of discounted
senior notes, distribution of the balance in escrow, plus all of the equity in
the newly reorganized company. No tax benefit was recorded since (a) deferred
tax assets were fully reserved, (b) there were no available deferred tax
liabilities to reduce and (c) it is more likely than not that any benefit
recorded on the Company's prior losses would not be realized in the foreseeable
future, especially when the prior losses are further limited as to availability
by the change in control created by the bankruptcy.
The Predecessor Entity also realized a net extraordinary gain of $5.3
million for the year ended March 31, 1998 consisting of a $10 million gain as a
result of the termination of CAI's relationship with Bell Atlantic and NYNEX,
the related exchange of CAI securities, and the forgiveness of accrued interest
related to the term notes originally held by Bell Atlantic and NYNEX, offset, in
part, by the $4.7 million non-recurring extraordinary charge related to the
write-off of the unamortized costs arising from the early termination of the
Foothill/Canyon Credit Facility.
YEAR ENDED MARCH 31, 1998 (PREDECESSOR ENTITY) COMPARED TO YEAR ENDED MARCH
31, 1997 (PREDECESSOR ENTITY). The Predecessor Entity's revenue decreased $7.7
million in the year ended March 31, 1998, from $36.3 million in fiscal year 1997
to $28.6 million in fiscal year 1998. The decrease resulted primarily from the
Predecessor Entity's strategy not to pursue analog-based television subscriber
growth while it evaluated its business opportunities in addition to subscription
television. As anticipated, the policy had a negative impact on the Predecessor
Entity's subscription revenues. As of March 31, 1998, the Predecessor Entity's
subscriber base had decreased by approximately 18,800 to 52,000 subscribers from
approximately 70,800 at March 31, 1997.
The Predecessor Entity's television subscription revenue was $26.1 million
for the year ended March 31, 1998 compared to $33.1 million for the year ended
March 31, 1997. This reduction is primarily attributed to subscriber churn.
Operating expenses were $161.8 million and $81.6 million for the years ended
March 31, 1998 and 1997, respectively. The $80.2 million increase is
attributable primarily to the $73.5 million write-down of goodwill. License fees
did not decrease commensurate with the revenue decrease due to minimum monthly
payment requirements.
The Predecessor Entity recorded equity losses of $31.7 million for the year
ended March 31, 1998 relating to CAI's 60% investment in CS and 25% investment
in TelQuest. The decrease in CAI's investment in CS reflects the Predecessor
Entity's pro-rata share of the $52.3 million net loss reported by CS for its
year ended December 31, 1997 along with $2.4 million of amortization of the
goodwill associated with this investment, compared to an aggregate loss of $17.6
million for the same period in
112
the prior year. In addition, based on the current depressed industry conditions
of the wireless industry and CS's continuing losses, management has re-evaluated
the goodwill associated with its investment in CS. Accordingly, the goodwill
portion of the CS investment had been written-down by $23.6 million during the
year ended March 31, 1998. The decrease in CAI's investment in TelQuest of $1.8
million reflects the Predecessor Entity's pro-rata share of the $7.0 million
loss reported by TelQuest since its inception through March 31, 1998, and
amortization of goodwill.
Interest and other income, primarily interest income on the debt escrow
funds, for the year ended March 31, 1998 was $4.5 million compared to $6.4
million for the year ended March 31, 1997. Interest income on investments
continues to decline as funds are used to make the semi-annual interest payments
on the Senior Notes.
Interest expense increased $6.5 million, to $47.3 million for the year ended
March 31, 1998, compared to $40.8 million in fiscal year 1997. The increase in
interest expense for the year consists of interest incurred on the
Foothill/Canyon Credit Facility and secured notes, and amortization of the
financing fees associated with those facilities.
The Predecessor Entity recorded an income tax benefit of $15.0 million for
the year ended March 31, 1997 to offset existing deferred tax liabilities. There
was no tax benefit for the year ended March 31, 1998, since there were no
available deferred tax liabilities and it is more likely than not that any
benefit recorded on the Company's current losses would not be realized in the
foreseeable future.
Additionally, the Predecessor Entity realized a net extraordinary gain of
$5.3 million for the year ended March 31, 1998, consisting of a $10 million gain
as a result of the termination of CAI's relationship with Bell Atlantic and
NYNEX, the related exchange of CAI securities, and the forgiveness of accrued
interest related to the term notes originally held by Bell Atlantic and NYNEX,
offset, in part, by the $4.7 million non-recurring extraordinary charge related
to the write off of the unamortized costs arising from the early termination of
the Foothill/Canyon Credit Facility.
INCOME TAX MATTERS. The Company has net operating loss carryforwards that
are affected by the Chapter 11 bankruptcy and the consolidation of CS. The
effects on the net operating losses including limitations due to changes in
control and separate return limitation year rules are currently under review and
have not been determined at this time.
INFLATION. Management does not believe that inflation had or will have a
material impact on the Company's results of operations.
THE YEAR 2000 ISSUE.
OVERVIEW. The Company is continuing to evaluate and address the impact of
the Year 2000 date transition on its operations. The Company is in the process
of taking steps to (a) inventory and assess for Year 2000 compliance its
equipment, software and systems, (b) determine which items will be remediated,
replaced or retired, and establish a plan to accomplish these steps, (c)
remediate, replace or retire the items, (d) test the items, where required, and
(e) provide senior management with a reporting system to support a seamless
transition to the Year 2000.
STATE OF READINESS. The Company's Year 2000 compliance program focuses on
the Company's analog video operations, limited Internet operations, and internal
business processes, such as accounting. As of March 31, 1999, the inventory,
assessment and compliance planning phases for these areas have been materially
completed, and remediation, replacement or retirement and testing activities had
begun. The inventory items that were not assessed as Year 2000 compliant and
that require action to avoid service impact are to be fixed, replaced, or
retired. The Company's accounting software and
113
any other mission critical systems relating directly to the accounting function
have been upgraded to be Year 2000 compliant. For all other areas, its goal is
to have all mission critical systems Year 2000 compliant by September 1, 1999.
VENDOR AND SERVICE PROVIDER ISSUES. The Company has requested that its
vendors and service providers provide CAI with information as to the compliance
status of products and/or services used by the Company, which information is
subject to Company testing and verification. Although the Company has received
information from some of its vendors and service providers, it has not yet
received information from each of the vendors and service providers it has
identified. The Company will continue to pursue its vendors and service
providers in order to obtain the necessary information regarding Year 2000
compliance of such vendors and service providers.
COSTS. The Company has estimated that it will cost approximately $875,000
to implement its Year 2000 compliance program, based on information it has
received as of March 31, 1999 from vendors and service providers. The Company
anticipates that most of the cost associated with its Year 2000 compliance
program will be the result of remediation or replacement of non-compliant
equipment necessary for the Company's analog video operations and internal
business processes.
RISKS. The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of the Company's normal business functions or
operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition. Due to the uncertainty inherent in
other Year 2000 issues that are ultimately beyond the Company's control,
including, for example, the final Year 2000 readiness of its mission critical
vendors and service providers, the Company is unable to determine at this time
the likelihood of a material impact on its results of operations, liquidity or
financial condition, due to such Year 2000 issues.
The costs of the Company's Year 2000 program and the timetable for
completing its Year 2000 preparations are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of third-party
remediation plans and other factors. The Company can give no assurance that
these estimates will be achieved, and actual results could differ materially
from those currently anticipated. In addition, the Company cannot assure that
its Year 2000 program will be effective or that its contingency plans will be
sufficient. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct relevant computer software codes and
embedded technology, the results of internal and external testing and the
timeliness and effectiveness of remediation efforts of third parties.
CONTINGENCY PLAN. At March 31, 1999, the Company was not aware of any
mission critical aspect of its operations or internal business processes that
cannot be made Year 2000 compliant. However, its inventory and assessment of
Year 2000 compliance is not yet completed. Due to the uncertainties presented by
third party Year 2000 problems, and the possibility that, despite its efforts,
the Company may be unsuccessful in preparing its internal systems and equipment
for the Year 2000, the Company expects to develop contingency plans for dealing
with the most reasonably likely worst case scenario. The Company's assessment of
its most reasonably likely worst case scenario and the exact nature and scope of
its contingency plans will be affected by the Company's continued Year 2000
assessment and testing. The Company has substantially completed its assessment
and expects to have all contingency systems in place and fully tested by the
fourth quarter of 1999.
SEASONALITY OF INSTALLATION ACTIVITIES. The rate at which new subscriber
installations occur can be affected by severe winter or other weather conditions
and limited daylight hours in the winter months in certain markets. Therefore,
the Company may experience lower than average subscriber growth and capital
expenditures primarily during the winter season.
114
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 1999, CAI had $212,909,624 aggregate principal amount and
interest at maturity of CAI's 13% senior notes outstanding ($105,994,444 net of
discount) with a fair value of $105,994,444, as estimated by quoted market
prices of similar securities, and $400,000,000 aggregate principal of CS
Wireless' Series B 11 3/8% senior discount notes ($238,790,942 net of discount)
with a fair value of $164,000,000, as estimated by quoted market prices of
similar securities. The CAI 13% senior notes mature on October 14, 2004 and the
CS Wireless Series B 11 3/8% senior discount notes mature on March 1, 2006.
Interest on the CAI 13% senior notes accrues at a per annum rate of 13%,
compounded semi-annually. The CS Wireless Series B 11 3/8% senior discount notes
bear interest at a per annum rate of 11 3/8%, compounded semi-annually. No cash
interest is payable on the CS Wireless Series B 11 3/8% senior discount notes
prior to March 1, 2001.
The Company does not have any derivative financial instruments as of March
31, 1999, and believes that the interest rate risk associated with its senior
notes and the market risk associated with its securities are not material to the
results of operation of the Company.
RESIGNATION OF AUDITORS
On July 30, 1998, PricewaterhouseCoopers LLP resigned from its engagement as
CAI's independent accountants due to a conflict of interest arising as the
result of the July 1, 1998 merger of Price Waterhouse, LLP and Coopers & Lybrand
L.L.P. Prior to the merger, Coopers & Lybrand L.L.P. acted as CAI's independent
accountants. Price Waterhouse, LLP acted as collateral agent and administrative
agent for MLGAF under a Note Purchase Agreement dated as of November 24, 1997,
as amended from time to time. PricewaterhouseCoopers LLP currently acts as
collateral agent and administrative agent for the lenders under the Note
Purchase Agreement dated as of October 14, 1998 between CAI and the purchasers
listed therein.
Except as discussed below, the reports of Coopers & Lybrand L.L.P. on the
Company's financial statements for the years ended March 31, 1998 and 1997
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle.
The report of Coopers & Lybrand L.L.P. delivered in connection with CAI's
audited financial statements for the years ended March 31, 1998 and 1997
contained an explanatory paragraph which indicated that there was substantial
doubt regarding CAI's ability to continue as a going concern.
In connection with its audits for the years ended March 31, 1998 and 1997
and through July 30, 1998, there were no disagreements with Coopers & Lybrand
L.L.P. or PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Coopers & Lybrand L.L.P.
would have caused them to make reference thereto in their report on the
financial statements for such years. During the years ended March 31, 1998 and
1997 and through July 30, 1998, there were no reportable events (as defined in
Regulation S-K item 304(a)(1)(v)) involving CAI.
CAI requested that PricewaterhouseCoopers LLP furnish it with a letter
addressed to the SEC stating whether or not PricewaterhouseCoopers LLP agrees
with the above statements. A copy of such letter, dated August 6, 1998, was
filed as Exhibit 16 to CAI's Current Report on Form 8-K dated August 6, 1998.
CAI subsequently retained KPMG LLP as its independent auditors.
MARKET PRICES OF COMMON STOCK
On January 8, 1998, the CAI common stock outstanding prior to the CAI
bankruptcy was removed from The Nasdaq National Market due to CAI's failure to
meet the net tangible asset listing
115
requirement imposed by Nasdaq. As a condition to listing on The Nasdaq SmallCap
Market, CAI was required to maintain compliance with a $1.00 per share bid price
for a defined interim period. Effective January 13, 1998, as a result of failing
to maintain the $1.00 per share bid price, the CAI common stock outstanding
prior to the CAI bankruptcy was de-listed from The Nasdaq SmallCap Market. As of
October 15, 1998, no market existed for the pre-bankruptcy CAI common stock.
The CAI common shares issued in connection with the CAI bankruptcy are
traded in the over-the-counter market on the electronic bulletin board under the
ticker symbol "CWSS." On July 26, 1999, the last day CAI common shares traded
before the printing of this proxy statement, the high and low bid quotations for
CAI common shares were $28.375 and $28.28125, respectively, per share. On April
26, 1999, the last trading day before the public announcement of the merger
agreement, the high and low bid quotations for CAI common shares were $23.75 and
$23.50, respectively, per share. On April 16, 1999, the last trading day before
public announcement of the letter of intent, the high and low bid quotations for
CAI common shares were $23.25 and $20.75, respectively, per share. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions. SHAREHOLDERS ARE
URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR CAI COMMON SHARES.
The following table sets forth, on a per share basis, the high and low
closing sale prices of the pre-bankruptcy CAI common stock, as reported by the
National Association of Securities Dealers, Inc. for the first three quarters of
CAI's fiscal year ended March 31, 1998. The following table also sets forth, on
a per share basis, the range of reported high and low bid quotations on the
over-the-counter electronic bulletin board, as derived from the National
Association of Securities Dealers, Inc. for the fourth quarter of CAI's fiscal
year ended March 31, 1998, each quarter of CAI's fiscal year ended March 31,
1999 and for the first quarter and second quarter (through July 27, 1999) of the
fiscal year ending March 31, 2000. Such quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily reflect
actual transactions.
CLOSING SALE PRICES
--------------------
HIGH LOW
--------- ---------
Fiscal Year Ended March 31, 1998:
First Quarter:.............................................................................. $ 2.00 $ 1.03
Second Quarter:............................................................................. $ 1.94 $ 0.94
Third Quarter:.............................................................................. $ 2.50 $ 0.88
BID QUOTATIONS
----------------------
HIGH LOW
---------- ----------
Fiscal Year Ended March 31, 1998:
Fourth Quarter:......................................................................... $ 1.34375 $ 0.375
Fiscal Year Ended March 31, 1999:
First Quarter:.......................................................................... $ 0.475 $ 0.11
Second Quarter:......................................................................... $ 0.125 $ 0.0075
Third Quarter (1):...................................................................... $ 1.71875 $ 0.015
Fourth Quarter:......................................................................... $ 7.750 $ 0.6563
Fiscal Year Ended March 31, 2000
First Quarter:.......................................................................... $ 28.8750 $ 7.1875
Second Quarter (through July 27, 1999).................................................. $ 28.875 $ 26.9375
- ------------------------
(1) Represents the high and low bid quotations for the post-bankruptcy CAI
common shares, which began trading on October 28, 1998.
116
As of July 28, 1999, CAI had approximately 100 shareholders of record,
including participants in security position listings, as defined in Exchange Act
Rule 17Ad-8.
DIVIDENDS
CAI has never paid cash dividends on CAI common shares and does not
currently intend to pay cash dividends on CAI common shares in the foreseeable
future. Since CAI generally conducts, and in the future intends to conduct,
operations through subsidiaries, CAI's ability to declare or pay cash dividends
will depend in part on the ability of CAI's present and future subsidiaries to
declare or pay cash dividends to CAI. Any future determination by CAI to pay
cash dividends on CAI common shares will be within the discretion of the CAI
board and will depend upon the earnings of CAI, CAI's financial condition and
capital requirements and other financial factors which are considered relevant
by the CAI board.
Pursuant to certain restrictive covenants contained in the instruments
governing CAI's indebtedness, including the indenture governing the 13% senior
notes and the note purchase agreement governing the terms of the 13% senior
secured notes, CAI cannot declare or pay any dividends or make any distributions
on CAI common shares. Also, CAI may not purchase or redeem any of its shares,
including warrants and options. Pursuant to certain restrictive covenants
contained in the instruments governing CS Wireless' indebtedness, including the
indenture governing CS Wireless' Series B 11 3/8% senior discount notes, CS
Wireless is prohibited from declaring or paying any dividends or making any
distributions to CAI. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," beginning on page 103 of this proxy
statement.
INDEPENDENT AUDITORS
Representatives of KPMG LLP, CAI's independent auditors, are expected to be
present at the special meeting. These representatives will have an opportunity
to make a statement if they so desire and will be available to respond to
appropriate questions.
SHAREHOLDER PROPOSALS
As set forth in the materials distributed with this proxy statement, MCI
WorldCom has demanded that CAI hold a special meeting of its shareholders to
consider and vote upon proposals to remove CAI's current board of directors, to
amend CAI's bylaws to, among other things, provide for a two-member board and to
elect a new board of directors consisting of two members. That special meeting
will immediately follow the special meeting described in this proxy statement.
If the merger is not consummated, CAI will hold a 2000 annual meeting of its
shareholders on or about August 31, 2000. As set forth in CAI's bylaws,
shareholder proposals that are intended to be considered at such annual meeting,
if any, are required to be submitted, together with certain other specified
information and materials, on or before May 3, 2000, and any proposal not
received before this time will be considered untimely.
117
CHAPTER III--WHERE YOU CAN FIND MORE INFORMATION
CAI files annual, quarterly and special reports, proxy statements and other
information, and CS Wireless files annual, quarterly and special reports, with
the SEC. Pursuant to Rule 12g-4(a)(1)(i) under the Securities Exchange Act of
1934, as amended, on April 29, 1998, CAI filed a Form 15 with the SEC to
deregister the CAI common shares under Section 12(g) of the Exchange Act, which
became effective on July 29, 1999. As a result, persons subject to the insider
trading rules of Section 16 of the Exchange Act or the filing requirements of
Section 13(d) of the Exchange Act, and CAI, with respect to, among other things,
the proxy and information statement rules under Section 14 of the Exchange Act,
are no longer subject to such rules or requirements. In addition, after
completion of the merger, CAI intends to file a Form 15 with regard to its
reporting obligations under Section 15(d) of the Exchange Act. Once that Form 15
is effective, CAI will no longer be required to file periodic and other reports
required under the Exchange Act and the rules promulgated thereunder.
Notwithstanding CAI's intent to be relieved from the filing requirements under
the federal securities laws, the indenture governing CAI's 13% senior notes due
2004 requires CAI to make certain filings so long as such notes remain
outstanding.
Shareholders may read and copy any reports, statements or other information
that CAI or CS Wireless files at the public reference facilities of the SEC at
its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington DC 20549, and its regional offices at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 W. Madison Street, Suite
1400, Chicago, Illinois 60661. Shareholders may call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. CAI's and CS Wireless'
filings with the SEC are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
http://www.sec.gov.
In "Chapter II--Certain Information Regarding CAI" and "--Certain
Information Regarding CS Wireless," we summarized the businesses of CAI and CS
Wireless and strongly encouraged you to read carefully certain documents we
previously filed with the SEC, which contain important information about CAI, CS
Wireless and their respective finances. We strongly encourage you to read
carefully the documents CAI and CS Wireless have filed with the SEC.
We have decided to "incorporate by reference" information into this proxy
statement. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this proxy statement,
except for any information that is superseded by other information that is
included in or incorporated by reference into this document.
This proxy statement incorporates by reference the documents listed below
that we and CS Wireless have previously filed with the SEC. These documents
contain important information about us.
CAI SEC FILINGS (SEC FILE NO. 0-22888) PERIOD
- -------------------------------------------------------- --------------------------------------------------------
Annual Report on Form 10-K Years ended March 31, 1999 and 1998
Quarterly Reports on Form 10-Q Quarters ended June 30, 1998, September 30, 1998 (as
amended by Form 10-Q/A filed on June 29, 1999) and
December 31, 1998 (as amended by Form 10-Q/A filed on
June 29, 1999)
Current Reports on Form 8-K Filed on July 2, 1998, July 16, 1998, August 4, 1998,
August 6, 1998, October 15, 1998, October 30, 1998,
April 28, 1999, June 16, 1999, June 29, 1999 and July
12, 1999
118
CS WIRELESS SEC FILINGS (SEC FILE NO. 333-03288) PERIOD
- -------------------------------------------------------- --------------------------------------------------------
Annual Report on Form 10-K Year ended December 31, 1998
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
We also incorporate by reference any additional documents that we may file
with the SEC under Section 15(d) of the Exchange Act between the date of this
document and the date of the special meeting. These may include periodic
reports, such as Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.
CAI anticipates filing a Current Report on Form 8-K on or about August 2, 1999,
which report shall contain, as exhibits, the materials relating to each of the
special meetings to be held by CAI on August 31, 1999.
MCI WorldCom and Cardinal Acquisition Subsidiary have supplied all
information contained in this proxy statement relating to MCI WorldCom and
Cardinal Acquisition Subsidiary, and CAI has supplied all such information
relating to CAI and CS Wireless.
CAI may have sent to CAI shareholders some of the documents referenced
above, but shareholders can obtain any of them through CAI or the SEC. Documents
previously filed with the SEC and referenced in this proxy statement, are
available from CAI without charge. Shareholders may obtain documents previously
filed with the SEC and referenced in this proxy statement, by requesting them in
writing at the following address:
CAI Wireless Systems, Inc.
18 Corporate Woods Boulevard, Third Floor
Albany, New York 12211
Attention: Corporate Secretary
Telephone: (518) 462-2632
If you would like to request documents from CAI, please do so by August 24,
1999 to receive them before the special meeting.
Shareholders should rely only on the information contained or incorporated
by reference in this proxy statement to vote their shares at the special
meeting. CAI has not authorized anyone to provide you with information that is
different from what is contained in this proxy statement. This proxy statement
is dated July 30, 1999. Shareholders should not assume that the information
contained in the proxy statement is accurate as of any date other than such
date, and the mailing of this proxy statement to shareholders will not create
any implication to the contrary.
119
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
IN PROXY STATEMENT
---------------------
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES:
Independent Auditors' Report................................................................. F-2
Report of Independent Accountants............................................................ F-3
Consolidated Balance Sheets--March 31, 1999 and 1998......................................... F-5
Consolidated Statements of Operations--Periods Ended March 31, 1999 and October 14, 1998 and
Years Ended March 31, 1998 and 1997........................................................ F-6
Consolidated Statements of Shareholders' Equity (Deficit)--Periods Ended March 31, 1999 and
October 14, 1998 and Years Ended March 31, 1998 and 1997................................... F-7
Consolidated Statements of Cash Flows--Periods Ended March 31, 1999 and October 14, 1998 and
Years Ended March 31, 1998 and 1997........................................................ F-8
Notes to Consolidated Financial Statements................................................... F-11
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES:
Independent Auditors' Report................................................................. F-48
Consolidated Balance Sheets as of December 31, 1998 and 1997................................. F-49
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996... F-50
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31,
1998, 1997 and 1996........................................................................ F-51
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996... F-52
Notes to Consolidated Financial Statements................................................... F-53
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31,
1998....................................................................................... F-71
Condensed Consolidated Statements of Operations (unaudited) for the three months ended March
31, 1999 and 1998.......................................................................... F-72
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March
31, 1999 and 1998.......................................................................... F-73
Notes to Unaudited Condensed Consolidated Financial Statements............................... F-74
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES:
Introduction to Pro Forma Combined Financial Statements (unaudited).......................... F-77
Pro Forma Combined Balance Sheet--September 30, 1998 (unaudited)............................. F-78
Notes to Pro Forma Combined Balance Sheet (unaudited)........................................ F-79
Pro Forma Combined Statement of Operations (unaudited) for the year ended March 31, 1999..... F-80
Pro Forma Combined Statement of Operations (unaudited) for the year ended March 31, 1998..... F-81
Pro Forma Combined Statement of Operations (unaudited) for the six months ended September 30,
1998....................................................................................... F-82
Notes to Pro Forma Combined Statements of Operations (unaudited)............................. F-83
F-1
[LOGO]
Suite 400
8200 Greensboro Drive Telephone 703 442 0030
McLean, VA 22102-3803 Fax 703 556 0195
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CAI Wireless Systems, Inc.
We have audited the accompanying consolidated balance sheet of CAI Wireless
Systems, Inc. and subsidiaries as of March 31, 1999 (Reorganized Company) and
the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the period October 15, 1998 to March 31, 1999
(Reorganized Company period) and for the period April 1, 1998 to October 14,
1998 (Predecessor Entity period). These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 16 to the consolidated financial statements, on April
26, 1999, CAI entered into an Agreement and Plan of Merger with MCI WORLDCOM,
Inc. and Cardinal Acquisition Subsidiary Inc., a wholly owned subsidiary of MCI
WORLDCOM, Inc. As a result of the merger, each outstanding share of common stock
of CAI will be converted into the right to receive $28.00 per share of common
stock.
In our opinion, the aforementioned Reorganized Company consolidated
financial statements present fairly, in all material respects, the financial
position of CAI Wireless Systems, Inc. and subsidiaries as of March 31, 1999 and
the results of their operations and their cash flows for the Reorganized Company
period and the Predecessor Entity period in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, on
October 14, 1998, CAI Wireless Systems, Inc. and one of its wholly owned
subsidiaries emerged from bankruptcy. The consolidated financial statements of
the Reorganized Company reflect the impact of adjustments to reflect the fair
value of assets and liabilities under fresh start reporting. As a result, the
consolidated financial statements of the Reorganized Company are presented on a
different basis than those of the Predecessor Entity and, therefore, are not
comparable in all respects.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company's recurring losses from
operations, restrictions on its ability to obtain additional financing and
substantial commitments raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
KPMG LLP
June 22, 1999
F-2
[LOGO]
PRICEWATERHOUSECOOPERS LLP
2400 Eleven Penn Center
REPORT OF INDEPENDENT ACCOUNTANTS Philadelphia PA 19103-2962
Telephone (215) 963-8000
Facsimile (215) 963-8700
Shareholders and Board of Directors
CAI Wireless Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of CAI Wireless
Systems, Inc. and Subsidiaries as of March 31, 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years ended March 31, 1998 and 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the financial statements of CS Wireless Systems, Inc., the Company's
investment in which is accounted for by use of the equity method. The Company's
investment of $43,337,527 in CS Wireless Systems, Inc. as of March 31, 1998 and
its share of losses of $27,522,000 and $17,600,000 in CS Wireless Systems,
Inc.'s operations for the years ended March 31, 1998 and 1997 are included in
the accompanying financial statements. The financial statements of CS Wireless
Systems, Inc. were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for CS
Wireless Systems, Inc., is based on the report of such other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of CAI Wireless Systems, Inc. and
Subsidiaries as of March 31, 1998, and the consolidated results of their
operations and their cash flows for the years ended March 31, 1998 and 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and incurred substantial debt, of which $45,000,000 is
due on June 30, 1998. The Company also has a capital deficiency. The Company's
operating plans require additional funds which may take the form of debt or
equity security issuances, borrowings or asset sales. In addition, the Company
intends to, if approved by its creditors, file a pre-packaged reorganization
plan under Chapter 11 of the U.S. Bankruptcy Code. Recovery of the Company's
intangible and other long-lived assets is dependent on the Company's ability to
implement its operating plans. There can be no assurance that additional
financing will be available or that the Company will be able to implement its
operating plans. The uncertainty over the Company's ability to obtain such
additional financing or that the Company can execute its business plan raises
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
F-3
As indicated in Note 2 to the financial statements, the Company has revised
its financial statements for certain restructuring costs.
[LOGO]
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
June 15, 1998, except as to the first and second paragraphs of Note 2,
for which the date is June 24, 1998 and the fourth paragraph of Note 2,
for which the date is June 22, 1999.
F-4
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
REORGANIZED PREDECESSOR
COMPANY(A) ENTITY
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents............................................... $ 36,837,354 $ 1,275,020
Restricted cash and cash equivalents.................................... 16,897,223 9,134,651
Debt service escrow..................................................... -- 16,418,922
Subscriber accounts receivable, net..................................... 1,484,455 387,144
Prepaid expenses........................................................ 1,436,696 661,669
Property and equipment, net............................................. 68,435,750 49,898,337
Wireless channel rights, net............................................ 307,181,897 194,050,792
Investment in CS Wireless Systems, Inc.................................. -- 43,337,527
Investment in TelQuest Satellite Services LLC........................... -- 3,174,732
Other investments....................................................... 4,313,848 --
Goodwill, net........................................................... -- 22,985,876
Debt financing costs, net............................................... 8,271,586 7,079,424
Reorganization value in excess of amounts allocable to identifiable
assets, net........................................................... 35,913,446 --
Other assets............................................................ 2,681,695 3,061,780
------------- -------------
Total Assets............................................................ $ 483,453,950 $ 351,465,874
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Accounts payable...................................................... $ 12,063,414 $ 4,852,091
Accrued expenses...................................................... 7,186,250 4,829,844
Accrued interest...................................................... 4,428,876 3,264,919
Wireless channel rights obligations................................... 6,185,794 4,832,971
Interim debt financing................................................ 65,807,317 45,000,000
Senior notes.......................................................... 353,139,771 312,088,506
------------- -------------
448,811,422 374,868,331
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, no shares outstanding................................ -- --
Common stock:
40,543,039 no par value shares outstanding at March 31, 1998, all
canceled as of October 14, 1998 -- 275,770,764
17,241,379 new $.01 par value shares issued and outstanding as of
March 31, 1999.................................................... 172,414 --
Additional paid-in capital............................................ 145,117,997 101,711,759
Accumulated deficit (b)............................................... (110,647,883) (400,884,980)
------------- -------------
34,642,528 (23,402,457)
------------- -------------
Total Liabilities and Shareholders' Equity (Deficit).................... $ 483,453,950 $ 351,465,874
------------- -------------
------------- -------------
- ------------------------
(a) Reorganized as of October 15, 1998. See Note 2 of the notes to consolidated
financial statements.
(b) Accumulated deficit of $415,434,827, net of an extraordinary gain of
$85,355,624 from the extinguishment of debt in the CAI reorganization, was
eliminated as of October 14, 1998. The accumulated deficit shown at March
31, 1999 is for the period from October 15, 1998 to March 31, 1999.
See notes to consolidated financial statements.
F-5
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS ENDED MARCH 31, 1999 AND OCTOBER 14, 1998
AND YEARS ENDED MARCH 31, 1998 AND 1997
REORGANIZED
COMPANY(A) PREDECESSOR ENTITY
------------- -----------------------------------------
PERIOD FROM PERIOD FROM
OCTOBER 15, APRIL 1, 1998
1998 TO YEAR ENDED YEAR ENDED
TO MARCH 31, OCTOBER 14, MARCH 31, MARCH 31,
1999 1998(C) 1998 1997
------------- -------------- ------------ -----------
Revenues......................... $15,433,357 $ 11,481,498 $ 28,621,710 3$6,326,816
------------- -------------- ------------ -----------
Costs and expenses:
Programming and licensing...... 9,963,335 8,099,445 15,459,663 16,051,094
Marketing...................... 603,223 189,133 1,373,265 2,033,107
General and administrative..... 24,653,961 11,471,224 36,750,542 31,196,446
Depreciation and
amortization................. 22,700,264 14,663,560 34,713,610 32,345,327
Write-down of assets........... -- -- 73,500,000 --
------------- -------------- ------------ -----------
57,920,783 34,423,362 161,797,080 81,625,974
------------- -------------- ------------ -----------
Operating loss............... (42,487,426) (22,941,864) (133,175,370) (45,299,158)
------------- -------------- ------------ -----------
Other income (expense):
Interest expense............... (30,937,947) (18,243,038) (47,226,574) (40,805,791)
Equity in losses of
affiliates................... (38,740,977) (45,483,966) (31,747,268) (17,600,000)
Write-down of equity
investment................... -- -- (23,570,000) --
Reorganization expense......... -- (17,101,383) -- --
Interest and other income...... 1,518,467 3,864,780 4,458,782 6,406,742
------------- -------------- ------------ -----------
(68,160,457) (76,963,607) (98,085,060) (51,999,049)
------------- -------------- ------------ -----------
Loss before income tax
benefit and extraordinary
item......................... (110,647,883) (99,905,471) (231,260,430) (97,298,207)
Income tax benefit............... -- -- -- 15,000,000
------------- -------------- ------------ -----------
Loss before extraordinary
item......................... (110,647,883) (99,905,471) (231,260,430) (82,298,207)
Extraordinary item: net gains
from early extinguishment of
debt........................... -- 85,355,624 5,345,699 --
------------- -------------- ------------ -----------
Net loss..................... (110,647,883) (14,549,847) (225,914,731) (82,298,207)
Preferred stock dividends........ -- -- (13,891,025) (13,011,270)
------------- -------------- ------------ -----------
Loss applicable to common
shareholders................... ($110,647,883) $(14,549,847) $(239,805,756) ($95,309,477)
------------- -------------- ------------ -----------
------------- -------------- ------------ -----------
Basic and diluted loss per new
common share(b)................ $ (6.42)
-------------
-------------
Weighted average new common
shares outstanding............. 17,241,379
-------------
-------------
- ------------------------
(a) Reorganized as of October 15, 1998. See Note 2 of the notes to consolidated
financial statements.
(b) Share data for the pre-reorganization periods is not presented as such
amounts are not meaningful.
(c) Contractual interest of $4,956,347 was not recorded for the period July 30,
1998, the date CAI voluntarily filed its Chapter 11 bankruptcy petition,
through October 14, 1998, the date of the bankruptcy consummation, in
accordance with SOP 90-7, since contractual interest was an unsecured
unallowed claim in the bankruptcy proceeding.
See notes to consolidated financial statements.
F-6
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
PERIODS ENDED MARCH 31, 1999 AND OCTOBER 14, 1998 AND YEARS ENDED MARCH 31, 1998
AND 1997
ADDITIONAL
PAID-IN
PREDECESSOR ENTITY: SHARES AMOUNT CAPITAL
- ------------------------------------------------------------------------------------- ---------- ----------- -----------
Balance at March 31, 1996............................................................ 37,829,482 $257,701,130 $ --
Series A 8% preferred stock converted to common...................................... 2,637,742 18,049,955 --
Value assigned to warrants exercised................................................. 73,315 18,329 --
Senior preferred stock issuance costs................................................ -- -- --
Preferred stock dividends............................................................ -- -- --
Net loss for the year................................................................ -- -- --
---------- ----------- -----------
Balance at March 31, 1997............................................................ 40,540,539 275,769,414 --
Common stock issued in exchange for Bell Atlantic warrants........................... 2,500 1,350 --
Senior preferred stock and accumulated dividends contributed to capital pursuant to
the Bell Atlantic termination agreement on March 3, 1998........................... -- -- 101,711,759
Preferred stock dividends............................................................ -- -- --
Net loss for the year................................................................ -- -- --
---------- ----------- -----------
Balance at March 31, 1998............................................................ 40,543,039 275,770,764 101,711,759
NET LOSS FOR THE PERIOD FROM APRIL 1, 1998 TO OCTOBER 14, 1998, INCLUDING AN
EXTRAORDINARY GAIN OF $85,355,624.................................................. -- -- --
ELIMINATE PREDECESSOR EQUITY ACCOUNTS AND FAIR VALUE ASSETS AND LIABILITIES IN
CONNECTION WITH FRESH-START ACCOUNTING:
CANCEL COMMON SHARES (NO PAR VALUE) AND RESTATE THE ACCUMULATED DEFICIT............ (40,543,039) (275,770,764) (101,711,759)
ISSUE NEW COMMON SHARES, PAR VALUE $.01............................................ 15,000,000 150,000 119,814,776
NEW SHARES ISSUED WITH THE EXIT FACILITY........................................... 2,241,379 22,414 17,903,355
RECORD EXCESS OF REORGANIZATION VALUE OVER IDENTIFIABLE ASSETS..................... -- -- --
---------- ----------- -----------
BALANCE AT OCTOBER 14, 1998.......................................................... 17,241,379 172,414 137,718,131
REORGANIZED COMPANY(A):
- -------------------------------------------------------------------------------------
COMPENSATION EXPENSE UNDER STOCK OPTION PLANS........................................ -- -- 7,399,866
NET LOSS FOR THE PERIOD FROM OCTOBER 15, 1998 TO MARCH 31, 1999...................... -- -- --
---------- ----------- -----------
BALANCE AT MARCH 31, 1999............................................................ 17,241,379 $ 172,414 $145,117,997
---------- ----------- -----------
---------- ----------- -----------
ACCUMULATED
PREDECESSOR ENTITY: DEFICIT TOTAL
- ------------------------------------------------------------------------------------- ------------ -----------
Balance at March 31, 1996............................................................ $(65,090,206) $192,610,924
Series A 8% preferred stock converted to common...................................... -- 18,049,955
Value assigned to warrants exercised................................................. (18,329) --
Senior preferred stock issuance costs................................................ (661,212) (661,212)
Preferred stock dividends............................................................ (13,011,270) (13,011,270)
Net loss for the year................................................................ (82,298,207) (82,298,207)
------------ -----------
Balance at March 31, 1997............................................................ (161,079,224) 114,690,190
Common stock issued in exchange for Bell Atlantic warrants........................... -- 1,350
Senior preferred stock and accumulated dividends contributed to capital pursuant to
the Bell Atlantic termination agreement on March 3, 1998........................... -- 101,711,759
Preferred stock dividends............................................................ (13,891,025) (13,891,025)
Net loss for the year................................................................ (225,914,731) (225,914,731)
------------ -----------
Balance at March 31, 1998............................................................ (400,884,980) (23,402,457)
NET LOSS FOR THE PERIOD FROM APRIL 1, 1998 TO OCTOBER 14, 1998, INCLUDING AN
EXTRAORDINARY GAIN OF $85,355,624.................................................. (14,549,847) (14,549,847)
ELIMINATE PREDECESSOR EQUITY ACCOUNTS AND FAIR VALUE ASSETS AND LIABILITIES IN
CONNECTION WITH FRESH-START ACCOUNTING:
CANCEL COMMON SHARES (NO PAR VALUE) AND RESTATE THE ACCUMULATED DEFICIT............ 377,482,523 --
ISSUE NEW COMMON SHARES, PAR VALUE $.01............................................ -- 119,964,776
NEW SHARES ISSUED WITH THE EXIT FACILITY........................................... -- 17,925,769
RECORD EXCESS OF REORGANIZATION VALUE OVER IDENTIFIABLE ASSETS..................... 37,952,304 37,952,304
------------ -----------
BALANCE AT OCTOBER 14, 1998.......................................................... -- 137,890,545
REORGANIZED COMPANY(A):
- -------------------------------------------------------------------------------------
COMPENSATION EXPENSE UNDER STOCK OPTION PLANS........................................ -- 7,399,866
NET LOSS FOR THE PERIOD FROM OCTOBER 15, 1998 TO MARCH 31, 1999...................... (110,647,883) (110,647,883)
------------ -----------
BALANCE AT MARCH 31, 1999............................................................ $(110,647,883) $34,642,528
------------ -----------
------------ -----------
- ------------------------------
(a) Reorganized as of October 15, 1998. See Note 2 of the notes to consolidated
financial statements.
See notes to consolidated financial statements.
F-7
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED MARCH 31, 1999 AND OCTOBER 14, 1998 AND YEARS ENDED MARCH 31, 1998
AND 1997
REORGANIZED COMPANY(A) PREDECESSOR ENTITY
---------------------- -----------------------------------------------
PERIOD FROM
APRIL 1, 1998
PERIOD FROM TO
OCTOBER 15, 1998 OCTOBER 14, YEAR ENDED YEAR ENDED
TO MARCH 31, 1999 1998 MARCH 31, 1998 MARCH 31, 1997
---------------------- --------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................... $ (110,647,883) $(14,549,847) $(225,914,731) $(82,298,207)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization........ 20,960,783 14,663,560 34,713,610 32,345,327
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets................ 1,739,481 -- -- --
Reorganization expense............... -- 10,795,636 -- --
Compensation expense under stock
option plans....................... 7,399,866 -- -- --
Write-down of impaired assets........ -- -- 73,500,000 --
Equity in losses of affiliates....... 38,740,977 45,483,966 31,747,268 17,600,000
Write-down of equity investment...... -- -- 23,570,000 --
Extraordinary net gain on early
extinguishment of debt............. -- (85,355,624) (5,345,699) --
Deferred income tax benefit.......... -- -- -- (15,000,000)
Debt financing costs and discount
amortization and accretion......... 26,255,739 1,407,539 4,915,160 3,336,483
Write-off of projects and other
costs.............................. -- -- 7,136,940 2,087,144
Gain on the sale of assets........... -- (2,543,327) (1,239,175) (16,851)
Other................................ (367,085) -- 180,230 277,820
Changes in assets and liabilities,
net of effects from acquired
companies:
Subscriber receivables............. 775,762 (314,491) 273,604 690,092
Other assets....................... 602,496 (98,739) 638,880 (382,798)
Accounts payable and accrued
expenses......................... (454,951) 4,263,245 7,881,801 6,608,567
---------------------- --------------- -------------- --------------
Net cash used in operating
activities..................... (14,994,815) (26,248,082) (47,942,112) (34,752,423)
---------------------- --------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of wireless channel rights.... (376,652) (110,000) (2,024,526) (3,686,989)
Purchase of property and equipment..... (2,107,937) (991,649) (7,167,875) (37,109,164)
Purchase of investments................ -- -- -- (15,087,990)
Net cash received in CS acquisition.... 43,989,778 -- -- --
Proceeds from maturity of
investments.......................... -- 16,472,495 31,514,960 43,495,837
Proceeds from sale of assets........... 179,407 4,810,018 1,841,057 486,307
Investments in affiliates.............. (874,567) (411,567) (4,388,433) --
Other.................................. 188,343 (81,527) 2,146,551 (765,117)
---------------------- --------------- -------------- --------------
Net cash provided by (used in)
investing activities........... 40,998,372 19,687,770 21,921,734 (12,667,116)
---------------------- --------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of secured
financings and other debt............ 174,500 26,847,439 33,714,321 --
(Increase) decrease in restricted cash
accounts............................. 10,260,359 (18,022,931) (9,134,651) --
Repayment of senior and other debt..... (940,129) (2,073,704) (3,056,834) (45,263,492)
Debt financing costs paid.............. -- (126,445) (4,699,356) --
Other.................................. -- -- -- (108,145)
---------------------- --------------- -------------- --------------
Net cash provided by (used in)
financing activities........... 9,494,730 6,624,359 16,823,480 (45,371,637)
---------------------- --------------- -------------- --------------
Net increase (decrease) in cash
and cash equivalents........... 35,498,287 64,047 (9,196,898) (92,791,176)
Cash and cash equivalents, beginning... 1,339,067 1,275,020 10,471,918 103,263,094
---------------------- --------------- -------------- --------------
Cash and cash equivalents, ending...... $ 36,837,354 $ 1,339,067 $ 1,275,020 $ 10,471,918
---------------------- --------------- -------------- --------------
---------------------- --------------- -------------- --------------
- ------------------------
(a) Reorganized as of October 15, 1998. See Note 2 of the notes to consolidated
financial statements.
See notes to consolidated financial statements.
F-8
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING AND FINANCING ACTIVITIES
During the post-reorganization period from October 15, 1998 to March 31,
1999 and the pre-reorganization period from April 1, 1998 to October 14, 1998
and the years ended March 31, 1998 and 1997, the following non-cash investing
and financing activities occurred:
REORGANIZED
COMPANY PREDECESSOR ENTITY
------------- ---------------------------------------
PERIOD FROM
OCTOBER 15, PERIOD FROM
1998 APRIL 1, 1998
TO TO YEAR ENDED YEAR ENDED
MARCH 31, OCTOBER 14, MARCH 31, MARCH 31,
1999 1998 1998 1997
------------- ------------- ----------- -----------
1. Purchase of property and
equipment with accrued
obligations..................... $ 262,008 $ -- $ 832,549 $1,213,335
2. Acquisition of wireless channel
rights with accrued
obligations..................... -- -- 2,143,855 2,380,234
3. Accrued preferred stock
dividends....................... -- -- 13,761,561 12,848,172
4. On November 25, 1997, amounts outstanding and owed under the Foothill
Capital Credit Facility totaling $17.3 million were repaid with proceeds
from the sale by CAI of $25 million principal amount of 13% senior secured
notes to Merrill Lynch Global Allocation Fund, Inc. ("MLGAF") (see Note 8).
On January 26, 1998, MLGAF purchased an additional $2 million principal
amount of 13% senior secured notes from CAI.
5. On February 17, 1998, CAI consummated a series of transactions, including
the purchase by CAI of the remaining interest of affiliates of NYNEX and
Bell Atlantic (collectively, "Bell Atlantic") under the Business
Relationship Agreement and the acquisition of Bell Atlantic's approximately
9.9% equity interest in CS Wireless Systems, Inc. As consideration for the
termination of the joint venture and the transfer to CAI of the CS common
stock held by Bell Atlantic, CAI issued $7 million aggregate principal
amount of its 13% senior secured notes to Bell Atlantic. As part of these
transactions, MLGAF advised CAI that it had completed the purchase from Bell
Atlantic of the $30 million aggregate principal amount of CAI's 14% term
notes, $70 million of CAI's 14% senior preferred stock and Bell Atlantic
warrants to purchase CAI equity and the $7 million aggregate principal
amount of 13% senior secured notes issued to Bell Atlantic on February 17,
1998. Simultaneously, MLGAF also purchased an additional $11 million
aggregate principal amount of CAI's 13% senior secured notes. As a result of
these transactions, as of March 31, 1998, there was $45 million aggregate
principal amount of CAI's 13% senior secured notes outstanding, all of which
was held by MLGAF.
6. On March 3, 1998, MLGAF exchanged the Bell Atlantic term notes and the Bell
Atlantic senior preferred stock, together with accrued but unpaid interest
($15,709,804) and dividends ($32,422,295) thereon, acquired by MLGAF on
February 17, 1998, for a $30 million 12% subordinated note due 2005 and
exchanged the Bell Atlantic warrants for 2,500 shares of CAI common stock
valued at $1,350.
7. During the year ended March 31, 1997, all of the Series A preferred stock,
with a basis of $18.1 million, was converted into 2,637,742 shares of common
stock.
F-9
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING AND FINANCING ACTIVITIES
8. Net cash provided by issuance of secured financings and other debt during
the period from April 1, 1998 to October 14, 1998:
INTERIM DEBT REFINANCING
Proceeds from issuance of secured notes under the DIP
facility................................................... $60,000,000
Repayment of 13% senior secured notes........................ (45,000,000)
Debt financing costs paid.................................... (4,105,894)
-----------
Net cash provided by interim debt refinancing.............. 10,894,106
-----------
EXIT FACILITY AND STOCK ISSUANCE
Proceeds from issuance of secured notes under the exit
facility................................................... 80,000,000
Exit facility discount....................................... (17,925,769)
Proceeds from stock issuance................................. 17,925,769
-----------
Net proceeds from exit facility and stock issuance......... 80,000,000
Repayment of the DIP facility................................ (60,000,000)
Accrued interest paid........................................ (1,646,667)
Debt financing costs paid.................................... (2,400,000)
-----------
Net cash provided by the exit facility and stock
issuance................................................. 15,953,333
-----------
Net cash provided by issuance of secured financings and other
debt......................................................... $26,847,439
-----------
-----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
REORGANIZED
COMPANY PREDECESSOR ENTITY
--------------- --------------------------------------
PERIOD FROM PERIOD FROM
OCTOBER 15, APRIL 1,
1998 1998 TO YEAR ENDED YEAR ENDED
TO OCTOBER 14, MARCH 31, MARCH 31,
MARCH 31, 1999 1998 1998 1997
--------------- ------------ ----------- -----------
Cash payments for
interest......... $ 16,582 $17,028,872 3$4,944,126 3$4,341,025
------- ------------ ----------- -----------
------- ------------ ----------- -----------
F-10
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of CAI Wireless Systems, Inc. ("CAI") and its wholly-owned
subsidiaries and, effective as of December 2, 1998, its approximately 94%
ownership of CS Wireless Systems, Inc. ("CS"), its 60% interest in TelQuest
Satellite Services LLC ("TelQuest") and its 50% ownership of each of CAI Data
Systems Inc., CAI Satellite Communications, Inc. and MMDS Satellite Ventures,
Inc. (collectively the "Company"). Throughout the Notes to the Consolidated
Financial Statements and the Financial Statements to which the Notes are
attached, use of the term "Reorganized Company" refers to CAI Wireless Systems,
Inc. and its subsidiaries, on a consolidated basis, from and after October 15,
1998. Throughout the Notes to the Consolidated Financial Statements and the
Financial Statements to which the Notes are attached, use of the term
"Predecessor Entity" refers to CAI and its subsidiaries prior to October 15,
1998. A vertical black line is shown in the consolidated financial statements to
separate the reorganized company and the predecessor entity since they have not
been prepared on a consistent basis of accounting. All significant intercompany
accounts and transactions have been eliminated in consolidation. Acquisitions
have been accounted for on the purchase method of accounting. Accordingly, CS
and TelQuest have been consolidated as of December 2, 1998. The Consolidated
Statement of Operations reflects CS and TelQuest operations for the four month
period ended March 31, 1999 with no allowance for minority interest since the
respective minority shareholders do not provide any guarantees for funding the
losses sustained by these companies.
FRESH-START REPORTING. Financial accounting during a Chapter 11 proceeding
is prescribed in the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." The emergence from the Chapter 11
proceeding resulted in the creation of a new reporting entity without any
accumulated deficit and with CAI's assets and liabilities restated to their
estimated fair values (see Note 2). Due to the application of fresh-start
reporting, the financial statements for periods after the reorganization are not
comparable in all respects to the financial statements for periods prior to the
reorganization, primarily with respect to depreciation and amortization.
NATURE OF BUSINESS. CAI was incorporated in August 1991 to invest in,
lease, and purchase wireless channel rights including multi-channel, multi-point
distribution services licenses, multi-point distribution services ("MDS")
licenses and instructional television fixed services ("ITFS") licenses
(collectively, "MMDS"), and develop wireless cable systems. CAI operates six
analog-based wireless cable systems providing analog video service to
approximately 32,300 subscribers as of March 31, 1999 in New York City,
Rochester, and Albany, NY; Philadelphia, PA; Washington, DC; and
Norfolk/Virginia Beach, VA. In addition, CAI has a portfolio of MMDS channel
rights in eight additional markets including Long Island, Buffalo and Syracuse,
NY; Providence, RI; Hartford, CT; Boston, MA (built-out with limited Internet
operations); Baltimore, MD; and Pittsburgh, PA. For the periods from October 15,
1998 to March 31, 1999 and April 1, 1998 to October 14, 1998, approximately 62%,
15% and 14% and 56%, 16% and 18% of CAI's total revenues were derived from the
Philadelphia, New York City and Albany systems, respectively, as compared to
60%, 18% and 11% and 59%, 22% and 9% for the years ended March 31, 1998 and
1997, respectively.
F-11
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED).
CS provides subscription video services to approximately 55,900 subscribers
as of March 31, 1999, in eleven operating markets (exclusive of subscribers in
the Story City, Iowa market contemplated to be transferred to Nucentrix
Broadband Networks, Inc.;"Nucentrix", formerly known as Heartland Wireless
Communications, Inc.). Those markets are Bakersfield, CA; Sweet Springs and
Cameron/ Maysville, MO; Cleveland and Dayton, OH; San Antonio, Dallas and Fort
Worth, TX; Minneapolis, MN; Nortonville/Effingham, KS; and Grand Rapids, MI.
Additionally, CS provides high speed Internet access services in its Dallas/Ft.
Worth market. CS also owns or holds lease rights in other markets as follows:
Battle Creek, Grand Rapids and Kalamazoo, MI; Charlotte, NC; Kalispell, MT;
Kansas City, MO; Napoleon/Bloom Center, IN; Rochester, MN; Scottsbluff, NE;
Stockton/Modesto, CA; and Wellsville, KS.
The Company's subscription video services operate 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 and companies using direct broadcast satellite and
other 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.
In addition to providing wireless cable television services, the Company intends
to expand the use of its wireless channel rights spectrum to include
telecommunications services. As the telecommunications industry continues to
evolve and the Company seeks to expand its product offerings, the Company faces
additional competition from new providers of entertainment and data services.
There can be no assurance that the Company will be able to compete successfully
with existing or potential competitors in the subscription video industry or any
other segment of the telecommunications industry.
The Company has incurred significant operating losses since its inception.
Losses are expected for at least the next year as the Company continues to
operate its subscription video business and implement its business plan. The
Company has approximately $53.7 million in cash, cash equivalents and restricted
cash at March 31, 1999, of which $17.5 million is available to CAI and $36.0
million is available to CS to fund their respective capital requirements. Based
on the current operating budgets, CAI believes that it has sufficient cash to
fund its anticipated capital requirements through November 1999, and CS believes
that it has sufficient cash to fund its anticipated capital requirements through
March 2000. CAI's operating budget does not contemplate further investment in
any of CAI's non-wholly-owned subsidiaries and CS' operating budget does not
contemplate any investment in CAI or its wholly-owned subsidiaries.
The Company has committed significant resources to the development of two
way digital MMDS systems and contemplates additional capital expenditures in
connection with the continued efforts to engineer and design two-way systems in
the Company's markets. The Company continues to enhance its portfolio of MMDS
spectrum rights by entering into long-term leases and, where feasible,
purchasing or otherwise obtaining rights to MMDS spectrum in certain of its
markets. The amount and timing of the Company's future capital requirements will
depend upon a number of factors, including programming, equipment 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 financing could materially affect the
growth, cash flow and/or operating results of the Company.
F-12
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED).
The Company is also faced with significant debt service requirements
beginning on October 14, 2000, when $80 million aggregate principal amount of
CAI's 13% senior secured notes, together with all accrued interest thereon and
all fees and expenses associated therewith, are due and payable in full (see
Note 8). Additionally, beginning in September 2001, CS will have to make
semi-annual interest payments on the outstanding aggregate amount of its Series
B 11.375% senior discount notes due 2006.
Without additional funding through debt or equity offerings, joint ventures,
non-core asset sales, 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 (see Note 2 and Subsequent Event in Note 16).
There can be no assurance that the Company will achieve positive cash flow from
operations or consummate any asset sale or that sufficient debt or equity
financing will be available to it. In addition, subject to restrictions under
their outstanding debt obligations, CAI and CS 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 wireless
communications business.
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 amounts reported in the financial
statements and accompanying notes. Significant estimates include fair value
adjustments, valuation allowances, useful lives of tangible and intangible
assets and estimates of impairment of long-lived assets. Actual results could
differ from those estimates and assumptions.
CASH EQUIVALENTS AND RESTRICTED CASH. For purposes of determining cash and
cash equivalents, restricted cash balances are not included. The Company
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. Cash equivalents consist
primarily of money market type funds. The Company has a concentration of credit
risk with regard to its cash in excess of the amount subject to federal
insurance and money market type funds. The Company has mitigated its risk by
depositing its cash in high credit quality financial institutions and by
investing in low risk, high grade money market type funds which invest in U.S.
government securities or high grade commercial paper. The net proceeds from the
issuance to Merrill Lynch Global Allocation Fund, Inc. ("MLGAF") of the CAI
senior secured notes (see Note 8) are held in an account controlled by
PricewaterhouseCoopers LLP as collateral agent for the holders of CAI senior
secured notes. On March 26, 1999, MCI WORLDCOM, Inc. acquired the $80 million
aggregate principal amount of CAI's senior secured notes from MLGAF. The release
and use of funds is limited to expenditures that are in accordance with CAI's
operating plan as submitted from time to time to the holders of the senior
secured notes.
ACCOUNTS RECEIVABLE. The Company provides an allowance for doubtful
accounts on its accounts receivable, which amounted to $.6 million and $.2
million at March 31, 1999 and 1998, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost as of
October 14, 1998 and at fair market value as of October 15, 1998. Subsequent
additions are recorded at cost. Depreciation and amortization are calculated by
the straight-line method over the estimated useful lives of the related assets.
The Company capitalizes subcontractor and direct employee labor costs incurred
in connection with the installation of its television reception equipment on
subscriber premises. Repairs and maintenance costs are expensed when incurred;
renewals and betterments are capitalized.
F-13
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED).
Amortization of such costs is based on the estimated subscriber turnover rate
for each system, which ranges from 1 to 7 years.
INVESTMENTS IN AFFILIATES.
CS WIRELESS SYSTEMS, INC. On December 2, 1998, CAI increased its
ownership interest in CS to 94% by acquiring shares held by Nucentrix Broadband
Networks, Inc. (formerly known as Heartland Wireless Communications, Inc.), for
$1,534,000 in cash, which shares were subsequently acquired from CAI by CS for
the same price and placed into treasury. Concurrently with the purchase by CAI,
CAI, CS and Nucentrix mutually agreed to terminate that certain stockholders'
agreement dated as of February 23, 1996. The stockholders' agreement (and bylaws
of CS) required the affirmative vote of a supermajority of the members of the CS
board of directors or stockholders, as the case may be, for certain actions to
be acted upon by the CS board or stockholders. Consequently, percentage
ownership of CS common stock was not indicative of control at CS so long as the
stockholders' agreement continued. As a result of the increased percentage
ownership in CS and the termination of the stockholders' agreement, the
subsequent results of CS are consolidated with those of CAI. The consolidation
with CS as of December 2, 1998 created negative goodwill of $25,550,304 which
was eliminated by proportionate offsets to property and equipment and wireless
channel rights of $6,132,073 and $19,418,231, respectively. In prior periods, as
a result of the effect the stockholders' agreement had on the control of CS, CAI
accounted for its investment in CS under the equity method of accounting, and
the difference between CAI's cost and the pro-rata value of its ownership of the
underlying equity was amortized over 15 years, commensurate with goodwill and
wireless channel rights amortization periods to which the investment primarily
related. CAI recorded its share of the CS net losses, adjusted for the
amortization of its investment, under the equity method because CAI did not
control day to day operations and due to the significant participation rights of
Nucentrix under the terms of a stockholders' agreement that was terminated on
December 2, 1998. The Company recognized a loss of $37,344,377 upon the
acquisition of the controlling interest of CS representing the losses not
previously recognized under its ownership percentage under the equity method. CS
owns 39% of Television Interactiva del Norte, S.A. de C.V. ("Telinor") and has a
49% interest in Telinor Inalambrica, S.A. de C.V. ("Television"). Telinor and
Television were formed to develop wireless cable television systems providing
subscription television services in Mexico. The carrying value of CS's
investments in and advances to Telinor and Television was $4.3 million at March
31, 1999.
TELQUEST SATELLITE SERVICES LLC. With the increased percentage of
ownership of CS on December 2, 1998, the Company has a 60% interest in TelQuest.
Accordingly, the subsequent results of TelQuest are consolidated with those of
CAI. In prior periods, the investment in TelQuest was recorded on the equity
method of accounting and the difference between CAI's cost and the pro-rata
ownership of the underlying equity was amortized over 15 years. The Company
recorded its share of TelQuest's net loss, adjusted for the amortization of its
excess investment, under the equity method until December 2, 1998.
INTANGIBLES.
WIRELESS CHANNEL RIGHTS. Wireless channel rights, including costs
incurred to acquire wireless cable channel rights, are carried at cost as of
October 14, 1998 and at fair market value on October 15,
F-14
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED).
1998. Subsequent additions are carried at cost. Wireless channel rights are
amortized over their estimated useful lives, generally 10 to 15 years,
commencing when the related market is placed in service or available for
service.
GOODWILL. Goodwill, consisting of acquisition costs in excess of the fair
value of assets and liabilities of the companies acquired, is amortized on a
straight line basis over periods ranging from 10 to 15 years. Accumulated
amortization was approximately $4.6 million at March 31, 1998.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE
ASSETS. Reorganization value approximates the amount a willing buyer would pay
for the assets of a company immediately after a restructuring. The
reorganization value in excess of amounts allocable to identifiable assets
(total assets after adjusting to fair value) is amortized over 10 years.
Accumulated amortization at March 31, 1999 is approximately $1.7 million.
DEBT FINANCING COSTS. Costs incurred to obtain financing are amortized
over the respective terms of the debt as a component of interest expense.
LONG-LIVED ASSETS. The Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on April 1,
1996. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be periodically 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 estimated 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 (see Note 2). Pursuant to SFAS No. 121, the Company periodically
reviews wireless channel rights and other long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. When such circumstances occur, the Company evaluates the
possible effects on the carrying amount of such assets.
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, the Company's
ability to obtain permission for flexible use of the wireless channel rights,
government regulation and/or available financing or competition. The Company's
estimate of future gross revenues and operating cash flows assumes that the
Company will successfully develop wireless broadband networks in its markets
which will enable the Company to provide fixed, flexible two-way
telecommunications transmission services, including high-speed data and
telephony services. Since these alternative uses of the MMDS spectrum are in the
early stages of development, there is no assurance that the Company can
commercially deploy such alternatives or that it will be able to achieve
positive cash flow from any operating activities.
Based on the results of its valuation as of March 31, 1998, CAI recorded a
$73.5 million write-down (net of an accumulated amortization adjustment of $14.7
million) of the goodwill associated with the wireless channel rights acquired
from companies purchased by CAI in September 1995.
F-15
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED).
INVESTMENTS IN DEBT SERVICE ESCROW. Investments in the debt service escrow,
consisting of debt instruments, matured in September 1998 and were carried at
cost since they were held to maturity.
REVENUE RECOGNITION. Revenues from subscribers are recognized in the period
that service is rendered. Amounts paid in advance are recorded as deferred
revenue. Subscriber installation fees are recognized as revenue to the extent of
costs incurred to obtain subscribers.
STOCK OPTIONS. SFAS No. 123 requires entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of grant
or alternatively, 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 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. Compensation expense has been reflected for the period from October 15,
1998 to March 31, 1999 relative to variable options issued after the bankruptcy
to incentivize certain key employees.
INCOME TAXES. The Company files a consolidated federal income tax return
with its subsidiaries in which it owns 80% or more of the outstanding common
stock. Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable for
future years to the difference between the financial statement and tax basis of
existing assets and liabilities. The effect of tax rate changes on deferred
taxes is recognized in the income tax provision in the period that includes the
enactment date. A valuation allowance is established to reduce deferred tax
assets, if it is more likely that all or some portion of such deferred tax asset
will not be realized.
LOSS PER SHARE. The Company adopted SFAS No. 128, "Earnings Per Share" for
the year ended March 31, 1998. Accordingly, the "primary" EPS was replaced with
a "basic" EPS computation based upon the weighted-average common shares
outstanding. Due to the Company's net losses, only the basic loss per share
amounts are reflected in the accompanying Consolidated Statements of Operations.
Outstanding options, warrants, and other convertible securities were not
considered for the purposes of calculating the weighted average common shares
outstanding since these securities were determined to be anti-dilutive. CAI's
basic loss per share for the year ended March 31, 1999 reflects the
post-bankruptcy loss per new common share. Per share data for the
pre-reorganization periods are not presented as such amounts are not meaningful.
RECLASSIFICATION. The Company has reclassified certain items in prior
years' financial statements to make them conform to the current year
presentation.
COMPREHENSIVE INCOME. The Company has adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires 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, and it includes all changes
in equity during a period, except those resulting from investments by owners and
distributions to owners. The adoption of SFAS No. 130 has had no effect on the
Company because the Company had no elements of other comprehensive income.
F-16
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED).
SEGMENT REPORTING. The Company adopted SFAS No. 131, "Disclosures about
segments of an enterprise and related information." 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. Accordingly, no additional
disclosure is required by the Company to conform to the requirements of SFAS No.
131.
NOTE 2--GOING CONCERN AND CHAPTER 11 REORGANIZATION.
GOING CONCERN. Although CAI has emerged from bankruptcy, the Company's
recurring losses, restrictions on its ability to obtain additional financing,
and substantial commitments raise substantial doubt about its continuation as a
going concern. For the year ending March 31, 2000, the Company is obligated to
pay approximately $7.9 million for minimum license fees and channel lease
payments, approximately $4.7 million for operating leases, approximately $6.2
million in wireless channel rights obligations including MMDS license auction
fees, $.8 million in debt service, and to fund current operating deficits. The
Company projects that operating cash requirements will be approximately $40.6
million for the year ending March 31, 2000. Additionally, as of March 31, 1999,
the Company had outstanding trade payables of approximately $12.1 million, and
is committed through additional open purchase orders to spend approximately $2.2
million, primarily for capital expenditures associated with digital, Internet
and telephony projects. For the year ended March 31, 1999, the Company was
obligated to pay approximately $5.5 million for minimum license fees and channel
lease payments, approximately $3.7 million for operating leases, approximately
$3.5 million in wireless channel rights obligations, including MMDS license
auction fees, and to fund current operating costs. The Company projected that
operating cash requirements would be approximately $20 million for the year
ending March 31, 1999. Additionally, as of March 31, 1998, the Company had
outstanding trade payables of approximately $4.9 million. The Company's business
strategy has been to explore digital wireless cable services for its MMDS
subscription television systems and alternative uses of its MMDS spectrum for a
variety of applications, including data and voice transmission such as Internet
access and telephone delivery services, and to petition the Federal
Communications Commission ("FCC") for the establishment of rules governing the
full two-way use of the MMDS spectrum. In management's opinion, this strategy,
if successful, will help meet current and perceived future competition and, in
relation to obtaining a new strategic partner, show the flexibility and
increased value of the Company's MMDS spectrum. In connection with achieving
these objectives, the Company was committed, through additional open purchase
orders as of March 31, 1998, to spend approximately $1.8 million, primarily for
capital expenditures associated with the additional development of the Boston
digital transmission facilities.
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The appropriateness of reporting on a going concern basis is dependent
upon, among other things, future operations and the ability to generate
sufficient cash from operations and financing sources to meet obligations.
F-17
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--GOING CONCERN AND CHAPTER 11 REORGANIZATION (CONTINUED).
Management has been seeking strategic partners to fund these financial
requirements. On April 26, 1999 CAI entered into an agreement and plan of merger
dated as of April 26, 1999 with MCI WorldCom (see Note 16).
RESTRUCTURING COSTS. The Company has revised its March 31, 1998 financial
statements to reflect financial restructuring fees which relate to a subsequent
period but which are immaterial in relation to the March 31, 1998 financial
statements.
CHAPTER 11 REORGANIZATION. On July 30, 1998, CAI and one of its
wholly-owned subsidiaries filed voluntary petitions under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. The CAI reorganization plan, which provided for the
restructuring of certain amounts of CAI's long-term indebtedness, was confirmed
on September 30, 1998 and consummated on October 14, 1998. Under the confirmed
reorganization plan, each holder of CAI's 12.25% senior notes due 2002 received,
in full satisfaction of its claim against CAI as a holder of senior notes, a
pro-rata portion of $212,909,624 aggregate principal amount at maturity ($100
million aggregate discounted principal amount at issuance) of 13% senior notes
due 2004, 91% of the equity of reorganized CAI and approximately $17.0 million
in cash. The 12.25% senior notes have been extinguished and certificates for
such notes represent solely the right to receive the pro-rata share of the
distribution contemplated by the CAI reorganization plan to be made on account
of such previously-held senior notes. The reorganization plan also provided that
each holder of subordinated indebtedness claims against CAI receive, in full
satisfaction of its claim against CAI as a holder of a subordinated indebtedness
claim, a pro-rata portion of the remaining 9% of the equity of reorganized CAI.
The subordinated indebtedness claims against CAI have been extinguished and
notes previously representing such claims represent solely the right to receive
the pro-rata share of the distribution contemplated by the CAI reorganization
plan to be made on account of such previously-held subordinated indebtedness
claims. All equity received by the holders of 12.25% senior notes and
subordinated indebtedness claims was diluted by equity reserved for issuance
upon the exercise of options granted to members of CAI's senior management and
for equity issued in connection with the exit facility (see Note 8).
In connection with the reorganization, the Company recorded an extraordinary
gain of $85.4 million reflecting the extinguishment of debt. Long-term notes
totaling approximately $308 million, including the interest accrued thereon and
associated issuance costs, were replaced with $100 million aggregate principal
amount at issuance of 13% senior notes, equity of CAI, and cash from the debt
escrow account. The consolidated balance sheet reflects the 13% senior notes,
together with accreted interest thereon from October 15, 1998 to March 31, 1999.
In determining the post-confirmation going concern enterprise value, CAI's
financial advisors performed a variety of generally accepted valuation
techniques. The three primary methodologies used were: (1) comparable public
company analysis ("Comparables"), (2) discounted cash flow ("DCF") and (3)
comparable mergers and acquisitions analysis ("M&A"). The Comparables approach
included comparisons with five similar companies and detailed multi-year
financial comparisons. Specifically, the total enterprise value for each company
was compared to its respective estimated gross line-of-sight households. The DCF
value represents the present value of unlevered, after-tax cash flows. The basis
for the DCF was the Company's ten-year projections in the provision of fixed
wireless video and two-way voice and data services on a wholesale basis to
prospective strategic partners. An effective tax
F-18
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--GOING CONCERN AND CHAPTER 11 REORGANIZATION (CONTINUED).
rate of 40% was estimated, and a discount rate of 25% was applied to the cash
flows, reflective of the estimated high degree of risk associated with the
business plan. In addition, a terminal value was determined by assuming the sale
of the business at the end of the time period. The terminal value multiple of
ten was used. The M&A approach included evaluation of a series of transactions
involving companies in the wireless cable industry. Seven transactions between
1996 and 1997 were considered. Based upon the analyses, the assumptions made and
matters considered, the post-confirmation going concern enterprise value of CAI
was estimated to be $293 million.
Reorganization expense recorded by CAI prior to consummation of the
reorganization plan consisted of the following for the period from April 1, 1998
to October 14, 1998:
Professional fees and other expenses related to the Chapter 11
proceedings.................................................. $6,305,747
Adjustment of assets and liabilities to fair value............. 10,795,636
----------
$17,101,383
----------
----------
F-19
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--GOING CONCERN AND CHAPTER 11 REORGANIZATION (CONTINUED).
The effects of the CAI reorganization plan and the application of
fresh-start reporting on CAI's Consolidated Balance Sheet at October 14, 1998
are as follows:
REORGANIZED
PREDECESSOR CAI
ENTITY EXIT DEBT FRESH-START OCTOBER 14,
OCTOBER 14, 1998 FINANCING DISCHARGE ADJUSTMENTS 1998
----------------- ------------- -------------- -------------- --------------
ASSETS
Cash and cash equivalents............ $ 1,339,067 $ -- $ -- $ -- $ 1,339,067
Restricted cash and cash
equivalents........................ 11,204,249 15,953,333 -- -- 27,157,582
Debt service escrow.................. 16,971,807 -- (16,971,807) -- --
Subscriber receivables, net.......... 701,635 -- -- -- 701,635
Prepaid expenses..................... 549,100 -- -- -- 549,100
Property and equipment, net.......... 40,982,272 -- -- 263,526 41,245,798
Wireless channel rights, net......... 187,249,998 -- -- 17,112,933 204,362,931
Investment in CS Wireless Systems,
Inc................................ -- -- -- -- --
Investment in TelQuest Satellite
Services LLC....................... 1,220,404 -- -- -- 1,220,404
Other investments.................... -- -- -- -- --
Goodwill, net........................ 21,997,237 -- -- (21,997,237) --
Reorganization value in excess of
amounts allocable to identifiable
assets............................. -- -- -- 37,952,304 37,952,304
Debt financing costs, net............ 5,781,300 4,300,000 -- (5,781,300) 4,300,000
Other assets......................... 3,059,931 -- -- (393,558) 2,666,373
----------------- ------------- -------------- -------------- --------------
Total Assets......................... $ 291,057,000 $20,253,333 $ (16,971,807) $ 27,156,668 $ 321,495,194
----------------- ------------- -------------- -------------- --------------
----------------- ------------- -------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities
Accounts payable................... $ 3,125,495 $ (600,000) $ -- $ -- $ 2,525,495
Accrued expenses................... 9,170,546 2,500,000 -- 647,224 12,317,770
Accrued interest................... 16,145,874 (1,646,667) (14,499,207) -- --
Wireless channel rights
obligations...................... 2,922,100 -- -- -- 2,922,100
Interim debt financing............. 60,000,000 2,074,231 -- -- 62,074,231
Senior notes....................... 311,558,053 -- (207,793,000) -- 103,765,053
----------------- ------------- -------------- -------------- --------------
Total Liabilities.................. 402,922,068 2,327,564 (222,292,207) 647,224 183,604,649
----------------- ------------- -------------- -------------- --------------
Shareholders' Equity (Deficit)
Preferred stock.................... -- -- -- -- --
Common stock....................... 275,770,764 22,414 150,000 (275,770,764) 172,414
Additional paid-in capital......... 101,711,759 17,903,355 119,814,776 (101,711,759) 137,718,131
Accumulated deficit................ (489,347,591) -- 85,355,624 403,991,967 --
----------------- ------------- -------------- -------------- --------------
Total Shareholders' Equity
(Deficit)...................... (111,865,068) 17,925,769 205,320,400 26,509,444 137,890,545
----------------- ------------- -------------- -------------- --------------
Total Liabilities and Shareholders'
Equity (Deficit)................... $ 291,057,000 $20,253,333 $ (16,971,807) $ 27,156,668 $ 321,495,194
----------------- ------------- -------------- -------------- --------------
----------------- ------------- -------------- -------------- --------------
F-20
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT.
Property and equipment consist of the following:
REORGANIZED
COMPANY PREDECESSOR
USEFUL MARCH 31, ENTITY
LIFE 1999 MARCH 31, 1998
--------- ----------- --------------
3-10
Transmission equipment.......................... years 3$7,920,100 $ 26,729,489
Subscriber equipment............................ 1-7 years 29,612,375 45,971,855
5-20
Leasehold improvements.......................... years 5,854,156 7,102,765
Furniture and equipment......................... 3-7 years 4,410,633 4,339,192
----------- --------------
77,797,264 84,143,301
Less accumulated depreciation and
amortization.................................. 9,932,143 42,027,561
----------- --------------
67,865,121 42,115,740
Projects in process............................. 570,629 7,782,597
----------- --------------
6$8,435,750 $ 49,898,337
----------- --------------
----------- --------------
Subscriber equipment includes recoverable equipment (antennas,
downconverters, set-top converters, and remote controls); non-recoverable
equipment (wiring, connectors, and miscellaneous small parts); and installation
costs (outside subcontractor charges, internal direct labor, and other related
installation costs which are capitalized). The Company generally does not
capitalize the cost of disconnecting or reconnecting subscribers.
The projects in process for 1998 primarily represent costs incurred to date
relative to establishing digital systems in Norfolk/Virginia Beach, VA and
Internet and telephony testing sites in Boston, MA, and have been transferred to
property and equipment for 1999. The Boston digital project costs, net of
write-downs, were transferred to depreciable property and equipment, primarily
transmission equipment, during the year ended March 31, 1998. In connection with
building the Boston digital system in accordance with the agreement with Bell
Atlantic which was later terminated, CAI abandoned certain improvements and
wrote-off certain project costs of approximately $4 million for the year ended
March 31, 1998. Additionally, the Company had other project write-offs of
approximately $0, $0, $2.6 million and $2 million for the periods from October
15, 1998 to March 31, 1999 and from April 1, 1998 to October 14, 1998 and for
the years ended March 31, 1998 and 1997, respectively.
Depreciation and amortization expense of property and equipment for the
periods from October 15, 1998 to March 31, 1999 and April 1, 1998 to October 14,
1998 and the years ended March 31, 1998 and 1997 was approximately $9.9 million,
$6.8 million, $14.8 million, and $14.9 million, respectively.
NOTE 4--WIRELESS CHANNEL RIGHTS.
The Company is dependent on leases with third parties for most of its
wireless channel rights and has acquired wireless channel rights through direct
negotiation with licenseholders and with sublessors of certain licenses and
through business combinations. The Company's wireless channel rights are
predominately lease arrangements; however, the Company is the direct licensee of
certain licenses and has purchase options with respect to others. The Company's
wireless channel rights are principally located in the northeastern, midwestern
and southcentral sections of the United States.
F-21
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--WIRELESS CHANNEL RIGHTS (CONTINUED).
The lease and sublease agreements frequently require initial fees followed
by monthly fees based on subscriber volume, subject to certain minimum fees.
Some agreements require profit sharing with the licenseholders. Under FCC rules,
the base term of each lease cannot exceed the term of the underlying FCC
license. Accordingly, the lease and sublease periods follow the periods
corresponding to the actual FCC license dates with provisions for extensions
upon license renewal from the FCC. The FCC licenses are typically granted for a
ten-year period and there is no automatic renewal of such licenses. The use of
such channels by the lessors is subject to regulation by the FCC; therefore, the
Company's ability to continue to enjoy the benefits of these leases is dependent
upon the lessors' continuing compliance with applicable regulations. 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. The remaining initial terms
of most of the Company's channel leases range from 5 to 10 years, although
certain channel leases have initial terms expiring in the next several years.
The Company is obligated as of March 31, 1999 to pay minimum fees to
licenseholders or sublessors in future years as follows:
YEARS ENDING
MARCH 31, AMOUNT
------------- -------------
2000........................................................................... $ 7,902,000
2001........................................................................... 7,513,000
2002........................................................................... 6,197,000
2003........................................................................... 6,109,000
2004........................................................................... 5,141,000
Thereafter..................................................................... 12,979,000
-------------
Total........................................................................ $ 45,841,000
-------------
-------------
Lease expense for the periods from October 15, 1998 to March 31, 1999 and
from April 1, 1998 to October 14, 1998 and the years ended March 31, 1998, and
1997 was approximately $4.2 million, $3.9 million, $4.3 million, and $3.7
million, respectively. The Company capitalizes wireless channel rights
acquisition costs and initial fees and amortizes such costs when operations
commence in the market to which they relate. Amortization of the wireless
channel rights for the period October 15, 1998 to March 31, 1999, the period
from April 1, 1998 to October 14, 1998, and the years ended March 31, 1998 and
1997 was $10.3 million, $6.9 million, $12 million, and $9.9 million,
respectively.
The following is a summary of wireless channel rights:
REORGANIZED PREDECESSOR
COMPANY ENTITY
MARCH 31, 1999 MARCH 31, 1998
---------------- --------------
Cost of wireless channel rights........... $317,441,222 $222,666,188
Less accumulated amortization............. 10,259,325 28,615,396
---------------- --------------
$307,181,897 $194,050,792
---------------- --------------
---------------- --------------
F-22
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--WIRELESS CHANNEL RIGHTS (CONTINUED).
Wireless channel rights obligations are generally due within one year
without interest. The FCC concluded auctions in 1997 for the award of initial
commercial wireless cable licenses for Basic Trading Areas or "BTAs". Wireless
channel rights obligations of approximately $6.2 million, including amounts owed
for BTAs, are anticipated to become due in the current fiscal year ending March
31, 2000. As of March 31, 1999, the wireless channel rights obligations in the
accompanying consolidated balance sheet include approximately $1.1 million
payable by CAI to the Federal Communications Commission for two BTAs, $1.3
million to various entities, and a payable by CS to Nucentrix of approximately
$3.8 million representing the remaining unpaid balances with respect to BTAs to
be conveyed by Nucentrix to CS. The CS payable to Nucentrix bears interest at
9.5% and is being paid over a 10-year period commencing in the fourth quarter of
1996. CS 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.
NOTE 5--EQUITY INVESTMENTS.
CS WIRELESS SYSTEMS, INC. CAI currently has a 94% equity interest in CS.
CAI's equity interest in CS had increased from 47.7% to 50.7% as of September
30, 1997 due to the rescission of a previously recorded transaction pursuant to
which CAI was to purchase the Portsmouth, NH wireless channel rights from
Nucentrix in exchange for approximately 314,000 shares of CS held by CAI. CAI's
equity interest in CS subsequently increased from 50.7% to 60.0% on February 17,
1998 when, in connection with the termination of the joint venture between CAI
and Bell Atlantic, CAI acquired 1,000,000 shares of CS from Bell Atlantic valued
at $2.4 million. Additionally, CAI's investment in CS reflects an equity loss of
$43.3 million and $29.9 million (based on CAI's pro-rata share of CS' net loss
of $130.5 million and $52.6 million for the eleven months ended December 2, 1998
and the year ended December 31, 1997, respectively), together with $2.4 million
of amortization of the associated goodwill each year.
Based on the depressed market condition of the wireless industry and CS'
continuing losses, management of CAI re-evaluated the goodwill associated with
its initial investment in CS. During the year ended March 31, 1998, the goodwill
portion of the CS investment was written-off in the amount of $23.6 million.
On December 2, 1998, CS, CAI and Nucentrix entered into a master agreement
providing for, among other things, the termination of Nucentrix's rights in, and
claims against CAI and CS. As part of the master agreement, in December 1998,
CAI purchased from Nucentrix 3,836,035 shares of CS common stock for $1,534,000.
CS subsequently repurchased those shares from CAI and placed the shares in
treasury. The net effect of the stock transactions was to increase CAI's
ownership percentage of CS' issued and outstanding stock to 94%. Concurrently
with the purchase by CAI, CAI, CS, and Nucentrix mutually agreed to terminate
that certain Stockholders' Agreement dated as of February 23, 1996.
Additionally, CS agreed to lease certain channel rights and sell the net
operating assets of its Story City, Iowa market to Nucentrix primarily in
exchange for the forgiveness by Nucentrix of the outstanding balance owed by CS
of $2,335,000 under the so-called Heartland Long-Term Note (see Note 8) and
additional cash payments by CS to Nucentrix of $466,000. In December 1998, under
the terms of the master agreement, CS made a deposit of $366,000 to Nucentrix in
anticipation of the exchange.
Accordingly, the consolidated financial statements of CAI reflect a purchase
method step acquisition with respect to CS effective December 2, 1998. The
period ended October 14, 1998 and years ended March 31, 1998 and 1997 reflect
the equity method of accounting for CS' losses for the eleven months ended
December 2, 1998 and for the years ended December 31, 1997 and 1996. CS reports
on a December fiscal year basis and accordingly, the Company recorded its
proportionate share of the results of CS operations based on their fiscal period
ending three months earlier than that of CAI.
F-23
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--EQUITY INVESTMENTS (CONTINUED).
The following is a condensed version of the CS Consolidated Balance Sheet as
of December 31, 1997 as presented in its Form 10-K for the year ended December
31, 1997:
DECEMBER 31, 1997
-----------------
ASSETS
Cash and cash equivalents.................................................. $ 74,564,000
Restricted cash............................................................ 5,030,000
Other current assets....................................................... 1,965,000
Property and equipment, net................................................ 50,519,000
Wireless channel rights, net............................................... 170,689,000
Goodwill, net.............................................................. 48,243,000
Investments in and loans to equity affiliates.............................. 8,503,000
Debt issuance costs, net................................................... 8,260,000
Other assets, net.......................................................... 2,930,000
-----------------
$ 370,703,000
-----------------
-----------------
LIABILITIES AND EQUITY
Accounts payable and accrued expenses...................................... $ 8,652,000
Other current liabilities.................................................. 1,523,000
FCC auction payable........................................................ 4,396,000
Long-term debt............................................................. 283,903,000
Equity..................................................................... 72,229,000
-----------------
$ 370,703,000
-----------------
-----------------
F-24
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--EQUITY INVESTMENTS (CONTINUED).
The following is the condensed version of the CS Consolidated Statement of
Operations for the year ended December 31, 1997 as presented in its Form 10-K
for the year ended December 31, 1997:
YEAR ENDED
DECEMBER 31, 1997
-----------------
Total revenues............................................................. $ 26,920,000
-----------------
Operating expenses:
Systems operations....................................................... 14,976,000
Selling, general and administrative...................................... 15,849,000
Depreciation and amortization............................................ 26,858,000
-----------------
Total operating expenses............................................... 57,683,000
-----------------
Operating loss....................................................... (30,763,000)
Interest expense........................................................... (31,995,000)
Interest income............................................................ 5,469,000
Equity in losses of affiliates............................................. (1,349,000)
Other...................................................................... 644,000
-----------------
Loss before income tax benefit....................................... (57,994,000)
Income tax benefit......................................................... 5,429,000
-----------------
Net loss............................................................. $ (52,565,000)
-----------------
-----------------
Basic and diluted loss per common share.................................... $ (4.94)
-----------------
-----------------
Weighted average basic and dilutive shares outstanding..................... 10,639,190
-----------------
-----------------
PRO FORMA INFORMATION (UNAUDITED). The following unaudited pro forma
information presents the consolidated results of operations as if the
consolidation of CS and TelQuest had occurred April 1, 1996 after giving effect
to certain adjustments including amortization of goodwill and minority
interests. Additionally, the pro forma results include the Chapter 11
reorganization as if it occurred on April 1, 1996 after giving effect to certain
adjustments including interest on the old and new debt, amortization and
write-offs of loan costs and recapitalization of the Company. The following
unaudited pro forma results have been prepared for information purposes only and
do not purport to be indicative of what would have occurred had the acquisitions
or the reorganization occurred on April 1, 1996 or of results that may occur in
the future:
1999 1998 1997
--------------- --------------- --------------
Net sales...................................................... $ 45,260,000 $ 55,542,000 $ 59,065,000
Loss before extraordinary item................................. $ (223,687,000) $ (225,756,000) $ (88,777,000)
Loss per share before extraordinary item....................... $ (12.97) $ (13.09) $ (5.15)
Number of shares (post-bankruptcy)............................. 17,241,379 17,241,379 17,241,379
TELQUEST SATELLITE SERVICES LLC. On August 4, 1997, CAI and CS each
acquired a 25% ownership interest in 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
F-25
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--EQUITY INVESTMENTS (CONTINUED).
Company's investment in TelQuest has been fully written down reflecting the
pro-rata share of the net losses of TelQuest since inception. The acquisition of
the CS shares from Nucentrix in December 1998 effectively increased the
Company's collective investment in TelQuest to 60%. Accordingly, TelQuest's
financial position and results have been consolidated into CAI's financial
statements since December 2, 1998.
OTHER INVESTMENTS. On September 29, 1997, CS acquired 39% of the voting
common stock of Telinor from Nucentrix for cash proceeds in the amount of
$915,000 and assumption of a cash call obligation in the amount of $145,000. CS
also purchased from Nucentrix 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, CS consummated another transaction with the
principal stockholders of Telinor whereby CS purchased 49% of the voting stock
of Television for cash in the amount of $1 million and committed to (i) loan
Television up to the sum of $5 million in cash or (ii) finance an equivalent
amount in sales of CS' equipment to Television. The funds committed were
deposited into escrow pending disbursement or reduction of the required escrow
amount through equipment sales to Television. During 1998, the escrowed funds
were released to CS. During the four months ended March 31, 1999, CS recorded
equity in losses of $417,000, related to its investments in Telinor and
Television.
NOTE 6--DEBT SERVICE ESCROW.
A debt service escrow account was established to pay the first three years
of interest on CAI's 12.25% senior notes (see Note 8). The escrow was held in
trust and consisted of marketable government debt instruments. The Company
received face value upon maturity of the securities in the escrow account with
no gain or loss. At March 31, 1998, the debt service escrow account balance of
the Predecessor Entity consisted of:
GROSS UNREALIZED
AMORTIZED COST HOLDING GAINS MARKET VALUE
-------------- ---------------- -------------
Investments........................................... $ 16,360,503 $ 21,576 $ 16,382,079
Cash balance.......................................... 20,575 -- 20,575
Accrued interest...................................... 37,844 -- 37,844
-------------- ------- -------------
Total escrow balance................................ $ 16,418,922 $ 21,576 $ 16,440,498
-------------- ------- -------------
-------------- ------- -------------
The balance of the debt service escrow account was paid to the holders of
CAI's 12.25% senior notes pursuant to the CAI reorganization plan.
NOTE 7--OTHER ASSETS.
Included in other assets is a $.7 million and $.9 million receivable from an
executive of CAI at March 31, 1999 and 1998, respectively (see Note 15).
F-26
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT.
Debt consists of the following at March 31:
REORGANIZED PREDECESSOR
COMPANY ENTITY
------------ -----------
1999 1998
------------ -----------
Senior notes:
CAI 13% senior notes (a):
Amount due at maturity...................................... $212,909,624 $ --
Less unearned discount...................................... (106,915,180) --
------------ -----------
Principal and earned interest........................... 105,994,444 --
------------ -----------
CS 11.375% senior discount notes (b):
Amount due at maturity...................................... 400,000,000 --
Less unearned discount...................................... (161,209,058) --
------------ -----------
Principal and earned interest........................... 238,790,942 --
------------ -----------
Heartland long-term note (c).................................. 2,335,276 --
General Instrument note (d)................................... 2,000,000 --
Bott notes (e)................................................ 3,379,472 3,841,349
Other notes (f)............................................... 639,637 454,157
Debt settled in CAI's Chapter 11 bankruptcy:
12.25% senior notes (a),(g)................................. -- 275,000,000
12% subordinated note (h)................................... -- 30,000,000
Acquisition related notes (i)............................... -- 2,793,000
------------ -----------
Total debt settled...................................... -- 307,793,000
------------ -----------
Total senior notes...................................... 353,139,771 312,088,506
------------ -----------
Interim debt financing (j):
Senior secured notes.......................................... -- 45,000,000
Exit facility (k):
Senior secured A note....................................... 30,000,000 --
Senior secured B note....................................... 50,000,000 --
Less unamortized discount................................... (14,192,683) --
------------ -----------
Total interim debt financing............................ 65,807,317 45,000,000
------------ -----------
Total debt.............................................. $418,947,088 $357,088,506
------------ -----------
------------ -----------
F-27
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED).
Scheduled maturities of debt (including the payables for BTAs of
approximately $6.2 million, see Note 4) at March 31, 1999 are as follows:
YEARS ENDING MARCH 31,
- ------------------------------------------------------------------------------
2000.......................................................................... $ 3,998,522
2001.......................................................................... 86,960,316
2002.......................................................................... 46,325,853
2003.......................................................................... 48,265,690
2004.......................................................................... 259,221,977
Thereafter.................................................................... 262,677,445
--------------
$ 707,449,803
--------------
--------------
(a) On October 14, 1998, in connection with the consummation of CAI's
reorganization plan, CAI issued $212,909,624 aggregate principal and
interest amount at maturity ($100 million aggregate principal amount at
issuance) of its 13% senior notes due 2004 to holders of, and in exchange
for, CAI's 12.25% senior notes due 2002, on a pro-rata basis (see (g)
below). The 13% senior notes bear interest at a per annum rate of 13%,
compounded semi-annually, and mature on October 14, 2004. The 13% senior
notes were issued with original issue discount in the amount of $530.32 per
$1,000 of principal amount at maturity. The 13% senior notes are governed by
an indenture dated as of October 14, 1998 between CAI and State Street Bank
and Trust Company, as trustee. The indenture contains certain restrictive
covenants and limitations, including, among other things, limitations on (i)
the incurrence of additional indebtedness, (ii) making restricted payments
(as defined) including the declaration and/or payment of dividends, (iii)
dividends and other payments by CAI's subsidiaries, (iv) the line of
business in which CAI may engage, (v) the granting of liens, and (vi) assets
sales and the disposition of proceeds therefrom. The Consolidated Balance
Sheet for the reorganized Company reflects the 13% senior notes, together
with accreted interest thereon from October 14, 1998 to March 31, 1999. CS
is not an obligor or guarantor of the CAI senior notes.
(b) On February 23, 1996, in connection with the consummation of transactions
contemplated by the participation agreement dated as of December 12, 1995
among CAI, CS and Nucentrix, CS issued $400 million aggregate principal
amount at maturity of its 11.375% senior discount notes due 2006. The notes
were originally issued in a private placement transaction. CS effected a
registered exchange of the notes, pursuant to which the entire $400 million
aggregate principal amount at maturity of senior discount notes was
exchanged for $400 million of CS' Series B 11.375% senior discount notes due
2006. The senior discount notes bear interest at a per annum rate of
11.375%, compounded semi-annually, and mature on March 1, 2006. No cash
interest is payable prior to March 1, 2001. Beginning on September 1, 2001,
cash interest is payable on the senior discount notes at the rate of 11.375%
per annum. The senior discount notes were issued with an original issue
discount in the amount of $428.29 per $1,000 principal amount at maturity.
The senior discount notes are governed by an indenture dated as of February
15, 1996 between CS and State Street Bank and Trust Company, successor to
Fleet National Bank of Connecticut, as trustee. The indenture contains
certain restrictive covenants and limitations, including, among other
things, limitations on (i) the incurrence of additional indebtedness, (ii)
making restricted payments (as defined) including the declaration and/or
payment of dividends, (iii) dividends and other payments
F-28
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED).
by CS' subsidiaries, (iv) the line of business in which CS may engage, (v)
the granting of liens, and (vi) assets sales and the disposition of proceeds
therefrom. CAI is not an obligor or guarantor of the CS senior discount
notes.
(c) In connection with the February 23, 1996 consummation of the transactions
contemplated by the participation agreement, CS issued a $15 million
promissory note to Nucentrix (the "Heartland Long-Term Note"). The Heartland
Long-Term Note bears interest at 15% per annum (which rate increased on
February 23, 1997 from 10%, in accordance with the terms of the note) and
matures on February 24, 2006. Interest accrues and is added to the principal
balance annually. CS is prohibited, under the terms of the senior discount
note indenture, from making cash interest payments on the Heartland
Long-Term Note while senior discount notes remain outstanding. Nucentrix has
agreed to exchange the Heartland Long-Term Note for primarily cash and
wireless cable assets relating to CS's Story City, IA market as part of the
transactions contemplated by the December 2, 1998 master agreement among
CAI, CS and Nucentrix. The exchange is expected to occur during the second
calendar quarter of 1999. As contemplated by the master agreement, interest
on the Heartland Long-Term Note ceased to accrue on November 30, 1998. CAI
is not an obligor or guarantor of the Heartland Long-Term Note.
(d) On February 25, 1998, TelQuest issued a promissory note in the principal
amount of $2 million to General Instrument Corporation. The note bears
interest at the prime rate published by THE WALL STREET JOURNAL and matures
on February 25, 2003. Interest accrues during the first two years of the
term of the note. Thereafter, interest is payable semi-annually in arrears.
The note is convertible into a 10% membership interest in TelQuest (i) prior
to the earlier to occur of (a) the second anniversary of the issuance of the
note, and (b) the date of an initial public offering by TelQuest, and (ii)
upon an event of default under the loan agreement governing the terms of the
$2 million loan. Subsequently, in May 1999, TelQuest borrowed an additional
$750,000 from General Instrument Corporation under the same terms as the $2
million loan. The additional $750,000 loan is convertible into an additional
3.75% membership interest in TelQuest. Neither CAI nor CS is an obligor or a
guarantor of the amounts borrowed by TelQuest from General Instrument
Corporation.
(e) The Bott notes reflect the notes issued to George Bott and the Bott Family
Trust in connection with the purchase of four corporations holding wireless
channel rights. Three Bott corporations were acquired on March 31, 1994,
partly through the issuance of notes with a face value of $3.8 million,
discounted to $2.9 million based on an imputed interest rate of 8.5%.
Another Bott corporation was acquired in January 1996, partly through the
issuance of a note with a face value of $1.4 million, discounted to $.8
million based on an imputed interest rate of 12.25%. Each of the Bott notes
is collateralized by the common stock of the corporation acquired and
matures through January 2002. At March 31, 1999, the net book value of the
wireless channel rights held in the Bott corporations was $4.7 million in
the aggregate.
(f) The 1999 amount includes loans made by certain parties to TelQuest that
contain an option that entitles the holders to convert the loan into
TelQuest membership equity. The 1998 amount includes a note payable to
TelQuest representing CAI's commitment due to TelQuest that was paid early
on April 1, 1998 as part of CAI's investment in TelQuest (see Note 15).
(g) On September 29, 1995, CAI issued $275 million of its 12.25% senior notes
due 2002. The 12.25% senior notes were restructured by CAI in connection
with its 1998 bankruptcy. Under CAI's
F-29
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED).
reorganization plan, in full satisfaction of their claims against CAI as
holders of the 12.25% senior notes, such holders received their pro-rata
portion of CAI's 13% senior notes (see (a) above), 91% of the equity of
post-bankruptcy CAI (subject to dilution), and approximately $17.0 million
in cash. As a result of the reorganization, CAI recorded an extraordinary
gain of $85,355,624 reflecting the extinguishment of approximately $308
million of CAI debt, including the 12.25% senior notes, the subordinated
debt described below (see (h) and (i) below) and accrued interest and
associated fees described thereon.
(h) On March 3, 1998, CAI issued to MLGAF a $30 million 12% subordinated note
due October 1, 2005. The 12% subordinated note was issued to MLGAF in
exchange for $30 million aggregate principal amount of CAI term notes and
$70 million of 14% senior preferred stock of CAI, all of which was
originally issued in 1995 to affiliates of Bell Atlantic in connection with
the termination of the joint venture with Bell Atlantic. MLGAF acquired the
term notes and preferred stock from Bell Atlantic on February 17, 1998. For
the years ended March 31, 1998 and 1997, interest expense on the term notes
of approximately $6.1 million and $5.7 million, respectively, was accrued
and not paid. The Consolidated Statement of Operations for the year ended
March 31, 1998 reflects an extraordinary net gain on debt restructuring,
including a gain of approximately $10.0 million relating to the accrued
interest that was forgiven, net of a $4.6 million payment made by CAI in
connection with the termination of certain other relationships between CAI
and Bell Atlantic and
related closing costs. Under CAI's reorganization plan, MLGAF, as the holder
of the 12% subordinated note, and the holders of certain acquisition related
subordinated promissory notes of CAI (see (i) below), in full satisfaction
of their claims against CAI as the holder of such subordinated indebtedness
of CAI, received their pro-rata share of 9% of the equity of post-bankruptcy
CAI (subject to dilution). CAI recorded an extraordinary gain on the
extinguishment of this and other indebtedness more fully described in (g)
above and (i) below.
(i) In connection with the September 29, 1995 acquisition of wireless cable
assets in the Baltimore market, CAI issued a series of subordinated
promissory notes in the aggregate principal amount of $2,793,000. The
acquisition-related notes were five year notes, with interest payable
quarterly at a per annum rate of 8% through September 1998, increasing to
12% through maturity. Under CAI's reorganization plan, the holders of these
acquisition-related subordinated promissory notes of CAI and MLGAF, as the
holder of CAI's 12% subordinated note (see (h) above), in full satisfaction
of their claims against CAI as the holder of such subordinated indebtedness
of CAI, received their pro-rata share of 9% of the equity of post-bankruptcy
CAI (subject to dilution). CAI recorded an extraordinary gain on the
extinguishment of this and other indebtedness, more fully described in (g)
and (h) above.
(j) INTERIM DEBT FINANCING. On November 25, 1997, CAI issued and sold $25
million of 13% senior secured notes to MLGAF. CAI used approximately $17
million of the proceeds to repay all amounts outstanding under the
Foothill/Canyon credit facility and the remaining proceeds of approximately
$7.3 million, net of expenses associated with this transaction, for working
capital purposes and for the build-out of CAI's wireless cable business. On
January 26, 1998, CAI issued and sold an additional $2 million senior
secured note to MLGAF, and on February 17, 1998, CAI issued and sold an
additional $18 million of senior secured notes in connection with the
termination.
F-30
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED).
(k) EXIT FACILITY. On October 14, 1998, in connection with consummating the CAI
reorganization plan, CAI obtained an $80 million exit facility, also from
MLGAF. CAI received net proceeds from the exit facility of $15,953,000,
after repaying all outstanding amounts under the $60 million DIP facility
provided to CAI by MLGAF on July 30, 1998 and certain commitment fees
associated with the exit facility. The exit facility is governed by the
terms of a new note purchase agreement dated October 14, 1998.
The exit facility consists of two tranches: Tranche A and Tranche B. Tranche
A is a $30 million senior secured loan bearing interest at 10.5% compounded
semi-annually and evidenced by a Senior Secured A Note. CAI has granted a
first priority lien on and security interest in all of its assets to secure
performance of CAI's obligations with respect to Tranche A. Tranche B is a
$50 million senior secured loan bearing interest at 13% per annum and
evidenced by a Senior Secured B Note and is subordinate to the Tranche A
note. CAI has granted a second priority lien on and security interest in all
of its assets to secure performance of CAI's obligations with respect to
Tranche B.
In addition to the liens granted by CAI, substantially all of CAI's
wholly-owned subsidiaries have guaranteed the obligations of CAI with
respect to the exit facility. The subsidiaries have granted a lien on and
security interest in all of their respective assets to secure their
performance under such subsidiary guaranties.
The exit facility is a two-year credit facility, with principal and interest
due at maturity on October 14, 2000. CAI paid a 1% facility fee equal to
$300,000 on the Tranche A amount at the closing of the exit facility. In
addition, CAI is required to pay an 8% facility fee equal to $4 million on
the Tranche B amount, of which CAI paid $1.5 million at the closing of the
exit facility. The remaining $2.5 million balance of the Tranche B facility
fee is payable at maturity of the exit facility (by its term, acceleration
or otherwise).
CAI issued 2,241,379 shares of its common stock to MLGAF as additional
consideration to MLGAF for providing the exit facility. The shares of CAI
common stock issued to MLGAF represented 13% of the total CAI common stock
issued and outstanding on October 14, 1998. The value of the new stock is
reflected as a discount to the exit facility to be amortized over the
two-year term of the exit facility resulting in an effective interest rate
of 26%. The foregoing is a summary of certain terms of the exit facility and
is qualified in its entirety by reference to the new note purchase
agreement.
MCI WORLDCOM, Inc. acquired the $80 million aggregate principal amount of
senior secured notes from MLGAF on March 26, 1999.
F-31
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--INCOME TAXES.
The components of the consolidated income tax benefit for the periods ended
March 31, 1999 and October 14, 1998 are as follows:
REORGANIZED PREDECESSOR
COMPANY ENTITY
---------------- --------------
PERIOD FROM
PERIOD FROM APRIL 1, 1998
OCTOBER 15, 1998 TO
TO OCTOBER 14,
MARCH 31, 1999 1998
---------------- --------------
Deferred:
Federal and state anticipated benefit at 40%.............. $(44,259,153) $ (5,819,939)
Reduction of tax attributes in bankruptcy................. -- (31,829,729)
Financing costs on debt forgiveness....................... -- (2,312,520)
Equity in losses of unconsolidated affiliates............. 15,726,871 17,766,741
Nondeductible interest.................................... 1,391,200 --
Amortization of goodwill.................................. (27,165) 2,349,178
Amortization of reorganization value/other expenses....... (288,257) (196,892)
Change in valuation allowance(a).......................... 27,363,510 26,177,304
Change to federal and state deferred taxes due to rate
differences, generation of net operating loss
carryforwards and other causes.......................... 88,392 (6,138,503)
Other, net................................................ 4,602 4,360
---------------- --------------
Net income tax benefit.................................... $ -- $ --
---------------- --------------
---------------- --------------
- ------------------------
(a) Change in valuation allowance does not include the effect of net operating
losses acquired from CS.
The components of the consolidated income tax benefit for the years ended
March 31, 1998 and 1997 are as follows:
1998 1997
------------- -------------
Current........................................................ $ -- $ --
Deferred....................................................... -- 15,000,000
------------- -------------
Total...................................................... $ -- $ 15,000,000
------------- -------------
------------- -------------
The Company has no current income tax liability due to net operating losses.
The primary items giving rise to the difference between the federal statutory
tax rate and the Company's effective tax rate is the establishment of a
valuation allowance against deferred tax assets for the years ended March 31,
1998 and 1997.
F-32
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--INCOME TAXES (CONTINUED).
The significant components of deferred tax assets (liabilities) are as
follows:
REORGANIZED PREDECESSOR
COMPANY ENTITY
------------ ------------
MARCH 31, OCTOBER 14, MARCH 31, MARCH 31,
1999 1998 1998 1997
------------ ------------ ----------- -----------
Net operating loss carryovers........ $118,883,495 1$17,285,556 $103,213,000 7$2,100,000
Non-cash interest.................... 41,144,898 -- -- --
Non-cash compensation................ 2,959,946 -- -- --
Investment in CS..................... -- -- (6,305,000) (18,726,000)
Wireless channel rights.............. (37,567,704) (31,145,705) (31,911,000) (32,635,000)
Reorganization and other costs....... 4,037,730 4,180,181 -- --
Property and equipment............... 5,660,180 (813,770) (908,000) (2,352,000)
Programming.......................... 903,763 761,311 -- --
Other, net........................... 1,184,911 305,167 306,000 513,000
------------ ------------ ----------- -----------
Deferred tax asset................... 137,207,219 90,572,740 64,395,000 18,900,000
Less: valuation allowance............ (137,207,219) (90,572,740) (64,395,000) (18,900,000)
------------ ------------ ----------- -----------
Net income tax provision............. $ -- $ -- $ -- $ --
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
A valuation allowance is provided to reduce deferred tax assets to a level
which, more likely than not, will be realized. Accordingly, the Company has
recorded a full valuation allowance. The deferred tax assets recorded reflect
management's estimate of the amount which will be realized based upon current
operating results and contingencies. The valuation allowance established was
increased by $45.5 million for the year ended March 31, 1998, and further
increased by $72.8 million for the two periods comprising the year ended March
31, 1999, resulting primarily from the consolidation of CS and the
reorganization.
As of March 31, 1999, before giving effect to the CS consolidation, which
effects have not yet been determined, CAI had available approximately $249.0
million of net operating loss carryforwards that expire during the period from
April 1, 1999 to March 31, 2013, of which $519,000 will expire during the fiscal
year ending March 31, 2000. The use of these carryforwards is limited on an
annual basis pursuant to the Internal Revenue Code ("IRC") due to certain
changes in ownership and equity transactions. This limitation has not yet been
determined but may prove to have nominal value. Additionally, net operating loss
carryforwards acquired from CS will be subject to the IRC separate return
limitation rules.
NOTE 10--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS.
The following methods and assumptions were used to estimate their fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The
carrying amount approximates fair value because of their short maturities.
DEBT SERVICE ESCROW. The fair value of the investments in the debt service
escrow was estimated based on market values.
F-33
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED).
DEBT. The fair value of the Company's debt is based on quoted market prices
for its publicly traded senior notes. The remaining debt is valued based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt with similar remaining maturities. The fair
value of debt maturing within twelve months is estimated to be its carrying
value.
FAIR VALUE CARRYING AMOUNT
--------------------------------- ------------------------------
REORGANIZED PREDECESSOR REORGANIZED PREDECESSOR
COMPANY ENTITY COMPANY ENTITY
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1998
-------------- ----------------- -------------- --------------
CAI 12.25% senior notes...................... $ -- $ 275,000,000 $ -- $ 77,000,000
CAI 13% senior notes......................... 105,994,444 -- 105,994,444 --
CS senior discount notes..................... 238,790,942 (a) 164,000,000 (a)
CAI interim debt financing and subordinated
notes...................................... 65,807,317 75,000,000 65,807,317 50,405,000
Other........................................ 8,354,385 7,088,506 8,354,385 7,088,506
- ------------------------
(a) Not applicable since CS was not consolidated with CAI in the prior year.
NOTE 11--COMMITMENTS AND CONTINGENCIES.
PROGRAMMING CONTRACTS. In connection with its distribution of television
programming, the Company has fixed-term contracts with various program
suppliers, such as HBO, Showtime, Cinemax, CNN, MTV, USA, and A&E. Contract
terms range in length from one year to ten years and expire at various dates
through 2011. Most contracts are subject to automatic renewal upon expiration
unless notice is given, by either party, of intent not to renew. These contracts
require the Company to pay fees to programmers based on the number of
subscribers.
PURCHASE COMMITMENTS. As of March 31, 1999, the Company had approximately
$2.2 million of outstanding purchase orders, primarily relating to equipment and
technical work for the build-out of digital systems.
RETIREMENT PLAN. Effective April 1, 1996, CAI sponsored a defined
contribution pension plan pursuant to IRC section 401(k), covering substantially
all of its employees. Contributions are withheld from participating employees
with CAI matching 50% up to the first 5% of covered employees wages withheld and
contributed to the plan, which amounted to approximately $129,000, $53,000,
$115,000 and $114,000 for the periods from October 15, 1998 to March 31, 1999
and April 1, 1998 to October 14, 1998 and the years ended March 31, 1998 and
1997, respectively.
STRATEGIC PARTNER SUCCESS FEE. The engagement letter between BT Alex. Brown
Incorporated and CAI provides that, upon the consummation of a merger, or other
arrangement with a strategic partner, BT Alex. Brown will receive a transaction
fee for its services to be determined at the consummation of the merger in an
amount not expected to exceed $10 million. In addition, BT Alex. Brown will be
reimbursed for its expenses incurred in connection therewith. Further, CAI has
agreed to indemnify BT Alex. Brown and its affiliates, their respective
directors, officers, agents, and employees against certain liabilities and
expenses, including liability under federal securities laws, related to or
arising out of BT Alex. Brown's engagement.
F-34
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED).
LITIGATION.
IN RE CAI WIRELESS SYSTEMS, INC., DEBTOR, CHAPTER 11 CASE NO. 98-1766 (JJF)
AND IN RE PHILADELPHIA CHOICE TELEVISION INC., DEBTOR, CHAPTER 11 CASE NO.
98-1765 (JJF). On July 30, 1998, CAI and one of its wholly-owned subsidiaries,
Philadelphia Choice Television, Inc., filed voluntary petitions under Chapter
11, Title 11 of the United States Code with the United States Bankruptcy Court
for the District of Delaware. The reorganization plan proposed by CAI and
Philadelphia Choice Television was confirmed by the Bankruptcy Court on
September 30, 1998. CAI and Philadelphia Choice Television consummated the
reorganization plan and emerged from Chapter 11 on October 14, 1998. The case
remains open, with the Bankruptcy Court retaining limited jurisdiction, pending
the entry of a final decree closing the case.
IN RE CAI WIRELESS SYSTEMS, INC. SECURITIES LITIGATION. CAI and certain
individuals have been named in six class action lawsuits alleging various
violations of the federal securities laws filed in the United States District
Court for the Northern District of New York. The actions were consolidated into
one lawsuit entitled IN RE CAI WIRELESS SYSTEM, INC. SECURITIES LEGISLATION
(96-CV-1857), which is currently pending in the Northern District of New York
against Jared E. Abbruzzese, chairman and chief executive officer of CAI, John
J. Prisco, a former president and director of CAI, and Alan Sonnenberg, a former
president and director of CAI. The amended, consolidated complaint alleges a
variety of violations of the anti-fraud provisions of the Federal securities
laws by CAI arising out of its alleged disclosure (or alleged omission from
disclosure) regarding its Internet and other flexible use of MMDS spectrum, as
well as business relationship with Bell Atlantic and NYNEX. Specifically, the
complaint alleges that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended and Rule 10b-5 promulgated under the
Securities Exchange Act during the specified class period (May 23, 1996 through
December 6, 1996). CAI has notified the carrier of its Directors' and Officers'
Liability insurance policy, which is intended to cover not only CAI's directors
and officers, but also CAI, itself, against claims such as those made in the
securities lawsuit. The policy covers up to $5 million of any covered liability,
subject to a retention amount of $500,000. The securities lawsuit is in its
preliminary stages. A scheduling conference was held on June 3, 1997, at which
the briefing schedule for defendants' motion to dismiss was agreed upon among
the parties. The defendants' motion to dismiss was heard by the Northern
District of New York on October 17, 1997 and is still pending. While the motion
is pending, all other deadlines affecting motions and discovery have been
postponed. CAI's reorganization plan provided no recovery to any holder of CAI's
equity or to any holder of an equity-based claim, such as the claims made
against CAI in the securities lawsuit. Upon the confirmation of CAI's
reorganization plan on September 30, 1998 and the October 14, 1998 consummation
of the plan of reorganization, plaintiffs' claims against CAI in the securities
lawsuit were discharged and released by order of the Bankruptcy Court.
Furthermore, the securities lawsuit plaintiffs were enjoined from continuing
their action against CAI. A memorandum of understanding outlining a settlement
in the amount of $3 million (all of which will be covered by the proceeds from
the above-referenced insurance policy) has been executed by counsel to all
parties. The parties anticipate executing a settlement agreement shortly and
submitting such agreement to the court for final disposition of this action.
Accordingly, CAI's management believes the securities lawsuit will not have a
material adverse effect on CAI's earnings, financial condition, or liquidity.
F-35
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED).
JOE HAND PROMOTIONS, INC. V. CAI WIRELESS SYSTEMS, INC. D/B/A POPVISION
WIRELESS CABLE and as a third party defendant in JOE HAND PROMOTIONS, INC. V.
601 L & P BAR, INC. in the U.S. District Court for the Eastern District of
Pennsylvania. These actions arise out of the alleged improper broadcasts of
certain sporting events in commercial establishments in violation of the alleged
distributor's exclusive broadcast rights. The complaints seek actual
compensatory damages in unspecified amounts, together with statutory penalties
claimed for alleged violations of federal statutes. The plaintiff, Joe Hand
Promotions, has alleged that it is the exclusive distributor of certain
televised sporting events in the greater Philadelphia area for commercial
establishments, and has alleged the improper broadcast of such events in
approximately five instances. The lawsuits were in the preliminary stages when
CAI commenced its Chapter 11 case. Action against CAI in these lawsuits has been
suspended by the Court. CAI believes that in the event of an adverse outcome,
the amount would not be material given the nature of the claims.
OTHER LITIGATION. CAI is the defendant in two separate breach of contract
actions arising out of separate alleged marketing agreements entered into by ACS
Enterprises, Inc. prior to its merger with CAI in September 1995. The first
action, pending in the Court of Common Pleas, Montgomery County, Pennsylvania,
seeks unspecified damages in excess of $30,000. The action has been stayed as a
result of the CAI bankruptcy. The second action, pending in the Court of Common
Pleas, Philadelphia County, Pennsylvania, also seeks unspecified damages in
excess of $50,000. Plaintiff is currently conducting its discovery.
On or about June 18, 1999, an action was filed in the New York Supreme Court
for the County of Albany captioned BOGDAN AND FAIST, P.C. V. CAI WIRELESS
SYSTEMS, INC., Index No. 3463-99. The complaint asserts that CAI has failed to
transfer to the plaintiff unspecified property and property rights in breach of
an alleged contract between the plaintiff and CAI. The complaint seeks to
require CAI to specifically perform under the alleged contract. Management
believes that this action is without merit and intends to vigorously defend this
lawsuit.
THE YEAR 2000 COMPLIANCE PLAN (UNAUDITED).
OVERVIEW. The Company is continuing to evaluate and address the impact of
the Year 2000 date transition on its operations. The Company is in the process
of taking steps to (a) inventory and assess for Year 2000 compliance its
equipment, software and systems, (b) determine which items will be remediated,
replaced or retired, and establish a plan to accomplish these steps, (c) test
the items, where required, and (d) provide senior management with a reporting
system to support a seamless transition to the Year 2000.
STATE OF READINESS. The Company's Year 2000 compliance program focuses on
the Company's analog video operations, limited internet operations, and internal
business processes, such as accounting. As of March 31, 1999, the inventory,
assessment and compliance planning phases for these areas have been materially
completed, and remediation, replacement or retirement and testing activities
were beginning. The inventory items that were not assessed as Year 2000
compliant and that require action to avoid service impact are to be fixed,
replaced or retired. CAI's accounting software and any other mission critical
systems relating directly to the accounting function have been upgraded to be
Year 2000 compliant. For all other areas, CAI's goal is to have all mission
critical systems Year 2000 compliant by September 1, 1999.
F-36
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED).
VENDOR AND SERVICE PROVIDER ISSUES. The Company has requested that its
vendors and service providers provide CAI with information as to the compliance
status of products and/or services used by CAI and its operating subsidiaries,
which information is subject to Company testing and verification. Although the
Company has received information from some of its vendors and service providers
as of March 31, 1999, it had not yet received information from all of the
vendors and service providers contacted. The Company plans to continue to pursue
its vendors and service providers in order to request information regarding Year
2000 compliance of such vendors and service providers.
COSTS. The Company estimated that it will cost approximately $875,000 to
effect its Year 2000 compliance program, based on information it has received as
of March 31, 1999 from vendors and service providers. The Company anticipates
that most of the cost associated with its Year 2000 compliance program will be
the result of remediation or replacement of non-compliant equipment necessary
for the Company's analog video operations and internal business processes.
RISKS. The failure to correct a material Year 2000 problem could cause an
interruption or failure of certain of the Company's normal business functions or
operations, which could have a material adverse effect on its results of
operations, liquidity or financial condition. Due to the uncertainty inherent in
other Year 2000 issues that are ultimately beyond CAI's control, including, for
example, the final Year 2000 readiness of its mission critical vendors and
service providers, the Company is unable to determine at this time the
likelihood of a material impact on its results of operations, liquidity or
financial condition, due to such Year 2000 issues.
The costs of the Company's Year 2000 program and the timetable for
completing its Year 2000 preparations are based on current estimates, which
reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of third-party
remediation plans and other factors. The Company can give no assurance that
these estimates will be achieved, and actual results could differ materially
from those currently anticipated. In addition, there can be no assurance that
the Company's Year 2000 program will be effective or that its contingency plans
will be sufficient. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct relevant computer software codes
and embedded technology, the results of internal and external testing and the
timeliness and effectiveness of remediation efforts of third parties.
CONTINGENCY PLAN. At March 31, 1999, the Company was not aware of any
mission critical aspect of its operations or internal business processes that
cannot be made Year 2000 compliant; however, in light of its inventory and
assessment of Year 2000 problems, and the possibility that, despite its efforts,
the Company is unsuccessful in preparing its internal systems and equipment for
the Year 2000, the Company expects to develop contingency plans for dealing with
the most reasonably likely worst-case scenario. The Company's assessment of its
most reasonably likely worst-case scenario and the exact nature and scope of its
contingency plans will be affected by the Company's continued Year 2000
assessment by July 1, 1999 and its goal is to have all contingency systems in
place and fully tested by the fourth quarter of 1999.
F-37
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SHAREHOLDERS' EQUITY (DEFICIT).
CAI filed a certificate amending its Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Connecticut on October
14, 1998, the amendment modified CAI's capital structure by deleting the
existence of 100 million shares of common stock without par value; 15,000 shares
of 14% senior convertible preferred stock, par value $10,000 per share; 2
million shares of cumulative voting preferred stock without par value; 5 million
shares of preferred stock without par value to be designated from time to time
by the CAI board of directors; and authorizing 25 million shares of new common
stock, par value $.01 per share; and 5 million shares of preferred stock, par
value $.01 per share, which preferred stock may be designated from time to time
by the CAI board of directors. On April 16, 1999, CAI amended its Amended and
Restated Certificate of Incorporation to designate 2 million shares of Series A
preferred stock for issuance under a Shareholders' Rights Plan adopted by the
CAI Board of Directors on that date (see Note 16).
On September 29, 1995, CAI amended and restated its Certificate of
Incorporation, with shareholder approval, to increase the authorized number of
CAI no par common shares available for issuance from 45 million to 100 million
and to authorize 15,000 shares of 14% senior preferred stock and 2 million
shares of voting preferred stock described above. The senior preferred stock was
convertible into voting preferred stock and the voting preferred stock was
convertible into common stock. All such securities were extinguished on October
14, 1998 pursuant to the reorganization plan.
On March 3, 1998, in connection with the exchange of $30 million of CAI term
notes and $70 million of CAI's 14% senior preferred stock by MLGAF for a $30
million CAI 12% subordinated note due 2005, $15.7 million of interest on the
term notes and $32.4 million of accrued dividends on the preferred stock were
forgiven. CAI also exchanged the warrants held by MLGAF for 2,500 shares of CAI
common stock valued at $1,350. The $30 million subordinated note and the 2,500
shares of CAI common stock were extinguished pursuant to the reorganization plan
of CAI.
F-38
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED).
The pre and post-reorganization capital structures of CAI are as follows:
SHARES ISSUED AND
SHARES AUTHORIZED OUTSTANDING
AS OF MARCH 31, AS OF MARCH 31,
--------------------------- --------------------------
REORGANIZED PREDECESSOR REORGANIZED PREDECESSOR
COMPANY ENTITY COMPANY ENTITY
------------ ------------- ------------ ------------
CLASS OF STOCK 1999 1998 1999 1998
- -------------------------------------------------------- ------------ ------------- ------------ ------------
Predecessor Entity:
Preferred stock -
14% senior convertible preferred stock, par value
$10,000 per share................................... 15,000 --
------------- ------------
Series preferred stock, no par value
Series A 8% redeemable convertible preferred stock,
no par value........................................ 350,000 --
Undesignated........................................ 4,650,000 --
------------- ------------
Total series preferred stock...................... 5,000,000 --
------------- ------------
Voting preferred stock, no par value.................. 2,000,000 --
------------- ------------
Total preferred stock............................. 7,015,000 --
------------- ------------
------------- ------------
Common stock, no par value.............................. 100,000,000 40,543,039
------------- ------------
------------- ------------
REORGANIZED ENTITY:
Preferred stock, par value $.01......................... 5,000,000 --
------------ ------------
------------ ------------
Common stock, par value $.01 (a)........................ 25,000,000 17,241,379
------------ ------------
------------ ------------
- ------------------------
(a) CAI's post-reorganization common stock, par value $0.01, entitles the holder
thereof to one vote per share held. Holders of CAI common stock are entitled
to dividends if, as, or when declared out of funds legally available
therefor, which consists of current or accumulated earnings. In the event of
a liquidation or dissolution, any preferred stock outstanding including
accumulated dividends thereon would be satisfied before holders of common
stock would receive any distribution. As of March 31, 1999, there were
17,241,379 shares of common stock issued and outstanding.
NOTE 13--OPTIONS AND WARRANTS.
STOCK OPTION PLANS. In connection with the CAI Bankruptcy, CAI adopted the
1998 Stock Option Plan for key employees. The 1998 Stock Option Plan is intended
to provide key employees with a meaningful incentive to pursue CAI's strategic
business plan. The 1998 Stock Option Plan is also intended to align the
interests of such employees with those of CAI's shareholders. There are 1.5
million shares of CAI common stock reserved for issuance upon the exercise of
options granted pursuant to the 1998 Stock Option Plan.
F-39
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--OPTIONS AND WARRANTS (CONTINUED).
All options granted under the 1998 Stock Option Plan are intended to be 10
year options; however, options may lapse and expire prior to the expiration of
such 10 year period in certain circumstances more fully described in the 1998
Stock Option Plan. The vesting terms and exercise price of options granted under
1998 Stock Option Plan are determined by a committee designated by the Company's
board of directors to administer the 1998 Stock Option Plan. On January 18,
1999, the Governance and Compensation Committee of the CAI Board approved the
issuance to several key employees of the Company of options to purchase
1,256,500 shares of CAI common stock pursuant to the 1998 Stock Option Plan, and
subject to the surrender of certain options previously granted pursuant to the
reorganization plan.
Options issued subsequent to the CAI reorganization are exercisable at an
average per share price of $.98 and vest upon the occurrence of specified
conditions or the completion of identified tasks, depending upon the department
in which the optionee is employed by the Company, the satisfaction of which are
determined by the committee in its reasonable judgement. All options vest in
their entirety upon the occurrence of a change of control of CAI, as defined. As
of March 31, 1999, CAI had granted options under this plan to purchase 1,456,500
shares of common stock at a weighted average price of $0.98 per share.
In part to attract qualified outside directors, CAI's board of directors has
also adopted the 1998 Outside Directors' Stock Option Plan. Under the Outside
Directors' Plan, each non-employee director of CAI is entitled to an initial
grant of options to purchase 25,000 shares of CAI common stock at an exercise
price equal to the closing trading price on the day on which such individual is
deemed to have become a director of CAI following October 14, 1998 in connection
with the consummation of CAI's reorganization plan. The initially-granted
options vest over a one-year period with options to purchase 10,000 shares of
CAI common stock vesting on the date that is three months after such an
individual becomes a CAI director, options to purchase 7,500 shares of CAI
common stock vesting on the date that is eight months after such an individual
becomes a director of CAI and the remaining options to purchase 7,500 shares of
CAI common stock vesting on the one-year anniversary of the date such an
individual becomes a director. In addition to the initial grant of option, each
individual who has been a CAI director for at least six months prior to each
April 1, beginning on April 1, 2000, shall receive options to purchase 7,500
shares of CAI common stock at an exercise price equal to the closing trading
price on the day of grant, which options vest on the one-year anniversary of the
date of grant.
All options granted under the Outside Directors' Plan are intended to be
10-year options, however, options may lapse and expire prior to the expiration
of such 10-year period in certain circumstances more fully described in the
Outside Directors' Plan. CAI's board of directors has reserved 400,000 shares of
CAI common stock for issuance upon the exercise of options granted under the
Outside Directors' Plan. Notwithstanding anything to the contrary set forth in
the option agreements, in the event that a change of control (as defined) occurs
at any time following the grant date, all unvested options that have been
granted on or before date such change of control occurs, shall immediately vest
and become exercisable. As of March 31, 1999, CAI had granted options under this
plan to purchase 125,000 shares of common stock at a weighted average price of
$0.65 per share.
In November 1993, CAI adopted its 1993 Stock Option and Incentive Plan.
Under the 1993 Plan, options to purchase an aggregate of not more than 1 million
shares of common stock were available for grant to key employees (including
officers), advisors and independent consultants to the Company or to any of its
subsidiaries.
F-40
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--OPTIONS AND WARRANTS (CONTINUED).
The 1993 Plan was administered by the Committee. The per share exercise
price for stock options granted under this Plan was not less than 100% of the
fair market value per share of common stock on the date the option was granted.
As of March 31, 1998, CAI had granted options under this plan to purchase
996,500 shares of common stock at a weighted average price of $1.74 per share.
On October 14, 1998, all outstanding options under the 1993 Plan were cancelled
pursuant to the reorganization plan.
In October 1993, CAI adopted the 1993 Outside Directors' Option Plan (the
"1993 Directors' Plan"). Under the 1993 Directors' Plan, options to purchase an
aggregate of not more than 30,000 shares of common stock were available for
grant to non-employee directors. These options vested at the rate of 20% a year
over five years, beginning one year after date of grant and are exercisable for
a period of seven years. The exercise price for stock options granted under the
1993 Directors' Plan was not less than 100% of the fair market value of the
common stock on the grant date. As of March 31, 1998, CAI had granted
outstanding options under this plan to purchase 8,334 shares of common stock at
$1 per share. On October 14, 1998, all outstanding options under the 1993
Directors' Plan were cancelled pursuant to the reorganization plan.
On October 14, 1998, in connection with CAI's bankruptcy, CAI issued
warrants for the purchase of 86,640 shares of common stock of the Company to BT
Alex. Brown, the Company's financial advisor. The warrants are exercisable at
$0.59 per share. The warrants expire on October 14, 2003.
VALUATION OF OPTIONS. The Company applies APB Opinion No. 25 in accounting
for its stock option plans. Compensation expense has been recognized in the
financial statements for the period from October 15, 1998 to March 31, 1999 with
respect to certain options granted during this period. During the periods from
April 1, 1998 to October 14, 1998 and the years ended March 31, 1998 and 1997
the Company did not recognize compensation expense under APB 25. As a result of
the increase in the price per share of the Company's common stock, principally
as a result of the pending merger with MCI WORLDCOM, Inc. (Note 16), the Company
will incur additional compensation expense in the first quarter of fiscal year
2000 estimated to be in excess of $30,000,000. These options vest only on the
occurrence of certain events. 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 changed to the pro-forma amounts indicated
below:
REORGANIZED COMPANY PREDECESSOR ENTITY
-------------------- ---------------------------------------------------
PERIOD FROM PERIOD FROM YEAR ENDED MARCH 31,
OCTOBER 15, 1998 APRIL 1, 1998 TO -------------------------------
TO MARCH 31, 1999 OCTOBER 14, 1998 1998 1997
-------------------- ------------------ --------------- --------------
Net loss:
As reported...................... $ (110,647,883) $ (14,549,847) $ (225,914,731) $ (82,298,207)
Pro forma........................ $ (103,466,847) $ (18,093,430) $ (232,456,731) $ (88,839,207)
Loss per common share (a):
As reported...................... $ (6.42)
Pro forma........................ $ (6.00)
- ------------------------
(a) Share data for the pre-reorganization periods is not presented as such
amounts are not meaningful.
F-41
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--OPTIONS AND WARRANTS (CONTINUED).
The initial impact of SFAS No. 123 on pro-forma earnings per share may not
be representative of the effect on income in future years because options vest
over several years and additional option grants may be made each year. 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 issued, as follows:
PREDECESSOR ENTITY
REORGANIZED COMPANY ---------------------------------------------
--------------------- YEAR ENDED MARCH 31,
PERIOD FROM PERIOD FROM
OCTOBER 15, 1998 TO APRIL 1, 1998 TO -------------
MARCH 31, 1999 OCTOBER 14, 1998 1998 1997
--------------------- ------------------- ----- -----
Dividend yield................................................ 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate....................................... 4.7% 4.1% 5.8% 6.0%
Expected life (years)......................................... 1.0 1.5 2.6 3.6
Volatility.................................................... 183% 183% 100% 99%
OPTION ACTIVITY. A summary of the status of the Company's stock option
plans is presented below:
REORGANIZED COMPANY PREDECESSOR ENTITY
------------------------ ------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
-------------------------------------------------
PERIOD FROM PERIOD FROM
OCTOBER 15, 1998 TO APRIL 1, 1998 TO
MARCH 31, 1999 OCTOBER 14, 1998 1998 1997
------------------------ --------------------------- ------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- -------------- ----------- ----------- ----------- ---------- -----------
Outstanding,
beginning.......... -- $ -- 2,220,937 $ 1.64 2,195,937 $ 4.91 1,274,134 $ 7.74
Granted.............. 3,081,500 $ 4.61 -- $ -- 1,986,062 $ 1.01 1,071,803 $ 2.20
Forfeited............ 1,500,000 $ 8.43 (2,220,937)(A) $ 1.64 (1,961,062) $ 4.82 (150,000) $ 7.75
----------- -------------- ----------- ----------
Outstanding,
ending............. 1,581,500 $ .98 -- $ -- 2,220,937(b) $ 1.64 2,195,937 $ 4.91
----------- -------------- ----------- ----------
----------- -------------- ----------- ----------
Weighted average fair
value of options
granted $ .53 $ -- $ 0.72 $ 1.57
- ------------------------
(a) All outstanding options were canceled on October 14, 1998 in connection with
the consummation of the reorganization plan.
(b) Reflects the repricing of all outstanding options granted to optionees
employed by the Company as of March 9, 1998 to $1 per share. The repricing
was recorded as a forfeiture of the original options granted and the
simultaneous grant of new options on the same terms but at the revised
exercise price of $1 per share.
F-42
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--OPTIONS AND WARRANTS (CONTINUED).
The total number of shares of common stock reserved for options is 1.9 million
as of March 31, 1999. The following table summarizes information about stock
options outstanding at March 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------
WEIGHTED-
AVERAGE ----------------------------
REMAINING WEIGHTED- WEIGHTED-
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------ ----------- --------------- ----------------- ----------- ---------------
$0.01 to $0.875 1,346,500 9.8 years $ 0.86 40,000 $ 0.61
----------- -----------
$1.125 to $1.625 235,000 9.8 years $ 1.59 10,000 $ 1.44
----------- -----------
1,581,500 50,000
----------- -----------
----------- -----------
CS OPTIONS. In 1996, CS established an incentive stock plan which provides
for the issuance of stock options to officers and other key employees of CS. The
stock plan makes available for issuance 1.5 million shares of CS common stock.
Options issued under the CS 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 CS' common stock on
the date of grant.
At March 31, 1999, there were 633,617 options outstanding at a weighted
average price per share of $7.01. No CS options were granted in the four months
ended March 31, 1999.
WARRANTS.
THE BELL ATLANTIC WARRANTS. The Bell Atlantic warrants to purchase voting
preferred stock and common stock were canceled in the March 3, 1998 Bell
Atlantic termination transactions (see Note 12).
COMMON STOCK WARRANTS. Outstanding warrants, except the Bell Atlantic
warrants, are as follows:
WEIGHTED-AVERAGE NUMBER OF
EXERCISE PRICE WARRANTS
----------------- -----------
Outstanding, March 31, 1996................................... $ 7.72 2,310,541
Issued(a)................................................. -- 616,912
Exercised................................................. $ 0.25 (75,000)
-----------
Outstanding, March 31, 1997 and 1998.......................... $ 6.24 2,852,453
ISSUED(B)................................................. $ 0.59 86,640
CANCELED(C)............................................... $ 6.24 (2,852,453)
-----------
OUTSTANDING, MARCH 31, 1999................................... $ 0.59 86,640
-----------
-----------
- ------------------------
(a) The warrants issued and certain warrant exercise prices revised during the
years ended March 31, 1997 and 1996 were pursuant to anti-dilutive clauses
in agreements relating to the warrants.
(b) On October 14, 1998, warrants to purchase 86,640 shares of new CAI common
stock were issued to BT Alex. Brown at an exercise price of $0.59 per share
and expire on October 14, 2003. The warrants had a weighted average fair
value of $.38 on the grant date using the Black-Scholes option pricing model
with the following weighted average assumptions: dividend yield 0.0%; risk
free interest rate 4.7%; expected life 1 year; volatility 183%.
(c) All of these warrants were canceled on October 14, 1998 in connection with
the consummation of CAI's reorganization plan.
F-43
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--OPERATING LEASES.
The Company leases office space in each market it currently operates in
under non-cancelable agreements that expire through March 2006. The leases
require various minimum monthly payments and payment of property taxes, certain
maintenance, and insurance.
The Company leases towers, land and/or building space in each of its
operating markets and certain other markets for broadcasting purposes. The
leases are non-cancelable agreements expiring through December 2012. Most of the
leases have provisions for renewal periods. The leases require various minimum
monthly payments and are subject to periodic fixed and inflationary increases.
The Company leases vehicles for customer service and other corporate use.
The agreements are non-cancelable, expire through October 2001 and require
various monthly payments. The Company is responsible for normal maintenance and
insurance.
Additionally, the Company leases certain office and broadcast test equipment
under various lease agreements for periods up to thirty-six months. The Company
pays various monthly payments and is required to maintain and insure such
equipment.
The approximate minimum rental commitments for operating leases as of March
31, 1999 due in future years are as follows:
YEARS ENDING MARCH 31,
- -------------------------------------------------------------------------------
2000......................................................................... $ 4,716,000
2001......................................................................... 4,095,000
2002......................................................................... 3,446,000
2003......................................................................... 3,188,000
2004......................................................................... 2,887,000
Thereafter................................................................... 7,076,000
-------------
Total...................................................................... $ 25,408,000
-------------
-------------
Total rent expense for the period October 15, 1998 to March 31, 1999 and
April 1, 1998 to October 14, 1998 and the years ended March 31, 1998 and 1997
was approximately $2.2 million, $1.8 million, $3.8 million and $3.3 million,
respectively.
NOTE 15--RELATED PARTY TRANSACTIONS
.
INSTALLATION SERVICES. In October 1996, two of CAI's employees formed
Telecom Service Support LLC ("Telecom"), to provide subscriber installation,
service calls, and warehouse service to the subscription television industry.
CAI incurred approximately $86,000, $106,000, $452,000 and $348,000 for such
services during the periods October 15, 1998 to March 31, 1999 and April 1, 1998
to October 14, 1998 and the years ended March 31, 1998 and 1997, respectively.
Additionally, CAI has advances due from Telcom of $18,000 and $20,000 at March
31, 1999 and 1998, respectively, and, has provided leased vehicles and certain
facility space to Telecom for the years ended March 31, 1999 and 1998. On March
3, 1999, CAI entered into a service agreement with Telecom to provide
installation and services to CAI at a fixed cost of $4,500 per week through June
3, 1999.
F-44
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS (CONTINUED).
FLIGHT SERVICES. CAI periodically charters an airplane from Wave Air, Inc.,
which is primarily owned by Jared E. Abbruzzese, chairman and chief executive
officer of the Company, in order to carry out business when airline schedules
are not compatible. Wave Air charged CAI for this service on an hourly basis.
Transactions with Wave Air, Inc. amounted to approximately $0, $62,000,
$154,000, and $278,000, for the periods October 15, 1998 to March 31, 1999 and
April 1, 1998 to October 14, 1998 and the years ended March 31, 1998 and 1997,
respectively.
RELATED PARTY LOANS. On March 31, 1997, Mr. Abbruzzese executed and
delivered a demand promissory note in the principal amount of $780,054 in favor
of the Company. The note evidences various indebtedness owed by Mr. Abbruzzese
and affiliated entities, which Mr. Abbruzzese agreed to assume, including the
outstanding balance on an $800,000 loan made by CAI to Haig Capital L.L.C. The
obligation bears interest at 14% per annum and is secured by a pledge of Mr.
Abbruzzese's interest in Haig Capital. The note balance at both March 31, 1999
and 1998 was approximately $695,000. During the periods from October 15, 1998 to
March 31, 1999 and from April 1, 1998 to October 14, 1998 and for the year ended
March 31, 1998, CAI recorded interest income on the notes of $44,596, $52,705,
and $102,945, respectively. At March 31, 1999 and 1998, accrued interest
receivable was $155,246 and $102,945, respectively. Mr. Abbruzzese made a
payment in June 1998 of $45,000 that was applied to accrued interest in its
entirety.
PROGRAMMING COOPERATIVE. In 1997, CAI, CS and two other unrelated wireless
cable providers formed Wireless Enterprises, LLC ("Wireless Enterprises"). CAI
and CS each own a 25% interest in Wireless Enterprises (collectively 50%) at
March 31, 1999. Wireless Enterprises was formed as a cooperative to negotiate
the per subscriber rates on programming with suppliers of program content.
During the periods October 15, 1998 to March 31, 1999 and April 1, 1998 to
October 14, 1998 and the year ended March 31, 1998, the Company paid Wireless
Enterprises for programming and administrative services approximately $5.6
million, $2.7 million and $5.8 million, respectively.
TELQUEST SATELLITE SERVICES. TelQuest is a joint venture between CAI, CS
and TelQuest Communications, Inc., a company controlled by Mr. Abbruzzese,
formed on August 4, 1997 for the purpose of developing and operating satellite
systems providing digital services. CAI and CS each have $5 million investments
in TelQuest. CAI and CS each contributed a combination of equipment (made
available to TelQuest under the terms of a five-year renewable lease) and cash
(in lieu of equipment) in an amount equal to approximately $2.1 million as part
of the $2.5 million equipment portion of CAI's $5 million investment in
TelQuest. A final payment of $411,567 was made by CAI on April 1, 1998. In
return for CAI and CS' $5 million investments in TelQuest, each received a 25%
interest in TelQuest, which interest is subject to dilution upon the occurrence
of certain events. The 25% interest increased to 30% as consideration for CAI
and CS giving up their exclusivity arrangement with TelQuest.
EQUIPMENT SALES AND PURCHASES. During the year ended March 31, 1998, CAI
sold to CS approximately $3.7 million of excess equipment at a gain of $116,000,
primarily from the Boston Project that was not needed for the Boston operation.
Additionally, during April 1997, CAI placed purchase orders approximating
$1,612,000 with CS for equipment needed for the Boston Project, taking advantage
of CS' favorable pricing arrangements with its vendor. For the year ended March
31, 1999 and the four months ended March 31, 1999 of CAI and CS, respectively,
there were no material
F-45
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS (CONTINUED).
intercompany transactions related to equipment sales and purchases between the
companies that would otherwise need to be eliminated in consolidation.
SATELLITE PROJECTS. CAI has pursued three satellite ventures in addition to
its investment in TelQuest through the following subsidiaries (collectively, the
"Satellite Subsidiaries"): (i) MMDS Satellite Ventures, Inc., which was formed
for the purpose of pursuing Ku-band satellite opportunities; (ii) CAI Data
Systems, Inc., an entity formed for the purpose of pursuing Ka-band satellite
opportunities, and (iii) CAI Satellite Communications, Inc., an entity formed
for the purpose of pursuing V-band satellite opportunities. As part of CAI's
reorganization plan, each of the Satellite Subsidiaries issued a sufficient
number of shares of stock to Haig Capital to give Haig Capital a 50% equity
interest in each Satellite Subsidiary with CAI holding the other 50%.
ENGINEERING AND SPECTRUM MANAGEMENT SERVICES. During 1998, CAI and CS had
an arrangement whereby CAI personnel provided engineering and other technical
consulting services in connection with the digital build-out of the CS Dallas,
TX market. Under this arrangement, CAI received $10,000 per month plus
reimbursement for all reasonable expenses incurred in the performance of such
services. CAI and CS have renegotiated the terms of this arrangement and entered
into an Engineering and Spectrum Management Agreement whereby, effective March
1, 1999, CAI assumed supervision and delivery of all engineering and technical
management services. Accordingly, CS will pay CAI a fee equal to 40% of the full
allocated costs plus an administrative fee of 20% of such amount. Additionally,
CAI received approximately $263,000, $135,000 and $141,000 from CS for services
rendered, rent, licensing and other fees during the periods from October 15,
1998 to March 31, 1999 and April 1, 1998 to October 14, 1998 and for the year
ended March 31, 1998, respectively.
CAI also provided spectrum management services and subleased office space in
CAI's Arlington, VA office to CS. Up to 20% of the professional time of Mr.
Gerald Stevens-Kittner, CAI's Senior Vice President--Spectrum Management, was
devoted to CS spectrum management matters, including regulatory issues before
the FCC, for which CS paid Mr. Stevens-Kittner directly. CAI charged CS a pro
rata portion of the monthly rent payment for CAI's Arlington office space,
reflecting the office space used by one full-time CS employee resident in the
Arlington office. These charges are now included in the Engineering and Spectrum
Management agreement. For the four months ended March 31, 1999, all material
transactions between CAI and CS Wireless have been eliminated in consolidation.
In September 1997, CS entered into a two-year Installation Contractor
Agreement with ACS Telecommunications Systems, Inc. ("ACS") whereby for a fixed
monthly fee per market plus other additional variable costs, ACS agreed to
provide installation contractor services in the Dallas, Texas area and other
markets as mutually agreed upon. During the four months ended March 31, 1999, CS
paid $143,730 to ACS under this agreement. CS amended this agreement to shorten
the term and decrease the fixed monthly payment. In connection with this
amendment, CS has agreed to make payments totaling $510,000 to ACS pursuant to
the original agreement. A former director and President of CAI and former
director of CS, who resigned in February 1996 and December 1998, respectively,
is the principal stockholder of ACS.
F-46
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SUBSEQUENT EVENTS.
MERGER. On April 26, 1999, CAI entered into an Agreement and Plan of Merger
dated as of April 26, 1999 (the "Merger Agreement") with MCI WORLDCOM, Inc.
("MCI WorldCom") and Cardinal Acquisition Subsidiary Inc., a wholly-owned
subsidiary of MCI WorldCom ("MergerSub"). Pursuant to the terms and subject to
the conditions of the Merger Agreement, MergerSub will merge with and into CAI
(the "Merger"), with CAI as the surviving corporation. As a result of the
merger, which is subject to regulatory approval and usual and customary
conditions, each outstanding share of common stock of CAI (other than shares
owned by MCI WorldCom, MergerSub or shares of common stock held by CAI as
treasury stock or shares with respect to which the holders have demanded and
exercised dissenters' rights in a manner provided under Connecticut law) will be
converted into the right to receive $28.00 per share of common stock in cash.
CAI anticipates the Merger will be consummated during the third quarter of 1999.
On June 4, 1999, MCI WorldCom completed the acquisition of 8,284,425 CAI
common shares pursuant to one such agreement, thereby becoming a 48% shareholder
of CAI.
RIGHTS PLAN. On April 16, 1999, in connection with the transactions
contemplated by the Merger Agreement, the CAI Board of Directors adopted a
shareholders' rights plan and declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of common stock. The
dividend is payable on April 27, 1999 (the "Record Date") to the shareholders of
record on that date. Subject to certain terms and conditions, each Right shall
entitle the registered holder to purchase from the Company one one-hundredth of
a share of Series A Preferred Stock, $.01 par value of CAI at a price of $96.00
per one one-hundredth of a share of Series A Preferred Stock, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated as of April 16, 1999, as the same may be amended from time to
time, between the Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent.
STOCK OPTION AGREEMENT. On April 26, 1999, CAI entered into a stock option
agreement granting MCI WorldCom an option to acquire up to 6,090,481 CAI common
shares at a price of $28.00 per share.
SENIOR SECURED NOTES DUE 2000. MCI WorldCom holds the $80,000,000 aggregate
principal amount of outstanding senior secured notes of CAI due 2000. The senior
secured notes of CAI were issued under a note purchase agreement dated as of
October 14, 1998 between CAI and the purchasers named therein. The parties
closed the acquisition of the senior secured notes of CAI on March 26, 1999, at
which time MCI WorldCom was assigned all right, title and interest in, and to
the senior secured notes of CAI, and assumed all of the sellers' obligations
under the senior secured notes of CAI and the note purchase agreement.
13% SENIOR NOTES DUE 2004. MCI WorldCom holds $119,412,609 aggregate
principal amount of unsecured 13% senior notes of CAI due October 14, 2004. The
parties closed the acquisitions of the 13% senior notes on March 26, 1999 and
April 29, 1999, at which time MCI WorldCom was assigned all of the sellers'
rights, titles and interests in and to the 13% senior notes.
11.375% SENIOR NOTES OF CS. MCI WorldCom also holds $215,750,000 aggregate
principal amount of unsecured 11.375% senior notes of CS due 2006. The parties
closed the acquisition of the 11.375% senior notes of CS on March 26, 1999, and
on April 29, 1999, MCI WorldCom was assigned all of the sellers' rights, titles
and interests in and to the 11.375% senior notes of CS.
F-47
[LOGO]
200 Crescent Court
Suite 300
Dallas, TX 75201-1885
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
April 12, 1999
F-48
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997
--------- ---------
ASSETS
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 (note 4)....................................... 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
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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-49
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-50
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)
COMMON STOCK ADDITIONAL
------------------------- 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
acquisition......................... 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-51
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 statements.
F-52
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
F-53
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 (CONTINUED)
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
F-54
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 (CONTINUED)
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 include 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).
F-55
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 (CONTINUED)
(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
F-56
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 (CONTINUED)
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,
F-57
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)
(2) IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
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
F-58
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)
(3) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS (CONTINUED)
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.
F-59
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)
(3) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS (CONTINUED)
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.................................................. (6,982)
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.
F-60
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)
(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
F-61
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)
(4) INVESTMENTS IN AND LOANS TO AFFILIATES (CONTINUED)
$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
--------- ----------
--------- ----------
F-62
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)
(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
F-63
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)
(7) LONG-TERM DEBT (CONTINUED)
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.
F-64
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)
(7) LONG-TERM DEBT (CONTINUED)
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........................................................ 318,349
(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.
F-65
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)
(8) LEASES AND FCC LICENSES (CONTINUED)
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, 1998 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.
F-66
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)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
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:
1998 1997 1996
----------- --------- ---------
Net loss:
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
F-67
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)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT DECEMBER CONTRACTUAL EXERCISE AT DECEMBER EXERCISE
PRICE 31, 1998 LIFE PRICE 31, 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)
---------- --------- ---------
---------- --------- ---------
F-68
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)
(10) INCOME TAXES (CONTINUED)
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
F-69
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)
(11) OTHER RELATED PARTY TRANSACTIONS (CONTINUED)
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.
F-70
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 35,994 $ 41,839
Subscriber receivables, net......................................................... 1,047 1,542
Prepaid expenses and other.......................................................... 606 638
----------- ------------
Total current assets.......................................................... 37,647 44,019
Plant and equipment, net.............................................................. 40,084 43,645
License and leased license investment, net............................................ 155,169 157,269
Assets held for sale.................................................................. 2,212 2,102
Investment in and loans to equity affiliates.......................................... 4,315 3,884
Debt issuance costs and other assets, net............................................. 7,646 7,898
----------- ------------
$ 247,073 $ 258,817
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses............................................... $ 3,309 $ 5,490
Current portion of long-term debt................................................... 45 199
Current portion of BTA auction payable.............................................. 392 354
Other current liabilities........................................................... 1,081 237
----------- ------------
Total current liabilities..................................................... 4,827 7,280
Long-term debt, less current portion.................................................. 325,572 316,720
BTA auction payable, less current portion............................................. 3,365 3,505
----------- ------------
Total liabilities............................................................. 333,764 327,505
----------- ------------
Stockholders' deficit:
Common stock, $.001 par value; 15,000,000 shares authorized, 10,702,609 shares
issued in 1999 and 1998, and 6,864,471 shares outstanding in 1999 and 1998........ 11 11
Treasury stock, at cost; 3,838,138 shares in 1999 and 1998............................ (1,574) (1,574)
Additional paid-in capital............................................................ 154,557 154,557
Accumulated deficit................................................................... (239,685) (221,682)
----------- ------------
Total stockholders' deficit................................................... (86,691) (68,688)
----------- ------------
$ 247,073 $ 258,817
----------- ------------
----------- ------------
See accompanying notes to unaudited condensed consolidated financial statements.
F-71
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH
31,
------------------------
1999 1998
---------- ------------
Revenue................................................................................ $ 5,940 $ 6,823
Operating expenses:
Systems operations................................................................... 4,181 3,908
Selling, general and administrative.................................................. 5,384 4,119
Depreciation and amortization........................................................ 5,505 7,224
---------- ------------
Total operating expenses........................................................... 15,070 15,251
---------- ------------
Operating loss..................................................................... (9,130) (8,428)
Other income (expense):
Interest income...................................................................... 461 1,017
Equity in losses of affiliates....................................................... (150) (986)
Interest expense..................................................................... (9,139) (8,271)
Other................................................................................ (45) --
---------- ------------
Total other expense, net............................................................... (8,873) (8,240)
---------- ------------
Loss before income taxes............................................................... (18,003) (16,668)
Income tax benefit..................................................................... -- --
---------- ------------
Net loss............................................................................... $ (18,003) $ (16,668)
---------- ------------
---------- ------------
Weighted average basic and diluted loss per common share............................... $ (2.62) $ (1.56)
---------- ------------
---------- ------------
Basic and diluted weighted average shares outstanding.................................. 6,864,471 10,700,506
---------- ------------
---------- ------------
See accompanying notes to unaudited condensed consolidated financial statements.
F-72
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss................................................................................ $ (18,003) $ (16,668)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 5,505 7,224
Accretion on discount notes and amortization of debt issuance costs................. 9,048 8,100
Non-cash interest expense on other long-term debt................................... 91 164
Equity in losses of affiliates...................................................... 150 986
Other............................................................................... 45 --
Changes in assets and liabilities, net of effects of contributions:
Subscriber receivables............................................................ 495 (2)
Prepaid expenses and other........................................................ 32 (246)
Accounts payable, accrued expenses and other liabilities.......................... (474) (305)
---------- ----------
Net cash used in operating activities........................................... (3,111) (747)
---------- ----------
Cash flows from investing activities:
Purchases of plant and equipment.................................................... (1,004) (5,964)
Additions to license and leased license investment.................................. (342) (956)
Investment in equity affiliates..................................................... (953) (998)
Investment in assets held for sale.................................................. (110) --
---------- ----------
Net cash used in investing activities........................................... (2,409) (7,918)
---------- ----------
Cash flows from financing activities:
Payments on notes payable........................................................... (134) (156)
Payments on BTA auction payable..................................................... (191) (733)
---------- ----------
Net cash used in financing activities........................................... (325) (889)
---------- ----------
Net decrease in cash and cash equivalents................................................. (5,845) (9,554)
Cash and cash equivalents at beginning of period.......................................... 41,839 74,564
---------- ----------
Cash and cash equivalents at end of period................................................ $ 35,994 $ 65,010
---------- ----------
---------- ----------
See accompanying notes to unaudited condensed consolidated financial statements.
F-73
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
THE COMPANY. CS Wireless Systems, Inc. and its subsidiaries (the "Company"
or "CS Wireless") develop, own and operate a network of wireless cable
television systems providing subscription television and high speed Internet
access services. The Company has a portfolio of wireless cable channel rights in
various markets in the United States. The Company currently has systems in
operation in ten markets, and it owns, or holds rights to lease, radio spectrum
in its 21 primary markets and certain other markets. The Company is
approximately 94% owned by CAI Wireless Systems, Inc. ("CAI").
The subscription television industry is highly competitive. The Company's
principal subscription television competitors in each of its markets are
traditional hard-wire cable companies, direct broadcast satellite, private cable
companies and other alternate methods of distributing and receiving television
transmissions. Hard-wire cable companies generally are well-established and
known to potential customers and have significantly greater financial and other
resources than the Company. As the telecommunications industry continues to
evolve, the Company may face additional competition from new providers of
entertainment and data services. In addition, until the Company can increase its
channels offered in all of its operating markets through the deployment of
digital compression technology, the Company's existing competitors generally
continue to have more channels to offer subscribers. There can be no assurance
that the Company will be able to compete successfully with existing or potential
competitors in the subscription television industry.
The Company has incurred significant operating losses since inception and
has negative stockholders' equity at March 31, 1999. Losses are expected for at
least the next year as the Company continues to develop its wireless
communications business. The Company has approximately $36 million in cash and
cash equivalents at March 31, 1999, and, based on its current operating plan,
believes that it has sufficient cash to fund its anticipated capital
expenditures and operating losses through at least the first quarter of 2000.
However, the growth of the Company's wireless communications business may
require substantial continuing investment to finance capital expenditures
related to the acquisition of channel rights and infrastructure development of
digital video programming, two-way frequency utilization and telephony systems.
Additionally, beginning in September 2001, the Company will be required to make
payments to the holders of its 11 3/8% Senior Discount Notes due 2006. Without
additional funding through debt or equity offerings, joint ventures, the sale or
exchange of its wireless cable channel rights or the participation of a
strategic partner, or the restructuring of its debt agreements, the Company may
not be able to meet its future debt and interest payments. There can be no
assurance that the Company will achieve positive cash flow from operations, or
consummate the sale of any wireless cable channel rights or that sufficient debt
or equity financing will be available to the Company. In addition, subject to
restrictions under its outstanding debt, the Company may pursue other
opportunities to acquire additional wireless cable channel rights and businesses
that may utilize the capital currently expected to be available for its current
markets.
CAI announced on April 26, 1999 that it executed a definitive Agreement and
Plan of Merger with MCI WorldCom, Inc. ("MCI WorldCom") providing for the
acquisition by MCI WorldCom of all of the outstanding shares of CAI. The
transaction is subject to customary conditions, including the receipt of
required regulatory approvals.
F-74
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPAL MARKETS OF THE COMPANY. On February 23, 1996, in exchange for
approximately 60% of the Company's Common Stock, CAI, directly or indirectly,
contributed to the Company the wireless cable television assets and all related
liabilities, or the stock of subsidiaries owning wireless cable television
assets associated with the wireless cable television markets of Bakersfield and
Stockton/ Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio.
Simultaneously, in exchange for approximately 40% of the Company's Common Stock,
cash, a short term note and a long term note (the "Heartland Long Term Note"),
Heartland, directly or indirectly, contributed or sold to the Company the
wireless cable television assets and all related liabilities associated with the
wireless cable television markets of Grand Rapids, Michigan; Minneapolis,
Minnesota; Kansas City (suburbs), Missouri; Dayton, Ohio; Dallas, Fort Worth and
San Antonio, Texas; and Salt Lake City, Utah. The Company subsequently acquired
wireless cable television rights and related assets in certain Midwest markets,
including but not limited to, the Effingham and Wellsville, Kansas; Story City,
Iowa; Scottsbluff, Nebraska; Kalispell, Montana and Rochester, Minnesota markets
in connection with the Company's merger acquisition of USA Wireless Cable, Inc.
on October 11, 1996 ("USA Wireless Acquisition"). The Company consummated on
September 3, 1997 an exchange of its wireless cable rights and related assets in
Salt Lake City, Utah for wireless cable rights and related assets in Kansas
City, Missouri pursuant to an agreement dated as of November 6, 1996 with
People's Choice TV Corp.
On December 2, 1998, the Company, CAI and Heartland entered into a Master
Agreement ("Master Agreement") providing for, among other things, the
termination of Heartland's rights in, and claims against, the Company. As part
of the Master Agreement, in December 1998, CAI purchased Heartland's ownership
in the Company, or 3,836,035 shares of CS Wireless common stock, for $1,534,000.
The Company subsequently purchased those shares from CAI for the same price.
These shares are recorded as treasury stock for the periods presented.
Additionally, the Company agreed to lease certain channel rights and sell the
net operating assets of its Story City, Iowa market to Heartland primarily in
exchange for the forgiveness by Heartland of the outstanding balance owed by the
Company of $2,335,000 under the Heartland Long-Term Note and additional cash
payments by the Company to Heartland of $466,000. The deposit, along with the
carrying value of the net assets of the Story City, Iowa market, are classified
as assets held for sale at December 31, 1998 and March 31, 1999 in the
accompanying consolidated balance sheet.
(B) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(C) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of the Company contain all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of March 31, 1999, and the results of
operations and cash flows for the three months ended March 31, 1999 and 1998.
These results are not necessarily indicative of the results to be expected for
the full fiscal year.
F-75
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) COMMON SHARES OUTSTANDING AND NET LOSS PER COMMON SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share," in the fourth quarter of
1997, which required companies to present basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Potentially dilutive securities
have been excluded from the diluted loss per share computation as their
inclusion would be antidilutive
(2) CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. A
discussion of certain of these legal proceedings is contained in Part II, Item 1
"Legal Proceedings" of this Form 10-Q. The Company believes that the ultimate
resolution of the legal proceedings will not have a material adverse effect on
the Company's consolidated financial position, operating results or liquidity.
F-76
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
We have provided unaudited combined financial statements of CAI after giving
effect to CAI's bankruptcy case and the December 2, 1998 increase in percentage
ownership by CAI in CS, which are collectively referred to as the "pro forma"
information. In presenting the unaudited pro forma combined balance sheet, we
treated CAI, CS and TelQuest Satellite Services LLC, a subsidiary of each of CAI
and CS, (i) as if these entities had been consolidated for accounting and
financial reporting purposes and (ii) as if CAI had emerged from bankruptcy on
September 30, 1998. We have presented the unaudited pro forma combined
statements of operations for three periods: the fiscal years ended March 31,
1999 and 1998 and the six-month period ended September 30, 1998. In presenting
the unaudited pro forma combined statements of operations, we have treated CAI,
CS and TelQuest (i) as if these entities had been consolidated for accounting
and financial reporting purposes, (ii) as if CAI had emerged from bankruptcy at
the beginning of each of the periods presented, and (iii) as if CAI's percentage
ownership in CS had increased at the beginning of each of the periods presented.
The presentation of the unaudited pro forma combined financial statements is
in conformity with the so-called fresh-start accounting and financial reporting
requirements set forth in the American Institute of Certified Public
Accountants' Statement of Position 90-7 with respect to adjustments made as a
result of CAI's bankruptcy case, and the use of purchase method of accounting
and financial reporting for the increase in percentage ownership by CAI of CS as
a result of the December 2, 1998 step acquisition. You should be aware that
these unaudited pro forma combined financial statements are presented for
illustrative purposes only and may not be indicative of the operating results or
financial position that would have occurred or that will occur in the future.
The unaudited pro forma combined financial statements for all periods
presented exclude any positive effects of potential cost savings that the
companies may achieve as a result of the increased percentage ownership. The pro
forma adjustments are based on information currently available and upon certain
assumptions that the management of CAI believes are reasonable under the
circumstances. We strongly urge you to read the notes accompanying the unaudited
pro forma combined financial statements for a description of the assumptions
made by CAI management. There can be no assurance that the actual adjustments
will not differ significantly from the adjustments reflected in the pro forma
statements. Further, the unaudited pro forma combined financial statements
presented should be read in conjunction with the historical financial statements
of CAI and CS.
F-77
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
PRO FORMA ADJUSTMENTS
HISTORICAL --------------------------------------------------------------
CAI CS TELQUEST ELIMINATIONS[A] CAI REORGANIZATION[B]
----------- --------- ----------- --------------- ---------------------
ASSETS
Cash and cash equivalents...................... $ 1,339 $ 45,394 $ 3 $ -- $ --
Restricted cash and cash equivalents........... 11,204 4,222 -- -- 15,953
Debt service escrow............................ 16,914 -- -- -- (16,914)
Subscriber accounts receivables, net........... 702 1,295 -- -- --
Prepaid expenses............................... 549 929 -- -- --
Property and equipment, net.................... 41,459 54,905 87 -- 264
Wireless channel rights, net................... 187,730 168,247 -- -- 17,113
Investment in TelQuest Satellite Services
LLC.......................................... 1,220 2,250 -- (1,220) --
Goodwill, net.................................. 22,067 -- -- -- --
Debt financing costs, net...................... 5,838 7,656 -- -- (5,781)
Reorganization value in excess of amounts
allocable to identifiable assets............. -- -- -- -- 18,298
Other assets................................... 3,060 5,686 91 -- (394)
----------- --------- ----------- --------------- ----------
Total Assets................................. $ 292,082 $ 290,584 $ 181 $ (1,220) $ 28,539
----------- --------- ----------- --------------- ----------
----------- --------- ----------- --------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities Not Subject to Compromise
Accounts payable............................... $ 3,125 $ 515 $ 2,409 $ -- $ (600)
Accrued expenses............................... 22,738 6,441 318 -- (12,999)
Wireless channel rights obligations............ 2,922 -- -- -- --
Interim debt financing......................... 60,000 -- -- -- 2,074
Long-term notes................................ 3,765 312,161 3,175 -- 100,000
----------- --------- ----------- --------------- ----------
92,550 319,117 5,902 -- 88,475
----------- --------- ----------- --------------- ----------
Liabilities Subject to Compromise.............. 307,793 -- -- -- (307,793)
Stockholders' Equity (Deficit)
Preferred stock.............................. -- -- -- -- --
Common stock................................. 275,771 11 -- (11) (275,599)
Additional paid-in capital................... 101,712 154,517 5,796 (160,313) 2,238
Accumulated deficit.......................... (485,744) (183,061) (11,517) 159,104 521,218
----------- --------- ----------- --------------- ----------
Total Equity............................... (108,261) (28,533) (5,721) (1,220) 247,857
----------- --------- ----------- --------------- ----------
Total Liabilities and Shareholders' Equity..... $ 292,082 $ 290,584 $ 181 $ (1,220) $ 28,539
----------- --------- ----------- --------------- ----------
----------- --------- ----------- --------------- ----------
PRO FORMA
CS FAIR VALUE[C] COMBINED CAI
----------------- -------------
ASSETS
Cash and cash equivalents...................... $ -- $ 46,736
Restricted cash and cash equivalents........... -- 31,379
Debt service escrow............................ -- --
Subscriber accounts receivables, net........... -- 1,997
Prepaid expenses............................... -- 1,478
Property and equipment, net.................... (818) 95,897
Wireless channel rights, net................... (25,639) 347,451
Investment in TelQuest Satellite Services
LLC.......................................... -- 2,250
Goodwill, net.................................. (22,067) --
Debt financing costs, net...................... (2,555) 5,158
Reorganization value in excess of amounts
allocable to identifiable assets............. -- 18,298
Other assets................................... -- 8,443
-------- -------------
Total Assets................................. $ (51,079) $ 559,087
-------- -------------
-------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities Not Subject to Compromise
Accounts payable............................... $ -- $ 5,449
Accrued expenses............................... -- 16,498
Wireless channel rights obligations............ -- 2,922
Interim debt financing......................... -- 62,074
Long-term notes................................ (87,904) 331,197
-------- -------------
(87,904) 418,140
-------- -------------
Liabilities Subject to Compromise.............. -- --
Stockholders' Equity (Deficit)
Preferred stock.............................. -- --
Common stock................................. -- 172
Additional paid-in capital................... 36,825 140,775
Accumulated deficit.......................... -- --
-------- -------------
Total Equity............................... 36,825 140,947
-------- -------------
Total Liabilities and Shareholders' Equity..... $ (51,079) $ 559,087
-------- -------------
-------- -------------
See notes to Pro Forma Combined Balance Sheet.
F-78
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
A. ELIMINATIONS
Eliminate the investments in CS and TelQuest. Any losses attributable to
those subsidiaries in excess of the associated investments are reflected as
goodwill.
B. CAI REORGANIZATION
The reorganization pro forma entries include a) the application of
fresh-start accounting to CAI for the emergence from bankruptcy by adjusting the
assets and liabilities to their respective estimated fair values; b) the
issuance of $100 million of aggregate original principal amount of 13% senior
notes and the extinguishment of long-term notes totaling approximately $308
million, including the interest accrued thereon and associated issuance costs;
c) recording the cancellation of 40.5 million shares of CAI common stock, no par
value and the issuance of 15 million shares of new CAI common stock, $.01 par
value per share, and d) recording the $80 million exit facility, generating net
proceeds of approximately $15.9 million after repaying all amounts outstanding
under the $60 million DIP facility and the payment of certain commitment fees
associated therewith. CAI issued 2.2 million shares of its common stock to MLGAF
as additional consideration to MLGAF for providing the exit facility. The value
of this stock is reflected as a discount to the exit facility to be amortized
over the term of the exit facility.
C. CS FAIR VALUE
Adjust the value of the CS assets and liabilities to their respective
estimated fair values pursuant to the purchase method of accounting on a step
acquisition basis.
F-79
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS
----------------------------------------------------------
HISTORICAL CAI
CAI CS TELQUEST ELIMINATIONS[D] REORGANIZATION[E]
---------- --------- ----------- --------------- -----------------
Revenues......................................... $ 18,909 $ 25,376 $ 2 $ -- $ --
---------- --------- ----------- ------- -------
Costs and expenses:
Programming and license fees................... 14,658 16,682 -- -- --
General and administrative..................... 27,522 20,249 9,131 -- --
Asset writedown................................ -- 63,907 -- -- --
Depreciation and amortization.................. 30,611 27,503 -- 375 2,425
---------- --------- ----------- ------- -------
72,791 128,341 9,131 375 2,425
---------- --------- ----------- ------- -------
Operating loss............................... (53,882) (102,965) (9,129) (375) (2,425)
---------- --------- ----------- ------- -------
Other Income (Expense)
Interest expense............................... (33,484) (35,547) (252) -- (595)
Equity in losses of affiliates................. (83,857) (1,717) -- 84,732 --
Reorganization expense......................... (17,101) -- -- -- --
Interest and other income...................... 4,760 1,379 5 -- --
---------- --------- ----------- ------- -------
(129,682) (35,885) (247) 84,732 (595)
---------- --------- ----------- ------- -------
Net loss..................................... $ (183,564) $(138,850) $ (9,376) $ 84,357 $ (3,020)
---------- --------- ----------- ------- -------
---------- --------- ----------- ------- -------
Basic and diluted loss per new common share...... $ (10.65)
----------
----------
Weighted average new common shares outstanding... 17,241,379
----------
----------
PRO FORMA
CS FAIR VALUE[F] COMBINED CAI
---------------- -------------
Revenues......................................... $ -- $ 44,287
-------- -------------
Costs and expenses:
Programming and license fees................... -- 31,340
General and administrative..................... -- 56,902
Asset writedown................................ -- 63,907
Depreciation and amortization.................. (1,824) 59,090
-------- -------------
(1,824) 211,239
-------- -------------
Operating loss............................... 1,824 (166,952)
-------- -------------
Other Income (Expense)
Interest expense............................... (6,695) (76,573)
Equity in losses of affiliates................. -- (874)
Reorganization expense......................... -- (17,101)
Interest and other income...................... -- 6,144
-------- -------------
(6,695) (88,404)
-------- -------------
Net loss..................................... $ (4,871) $ (255,356)
-------- -------------
-------- -------------
Basic and diluted loss per new common share...... $ (14.81)
-------------
-------------
Weighted average new common shares outstanding... 17,241,379
-------------
-------------
See notes to Pro Forma Combined Statements of Operations.
F-80
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS
----------------------------------------------------------
HISTORICAL CAI
CAI CS TELQUEST ELIMINATIONS[D] REORGANIZATION[E]
---------- --------- ----------- --------------- -----------------
Revenues......................................... $ 28,622 $ 27,065 $ -- $ -- $ --
---------- --------- ----------- ------- -------
Costs and expenses:
Programming and license fees................... 15,460 15,189 -- -- --
General and administrative..................... 38,123 16,153 7,025 -- --
Goodwill writedown............................. 73,500 -- -- -- --
Depreciation and amortization.................. 34,714 27,497 -- -- 4,476
---------- --------- ----------- ------- -------
161,797 58,839 7,025 -- 4,476
---------- --------- ----------- ------- -------
Operating loss............................... (133,175) (31,774) (7,025) -- (4,476)
---------- --------- ----------- ------- -------
Other Income (Expense)
Interest expense............................... (47,227) (32,270) (45) -- 11,717
Equity in losses of affiliates................. (31,747) (2,335) -- 33,781 --
Write down of equity investment................ (23,570) -- -- 23,570 --
Interest and other income...................... 4,459 5,680 6 (117) --
---------- --------- ----------- ------- -------
(98,085) (28,925) (39) 57,234 11,717
---------- --------- ----------- ------- -------
Net loss..................................... $ (231,260) $ (60,699) $ (7,054) $ 57,234 $ 7,241
---------- --------- ----------- ------- -------
---------- --------- ----------- ------- -------
Basic and diluted loss per common share.......... $ (5.70)
----------
----------
Weighted average common shares outstanding....... 40,543,039
----------
----------
PRO FORMA
CS FAIR VALUE[F] COMBINED CAI
---------------- -------------
Revenues......................................... $ -- $ 55,687
-------- -------------
Costs and expenses:
Programming and license fees................... -- 30,649
General and administrative..................... -- 61,301
Goodwill writedown............................. -- 73,500
Depreciation and amortization.................. (2,736) 63,951
-------- -------------
(2,736) 229,401
-------- -------------
Operating loss............................... 2,736 (173,714)
-------- -------------
Other Income (Expense)
Interest expense............................... (10,141) (77,966)
Equity in losses of affiliates................. -- (301)
Write down of equity investment................ -- --
Interest and other income...................... -- 10,028
-------- -------------
(10,141) (68,239)
-------- -------------
Net loss..................................... $ (7,405) $ (241,953)
-------- -------------
-------- -------------
Basic and diluted loss per common share.......... $ (14.03)
-------------
-------------
Weighted average common shares outstanding....... 17,241,379
-------------
-------------
See notes to Pro Forma Combined Statements of Operations.
F-81
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS
----------------------------------------------------------
HISTORICAL CAI
CAI CS TELQUEST ELIMINATIONS[D] REORGANIZATION[E]
---------- --------- ----------- --------------- -----------------
Revenues......................................... $ 10,852 $ 13,253 $ -- $ -- $ --
---------- --------- ----------- ------- -------
Expenses
Programming and licensing...................... 7,606 8,111 -- -- --
General and administrative..................... 11,019 9,483 6,104 -- --
Goodwill writedown............................. -- 46,378 -- -- --
Depreciation and amortization.................. 13,637 14,779 -- -- 2,238
---------- --------- ----------- ------- -------
32,262 78,751 6,104 -- 2,238
---------- --------- ----------- ------- -------
Operating loss............................... (21,410) (65,498) (6,104) -- (2,238)
---------- --------- ----------- ------- -------
Other Income (Expense)
Interest expense............................... (18,059) (17,386) (113) -- 8,131
Equity in losses of affiliates................. (45,292) (1,071) -- 46,008 --
Reorganization expense......................... (3,955) -- -- -- --
Interest and other income...................... 3,857 1,729 5 -- --
---------- --------- ----------- ------- -------
(63,449) (16,728) (108) 46,008 8,131
---------- --------- ----------- ------- -------
Net loss..................................... $ (84,859) $ (82,226) $ (6,212) $ 46,008 $ 5,893
---------- --------- ----------- ------- -------
---------- --------- ----------- ------- -------
Basic and diluted loss per common share.......... $ (2.09)
----------
----------
Weighted average common shares outstanding....... 40,543,039
----------
----------
PRO FORMA
CS FAIR VALUE[F] COMBINED CAI
---------------- -------------
Revenues......................................... $ -- $ 24,105
-------- -------------
Expenses
Programming and licensing...................... -- 15,717
General and administrative..................... -- 26,606
Goodwill writedown............................. -- 46,378
Depreciation and amortization.................. (1,368) 29,286
-------- -------------
(1,368) 117,987
-------- -------------
Operating loss............................... 1,368 (93,882)
-------- -------------
Other Income (Expense)
Interest expense............................... (4,994) (32,421)
Equity in losses of affiliates................. -- (355)
Reorganization expense......................... -- (3,955)
Interest and other income...................... -- 5,591
-------- -------------
(4,994) (31,140)
-------- -------------
Net loss..................................... $ (3,626) $ (125,022)
-------- -------------
-------- -------------
Basic and diluted loss per common share.......... $ (7.25)
-------------
-------------
Weighted average common shares outstanding....... 17,241,379
-------------
-------------
See notes to Pro Forma Combined Statements of Operations.
F-82
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND THE YEARS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
D. ELIMINATIONS
Eliminate the a) equity in losses of CS and TelQuest and b) intercompany
income and/or expenses that do not offset in the consolidated statements of
operations.
E. CAI REORGANIZATION
The CAI reorganization pro forma adjustments reflect a) the increased
depreciation and amortization relative to the fresh-start adjustments made to
the CAI assets upon the emergence from bankruptcy; and b) the increase in
interest expense on the $100 million of CAI senior discounted notes and the $80
million exit facility, offset in part by the interest eliminated on the $304
million of debt subject to compromise and the interim debt and by the
elimination of amortization of debt financing costs that were written off.
F. CS FAIR VALUE
The adjustments reflect the decreased depreciation and amortization and the
increased interest expense relative to the fair value adjustments made to the
assets and liabilities pursuant to valuations made under the purchase method of
accounting.
F-83
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
CAI WIRELESS SYSTEMS, INC.,
MCI WORLDCOM, INC.
AND
CARDINAL ACQUISITION SUBSIDIARY INC.
DATED AS OF
APRIL 26, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
TABLE OF CONTENTS
PAGE
---------
ARTICLE I--TERMS OF THE MERGER............................................................................ A-9
1.1 The Merger.......................................................................................... A-9
1.2 Effective Time...................................................................................... A-9
1.3 Merger Consideration................................................................................ A-9
1.4 Shareholders' Rights upon Merger.................................................................... A-10
1.5 Dissenting Shares................................................................................... A-10
1.6 Surrender and Exchange of Shares.................................................................... A-11
1.7 Options and Warrants................................................................................ A-12
1.8 Certificate of Incorporation........................................................................ A-12
1.9 By-Laws............................................................................................. A-13
1.10 Other Effects of Merger............................................................................ A-13
1.11 Additional Actions................................................................................. A-13
ARTICLE II--REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS OF TARGET................................... A-13
2.1 Organization and Good Standing...................................................................... A-13
2.2 Capitalization...................................................................................... A-14
2.3 Subsidiaries........................................................................................ A-14
2.4 Authorization; Binding Agreement.................................................................... A-15
2.5 Governmental Approvals.............................................................................. A-16
2.6 No Violations....................................................................................... A-16
2.7 Securities Filings and Litigation................................................................... A-17
2.8 Target Financial Statements......................................................................... A-18
2.9 Absence of Certain Changes or Events................................................................ A-18
2.10 Compliance with Laws............................................................................... A-19
2.11 Permits, FCC Licenses; Channel Leases; System Agreements; and the Systems; Interference;
Households......................................................................................... A-19
2.12 Finders and Investment Bankers..................................................................... A-24
2.13 Contracts.......................................................................................... A-24
2.14 Employee Benefit Plans............................................................................. A-25
2.15 Taxes and Tax Returns.............................................................................. A-26
2.16 Liabilities........................................................................................ A-28
2.17 Environmental Matters.............................................................................. A-28
2.18 Intellectual Property.............................................................................. A-28
2.19 Real Estate........................................................................................ A-29
2.20 Corporate Records.................................................................................. A-30
2.21 Title to and Condition of Personal Property........................................................ A-30
2.22 No Adverse Actions................................................................................. A-30
2.23 Labor Matters...................................................................................... A-30
2.24 Change of Control Agreements....................................................................... A-31
2.25 Insurance.......................................................................................... A-31
2.26 Information Supplied............................................................................... A-31
2.27 Takeover Statutes.................................................................................. A-32
2.28 Target Rights Plan................................................................................. A-32
2.29 Year 2000.......................................................................................... A-32
2.30 Target Options..................................................................................... A-33
2.31 Transactions with Affiliates....................................................................... A-33
2.32 No Existing Discussions............................................................................ A-33
A-2
PAGE
---------
2.33 TelQuest........................................................................................... A-33
2.34 Disclosure......................................................................................... A-34
ARTICLE III--REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS OF ACQUIROR................................ A-34
3.1 Organization and Good Standing...................................................................... A-34
3.2 Authorization; Binding Agreement.................................................................... A-35
3.3 Governmental Approvals.............................................................................. A-35
3.4 No Violations....................................................................................... A-35
3.5 Finders and Investment Bankers...................................................................... A-36
3.6 Information Supplied................................................................................ A-36
3.7 Acquiror Ownership.................................................................................. A-36
ARTICLE IV--ADDITIONAL COVENANTS OF TARGET................................................................ A-36
4.1 Conduct of Business of Target and Target Subsidiaries............................................... A-36
4.2 Notification of Certain Matters..................................................................... A-39
4.3 Access and Information.............................................................................. A-40
4.4 Shareholder Approval; Proxy Statement; Shareholder Lists............................................ A-40
4.5 Reasonable Business Efforts......................................................................... A-41
4.6 Public Announcements................................................................................ A-42
4.7 Compliance.......................................................................................... A-42
4.8 Benefit Plans....................................................................................... A-42
4.9 No Solicitation of Takeover Proposal................................................................ A-42
4.10 Securities and Shareholder Materials............................................................... A-43
4.11 Resignations....................................................................................... A-43
4.12 Noncompete and Confidentiality Agreements; Consulting Agreement.................................... A-43
4.13 Comfort Letters.................................................................................... A-43
4.14 Takeover Statutes.................................................................................. A-44
4.15 Year 2000 Plan..................................................................................... A-44
4.16 Purchase of Target Common Stock.................................................................... A-44
4.17 Conversion of Options.............................................................................. A-44
ARTICLE V--ADDITIONAL COVENANTS OF ACQUIROR............................................................... A-44
5.1 Public Announcements................................................................................ A-44
5.2 Compliance.......................................................................................... A-45
5.3 Proxy Statement..................................................................................... A-45
5.4 Target Senior Secured Credit Facility............................................................... A-45
5.5 CS Borrowing........................................................................................ A-45
5.6 Indemnification and Insurance....................................................................... A-45
ARTICLE VI--CONDITIONS.................................................................................... A-46
6.1 Conditions to Each Party's Obligations.............................................................. A-46
6.1.1 Shareholder Approval.............................................................................. A-46
6.1.2 No Injunction or Action........................................................................... A-46
6.1.3 HSR Act........................................................................................... A-46
6.1.4 Opinion of Financial Advisor...................................................................... A-47
6.1.5 Governmental Approvals............................................................................ A-47
6.2 Conditions to Obligations of Target................................................................. A-47
6.2.1 Acquiror Representations and Warranties........................................................... A-47
6.2.2 Performance by Acquiror........................................................................... A-47
6.2.3 Certificate....................................................................................... A-47
6.3 Conditions to Obligations of Acquiror............................................................... A-48
A-3
PAGE
---------
6.3.1 Target Representations and Warranties............................................................. A-48
6.3.2 Performance by Target............................................................................. A-48
6.3.3 No Material Adverse Change........................................................................ A-48
6.3.4 No Pending Action................................................................................. A-48
6.3.5 Dissenting Shares................................................................................. A-49
6.3.6 Required Consents................................................................................. A-49
6.3.7 Certificates and Other Deliveries................................................................. A-49
6.3.8 Opinion of Target Counsel......................................................................... A-50
6.3.9 Comfort Letters................................................................................... A-50
ARTICLE VII--TERMINATION AND ABANDONMENT.................................................................. A-50
7.1 Termination......................................................................................... A-50
7.2 Termination Fees and Rights......................................................................... A-51
7.3 Procedure Upon Termination.......................................................................... A-51
ARTICLE VIII--MISCELLANEOUS............................................................................... A-51
8.1 Confidentiality..................................................................................... A-51
8.2 Amendment and Modification.......................................................................... A-52
8.3 Waiver of Compliance; Consents...................................................................... A-52
8.4 Survival of Representations and Warranties.......................................................... A-52
8.5 Notices............................................................................................. A-52
8.6 Binding Effect; Assignment.......................................................................... A-53
8.7 Expenses............................................................................................ A-53
8.8 Governing Law....................................................................................... A-54
8.9 Counterparts........................................................................................ A-54
8.10 Interpretation..................................................................................... A-54
8.11 Entire Agreement................................................................................... A-54
8.12 Severability....................................................................................... A-54
8.13 Specific Performance............................................................................... A-54
8.14 Third Parties...................................................................................... A-54
8.15 Schedules.......................................................................................... A-54
8.16 Control............................................................................................ A-55
A-4
LIST OF SCHEDULES
SCHEDULE DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
2.2(a) Rights, Subscriptions, Warrants, Options, etc., with Respect to Stock
2.2(b) Restrictions with Respect to Stock
2.3(a) Target Ownership Interests
2.3(b) Claims as to Capital Stock and Other Interests Held
2.3(c) Rights with respect to Target Subsidiary Securities
2.3(d) CS Limitations
2.5 Regulatory Consents
2.6 Target Required Approvals
2.7 Target Litigation
2.9 Target Subsequent Events
2.10 Compliance with Laws
2.11(a) Target Markets
2.11(b) Target Channel Leases
2.11(c) Target FCC Licenses
2.11(d) Target Systems Status
2.11(f) Target Systems
2.11(g) Target Systems Licenses, Permits
2.11(h) Target Systems Electrical Interference
2.11(i) Target Collocation and Other Applications
2.11(j) Target Fees
2.11(k) Target Total Households
2.11(l) Target License Judgments, Orders, Complaints & Proceedings
2.11(m) Target Regulatory Reports
2.13 Target Material Contracts
2.14 Target Employee Benefit Plans
2.15 Target Tax Matters
2.16 Target Liabilities
2.17 Target Environmental Matters
2.18(a)(1) Target Intellectual Property
2.18(a)(2) Target Intellectual Property Exceptions
2.19(b) Target Leased Real Property
2.20 Target Records Off Premises
2.22 Target Adverse Actions
2.23 Target Labor Matters
2.24 Target Change In Control Agreements
2.31 Target Affiliate Transactions
2.33(a)(1) TelQuest Capitalization
2.33(a)(2) TelQuest Capitalization Exceptions
2.33(b) TelQuest Subsidiaries
2.33(d) TelQuest Investment Exceptions
4.12(a) Form of Noncompete and Confidentiality Agreement
4.12(b) Designated Persons for Noncompete and Confidentiality Agreement
6.3.8 Opinion of Counsel to Acquiror
A-5
GLOSSARY OF DEFINED TERMS
PAGE WHERE
TERM DEFINED
- ----------------------------------------------------------------------------------------------------- -------------
Acquiror............................................................................................. A-9
Acquiror Ancillary Agreements........................................................................ A-35
Acquiror Material Adverse Effect..................................................................... A-35
Acquiror Material Contract........................................................................... A-35
Acquiror Modified Representation..................................................................... A-47
Acquiror Nonmodified Representation.................................................................. A-47
Acquisition Subsidiary............................................................................... A-9
affiliate............................................................................................ A-54
Agreement............................................................................................ A-9
Alternative Use...................................................................................... A-23
Alternative Use Application.......................................................................... A-23
associate............................................................................................ A-54
Benefit Plan......................................................................................... A-25
Booster Application.................................................................................. A-23
Booster License...................................................................................... A-23
BTA.................................................................................................. A-23
BTA Authorization.................................................................................... A-23
Certificate of Merger................................................................................ A-9
Certificates......................................................................................... A-10
Channel Leases....................................................................................... A-23
Channel License...................................................................................... A-23
Channels............................................................................................. A-23
Claim Notice......................................................................................... A-29
Closing.............................................................................................. A-9
Closing Date......................................................................................... A-9
Code................................................................................................. A-12
Collocation Application.............................................................................. A-22
Collocation Site..................................................................................... A-23
Connecticut Code..................................................................................... A-9
Consent.............................................................................................. A-16
CS................................................................................................... A-17
CS Approved Budget................................................................................... A-18
CS Borrowing......................................................................................... A-39
CS Subsidiaries...................................................................................... A-18
Effective Time....................................................................................... A-9
Enforceability Exceptions............................................................................ A-15
Environmental Laws................................................................................... A-28
ERISA................................................................................................ A-25
Event................................................................................................ A-18
Exchange Agent....................................................................................... A-11
FCC Licenses......................................................................................... A-23
FCC Rules............................................................................................ A-23
Final Order.......................................................................................... A-47
GAAP................................................................................................. A-18
Governmental Authority............................................................................... A-16
HSR Act.............................................................................................. A-16
Intellectual Property................................................................................ A-28
A-6
PAGE WHERE
TERM DEFINED
- ----------------------------------------------------------------------------------------------------- -------------
IRS.................................................................................................. A-25
ITFS................................................................................................. A-23
Law.................................................................................................. A-17
Letter of Transmittal................................................................................ A-11
Licensee............................................................................................. A-23
Litigation........................................................................................... A-17
MDS.................................................................................................. A-24
Merger............................................................................................... A-9
Merger Consideration................................................................................. A-10
MMDS................................................................................................. A-24
Multi-employer Plan.................................................................................. A-25
NASD................................................................................................. A-16
Noncompete and Confidentiality Agreements............................................................ A-43
Other Application.................................................................................... A-22
person............................................................................................... A-54
Proxy Statement...................................................................................... A-40
Rights Plan.......................................................................................... A-32
SEC.................................................................................................. A-17
Securities Act....................................................................................... A-14
Securities Exchange Act.............................................................................. A-14
Senior Secured Credit Facility....................................................................... A-36
Senior Secured Notes................................................................................. A-36
shareholder.......................................................................................... A-54
Subsidiary........................................................................................... A-13
Surviving Corporation................................................................................ A-9
Surviving Corporation Common Stock................................................................... A-10
Surviving Corporation Material Adverse Effect........................................................ A-47
System............................................................................................... A-24
System Agreements.................................................................................... A-24
Takeover Statute..................................................................................... A-32
Target............................................................................................... A-9
Target Ancillary Agreements.......................................................................... A-15
Target Approved Budget............................................................................... A-18
Target Common Stock.................................................................................. A-10
Target Financial Statements.......................................................................... A-18
Target Material Adverse Effect....................................................................... A-13
Target Material Contract............................................................................. A-24
Target Minority Entity............................................................................... A-14
Target Modified Representation....................................................................... A-48
Target Nonmodified Representation.................................................................... A-48
Target Permits....................................................................................... A-19
Target Real Property Leases.......................................................................... A-29
Target Securities Filings............................................................................ A-17
Target Shares........................................................................................ A-9
Target Subsidiaries.................................................................................. A-13
Tax.................................................................................................. A-26
Tax Return........................................................................................... A-26
TelQuest............................................................................................. A-33
TelQuest Subsidiaries................................................................................ A-34
A-7
PAGE WHERE
TERM DEFINED
- ----------------------------------------------------------------------------------------------------- -------------
Termination Fee...................................................................................... A-51
Tower Site Leases.................................................................................... A-29
Wireless Cable Service............................................................................... A-24
Wireless Telecommunications Service.................................................................. A-24
Year 2000 Compliant.................................................................................. A-32
Year 2000 Plan....................................................................................... A-32
Year 2000 Problem.................................................................................... A-32
A-8
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is made and entered into
as of April 26, 1999, by and among MCI WORLDCOM, Inc., a Georgia corporation
("ACQUIROR"), Cardinal Acquisition Subsidiary, Inc., a Connecticut corporation
and wholly owned subsidiary of Acquiror ("ACQUISITION SUBSIDIARY"), and CAI
Wireless Systems, Inc., a Connecticut corporation ("TARGET").
RECITALS
A. The respective Boards of Directors of Target, Acquisition Subsidiary and
Acquiror have approved the merger (the "MERGER") of Acquisition Subsidiary with
and into Target in accordance with the laws of the State of Connecticut and the
provisions of this Agreement.
B. Target, Acquisition Subsidiary and Acquiror desire to make certain
representations, warranties and agreements in connection with, and establish
various conditions precedent to, the Merger.
C. As a condition and inducement to Acquiror and Acquisition Subsidiary
entering into this Agreement, concurrently with the execution and delivery of
this Agreement, Target has granted an option to Acquiror to purchase 6,090,481
shares of common stock of Target pursuant to the terms and conditions of a Stock
Option Agreement between Target and Acquiror dated as of even date herewith (the
"STOCK OPTION AGREEMENT").
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements hereinafter set forth, the parties hereto
agree as follows:
ARTICLE I
TERMS OF THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, the Merger shall be consummated in accordance with the Connecticut
Business Corporation Act (the "CONNECTICUT CODE"). At the Effective Time (as
defined in SECTION 1.2, below), upon the terms and subject to the conditions of
this Agreement, Acquisition Subsidiary shall be merged with and into Target in
accordance with the Connecticut Code and the separate existence of Acquisition
Subsidiary shall thereupon cease, and Target, as the surviving corporation in
the Merger (the "SURVIVING CORPORATION"), shall continue its corporate existence
under the laws of the State of Connecticut as a subsidiary of Acquiror. Acquiror
shall prepare and Target shall execute a certificate of merger (the "CERTIFICATE
OF MERGER") in order to comply in all respects with the requirements of the
Connecticut Code and with the provisions of this Agreement.
1.2 EFFECTIVE TIME. The Merger shall become effective at the time of the
filing of the Certificate of Merger with Secretary of State of the State of
Connecticut in accordance with the applicable provisions of the Connecticut Code
or at such later time as may be specified in the Certificate of Merger. The
Certificate of Merger shall be filed as soon as practicable after all of the
conditions set forth in this Agreement have been satisfied or waived by the
party or parties entitled to the benefit of the same. Acquiror, after
consultation with Target, shall determine the time of such filing and the place
where the closing of the Merger (the "CLOSING") shall occur. The time when the
Merger shall become effective is herein referred to as the "EFFECTIVE TIME" and
the date on which the Effective Time occurs is herein referred to as the
"CLOSING DATE."
1.3 MERGER CONSIDERATION.
(a) Subject to the provisions of this Agreement and any applicable backup or
other withholding requirements, each of the issued and outstanding shares
("TARGET SHARES") of common stock, par value
A-9
$0.01 per share, of Target ("TARGET COMMON STOCK") (other than shares canceled
pursuant to SECTION 1.3(B) and Dissenting Shares (as hereinafter defined), if
any) as of the Effective Time shall by virtue of the Merger and without any
action on part of the holder thereof, be converted into the right to receive,
and there shall be paid as hereinafter provided, in exchange for each of the
Target Shares, $28.00 in cash (the "MERGER CONSIDERATION"), payable to the
holder thereof, without interest thereon, upon the surrender of the certificate
formerly representing such Target Share in the manner provided in SECTION 1.6.
(b) Each share of Target Common Stock issued and outstanding immediately
prior to the Effective Time that is owned by Acquiror or Acquisition Subsidiary
and each share of Target Common Stock held in the treasury of Target or by a
wholly owned subsidiary of Target shall be canceled as of the Effective Time and
no Merger Consideration shall be payable with respect thereto. From and after
the Effective Time, there shall be no further transfers on the stock transfer
books of Target of any of the Target Shares outstanding prior to the Effective
Time. If, after the Effective Time, Certificates (as hereinafter defined) are
presented to the Surviving Corporation, they shall be canceled and exchanged for
the Merger Consideration provided for in, and in accordance with the procedures
set forth in, this Agreement.
(c) Subject to the provisions of this Agreement, at the Effective Time, the
shares of Acquisition Subsidiary common stock outstanding immediately prior to
the Merger shall be converted, by virtue of the Merger and without any action on
the part of the holder thereof, into one validly issued, fully paid and
nonassessable share of the common stock of the Surviving Corporation (the
"SURVIVING CORPORATION COMMON STOCK"), which share of the Surviving Corporation
Common Stock shall constitute all of the issued and outstanding capital stock of
the Surviving Corporation.
1.4 SHAREHOLDERS' RIGHTS UPON MERGER. Upon consummation of the Merger, the
certificates which theretofore represented Target Shares (other than Dissenting
Shares) (the "CERTIFICATES") shall cease to represent any rights with respect
thereto, and, subject to applicable Law (as hereinafter defined) and this
Agreement, the Certificates shall only represent the right to receive the Merger
Consideration.
1.5 DISSENTING SHARES. (a) Notwithstanding anything in this Agreement to
the contrary, Shares which are issued and outstanding immediately prior to the
Effective Time and which are held by holders of Target Common Stock who have
demanded and exercised any dissenters' rights in the manner provided under the
Connecticut Code, if applicable and, as of the Effective Time, have neither
effectively withdrawn nor lost their rights to payment under the Connecticut
Code (the "DISSENTING SHARES"), shall not be converted into or be exchangeable
for the right to receive the Merger Consideration, unless and until such holder
shall have failed to exercise or shall have effectively withdrawn or lost such
holder's right to payment under the Connecticut Code. If such holder shall have
so failed to exercise or shall have effectively withdrawn or lost such right,
such holder's Shares shall thereupon be deemed to have been converted into and
to have become exchangeable for, at the Effective Time, the right to receive the
Merger Consideration provided for in this Agreement, without any interest
thereon.
(b) Target shall give Acquiror (i) prompt notice of any demands for
appraisal and payment pursuant to Section 33-861 of the Connecticut Code
received by Target, withdrawals of such demands, and any other instruments
served pursuant to the Connecticut Code, and received by Target and (ii) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal and payment under the Connecticut Code. Target shall not, except
with the prior written consent of Acquiror or as otherwise required by
applicable law, make any payment with respect to any such demands for appraisal
and payment or offer to settle or settle any such demands.
A-10
1.6 SURRENDER AND EXCHANGE OF SHARES.
(a) Prior to the Effective Time, Acquiror shall designate The Bank of New
York or such other bank or trust company as it may designate to act as exchange
agent in the Merger (the "EXCHANGE AGENT"). Immediately prior to the Effective
Time, Acquiror will deposit with the Exchange Agent the funds necessary to make
the payments contemplated herein on a timely basis. After the Effective Time,
each holder of a Target Share (other than Dissenting Shares) shall surrender and
deliver the Certificates to the Exchange Agent together with a duly completed
and executed transmittal letter provided by the Exchange Agent (the "LETTER OF
TRANSMITTAL") and any other required documents. Upon such surrender and
delivery, the holder shall be entitled to receive in exchange therefor the
Merger Consideration, and such Certificate shall forthwith be canceled. No
interest will be paid or accrued on the cash payable upon the surrender of the
Certificates. If payment is to be made to a person other than the person in
whose name the Certificate surrendered is registered, it shall be a condition of
payment that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
payment shall pay any transfer or other taxes required by reason of the payment
to a person other than the registered holder of the Certificate surrendered or
establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Until surrendered in accordance with the
provisions of this SECTION 1.6 and exchanged, each outstanding Certificate after
the Effective Time (other than Certificates representing Dissenting Shares)
shall be deemed for all purposes only to evidence the right to receive Merger
Consideration, without any interest thereon.
(b) At any time following the sixth (6th) month after the Effective Time,
the Surviving Corporation shall be entitled to require the Exchange Agent to
deliver to it any portion of the funds which had been made available to the
Exchange Agent and not disbursed to holders of shares of Target Common Stock
(including, without limitation, all interest and other income received by the
Exchange Agent in respect of all amounts of funds made available to it), and
thereafter each such holder shall be entitled to look only to the Surviving
Corporation (subject to abandoned property, escheat and other similar laws), and
only as general creditors thereof, with respect to any Merger Consideration that
may be payable upon due surrender of the Certificates held by such holder. If
any Certificates representing shares of Target Common Stock shall not have been
surrendered immediately prior to such date on which the Merger Consideration in
respect of such Certificate would otherwise escheat to or become the property of
any Governmental Entity (as hereinafter defined), any such cash, shares,
dividends or distributions payable in respect of such Certificate shall, to the
extent permitted by applicable Law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto. Notwithstanding the foregoing, none of the Surviving
Corporation, Acquiror, Acquisition Subsidiary or the Exchange Agent shall be
liable to any holder of a share of Target Common Stock for any Merger
Consideration delivered in respect of such share of Target Common Stock to a
public official pursuant to any abandoned property, escheat or other similar
Law.
(c) At the Effective Time, the stock transfer books of the Target shall be
closed and thereafter there shall be no further registration of transfers of
shares of Target Common Stock on the records of the Target. Except for Acquiror
and Acquisition Subsidiary, the holders of shares of Target Common Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights, from and after the Effective Time, with respect to such shares of Target
Common Stock except as otherwise provided herein or by applicable Law, and all
cash paid pursuant to this ARTICLE I upon the surrender or exchange of
Certificates shall be deemed to have been paid in full satisfaction of all
rights pertaining to the shares of the Target Common Stock theretofore
represented by such Certificate.
(d) Acquiror, Acquisition Subsidiary, the Surviving Corporation and the
Exchange Agent, as the case may be, shall be entitled to deduct and withhold
from the Merger Consideration otherwise payable pursuant to this Agreement to
any holder of shares of Target Common Stock and Target Options (as hereinafter
defined) such amounts that Acquiror, Acquisition Subsidiary, the Surviving
Corporation or
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the Exchange Agent is required to deduct and withhold with respect to the making
of such payment under the Internal Revenue Code of 1986, as amended (the
"CODE"), the rules and regulations promulgated thereunder or any provision of
state, local or foreign tax Law. To the extent that amounts are so withheld by
Acquiror, Acquisition Subsidiary, the Surviving Corporation or the Exchange
Agent, such amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares of Target Common Stock and Target
Options in respect of which such deduction and withholding was made by Acquiror,
Acquisition Subsidiary, the Surviving Corporation or the Exchange Agent.
1.7 OPTIONS AND WARRANTS.
(a) Prior to the Effective Time, Target shall cause each outstanding and
unexpired option or warrant to purchase Shares described in SCHEDULE 2.2 (an
"OPTION" and, collectively, the "OPTIONS"), if such Option is exercisable as of
the Effective Time, to be converted into the right to receive from the Surviving
Corporation an amount of cash equal to the product of (i) the number of Shares
subject to the Option and (ii) the excess, if any, of the Merger Consideration
over the exercise price per Share of such Option (the "OPTION CONSIDERATION"),
as contemplated by SECTION 4.17. Prior to the Effective Time, the Target shall
cause each Option to be converted as described herein, and shall take all steps
necessary to give written notice to each holder of an Option that, as
applicable: (i) all Options which are exercisable as of the Effective Time shall
be canceled effective as of the Effective Time; (ii) the Option Consideration
for such Options which are exercisable as of the Effective Time held by such
holder shall be payable as described in SECTION 1.7(B); (iii) all Options which
are not exercisable as of the Effective Time shall be converted, immediately
prior to the Effective Time, to the right to receive, when exercisable, solely
the Option Consideration, with such Option otherwise becoming exercisable in
accordance with its terms; and (iv) the Option Consideration for such Options
which are not exercisable as of the Effective Time held by such holder shall be
payable as described in SECTION 1.7(B). The Board of Directors of Target or any
committee thereof responsible for the administration of any plans under which
Options have been granted shall take any and all action necessary to effectuate
matters described in this SECTION 1.7 and SECTION 4.17 on or before the
Effective Time.
(b) The Option Consideration shall be payable by the Surviving Corporation
to each holder of Options promptly following the Effective Time, in the case of
Options which are exercisable as of the Effective Time, or promptly following
exercise, in the case of Options which become exercisable after the Effective
Time, only after (i) verification by the Acquiror and the Surviving Corporation
of the ownership and terms of the particular Option by reference to the
Surviving Corporation's records, and (ii) delivery of a written instrument duly
executed by the holder of the applicable Option, in a form provided by the
Target and acceptable to Acquiror and setting forth (x) the aggregate number of
Options owned by that person and their respective issue dates and exercise
prices, (y) a representation by the person that he or she is the owner of all
Options described pursuant to clause (x) and that none of those Options has
expired or ceased to be exercisable and (z) a confirmation of, and consent to,
the cancellation and/or conversion of all Options held by such person effective
as of the Effective Time, as contemplated by this SECTION 1.7 and SECTION 4.17.
(c) Any amounts payable pursuant to this SECTION 1.7 shall be subject to any
required withholding of taxes and shall be paid without interest.
1.8 CERTIFICATE OF INCORPORATION. At and after the Effective Time, the
Certificate of Incorporation of the Surviving Corporation shall be amended and
restated in its entirety to read as the Certificate of Incorporation of the
Acquisition Subsidiary in effect at the Effective Time except that Article First
shall be amended to read as follows: "The name of the corporation is CAI
Wireless Systems, Inc." (subject to any subsequent amendment).
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1.9 BY-LAWS. At and after the Effective Time, the By-Laws of Acquisition
Subsidiary in effect at the Effective Time shall be the By-Laws of the Surviving
Corporation (subject to any subsequent amendment).
1.10 OTHER EFFECTS OF MERGER. The directors and officers of Acquisition
Subsidiary at the Effective Time shall be the initial directors and officers of
the Surviving Corporation and will hold office from the Effective Time until
their respective successors are duly elected or appointed and qualify in the
manner provided in the Certificate of Incorporation and By-Laws of the Surviving
Corporation, or as otherwise provided by Law. The Merger shall have all further
effects as specified in the applicable provisions of the Connecticut Code.
1.11 ADDITIONAL ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Acquisition Subsidiary or Target or otherwise to carry
out this Agreement, the officers and directors of the Surviving Corporation
shall be authorized to execute and deliver, in the name and on behalf of
Acquisition Subsidiary or Target, as the case may be, all such deeds, bills of
sale, assignments and assurances and to take and do, in the name and on behalf
of Acquisition Subsidiary or Target, as the case may be, all such other actions
and things as may be necessary or desirable to vest, perfect or confirm any and
all right, title and interest in, to and under such rights, properties or assets
in the Surviving Corporation or otherwise to carry out this Agreement.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS OF TARGET
Target represents, warrants and/or covenants to and with Acquiror as
follows:
2.1 ORGANIZATION AND GOOD STANDING. Target and, except for TelQuest (as
hereinafter defined), each of its Subsidiaries (as defined below) (the "TARGET
SUBSIDIARIES") is a corporation, limited liability company or partnership duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization and has all requisite
corporate, limited liability company or partnership power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Target and each of the Target Subsidiaries is duly qualified and in
good standing to do business in each jurisdiction in which the character of the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification necessary, except where the failure to be so duly
qualified and in good standing would not have a Target Material Adverse Effect
(as defined below). For purposes of this Agreement, "TARGET MATERIAL ADVERSE
EFFECT" shall mean a material adverse effect on (i) the business, assets,
condition (financial or otherwise), properties, liabilities, prospects or the
results of operations of Target and the Target Subsidiaries taken as a whole,
(ii) the ability of Target to perform its obligations set forth in this
Agreement and the Target Ancillary Agreements (as hereinafter defined), or (iii)
the ability to timely consummate the transactions contemplated by this Agreement
and the Target Ancillary Agreements. Target has delivered to Acquiror a complete
and accurate list of the jurisdictions of incorporation or organization and
qualification of Target and the Target Subsidiaries. Target has heretofore
delivered to Acquiror accurate and complete copies of the Certificates or
Articles of Incorporation and By-Laws, or equivalent governing instruments, as
currently in effect, of Target and each of the Target Subsidiaries. "SUBSIDIARY"
means, with respect to any person, any affiliate controlled by such person
directly, or indirectly through one or more intermediaries, and shall include,
without limitation, any corporation, partnership, joint venture, limited
liability company, trust, estate or other organization or entity, of which (or
in which) 50% or more of: (i) the issued and outstanding shares of capital stock
having ordinary voting power to elect a majority of the board of directors or
others performing similar functions with respect thereto of such corporation or
other organization (irrespective of whether at the time shares of capital stock
or
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other interests of any other class or classes of such corporation shall or might
have voting power upon the occurrence of any contingency); (ii) the interest in
the capital or profits of such partnership, joint venture, limited liability
company or other organization or entity; or (iii) the beneficial interest in
such trust or estate; is at the time, directly or indirectly, owned or
controlled by such person, by such person and one or more of its other
subsidiaries or by one or more of such person's other subsidiaries;
2.2 CAPITALIZATION. As of the date hereof, the authorized capital stock of
Target consists of 25,000,000 shares of Target Common Stock and 5,000,000 shares
of preferred stock, of which 2,000,000 shares have been designated by the Board
of Directors of Target as Series A Preferred Stock and are reserved for issuance
under the Rights Plan (as hereinafter defined). As of the opening of business on
the date hereof, (a) 17,241,379 shares of Target Common Stock were issued and
outstanding, and (b) no shares of Target Common Stock were issued and held in
the treasury of Target. No other capital stock of Target is issued or
outstanding. All issued and outstanding shares of the Target Common Stock are
duly authorized, validly issued, fully paid and non-assessable and were issued
free of preemptive rights and in compliance with applicable corporate and
securities Laws (as hereinafter defined). Except as set forth on SCHEDULE 2.2(A)
attached hereto, as of the date of this Agreement there are no outstanding
rights, reservations of shares, subscriptions, warrants, puts, calls,
unsatisfied preemptive rights, options or other agreements of any kind relating
to any of the capital stock or any other security of Target, and there is no
authorized or outstanding security of any kind convertible into or exchangeable
for any such capital stock or other security. There are no restrictions upon the
transfer of or otherwise pertaining to the securities (including, but not
limited to, the ability to pay dividends thereon) or retained earnings of Target
and the Target Subsidiaries or the ownership thereof other than those, if any,
described on SCHEDULE 2.2(B) attached hereto or those imposed generally by the
Securities Act of 1933, as amended (the "SECURITIES ACT"), the Securities
Exchange Act of 1934, as amended (the "SECURITIES EXCHANGE ACT"), applicable
state or foreign securities Laws or applicable corporate Law.
2.3 SUBSIDIARIES. SCHEDULE 2.3(A) attached hereto sets forth the name and
percentages of outstanding capital stock or other interest held, directly or
indirectly, by Target and other persons, with respect to Target's Subsidiaries
or other persons in which Target or a Target Subsidiary holds, directly or
indirectly, any capital stock or other interest (a "TARGET MINORITY ENTITY").
Except as set forth on SCHEDULE 2.3(B) attached hereto, all of the capital stock
and other interests so held by Target are owned by it or a Target Subsidiary as
indicated on said SCHEDULE 2.3(A), free and clear of any claim, lien,
encumbrance, security interest or agreement with respect thereto. All of the
outstanding shares of capital stock in each of the Target Subsidiaries are duly
authorized, validly issued, fully paid and non-assessable and were issued free
of preemptive rights and in compliance with applicable Laws. Except as set forth
on SCHEDULE 2.3(C) attached hereto, there are no irrevocable proxies, voting
agreements or similar obligations with respect to such capital stock of the
Target Subsidiaries or a Target Minority Entity held by Target or any of the
Target Subsidiaries and no equity securities or other interests of any of the
Target Subsidiaries are or may become required to be issued or purchased by
reason of any options, warrants, rights to subscribe to, puts, calls,
reservation of shares or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, shares of any capital
stock of any Target Subsidiary, and there are no contracts, commitments,
understandings or arrangements by which any Target Subsidiary is bound to issue
additional shares of its capital stock, or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or securities
convertible into or exchangeable for such shares. Except as set forth on
SCHEDULE 2.3(D), Target is not aware of any provision of the Certificate of
Incorporation or By-Laws of CS (as hereinafter defined) or Target or any other
agreement, contract, understanding or arrangement or of any Law that would
restrict, limit or condition, or otherwise adversely affect, the ability of
Target, as the holder of over 90% of the capital stock of CS, to cause CS,
immediately following the Effective Time, to merge with and into Target or a
direct or indirect wholly-owned subsidiary of Target or Acquiror.
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2.4 AUTHORIZATION; BINDING AGREEMENT. (a) Target has all requisite
corporate power and authority to execute and deliver this Agreement and the
Stock Option Agreement and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the other
agreements and documents referred to herein and to be executed in connection
herewith to which Target is or will be a party or a signatory, including,
without limitation, the Stock Option Agreement (the "TARGET ANCILLARY
AGREEMENTS") and the consummation of the transactions contemplated hereby and
thereby including, but not limited to, the Merger have been duly and validly
authorized by Target's Board of Directors and no other corporate proceedings on
the part of Target or any Target Subsidiary are necessary to authorize the
execution and delivery of this Agreement and the Target Ancillary Agreements or
to consummate the transactions contemplated hereby or thereby (other than the
adoption of this Agreement by the shareholders of Target in accordance with the
Connecticut Code and the Certificate of Incorporation and By-Laws of Target).
This Agreement and the Stock Option Agreement have been duly and validly
executed and delivered by Target and constitute, and upon execution and delivery
thereof as contemplated by this Agreement, the Target Ancillary Agreements will
constitute, the legal, valid and binding agreements of Target, enforceable
against Target in accordance with its and their respective terms, except to the
extent that enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement of
creditors' rights generally and by principles of equity regarding the
availability of remedies ("ENFORCEABILITY EXCEPTIONS").
(b) At a meeting duly called and held on April 26, 1999, the Board of
Directors of Target, after consideration of (A) the long-term as well as the
short-term interests of Target, (B) the interests of the shareholders, long-term
as well as short-term, including the possibility that those interests may be
best served by the continued independence of Target, (C) the interests of
Target's employees, customers, creditors and suppliers, and (D) community and
societal considerations including those of any community in which any office or
other facility of Target is located, unanimously (i) determined that this
Agreement and the other transactions contemplated hereby, including the Merger,
are fair to and in the best interests of Target and the holders of Target
Shares, (ii) approved, authorized and adopted this Agreement, the Target
Ancillary Agreements, the Merger and the other transactions contemplated hereby
and thereby, and (iii) resolved to recommend approval and adoption of this
Agreement and the Merger and the other transactions contemplated hereby and
thereby by the holders of Target Shares.
(c) Target's Board of Directors has received from Target's financial
advisor, BT Alex. Brown Incorporated, a written opinion addressed to it for
inclusion in the Proxy Statement (as hereinafter defined) to the effect that the
Merger Consideration is fair to the holders of the Target Shares (other than
Acquiror and its affiliates) from a financial point of view. An accurate and
complete copy of such opinion has been provided to Acquiror.
(d) The affirmative vote of the holders of two-thirds of the outstanding
Target Shares is required to adopt this Agreement and the Merger and the other
transactions contemplated hereby and thereby. No other vote of the holders of
Target Common Stock or any other capital stock of Target is required by Law or
the Certificate of Incorporation or By-Laws of Target or otherwise in order for
Target to consummate the Merger and the transactions contemplated hereby and by
the Target Ancillary Agreements.
(e) The Certificate of Incorporation of Target, as amended through the date
hereof, specifically provides that Target has elected not to be governed by
Sections 33-840 to 33-845, inclusive, of the Connecticut Code. Such provisions
of the Certificate of Incorporation have been duly adopted by vote of the Board
of Directors and shareholders of Target, as necessary and appropriate to ensure
the effectiveness of such provisions, in the case of Sections 33-840 to 33-843,
inclusive, of the Connecticut Code such that such provisions are inapplicable to
the Merger, the Target Ancillary Agreements and the transactions contemplated
hereby and thereby, and the execution, delivery and performance of any agreement
to acquire, or any other acquisition of, Target Common Stock by Acquiror or any
of its
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affiliates or associates, and, in the case of Sections 33-844 to 33-845,
inclusive, of the Connecticut Code such that such provisions are, in Target's
reasonable business judgment, inapplicable to the Merger, the Target Ancillary
Agreements and the transactions contemplated hereby and thereby and the
execution, delivery and performance of any agreement to acquire, or any other
acquisition of, Target Common Stock by Acquiror or any of its affiliates or
associates. The Board of Directors of Target and a majority of the nonemployee
directors (as described in Section 33-844 of the Connecticut Code), of which
there are at least two, have approved this Agreement, the Target Ancillary
Agreements and the consummation of the transactions contemplated hereby and
thereby, including, but not limited to, the Merger. Accordingly, the
restrictions on "business combinations" under the provisions of Sections 33-840
to 33-845, inclusive, of the Connecticut Code are inapplicable to the Merger,
the Target Ancillary Agreements and the transactions contemplated hereby and
thereby and the execution, delivery and performance of any agreement to acquire,
or any other acquisition of, Target Common Stock by Acquiror or any of its
affiliates or associates.
2.5 GOVERNMENTAL APPROVALS. No consent, approval, waiver or authorization
of, notice to or registration, declaration or filing with or other action by
("CONSENT") any nation or government, any state or other political subdivision
thereof, any person, authority or body exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government
including, without limitation, any governmental or regulatory authority, agency,
department, board, commission or instrumentality, any court, tribunal or
arbitrator and any self-regulatory organization ("GOVERNMENTAL AUTHORITY") on
the part of Target or any of the Target Subsidiaries is required in connection
with any change of control of Target or any of the Target Subsidiaries,
including, without limitation, any acquisition of Target Common Stock by
Acquiror or any of its affiliates or associates, or the execution or delivery by
Target of this Agreement and the Target Ancillary Agreements or the consummation
by Target of the transactions contemplated hereby or thereby, other than (i) the
filing of the Certificate of Merger with the Secretary of the State of
Connecticut in accordance with the Connecticut Code, (ii) filings with the SEC,
state securities laws administrators and the National Association of Securities
Dealers, Inc. (the "NASD"), (iii) Consents from or with Governmental Authorities
set forth on SCHEDULE 2.5 attached hereto, (iv) filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder (the "HSR ACT"), and (v) Consents
described in SECTION 2.11 below, and (vi) those Consents that, if they were not
obtained or made, do not or would not have a Target Material Adverse Effect,
provided that the failure to obtain any Consent relating to any FCC License (as
hereinafter defined) shall be deemed to have a Target Material Adverse Effect
and the failure to obtain Consents relating to Channel Leases (as hereinafter
defined) or Tower Site Leases (as hereinafter defined), which, in the aggregate,
are or would be material to Target and the Target Subsidiaries or are or would
be material to the future plans or objectives of Acquiror, or the failure of
which to obtain would otherwise have a Target Material Adverse Effect, shall be
deemed to have a Target Material Adverse Effect.
2.6 NO VIOLATIONS. The execution and delivery of this Agreement and the
Target Ancillary Agreements, the consummation of the transactions contemplated
hereby and thereby and compliance by Target with any of the provisions hereof or
thereof and any change of control of Target or any of the Target Subsidiaries,
including, without limitation, any acquisition of Target Common Stock by
Acquiror or any of its affiliates or associates, will not (i) conflict with or
result in any breach of any provision of the Certificate and/or Articles of
Incorporation or By-Laws or other governing instruments of Target or any of the
Target Subsidiaries, (ii) except as set forth on SCHEDULE 2.6(A) attached
hereto, require any Consent under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or augment
the performance required) under any of the terms, conditions or provisions of
any Target Material Contract (as hereinafter defined) or other obligation to
which Target or any Target Subsidiary is a party or by which any of them or any
of their properties or assets may be bound, (iii) result in the creation or
imposition of any lien or encumbrance of any kind upon any of the assets
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of Target or any Target Subsidiary, or (iv) subject to obtaining the Consents
from Governmental Authorities referred to in SECTION 2.5, above, contravene any
applicable provision of any constitution, treaty, statute, law, code, rule,
regulation, tariff, ordinance, policy, permit or order of any Governmental
Authority or other matters having the force of law including, but not limited
to, any orders, decisions, injunctions, judgments, awards and decrees of or
agreements with any court, tribunal, arbitrator, mediator or other Governmental
Authority ("LAW") currently in effect to which Target or any Target Subsidiary
or its or any of their respective assets or properties are subject, except in
the case of clauses (ii), (iii) and (iv), above, for any deviations from the
foregoing which do not or would not have a Target Material Adverse Effect.
2.7 SECURITIES FILINGS AND LITIGATION. Target has made available to
Acquiror true and complete copies of (i) its Annual Reports on Form 10-K, as
amended, for the years ended March 31, 1996, 1997 and 1998, as filed with the
Securities and Exchange Commission (the "SEC"), (ii) the Annual Reports on Form
10-K, as amended, for the years ended December 31, 1996, 1997 and 1998, as filed
by CS Wireless Systems, Inc. ("CS") with the SEC, (iii) the proxy statements
relating to all of the meetings of shareholders (whether annual or special) of
Target and the Target Subsidiaries (including CS) since January 1, 1996, as
filed with the SEC, and (iv) all other reports, statements, schedules,
registration statements and other filings or documents and amendments thereto
(including, without limitation, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as amended) filed by Target or CS with the SEC since
January 1, 1996. The reports, statements, schedules, registration statements,
and other filings and documents set forth in clauses (i) through (iv), above,
and those subsequently provided or required to be provided pursuant to this
Section, are referred to collectively herein as the "TARGET SECURITIES FILINGS."
Target and the Target Subsidiaries have filed with the SEC all Target
Securities Filings required to be filed therewith on or prior to the date of
this Agreement and, as of the Closing, Target and the Target Subsidiaries shall
have filed with the SEC all Target Securities Filings required to be filed on or
prior thereto. As of their respective dates, or as of the date of the last
amendment thereof, if amended after filing, none of the Target Securities
Filings (including all schedules thereto and disclosure documents incorporated
by reference therein), contained or, as to Target Securities Filings subsequent
to the date hereof, will contain any untrue statement of a material fact or
omitted or, as to Target Securities Filings subsequent to the date hereof, will
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Each of the Target Securities Filings at the time of
filing or as of the date of the last amendment thereof, if amended after filing,
complied or, as to Target Securities Filings subsequent to the date hereof, will
comply in all material respects with the Securities Exchange Act or the
Securities Act, as applicable. Except as set forth in SCHEDULE 2.7 attached
hereto, there is no action, cause of action, claim, demand, suit, proceeding,
citation, summons, subpoena, inquiry or investigation of any nature, civil,
criminal, regulatory or otherwise, in law or in equity, by or before any court,
tribunal, arbitrator, mediator or other Governmental Authority ("LITIGATION")
pending or, to the knowledge of Target, threatened against Target, any Target
Subsidiary or any Target Minority Entity, or any officer, director, employee or
agent thereof, in his or her capacity as such, or as a fiduciary with respect to
any Benefit Plan (as hereinafter defined) of Target, or otherwise relating, in a
manner that could have a Target Material Adverse Effect, to Target, any Target
Subsidiary, any Target Minority Entity or the securities of any of them, or any
properties or rights of Target, any of the Target Subsidiaries or any Target
Minority Entity or any Benefit Plan. No event has occurred as a consequence of
which Target would be required to file a Current Report on Form 8-K pursuant to
the requirements of the Securities Exchange Act as to which such a report has
not been timely filed with the SEC. Any reports, statements, schedules,
registration statements and other filings and documents and amendments thereto
(including, without limitation, Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as amended) filed by Target with the SEC
after the date hereof shall be provided to Acquiror no later than the date of
such filing.
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2.8 TARGET FINANCIAL STATEMENTS. The audited consolidated and unaudited
interim financial statements of Target and the Target Subsidiaries included in
the Target Securities Filings and, as prepared by Target, the unaudited
financial statements of Target and the Target Subsidiaries as of and for the
months ended January 31, 1999, February 28, 1999 and March 31, 1999 (the "TARGET
FINANCIAL STATEMENTS") have been provided to Acquiror. Except as noted therein,
the Target Financial Statements were or, as to those Target Financial Statements
provided or required to be provided subsequent to the date hereof pursuant to
this Section, will be prepared in accordance with generally accepted accounting
principles applicable to the businesses of Target and the Target Subsidiaries
consistently applied in accordance with past accounting practices and fairly
present (including, but not limited to, the inclusion of all adjustments with
respect to interim periods which are necessary to present fairly the financial
condition and assets and liabilities or the results of operations of Target and
the Target Subsidiaries except as may be indicated therein or in the notes
thereto, subject to normal year-end adjustments in the ordinary course with
respect to certain items immaterial in amount or effect and the exclusion of
footnote disclosure in interim Target Financial Statements) the financial
condition and assets and liabilities and the results of operations of Target and
the Target Subsidiaries as of the dates and for the periods indicated. Except as
reflected in the Target Financial Statements, as of their respective dates,
neither Target nor any Target Subsidiary had any debts, obligations, guaranties
of obligations of others or liabilities (contingent or otherwise) that would be
required in accordance with generally accepted accounting principles to be
disclosed in the Target Financial Statements. Any financial statements prepared
with respect to Target or a Target Subsidiary subsequent to the date hereof
promptly shall be provided to Acquiror and shall constitute Target Financial
Statements for purposes hereof.
2.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
Target Securities Filings made available by Target to Acquiror prior to the date
of this Agreement or in SCHEDULE 2.9 attached hereto, since December 31, 1998,
through the date of this Agreement, there has not been: (i) any event,
occurrence, fact, condition, change, development or effect ("EVENT") that has
had or could reasonably be expected to have a Target Material Adverse Effect
(except for (A) any decrease in monthly average revenues, as determined based on
generally accepted accounting principles ("GAAP"), of Target and the Target
Subsidiaries (other than CS and its Subsidiaries (the "CS SUBSIDIARIES")) of no
more than 5.5% per month, subject to adjustment by percentage increase or
decrease of 0.7% for seasonal trends (e.g., college population subscribers), (B)
deviations of cash flow from operations of Target and the Target Subsidiaries
(other than CS and the CS Subsidiaries) of 25% or less on a month-to-month basis
as compared to cash flow from operations projected in the budget of Target dated
March 22, 1999 for the period from April 1, 1999 to October 31, 2000 delivered
by Target pursuant to that certain Note Purchase Agreement dated as of October
14, 1998, a copy of which budget has been delivered to Acquiror (the "TARGET
APPROVED BUDGET")), (C) any decrease in monthly average GAAP-based revenues of
CS and the CS Subsidiaries of no more than 5.5% per month, subject to adjustment
by percentage increase or decrease of 0.7% for seasonal trends (e.g., college
population subscribers), and (D) deviations of cash flow from operations of CS
and the CS Subsidiaries of 25% or less on a month-to-month basis as compared to
cash flow from operations projected in the budget of CS dated April 20, 1999
(the "CS APPROVED BUDGET"), a copy of which has been delivered to Acquiror);
(ii) any declaration, payment or setting aside for payment of any dividend
(except to Target or a Target Subsidiary wholly owned by Target) or other
distribution or any redemption, purchase or other acquisition of any shares of
capital stock or securities of or interest in Target or any Target Subsidiary;
(iii) any return of any capital or other distribution of assets to shareholders
of Target or any Target Subsidiary (except to Target or a Target Subsidiary
wholly owned by Target); (iv) other than in the ordinary course of business and
consistent with the Target Approved Budget, with respect to Target and any
Target Subsidiary other than CS and the CS Subsidiaries, and the CS Approved
Budget, with respect to CS and the CS Subsidiaries, any investment of a capital
nature by the purchase of any property or assets by Target or any Target
Subsidiary; (v) any acquisition (by merger, consolidation, acquisition of stock
or assets or otherwise) of any person or business; (vi) any sale, disposition,
pledge,
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mortgage or other transfer of assets or properties of Target or any Target
Subsidiary other than in the ordinary course of business consistent with past
practice or having a net book value in excess of $250,000 individually or
$500,000 in the aggregate; (vii) any action or agreement or undertaking by
Target or any Target Subsidiary to take any action that, if taken or done on or
after the date hereof, would result in a breach of Section 4.1, below; (viii)
any change in accounting methods or practices or any change in depreciation or
amortization policies or rates of or applicable to Target or any Target
Subsidiary; (viii) any employment, severance or consulting agreement entered
into by Target or any Target Subsidiary with any shareholder, officer, director,
agent, employee or consultant of Target or any Target Subsidiary or any
amendment or modification to, or termination of, any current employment,
severance or consulting agreement to which Target or any Target Subsidiary is a
party or by which it is bound; (ix) any forgiveness, cancellation, compromise,
settlement, waiver or release of any debts, claims, rights or Litigation; (x)
any agreement, authorization or commitment to take, whether in writing or
otherwise, any action which, if taken prior to the date hereof, would have made
any representation or warranty of Target in this Agreement untrue or incorrect
in any material respect; or (xi) any failure by Target or any Target Subsidiary
to conduct its business in the ordinary course consistent with past practice.
2.10 COMPLIANCE WITH LAWS. Other than as may be set forth on SCHEDULE
2.10, the business of Target and each Target Subsidiary has been operated in
compliance with all Laws applicable thereto, except for any instances of
non-compliance which do not and would not have a Target Material Adverse Effect.
2.11 PERMITS, FCC LICENSES; CHANNEL LEASES; SYSTEM AGREEMENTS; THE SYSTEMS;
INTERFERENCE; HOUSEHOLDS. Target and the Target Subsidiaries have all permits,
certificates, licenses, approvals, tariffs and other authorizations required in
connection with the operation of their respective businesses (collectively,
"TARGET PERMITS"), (ii) neither Target nor any Target Subsidiary is in violation
of any Target Permit, and (iii) no proceedings are pending or, to the knowledge
of Target, threatened, to revoke or limit any Target Permit, except, in the case
of clause (i) or (ii) above, those the absence or violation of which do not and
would not have a Target Material Adverse Effect. Without limiting the generality
of the foregoing:
(a) SCHEDULE 2.11(A) sets forth a description of each of the markets in
which Target and each of its Target Subsidiaries has a System.
(b) SCHEDULE 2.11(B) lists all Channel Leases by name of underlying lessee
and the monthly payment obligations thereunder. Except as set forth in SCHEDULE
2.11(B), (A) each Channel Lease constitutes a legal, valid, and binding
obligation of the parties thereto and is in full force and effect and
enforceable in accordance with its terms, subject to the Enforceability
Exceptions, and materially complies with all applicable Laws and has been filed
with the FCC, to the extent required by the FCC Rules, and no other Consent of
any Governmental Authority is required to enable Target or any of the Target
Subsidiaries to operate under such Channel Lease to recognize the benefits
thereunder, or to comply with applicable Laws; (B) none of Target or any of the
Target Subsidiaries has assigned its rights and interests under any Channel
Lease to any other Person; (C) none of Target or any of the Target Subsidiaries
is in material breach or default under any such Channel Lease, which breach or
default could result in the termination, impairment, or forfeiture of any rights
under or any payments being made with respect to any such Channel Lease, nor has
an event occurred with respect to any Channel Lease which (whether with or
without notice, the lapse of time, or the happening or occurrence of any other
event) would constitute a breach or default under such Channel Lease; (D) to the
knowledge of Target, no third party has any rights to assert any interest in any
Channel Lease or the rights and benefits granted to Target or any of the Target
Subsidiaries pursuant thereto; (E) there are no contractual restrictions
relating to any such Channel Lease that reasonably could be expected to
materially adversely affect or delay the collocation of the Channels (as
hereinafter defined) at their respective Collocation Sites (as hereinafter
defined) or the implementation of digital technology or
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Alternative Use (as hereinafter defined) services; (F) there are no material
provisions of any such Channel Lease that are the subject of negotiation, nor
has any party to any such Channel Lease requested the renegotiation of any
material term thereof; (G) none of the Channel Leases contain a put or call
option with respect to the subject matter thereof; and (H) none of the Channel
Leases contains any provisions granting the other party thereto the right to
terminate the Channel Leases upon, or otherwise limiting or adversely affecting
the ability of Acquiror or any of its affiliates or associates to effect, a
change in control of Target or any of the Target Subsidiaries, including,
without limitation, any acquisition of Target Common Stock by Acquiror or any of
its affiliates or associates, or the execution and delivery of this Agreement or
the Target Ancillary Agreements or the consummation of the transactions
contemplated hereby and thereby. Except as set forth on SCHEDULE 2.11(B), upon
any such change in control and upon the closing of the transactions contemplated
by this Agreement, all such Channel Leases shall continue in force and effect in
accordance with their terms without penalty, acceleration or rights of early
termination and Acquisition Subsidiary will have the sole right to use the
transmission capacity of the FCC License under each of the Channel Leases (other
than the transmission capacity expressly reserved by such Channel Lease for the
holder of an FCC License). Target has delivered or made available to Acquiror
complete and accurate copies of each of the Channel Leases and none of such have
been amended in any respect.
(c) SCHEDULE 2.11(C) lists all FCC Licenses and applications for FCC
Licenses. Except as set forth in SCHEDULE 2.11(C), (A) each of such FCC Licenses
has been duly and validly issued and is enforceable in accordance with its
terms, subject to the Enforceability Exceptions, and is in full force and
effect; (B) neither Target nor any of the Target Subsidiaries has assigned its
rights and interest under any of the FCC Licenses or any application for an FCC
License; (C) neither Target, any of the Target Subsidiaries nor any lessor under
any Channel Lease, as the case may be, is in violation of the terms under the
corresponding FCC License, which violation could result in the termination or
forfeiture of any rights under, or any payments being made with respect to, such
FCC License, nor has an event occurred with respect to any of the FCC Licenses
which (whether with or without notice, the lapse of time, or the happening or
occurrence of any other event) would constitute such a violation of the terms of
such FCC License that could result in the termination or forfeiture of such FCC
License; (D) to the knowledge of Target, except with respect to the lessors
under the Channel Leases, no third party has any rights to assert any interest
in any of the FCC Licenses or applications for FCC Licenses; and (E) there are
no contractual restrictions relating to any of the FCC Licenses which reasonably
could be expected to materially adversely affect the collocation of the Channels
that are the subject thereof at their respective Collocation Site (as
hereinafter defined) or the implementation of an Alternative Use (as hereinafter
defined). Upon a change in control of Target or any of the Target Subsidiaries,
including, without limitation, any acquisition of Target Common Stock by
Acquiror or any of its affiliates or associates, or the execution and delivery
of this Agreement or the Target Ancillary Agreements or the consummation of the
transactions contemplated hereby and thereby, all such FCC Licenses shall
continue in full force and effect in accordance with their terms without
penalty, acceleration or rights of termination and Acquisition Subsidiary will
have full rights and benefits under and to the FCC Licenses. Target has
delivered or made available to Acquiror complete and accurate copies of each of
the FCC Licenses and none of them have been amended in any respect.
(d) SCHEDULE 2.11(D) accurately lists, with respect to each of the Systems,
all Channels, and accurately describes the following:
(i) the status of each FCC License, including (A) the expiration date of
the license, (B) the renewal deadline and any pending construction deadline
and the status of compliance therewith (including whether one or more
extensions of the filing deadline have been requested or obtained), (C) the
status of any pending applications (including assignment and transfer of
control applications) including whether the application has been accepted
for filing by the FCC and any pending deadline for filing timely petitions
to deny such FCC applications, (D) whether there are
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any threatened or pending interference issues, petitions to deny, informal
objections, competing or conflicting applications, outstanding no-objection
letters, comments or waiver requests, and (E) with respect to any licensed
service areas of Target or any of the Target Subsidiaries that otherwise
qualify as protected service areas pursuant to 47 C.F.R. Section 21.902(d),
whether there are any currently pending FCC applications that were also
pending on September 9, 1983 that Target has identified as causing harmful
interference to its service area;
(ii) the status of each Collocation Application (as hereinafter
defined), Booster Application (as hereinafter defined) and Alternative Use
Application (as hereinafter defined) and any amendments thereto, including
(A) the relevant Collocation Site or other transmission site and proposed
technical parameters and conditions for analog and digital operations, (B)
whether the application has been accepted for filing by the FCC, (C) whether
there are any threatened or pending interference issues, petitions to deny,
informal objections, competing or conflicting applications, outstanding
no-objection letters, outstanding consent letters, comments or waiver
requests, and (D) with respect to any licensed service areas of Target or
any of the Target Subsidiaries that otherwise qualify as protected service
areas pursuant to 47 C.F.R. Section 21.902(d), whether there are any
currently pending FCC applications that were also pending on September 9,
1983 that Target has identified as causing harmful interference to its
service area; and
(iii) the market trials and operations that Target or any of the Target
Subsidiaries are conducting, or intend to conduct, pursuant to the Target
Approved Budget, with respect to Target and any Target Subsidiary other than
CS and the CS Subsidiaries, and the CS Approved Budget, with respect to CS
and the CS Subsidiaries, with respect to Alternative Uses of the Channels or
the Systems and the relevant authorizations used, or to be used, in
conjunction with such trial and operations and the conditions contained
therein.
(e) Complete and correct copies of all of the Target Permits, including,
without limitation, Booster Applications, Collocation Applications, Alternative
Use Applications and amendments thereto (with the FCC file date stamped
thereon), FCC Licenses and material related thereto, including pending
applications filed with the FCC relating to the Systems and other Target Permits
owned, held or possessed by Target or any of the Target Subsidiaries have been
provided to Acquiror.
(f) Except as set forth on SCHEDULE 2.11(F) and except for Channel Licenses
held by third parties, with respect to each of the Systems, all of the assets,
Target Permits and System Agreements relating to each System are owned by one or
more of Target and the Target Subsidiaries.
(g) Except as disclosed in SCHEDULE 2.11(G), (i) Target and each of the
Target Subsidiaries have obtained and possess all System Agreements, patents,
copyrights, certificates of confirmation, licenses, permits, trademarks, and
trade names, or rights thereto, necessary to conduct its business as currently
conducted by Target and each of the Target Subsidiaries and none of Target or
any of the Target Subsidiaries is in violation of any valid rights of others
with respect to any of the foregoing; (ii) no other license, permit or franchise
is necessary to the operation by Target or any of the Target Subsidiaries of the
Systems as currently conducted by Target and each of its Target Subsidiaries;
and (iii) Target and each of the Target Subsidiaries have obtained and possess
or applied for all licenses, and have obtained and possess all leases, conduit
use, equipment rental and microwave or satellite relay agreements necessary for
the operation of the Systems as required by the System Agreements.
(h) Except as set forth on SCHEDULE 2.11(H), neither any of Target, any of
the Target Subsidiaries, nor any Licensee of a Channel has contractually
accepted or will contractually accept any electrical interference from any
source that is likely to result in material adverse electrical interference to
any of the Channels in any of the Systems now operating or expected to be
operated, including the BTA Authorizations (as hereinafter defined) or any newly
licensed Channel in any BTA (as hereinafter defined) in which any System
operates or Target or any of the Target Subsidiaries expect to operate.
A-21
Except as set forth in SCHEDULE 2.11(H), neither Target nor any of the Target
Subsidiaries has filed a petition currently pending before the FCC against any
application filed with the FCC by a third party applicant and no third party has
filed a petition currently pending before the FCC against any application filed
with the FCC by Target or any of the Target Subsidiaries.
(i) Except as set forth in SCHEDULE 2.11(I), (i) each Collocation
Application and Other Application (as hereinafter defined) complies with the FCC
rules (including the interference protection requirements), has been accepted
for filing by the FCC, and cut-off from competing and conflicting applications;
(ii) the deadline for filing timely petitions to deny each Collocation
Application and each Other Application has lapsed; (iii) there are no threatened
or pending petitions to deny, informal objections, competing or conflicting
applications, outstanding no-objection letters, comments, petitions for
reconsideration, petitions for review or waiver requests relating to such
Collocation Applications and Other Applications; and (iv) a protected service
area for the FCC License has been granted or requested. For purposes hereof, (i)
a "COLLOCATION APPLICATION" shall mean any application filed with, or granted
by, the FCC to authorize the operation of the facilities associated with each
FCC License at a common transmitter site with other ITFS (as hereinafter
defined) and Multichannel Multipoint Distribution Service and Multipoint
Distribution Service stations pursuant to common technical parameters of the FCC
License and (ii) "OTHER APPLICATION" shall mean any other applications, in
addition to Collocation Applications, filed with or granted by the FCC to
authorize the provision of digital services and/or two-way services on the
facilities associated with each FCC License.
(j) Except as set forth in SCHEDULE 2.11(J), all regulatory fees and
expenses due and payable associated with the FCC Licenses have been paid to the
FCC, including all fees and costs associated with the FCC Licenses held by the
Target or any of the Target Subsidiaries to provide MMDS (as hereinafter
defined) or MDS (as hereinafter defined) service in BTAs. SCHEDULE 2.11(J)
discloses any discounts or bidding credits that the Target or any of the Target
Subsidiaries received from the FCC in conjunction with the licensing of the BTA
Authorizations.
(k) SCHEDULE 2.11(K) lists the total number of households for each BTA in
which Target or any of the Target Subsidiaries has been granted or is leasing an
FCC License and describes any material assumptions for arriving at such
determinations.
(l) Except as disclosed on SCHEDULE 2.11(L), all FCC Licenses are in full
force and effect and there are no outstanding adverse judgments, injunctions,
decrees or orders that have been issued by the FCC against the Target or any
Target Subsidiary or affiliate thereof or the holder of an FCC License and there
are no pending or threatened complaints, investigations, inquiries or
proceedings by or before the FCC or other Governmental Authority or any actions
or events that (i) could result in the revocation, cancellation, adverse
modification or non-renewal of any FCC License or the imposition of a material
fine or forfeiture, (ii) materially impair Target's or any of the Target
Subsidiaries' ability to develop or operate any of the Channels or Systems, or
(iii) otherwise result in a Target Material Adverse Change. The Systems,
Channels, FCC Licenses and related facilities are currently providing and, to
the knowledge of Target, have been providing service to the public (rather than
a test signal or color bar) and are being operated and/or developed in material
compliance with the respective FCC License and other Target Permits and with all
other Laws.
(m) Except as set forth on SCHEDULE 2.11(M), since January 1, 1996 all
material reports and other documents required to be filed with the FCC or other
Governmental Authority with respect to the Systems, Channels, FCC Licenses,
System Agreements and Channel Leases have been timely filed, including, without
limitation certifications of completion of construction. Notwithstanding
anything contained herein to the contrary, to the knowledge of Target, except as
set forth on SCHEDULE 2.11(M), there have been no failures to make filings with
the FCC or any Governmental Authority at any time that would reasonably be
likely to have a material adverse effect on any of the Channels, FCC Licenses,
System Agreements or Systems, or any of Target or any of the Target
Subsidiaries, or what would reasonably be likely to result in the imposition of
a material fine or forfeiture, including copyright filings, extension requests,
and reports required by Sections 21.11(a), 21.911 and 21.920 of the FCC Rules.
A-22
(n) As used in this Agreement, the following terms have the respective
meanings set forth below (such meanings to be equally applicable to both the
singular and plural forms of the term defined):
"ALTERNATIVE USE" means the provision of service other than Wireless Cable
Service through the use of, among others, ITFS, MDS, and MMDS channels,
including two-way transmission services and fixed or mobile telecommunications
services.
"ALTERNATIVE USE APPLICATION" means an application filed by Target or any of
the Target Subsidiaries or the Licensee of a Channel to provide an Alternative
Use, including an application for developmental authority, experimental
authority, or special temporary authority or any Booster Application requesting
to provide an Alternative Use.
"BOOSTER APPLICATION" means any application filed with, or granted by, the
FCC to authorize the operation of a booster station.
"BOOSTER LICENSE" means a license for a booster station.
"BTA" means basic trading area, as defined by Rand McNally and used by the
FCC in licensing MDS and MMDS channels pursuant to the competitive bidding
process.
"BTA AUTHORIZATION" means the Target Permit granted by the FCC to apply for
individual MDS and MMDS channels with a certain BTA.
"CHANNEL LEASES" means all leases to use transmission capacity held by or
for benefit of one or more of Target or any of the Target Subsidiaries of
transmission capacity on ITFS, MDS, or MMDS frequencies licensed by the FCC.
"CHANNEL LICENSE" means any Target Permits for a Channel granted by the FCC
to any one or more of Target or the Target Subsidiaries or leased to Target or
any of the Target Subsidiaries by a lessor of a Channel Lease, or any
application pending before the FCC for such Target Permit.
"CHANNELS" means the ITFS, MDS, or MMDS frequencies licensed, or expected to
be licensed, to one or more of Target or any of the Target Subsidiaries by the
FCC pursuant to an FCC License or made available to one or more of Target or any
of the Target Subsidiaries by an ITFS, MDS, or MMDS applicant, permittee,
conditional licensee or licensee pursuant to a Channel lease, including any
frequencies associated with any booster station, repeater station, response
station hub or any facility used to provide an Alternative Use.
"COLLOCATION SITE" means the site at which the facilities for the
corresponding Channel are, or are to be, collocated at a common transmitter site
with other Channels that are used to provide Wireless Telecommunications Service
(as hereinafter defined) on the System.
"FCC LICENSES" means the Target Permits, including, without limitation, any
Channel Licenses, Booster Licenses and any other related facility licenses and
construction permits, issued by the FCC to Target or any of the Target
Subsidiaries or any lessor under a Channel Lease, or that are the subject of an
application filed with the FCC by Target or any of the Target Subsidiaries or
any such lessor under a Channel Lease, to operate one or more of the Channels,
including, without limitation, any BTA Authorization, individual Target Permit
to construct or operate Channels within a BTA, and any Alternative Use permit.
"FCC RULES" means Title 47 of the Code of Federal Regulations, as amended at
any time and from time to time, and FCC decisions issued pursuant to the
adoption of such regulations.
"ITFS" means the Instructional Television Fixed Service, a class of
microwave frequencies licensed by the FCC pursuant to Part 74 of the FCC Rules.
"LICENSEE" means an applicant, permittee, conditional licensee, or licensee
of a facility regulated by the FCC.
A-23
"MDS" means the Multipoint Distribution Service, a domestic transmission
service licensed by the FCC pursuant to Part 21 of the FCC Rules.
"MMDS" means Multichannel Multipoint Distribution Service, a domestic
transmission service licensed by the FCC pursuant to Part 21 of the FCC Rules.
"SYSTEM AGREEMENTS" means, collectively, all FCC Licenses for Channels and
booster stations, Channel Leases, Tower Site Leases, programming agreements,
retransmission agreements, non-interference or cooperation agreements (excluding
no-objection letters issued in the ordinary course of business), equipment
agreements or instruments, licenses, permits, and other material agreements
pertaining to the transmission of video, voice, or data signals through wireless
cable transmission facilities, of each of Target and each of the Target
Subsidiaries now existing or hereafter acquired or obtained, relative to the
Channels or the construction and operation of the Systems.
"SYSTEMS" means the wireless telecommunications systems constructed and
operated by one or more of Target and each of the Target Subsidiaries for the
provision of Wireless Telecommunications Service.
"TOWER SITE LEASES" is defined in SECTION 2.19(B).
"WIRELESS CABLE SERVICE" means the provision of subscription video or
entertainment and additional programming services and services ancillary thereto
through the use of, among other, ITFS, MDS, and MMDS channels.
"WIRELESS TELECOMMUNICATIONS SERVICE" means any service that is permitted
under FCC rules and regulations or authorized by the FCC to be provided on or by
means of the transmission capacity on an ITFS, MDS, or MMDS channel, including
Wireless Cable Services and Alternative Use services.
2.12 FINDERS AND INVESTMENT BANKERS. Neither Target nor any of the Target
Subsidiaries nor any of their officers or directors or other affiliates has
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the acquisition of Target Common
Stock by Acquiror or any of its affiliates or associates, the Merger, the Target
Ancillary Agreements or the transactions contemplated hereby or thereby, other
than pursuant to the agreement with BT Alex. Brown Incorporated, an accurate and
complete copy of which has been provided to Acquiror.
2.13 CONTRACTS. SCHEDULE 2.13 attached hereto sets forth a complete and
accurate list of all material notes, bonds, mortgages, indentures, contracts,
leases, licenses, agreements, understandings, arrangements, commitments,
instruments, bids or proposals to which Target or any Target Subsidiary is a
party or is subject ("TARGET MATERIAL CONTRACT"). For purposes of this SECTION
2.13, a note, bond, mortgage, indenture, contract, lease, license, agreement,
understanding, arrangement, commitment, instrument, bid or proposal shall be
considered material if (i) it is with an affiliate or associate of Target or of
a Target Subsidiary or with a Target Minority Entity, (ii) it is required to be
described in or filed as an exhibit to any document filed under the Securities
Act or the Securities Exchange Act by an issuer subject thereto, (iii) the
financial obligation of Target or a Target Subsidiary thereunder or applicable
to the assets or properties of Target or a Target Subsidiary could exceed
$250,000, (iv) it provides for recurring monthly revenues to Target or a Target
Subsidiary in excess of $20,000, (v) it includes any exclusivity or
non-competition restrictions applicable to Target or a Target Subsidiary, (vi)
it is for the purchase or sale of any assets otherwise than in the ordinary
course of business, or (vii) it is a collective bargaining or similar agreement
or an agreement relating to which employees of Target or any of the Target
Subsidiaries are represented by a union in their employment relationship with
Target and any of the Target Subsidiaries. Target has made available to Acquiror
true and accurate copies of all Target Material Contracts. Target Material
Contracts are valid and binding and are in full force and effect and enforceable
in accordance with their respective terms (assuming the other parties thereto
are bound, as to which Target has no basis to believe otherwise), subject to the
Enforceability
A-24
Exceptions. Any and all transactions between or involving Target or a Target
Subsidiary and an affiliate or associate thereof were entered into in the
ordinary course of business and are upon fair and reasonable terms not
materially less favorable than Target or such Target Subsidiary could obtain or
become entitled to in an arm's-length transaction with a person that is not an
affiliate or an associate. Except as set forth in SCHEDULE 2.6(B) attached
hereto, (i) no Consent of any person is needed in order that each such Target
Material Contract shall continue in full force and effect in accordance with its
terms without penalty, acceleration or rights of early termination by reason of
any change of control of Target or any of the Target Subsidiaries, including,
without limitation, any acquisition of Target Common Stock by Acquiror or any of
its affiliates or associates, or the execution, delivery or performance of this
Agreement and the Target Ancillary Agreements or the consummation of the
transactions contemplated hereby or thereby, and (ii) neither Target nor any
Target Subsidiary is in violation or breach of or default under any such Target
Material Contract, nor to Target's knowledge is any other party to any such
Target Material Contract in violation or breach of or default under any such
Target Material Contract.
2.14 EMPLOYEE BENEFIT PLANS.
(a) Except as set forth in SCHEDULE 2.14 attached hereto, there are no
Benefit Plans (as defined below) maintained or contributed to by Target or a
Target Subsidiary under which Target, a Target Subsidiary or the Surviving
Corporation could incur any liability. A "BENEFIT PLAN" shall include (i) an
employee benefit plan as defined in SECTION 3(3) of the Employee Retirement
Income Security Act of 1974, as amended, together with all regulations
thereunder ("ERISA"), even if, because of some other provision of ERISA, such
plan is not subject to any or all of ERISA's provisions, and (ii) whether or not
described in the preceding clause, (a) any pension, profit sharing, stock bonus,
deferred or supplemental compensation, retirement, thrift, stock purchase, stock
appreciation or stock option plan, or any other compensation, welfare, fringe
benefit or retirement plan, program, policy, course of conduct, understanding or
arrangement of any kind whatsoever, whether formal or informal, oral or written,
providing for benefits for or the welfare of any or all of the current or former
employees or agents of Target or a Target Subsidiary or their beneficiaries or
dependents, (b) a multi-employer plan as defined in Section 3(37) of ERISA (a
"MULTI-EMPLOYER PLAN"), or (c) a multiple employer plan as defined in Section
413 of the Code.
(b) With respect to each Benefit Plan (where applicable): Target has made
available to Acquiror complete and accurate copies of (i) all plan and trust
texts and agreements, insurance contracts and other funding arrangements; (ii)
annual reports on the Form 5500 series for the last three (3) years; (iii)
financial statements and/or annual and periodic accountings of plan assets for
the last three (3) years; (iv) the most recent determination letter received
from the Internal Revenue Service ("IRS"); (v) actuarial valuations for the last
three (3) years; and (vi) the most recent summary plan description as defined in
ERISA.
(c) With respect to each Benefit Plan while maintained or contributed to by
Target or a Target Subsidiary: (i) if intended to qualify under Code Sections
401(a) or 403(a), such Benefit Plan has received a favorable determination
letter from the IRS that it so qualifies, and its trust is exempt from taxation
under Code Section 501(a) and nothing has since occurred to cause the loss of
the Benefit Plan's qualification; (ii) except for payment of benefits made in
the ordinary course of the plan administration, no event has occurred and there
exists no circumstance under which Target, a Target Subsidiary or the Surviving
Corporation could incur material liability under ERISA, the Code or otherwise;
(iii) no accumulated funding deficiency as defined in Code Section 412 has
occurred or exists; (iv) no material non-exempt prohibited transaction as
defined under ERISA and the Code has occurred; (v) no reportable event as
defined in Section 4043 of ERISA has occurred; (vi) all contributions and
premiums due have fully been made and paid on a timely basis; and (vii) except
as set forth on SCHEDULE 2.14 attached hereto, all contributions made or
required to be made under any Benefit Plan meet the requirements for
deductibility under the Code, and all contributions accrued
A-25
prior to the Effective Time which have not been made have been properly recorded
on the Target Financial Statements.
(d) No Benefit Plan of Target or a Target Subsidiary is a defined benefit
pension plan subject to Title IV of ERISA or Section 412 of the Code. Each of
such Benefit Plans has been maintained in compliance with its terms and all
applicable Law, except where the failure to do so would not result in a Target
Material Adverse Effect or a Surviving Corporation Material Adverse Effect (as
hereinafter defined). Neither Target nor any of the Target Subsidiaries
contributes to, or has any outstanding liability with respect to, any
Multi-employer Plan.
(e) With respect to each Benefit Plan which is a welfare plan (as defined
in ERISA Section 3(1)): (i) any liability for medical or death benefits with
respect to current or former employees beyond their termination of employment is
set forth in the Target Financial Statements (or footnotes thereto) to the
extent required to be so set forth by applicable accounting principles; (ii)
there are no reserves, assets, surplus or prepaid premiums under any such plan;
(iii) except as set forth in SCHEDULE 2.14 attached hereto, no term or provision
of any such plan prohibits the amendment or termination thereof; and (iv) Target
and the Target Subsidiaries have complied with Code Section 4980B, except for
any deviations from the foregoing which do not and would not have a Target
Material Adverse Effect or a Surviving Corporation Material Adverse Effect.
(f) Except as set forth in SCHEDULE 2.14 attached hereto, the consummation
of the Merger or the other transactions contemplated by this Agreement or the
Target Ancillary Agreements or any change of control of Target or any of the
Target Subsidiaries, including, without limitation, any acquisition of Target
Common Stock by Acquiror or any of its affiliates or associates, will not,
either alone or in conjunction with another Event: (i) entitle any individual to
severance pay, or (ii) accelerate the time of payment or vesting of benefits or
increase the amount of compensation or benefits due to any individual.
2.15 TAXES AND TAX RETURNS.
(a) Except as disclosed in SCHEDULE 2.15 attached hereto, Target and each
of the Target Subsidiaries has timely filed, or caused to be timely filed, all
federal, state, local and foreign income, gross receipts, sales, use, property,
production, payroll, franchise, withholding, employment, social security,
license, excise, transfer, gains, and other tax returns or reports required to
be filed by it (any of the foregoing being referred to herein as a "TAX
RETURN"), and each such Tax Return is true, correct and complete, and further,
Target and each of the Target Subsidiaries has paid, collected or withheld, or
caused to be paid, collected or withheld, all taxes and governmental charges,
assessments and contributions of any nature whatsoever including, but not
limited to, any related penalties, interest and liabilities (any of the
foregoing being referred to herein as a "TAX"), required to be paid, collected
or withheld, other than such Taxes for which adequate reserves in the Target
Financial Statements have been established or which are being contested in good
faith and have been disclosed in writing to Acquiror prior to the date of this
Agreement. Except as set forth in SCHEDULE 2.15 attached hereto, there are no
claims or assessments pending against Target or any Target Subsidiary for any
alleged deficiency in any Tax, and Target does not know of any threatened Tax
claims or assessments against Target or any Target Subsidiary (other than those
for which adequate reserves in the Target Financial Statements have been
established or which are being contested in good faith and have been disclosed
in writing to Acquiror prior to the date of this Agreement). Except as set forth
in SCHEDULE 2.15 attached hereto, neither Target nor any Target Subsidiary has
made an election under Section 338 of the Code or has taken any action that
would result in any Tax liability of Target or any Target Subsidiary as a result
of a deemed election within the meaning of Section 338 of the Code. Except as
set forth in SCHEDULE 2.15 attached hereto, neither Target nor any Target
Subsidiary has any waivers or extensions of any applicable statute of
limitations to assess any Taxes. Except as set forth in SCHEDULE 2.15 attached
hereto, there are no outstanding requests by Target or a Target Subsidiary for
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any extension of time within which to file any Tax Return or within which to pay
any Taxes shown to be due on any Tax Return. Except as set forth on SCHEDULE
2.15 attached hereto, no taxing authority is conducting or has notified or, to
the knowledge of Target, has threatened Target or any Target Subsidiary that it
intends to conduct, an audit of any prior Tax period of Target or any of its
past or present subsidiaries. Except as disclosed in SCHEDULE 2.15 attached
hereto, neither Target nor any Target Subsidiary has ever been an "S"
corporation under the Code.
(b) Neither Target nor any Target Subsidiary is a party to any Tax sharing
agreements or similar arrangements with respect to or involving Target or a
Target Subsidiary.
(c) Neither Target nor any Target Subsidiary has made or become obligated
to make, or will, as a result of the transactions contemplated by this
Agreement, make or become obligated to make, any "excess parachute payment" as
defined in Section 280G of the Code.
(d) Neither Target nor any Target Subsidiary is or has been a United States
real property holding company (as defined in Section 897(c)(2) of the Code)
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(e) Neither Target nor any Target Subsidiary is a person other than a
United States person within the meaning of the Code.
(f) None of the assets of Target or of any Target Subsidiary is property
which Target or any Target Subsidiary is required to treat as being owned by any
other person pursuant to the so-called "safe harbor lease" provisions of former
Section 168(f)(8) of the Code.
(g) Target and each Target Subsidiary have disclosed on their federal
income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income tax liability within the meaning of
Section 6662(d) of the Code.
(h) There are no liens for Taxes on the assets of Target or any Target
Subsidiary except for statutory liens for current Taxes not yet due and payable.
(i) All elections with respect to Taxes affecting Target and the Target
Subsidiaries are set forth in SCHEDULE 2.15 attached hereto or, with respect to
elections made on or before March 31, 1999, are reflected in the Tax Returns of
Target filed and provided to Acquiror prior to the date of this Agreement.
Neither Target nor any Target Subsidiary: (i) has made or will make a deemed
dividend election under former Treas. Reg. Section 1.1502-32(f)(2) or a consent
dividend election under Section 565 of the Code; (ii) has consented at any time
under Section 341(f)(l) of the Code to have the provisions of Section 341(f)(2)
of the Code apply to any disposition of the assets of Target or any Target
Subsidiary; (iii) has agreed, or is required, to make any adjustment under
Section 481(a) of the Code by reason of a change in accounting method or
otherwise; (iv) has made an express election, or is required, to treat any asset
of Target or any Target Subsidiary as owned by another person for federal income
tax purposes or as tax-exempt bond financed property or tax-exempt use property
within the meaning of Section 168 of the Code; or (v) has made any of the
foregoing elections or is required to apply any of the foregoing rules under any
comparable state, foreign or local income Tax provision.
(j) Target and the Target Subsidiaries are not and have never been
includible corporations in an affiliated group of corporations, within the
meaning of Section 1504 of the Code, other than in the affiliated group of which
Target is the common parent corporation.
(k) Except as set forth in SCHEDULE 2.15 attached hereto, the consolidated
net operating losses, net capital losses, foreign tax credits, investment and
other tax credits set forth in the Target Financial Statements are not subject
to any limitations under Section 382, Section 383 or the Treasury regulations
(whether temporary, proposed or final) under Section 1502 of the Code.
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(l) Except as set forth in SCHEDULE 2.15 attached hereto, neither Target
nor any Target Subsidiary is a partner or member in or subject to any joint
venture, partnership, limited liability company or other arrangement or contract
that is or could be treated as a partnership for federal income tax purposes.
(m) Except as set forth in SCHEDULE 2.15 attached hereto, neither Target
nor any Target Subsidiary is a party to or otherwise subject to any arrangement
having the effect of or giving rise to the recognition of a deduction or loss
before the Effective Time, and a corresponding recognition of taxable income or
gain after the Effective Time, or any other arrangement that would have the
effect of or give rise to the recognition of taxable income or gain by Target or
a Target Subsidiary after the Effective Time without the receipt of or
entitlement to a corresponding amount of cash.
2.16 LIABILITIES. From December 31, 1998, through the date of this
Agreement, except as expressly disclosed in the Target Securities Filings made
available by Target to Acquiror prior to the date of this Agreement or in
SCHEDULE 2.16 attached hereto, Target and the Target Subsidiaries do not have
any direct or indirect indebtedness, liability, claim, loss, damage, deficiency,
obligation or responsibility, fixed or unfixed, choate or inchoate, liquidated
or unliquidated, secured or unsecured, accrued, absolute, contingent or
otherwise, whether or not of a kind required by generally accepted accounting
principles to be set forth in a financial statement other than those incurred in
the ordinary course of business and in an amount not in excess of $500,000
individually or $2,000,000 in the aggregate. Except as set forth on SCHEDULE
2.16 attached hereto or reflected in the Target Securities Filings made
available by Target to Acquiror prior to the date of this Agreement, as of the
date of this Agreement, neither Target nor the Target Subsidiaries have any (i)
obligations in respect of borrowed money, (ii) obligations evidenced by bonds,
debentures, notes or other similar instruments, (iii) obligations which would be
required by generally accepted accounting principles to be classified as
"capital leases," (iv) obligations to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business and payable not more than twelve (12) months from the date of
incurrence, and (v) any guaranties of any obligations of any other person.
2.17 ENVIRONMENTAL MATTERS. As of the date of this Agreement, (i) Target
and the Target Subsidiaries are in compliance in all material respects with all
applicable Environmental Laws (as hereinafter defined), (ii) there is no civil,
criminal or administrative judgment, action, suit, demand, claim, hearing,
notice of violation, investigation, proceeding, notice or demand letter pending
or, to the knowledge of Target, threatened against Target, a Target Subsidiary
or any of their properties pursuant to Environmental Laws, and (iii) except as
set forth on SCHEDULE 2.17 attached hereto, there are no past or present Events
which reasonably may be expected to prevent compliance with, or which have given
rise to or will give rise to material liability on the part of Target or a
Target Subsidiary under, Environmental Laws. As used herein the term
"ENVIRONMENTAL LAWS" shall mean Laws relating to pollution, chemical usage,
waste or emission control, the management, generation, presence or disposal of
asbestos, hazardous or toxic wastes or substances, the protection or remediation
of the environment, environmental activity, product stewardship or public health
and safety.
2.18 INTELLECTUAL PROPERTY.
(a) For purposes of this Agreement, "INTELLECTUAL PROPERTY" shall mean all
U.S. and foreign patents, trademarks, service marks, trade names, copyrights,
franchises and similar rights of or used by Target or a Target Subsidiary, all
applications for any of the foregoing and all permits, grants and licenses or
other rights running to or from Target or any of the Target Subsidiaries
relating to any of the foregoing and any and all goodwill associated therewith.
Target or one of the Target Subsidiaries owns, or is licensed to, or otherwise
has, the full and exclusive rights to use all right, title and interest in, to
and under any and all Intellectual Property identified on SCHEDULE 2.18(A)(1)
and any and all goodwill associated therewith. Except as set forth on SCHEDULE
2.18(A)(2), Target or one of the Target Subsidiaries owns, or is licensed to
use, or otherwise has, legally enforceable rights to all of the
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Intellectual Property currently used or proposed to be used in, and necessary
for the conduct of the business of Target and the Target Subsidiaries as
presently or proposed to be conducted. The rights of Target and the Target
Subsidiaries in the Intellectual Property are, subject to the rights of any
licensor thereof, free and clear of any liens or other encumbrances and
restrictions and Target and the Target Subsidiaries have not received, as of the
date of this Agreement, notice of any adversely-held Intellectual Property of
any other person, or notice of any charge or claim of any person relating to
such Intellectual Property or any process or confidential information of Target
or any Target Subsidiary ("CLAIM NOTICE") and do not know of any basis for any
such charge or claim. Target, the Target Subsidiaries and their respective
predecessors, if any, have not conducted business at any time during the period
beginning five (5) years prior to the date hereof under any corporate, trade or
fictitious names other than their current corporate names. Target shall promptly
notify, and shall cause the Target Subsidiaries to promptly notify, Acquiror of
any Claim Notice received by Target or a Target Subsidiary after the date of
this Agreement. The business of each of Target and the Target Subsidiaries,
presently conducted, does not conflict with and, to the knowledge of Target, has
not been alleged to conflict with any patents, trademarks, trade names, service
marks, copyrights or other intellectual property rights of others. The execution
and delivery of this Agreement, the Target Ancillary Agreements, the
consummation of the transactions contemplated hereby and thereby and any change
of control of Target or any of the Target Subsidiaries, including, without
limitation, any acquisition of Target Common Stock by Acquiror or any of its
affiliates or associates, will not result in the loss or impairment of any of
the Intellectual Property rights or Target's or any Target Subsidiaries' right
to use any of the licensed Intellectual Property rights. To the knowledge of
Target, there are no third parties using any of the Intellectual Property rights
material to the business of Target or any Target Subsidiaries as presently
conducted.
(b) Without limiting the generality of paragraph (a) above, except as
disclosed in SCHEDULE 2.18(B), each of Target and the Target Subsidiaries owns,
or possesses valid rights to, all computer software programs that are material
to the conduct of the business of the Target and Target Subsidiaries. To
Target's knowledge, there are no infringement suits, actions or proceedings
pending or threatened against the Target or any Target Subsidiary with respect
to any software owned or licensed by the Target or any Target Subsidiary.
2.19 REAL ESTATE.
(a) Neither Target nor any of the Target Subsidiaries owns or has any
agreement or other right to acquire any real property as of the date of this
Agreement.
(b) SCHEDULE 2.19(B) attached hereto sets forth a true, correct and complete
schedule as of the date of this Agreement of all material leases, subleases,
easements, rights-of-way, licenses or other agreements under which Target or any
of the Target Subsidiaries uses or occupies, or has the right to use or occupy,
now or in the future, any real property or improvements thereon (the "TARGET
REAL PROPERTY LEASES"), including, without limitation, all agreements relating
to the location of towers and transmitters (the "TOWER SITE LEASES"). SCHEDULE
2.19(B) accurately and completely lists and sets forth a description (including
location of premises, term and assignability) of the Tower Site Leases and
office and studio space and the same constitute the only Tower Site Leases and
other leases necessary in connection with the conduct of business by Target and
any of the Target Subsidiaries as currently conducted. Each of Target and the
Target Subsidiaries enjoys quiet possession under all leases (including Tower
Site Leases) to which it is a party as lessee, and all of such leases are valid,
subsisting, and in full force and effect. Except as set forth in SCHEDULE
2.19(B), upon a any change of control of Target or the Target Subsidiaries,
including, without limitation, any acquisition of Target Common Stock by
Acquiror or any of its affiliates or associates, or the execution or delivery of
this Agreement and the Target Ancillary Agreements or the consummation of the
Merger or the transactions contemplated hereby or thereby, all such Target Real
Property Leases shall continue in full force and effect in accordance with their
terms, without penalty, acceleration or rights of early termination. Except for
the
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matters listed on said SCHEDULE 2.19(B), Target or a Target Subsidiary, as
indicated thereon, holds the leasehold estate under or other interest in each
Target Real Property Lease free and clear of all liens, encumbrances and other
rights of occupancy other than statutory landlords or mechanics' liens which
have not been executed upon.
(c) All of the existing towers owned by Target or any Target Subsidiaries
and, to the best of Target's knowledge, all of the other existing towers, used
in the operation of the Systems are obstruction-marked and lighted to the extent
required by, and in accordance with, the rules and regulations of the Federal
Aviation Administration (the "FAA") or the FCC. Appropriate notification to the
FAA has been filed for each tower where required by the rules and regulations of
the FAA or FCC.
2.20 CORPORATE RECORDS. The respective corporate record books of or
relating to Target and each of the Target Subsidiaries have been made available
to Acquiror by Target and contain materially accurate and complete records of
(i) all corporate actions of the respective shareholders and directors (and
committees thereof) of Target and the Target Subsidiaries, (ii) the Certificate
and/or Articles of Incorporation, By-Laws and/or other governing instruments, as
amended, of Target and the Target Subsidiaries, and (iii) the issuance and
transfer of stock of Target and the Target Subsidiaries. Except as set forth on
Schedule 2.20 attached hereto, neither Target nor any Target Subsidiary has any
of its material records or information recorded, stored, maintained or held off
the premises of Target and the Target Subsidiaries.
2.21 TITLE TO AND CONDITION OF PERSONAL PROPERTY. Target and each of the
Target Subsidiaries have good and marketable title to, or a valid leasehold
interest in, all material items of any personal property reflected in the Target
Financial Statements dated December 31, 1998, or currently used in the operation
of their respective businesses, and such property or leasehold interests are
free and clear of all liens, claims, charges, security interests, options, or
other title defects or encumbrances, except for property disposed of in the
ordinary course since the date thereof consistent with the provisions of SECTION
2.9, above, and such exceptions to title and liens, claims, charges, security
interests, options, title defects or encumbrances which do not and would not
have a Target Material Adverse Effect or interfere with the use and enjoyment of
such property and interests. As of the date of this Agreement, all such personal
property is in good operating condition and repair (ordinary wear and tear
excepted), is suitable for the use to which the same is customarily put by
Target or any Target Subsidiary, is, to the knowledge of Target, free from
inherent or latent manufacturing defects, and is free from all other material
defects and is of a quality and quantity presently usable in the ordinary course
of the operation of the business of Target and the Target Subsidiaries.
2.22 NO ADVERSE ACTIONS. Except as set forth on SCHEDULE 2.22 attached
hereto, there is no existing, pending or, to the knowledge of Target, threatened
termination, cancellation, limitation, modification or change in the business
relationship of Target or any of the Target Subsidiaries, with any supplier,
customer or other person except as are immaterial individually and in the
aggregate and are in the ordinary course of business. None of Target, any Target
Subsidiary or, to the knowledge of Target, any director, officer, agent,
employee or other person acting on behalf of any of the foregoing has used any
corporate funds for unlawful contributions, payments, gifts, entertainment or
other unlawful expenses relating to political activity, or made any direct or
indirect unlawful payments to governmental or regulatory officials or others.
2.23 LABOR MATTERS. Except as set forth on SCHEDULE 2.13 or SCHEDULE 2.23
attached hereto, neither Target nor any of the Target Subsidiaries has any
obligations, contingent or otherwise, under any employment, severance or
consulting agreement, collective bargaining agreement or other contract with a
labor union or other labor or employee group. To the knowledge of Target, as of
the date of this Agreement, there are no efforts presently being made or
threatened by or on behalf of any labor union with respect to the unionizing of
employees of Target or any Target Subsidiary. As of the date of this
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Agreement, there is no unfair labor practice complaint against Target or any
Target Subsidiary pending or, to the knowledge of Target, threatened before the
National Labor Relations Board or comparable agency; there is no labor strike,
dispute, slowdown or stoppage pending or, to the knowledge of Target, threatened
against or involving Target or any Target Subsidiary; no representation question
exists respecting the employees of Target or any Target Subsidiary; no grievance
or internal or informal complaint exists, no arbitration proceeding arising out
of or under any collective bargaining agreement is pending and no claim therefor
has been asserted; no collective bargaining agreement is currently being
negotiated by Target or any Target Subsidiary; and neither Target nor any Target
Subsidiary is experiencing any work stoppage, strike, slowdown or other labor
difficulty. As of the date of this Agreement, there has not been, and to the
knowledge of Target there will not be, any material adverse change in relations
with employees or agents of Target or any Target Subsidiary as a result of any
announcement or consummation of the transactions contemplated by this Agreement
or the Target Ancillary Agreements or any change of control of Target or the
Target Subsidiaries, including, without limitation, any acquisition of Target
Common Stock by Acquiror or any of its affiliates or associates. Target shall
promptly notify, and shall cause the Target Subsidiaries to promptly notify,
Acquiror upon knowledge by Target or a Target Subsidiary of the occurrence after
the date hereof of any matter referenced in this Section.
2.24 CHANGE OF CONTROL AGREEMENTS. Except as set forth in SCHEDULE 2.24,
neither the execution and delivery of this Agreement or the Target Ancillary
Agreements nor the consummation of the Merger or the other transactions
contemplated hereby or thereby, nor any change of control of Target or the
Target Subsidiaries, including without limitation, any acquisition of Target
Common Stock by Acquiror or any of its affiliates or associates will (either
alone or in conjunction with any other Event) result in, cause the accelerated
vesting or delivery of, or increase the amount of value of, any payment or
benefit to any director, officer or employee of Target or any Target Subsidiary.
Except as set forth in Schedule 2.24, without limiting the generality of the
foregoing, (x) no amount paid or payable by Target in connection with the Merger
or the other transactions contemplated by this Agreement or the Target Ancillary
Agreements, including accelerated vesting of options, (either solely as a result
thereof or as a result of such transactions in conjunction with any other event)
will be an "excess parachute payment" within the meaning of Section 280G of the
Code and (y) there are no agreements or arrangements on behalf of any officer,
director or employee providing for payment or other benefits to such person
contingent upon the execution of this Agreement or the Target Ancillary
Agreements or the transactions contemplated hereby or thereby or a transaction
involving a change control of the Target or the Target Subsidiaries, including,
without limitation, any acquisition of Target Common Stock by Acquiror or any of
its affiliates or associates.
2.25 INSURANCE. Target and each of the Target Subsidiaries has obtained
and maintains in full force and effect insurance with responsible and reputable
insurance companies or associations in such amounts, on such terms and covering
such risks, including fire and other risks insured against by extended coverage,
public liability insurance and insurance against claims for personal injury or
death or property damage occurring in connection with the activities of Target
or the Target Subsidiaries or any properties owned, occupied or controlled by
them, as is customary and prudent. Neither Target nor any of the Target
Subsidiaries has received notice of default under, or intended cancellation or
nonrenewal of, any policies of insurance. Neither Target nor any Target
Subsidiary has been refused any insurance for coverage by an insurance carrier
to which it has applied for insurance.
2.26 INFORMATION SUPPLIED. The Proxy Statement (as hereinafter defined) to
be mailed to the holders of Target Common Stock in connection with the
Shareholders' Meeting (as hereinafter defined) to be called to consider the
Merger at the date such document is first published, sent or delivered to the
holders of Target Common Stock or at any time prior to or during the pendency of
the Shareholders' Meeting, will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein,
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in light of the circumstances under which they were made, not misleading. The
Proxy Statement and any related schedules or other filings made with the SEC, as
contemplated hereby, will comply as to form and substance in all material
respects with the requirements of the Securities Exchange Act and the applicable
rules and regulations of the SEC thereunder and other applicable Laws.
Notwithstanding the foregoing, no representation or warranty is made by Target
with respect to statements made or incorporated by reference therein based on
information relating solely to Acquiror or Acquisition Subsidiary supplied by
Acquiror or Acquisition Subsidiary in writing expressly for inclusion or
incorporation by reference in the foregoing document.
2.27 TAKEOVER STATUTES. No "business combination," "fair price,"
"moratorium," "control share acquisition" or other similar antitakeover statute
or regulation enacted under state or federal laws in the United States (each a
"TAKEOVER STATUTE"), including, without limitation, Sections 33-840 et seq. of
the Connecticut Code (inasmuch as Target has taken all requisite corporate
action thereunder), applicable to Target or any of the Target Subsidiaries is
applicable to the Merger, this Agreement, the Target Ancillary Agreements or the
other transactions contemplated hereby or thereby or any change of control of
Target or the Target Subsidiaries, including, without limitation, any
acquisition of Target Common Stock by Acquiror or any of its affiliates or
associates.
2.28 TARGET RIGHTS PLAN. Under the Rights Agreement dated April 16, 1999,
between Target and ChaseMellon Shareholder Services LLC, as Rights Agent (the
"RIGHTS PLAN"), Acquiror will not become an "Acquiring Person", no "Stock
Acquisition Date" or "Distribution Date" will occur and the "Rights" will not
separate from the Target Common Stock (as such terms are defined in the Rights
Plan), and Target's shareholders will not be entitled to receive any benefits
under the Rights Plan as a result of the approval, execution or delivery of this
Agreement, the Target Ancillary Agreements or the consummation of the
transactions contemplated hereby or thereby or the execution, delivery or
performance of any other agreement to acquire, or any other acquisition of,
Target Common Stock by Acquiror or any affiliate or associate. As of the
Effective Time, the Rights Plan will terminate and the "Rights" thereunder will
be of no further force or effect.
2.29 YEAR 2000. (a) The Target has initiated a review and assessment of
the Year 2000 Problem (as hereinafter defined), has developed a plan for
addressing the Year 2000 Problem on a timely basis and is implementing such plan
on a timely basis. Except as would not reasonably be expected to have a Target
Material Adverse Effect, to the best knowledge of the Target after due inquiry,
none of the assets or equipment owned or utilized by Target or any of the Target
Subsidiaries will fail to perform because of, or due in any way to, a Year 2000
Problem. To the best knowledge of the Target based on responses to written
inquiries made by Target or otherwise based on information brought specifically
to the attention of the Target, no vendor, supplier or customer of Target or any
of the Target Subsidiaries is reasonably expected to experience Year 2000
Problem that, individually or in the aggregate, could constitute a Target
Material Adverse Effect. The term "YEAR 2000 PROBLEM" means the inability of any
hardware, software or process to recognize or correctly calculate dates on and
after January 1, 2000, or the failure of computer systems, products or services
to perform any of their intended functions in a proper manner in connection with
data containing any date on or after January 1, 2000.
(b) Target has made available to Acquiror Target's plan to address the Year
2000 Problem (the "YEAR 2000 PLAN"). To the Target's knowledge, the Year 2000
Plan will enable the Target and the Target Subsidiaries to be Year 2000
Compliant in a timely manner except as to matters which are not reasonably
likely to result in a Target Material Adverse Effect and the aggregate cost for
the Target and the Target Subsidiaries to become Year 2000 Compliant is
estimated to be $800,000. "YEAR 2000 COMPLIANT" means that (a) the products,
services, or other item(s) at issue accurately process, provide and/or receive
date/time data (including calculating, comparing, and sequencing), within, from,
into, and between centuries (including the twentieth and twenty-first centuries
and the years 1999 and 2000), including leap year calculations, and (b) neither
performance nor the functionality nor the supply of the products, services, and
other items at issue will be affected by dates/times prior to, on, after, or
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spanning January 1, 2000. The design of the products, services, and other items
at issue to ensure compliance with the foregoing warranties and representations
includes proper date/time data century recognition and recognition of 1999 and
2000, calculations that accommodate same century and multicentury formulae and
date/time values before, on, after, and spanning January 1, 2000, and date/ time
data interface values that reflect the century, 1999 and 2000.
2.30 TARGET OPTIONS. Upon the consummation of the Merger, each of Target's
outstanding Options to acquire shares of Target Common Stock shall, pursuant to
their terms as amended as contemplated hereby, if vested as of the Effective
Time, become converted into the right to receive an amount in cash equal to the
Option Consideration, as contemplated by SECTION 1.7, or, if unvested, shall
become converted into the right to receive an amount in cash equal to the Option
Consideration, as contemplated by SECTION 1.7, and shall become vested following
the Effective Time in accordance with their terms.
2.31 TRANSACTION WITH AFFILIATES. Except as set forth in SCHEDULE 2.31
(other than compensation and benefits received in the ordinary course of
business as an employee or director of Target or the Target Subsidiaries), no
director, officer or any other affiliate or associate of Target or any of the
Target Subsidiaries or any entity in which, to the knowledge of Target, any such
director, officer or other affiliate or associate, owns any beneficial interest
(other than a publicly held corporation whose stock is traded on a national
securities exchange or in the over-the-counter market and less than 1% of the
stock of which is beneficially owned by such persons), (A) has any interest in:
(i) any contract, arrangement or understanding with, or relating to the business
or operations of Target or any of the Target Subsidiaries; (ii) any loan,
arrangement, understanding, agreement or contract for or relating to
indebtedness of Target or any of the Target Subsidiaries, or (ii) any property
(real, personal or mixed), tangible or intangible, used or currently intended to
be used in, the business or operations of Target or any of the Target
Subsidiaries or (B) is an obligor under any notes receivable of Target or any of
the Target Subsidiaries.
2.32 NO EXISTING DISCUSSIONS. As of the date hereof, Target is not
engaged, directly or indirectly, in any negotiations or discussions with any
other party with respect to a Takeover Proposal (as hereinafter defined).
2.33 TELQUEST
(a) TelQuest Satellite Services LLC ("TELQUEST") is a limited liability
company duly organized, validly existing and in good standing under the laws of
Delaware and has all requisite limited liability company power and authority to
own, lease and operate its properties and to carry on its business. TelQuest is
in good standing to do business in each jurisdiction in which the character of
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified and in good standing would not have a Target Material Adverse
Effect. As of the date hereof, the authorized capitalization of TelQuest is as
set forth on SCHEDULE 2.33(A)(1) and each of Target and CS has a 28.34%
membership interest, subject to dilution as set forth on SCHEDULE 2.33(A)(2);
and all outstanding interests in TelQuest are duly authorized, validly issued
and fully paid and non-assessable and issued free of preemptive rights and in
compliance with applicable Laws. Except as set forth on SCHEDULE 2.33(A)(2),
there are no outstanding rights, reservations of shares, subscriptions,
warrants, puts, calls, unsatisfied preemptive rights, options or other
agreements of any kind relating to any of the interests in or any other security
of TelQuest, and there is no authorized or outstanding interest or other
security of any kind convertible into or exchangeable for any such interest or
other security.
(b) Except as set forth on SCHEDULE 2.33(B), TelQuest has no Subsidiaries,
and holds no direct or indirect capital stock or other interest in any other
person. The business, affairs, financial condition or results of operations are
not, and are not required to be, reported in the Target Financial Statements and
are not reflected in the Target Approved Budget or the CS Approved Budget,
except to the extent reported on an equity basis.
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(c) The execution and delivery of this Agreement and the Target Ancillary
Agreements, the consummation of the transactions contemplated hereby and thereby
and compliance by Target with any of the provisions hereof or thereof, and any
change of control of Target or any of the Target Subsidiaries, including,
without limitation, any acquisition of Target Common Stock by Acquiror or any of
its affiliates or associates, will not (i) conflict with or result in any breach
of any provision of any governing instruments of TelQuest or any of its
Subsidiaries ("TELQUEST SUBSIDIARIES"), (ii) require any Consent relating
directly or indirectly to TelQuest or any of the TelQuest Subsidiaries or result
in a violation or breach of, or constitute (with or without due notice or lapse
of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or augment the performance required) under any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
contract, lease, license, agreement, understanding, instrument, bid or proposal
or other obligation relating directly or indirectly to TelQuest or any of the
TelQuest Subsidiaries, or (iii) result in the creation or imposition of any lien
or encumbrance of any kind upon any of the assets of TelQuest or any of the
TelQuest Subsidiaries, or (iv) contravene any applicable Law currently in effect
to which TelQuest or any of the TelQuest Subsidiaries or any of its assets or
properties is subject.
(d) Except as set forth on SCHEDULE 2.33(D), neither Target nor any Target
Subsidiary has any direct or indirect obligation or liability, fixed or unfixed,
choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise, to invest, contribute, loan, borrow, sell,
assign, convey or otherwise transfer or dispose of, or to provide, purchase or
otherwise acquire, any funds, property or services, or make any payments, to or
from TelQuest or any of the TelQuest Subsidiaries or otherwise to directly or
indirectly participate in any transaction with or relating to TelQuest or any of
the TelQuest Subsidiaries, directly or indirectly. No Event relating to or in
connection with TelQuest or any of the TelQuest Subsidiaries, directly or
indirectly, does or could give rise to any direct or indirect indebtedness,
liability, claim, loss, damage, deficiency, obligation or responsibility of,
against or on the part of Target or any of the Target Subsidiaries, fixed or
unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured,
accrued, absolute, contingent or otherwise, whether or not of a kind required by
generally accepted accounting principles to be set forth in a financial
statement.
2.34 DISCLOSURE. All information and documents provided prior to the date
of this Agreement, and all information and documents subsequently provided, to
Acquiror or its representatives or lenders by or on behalf of Target in
connection with the transactions contemplated by this Agreement are or contain,
or will be or will contain as to subsequently provided information or documents,
true, accurate and complete information in all material respects with respect to
the subject matter thereof and are, or will be as to subsequently provided
information or documents, reasonably responsive to any specific request made by
or on behalf of Acquiror or its representatives or lenders.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND
CERTAIN COVENANTS OF ACQUIROR
Acquiror represents, warrants and/or covenants to and with Target as
follows:
3.1 ORGANIZATION AND GOOD STANDING. Acquiror is a corporation duly
organized and validly existing under the laws of the State of Georgia.
Acquisition Subsidiary is a corporation duly organized and validly existing
under the laws of the State of Connecticut. Acquiror and Acquisition Subsidiary
have all requisite corporate power and authority to own, lease and operate its
properties and to carry on their businesses as now being conducted, except where
the failure to have such power and authority would not have an Acquiror Material
Adverse Effect (as hereinafter defined). Acquiror and Acquisition Subsidiary are
duly qualified and in good standing to do business in each jurisdiction in which
the character of the property owned, leased or operated by it or the nature of
the business conducted by it
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makes such qualification necessary, except where the failure to be so duly
qualified and in good standing would not have an Acquiror Material Adverse
Effect. For purposes of this Agreement, "ACQUIROR MATERIAL ADVERSE EFFECT" shall
mean a material adverse effect on (i) the business, assets, condition (financial
or otherwise), properties, liabilities, prospects or the results of operations
of Acquiror and its subsidiaries (including Acquisition Subsidiary) taken as a
whole, (ii) the ability of Acquiror to perform its obligations set forth in this
Agreement and the Acquiror Ancillary Agreements (as hereinafter defined), or
(iii) the ability to timely consummate the transactions contemplated by this
Agreement and the Acquiror Ancillary Agreements.
3.2 AUTHORIZATION; BINDING AGREEMENT. Acquiror and Acquisition Subsidiary
have all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the other agreements and documents referred
to herein and to be executed in connection herewith to which Acquiror or
Acquisition Subsidiary is or will be a party or a signatory (the "ACQUIROR
ANCILLARY AGREEMENTS") and the consummation of the transactions contemplated
hereby and thereby including, but not limited to, the Merger have been duly and
validly authorized by the respective Boards of Directors of Acquiror and
Acquisition Subsidiary, as appropriate, and no other corporate proceedings on
the part of Acquiror or Acquisition Subsidiary are necessary to authorize the
execution and delivery of this Agreement and the Acquiror Ancillary Agreements
or to consummate the transactions contemplated hereby or thereby. This Agreement
has been duly and validly executed and delivered by each of Acquiror and
Acquisition Subsidiary and constitutes, and upon execution and delivery thereof
as contemplated by this Agreement, the Acquiror Ancillary Agreements will
constitute, the legal, valid and binding agreements of Acquiror and Acquisition
Subsidiary, enforceable against each of Acquiror and Acquisition Subsidiary in
accordance with its and their respective terms, subject to the Enforceability
Exceptions.
3.3 GOVERNMENTAL APPROVALS. No Consent from or with any Governmental
Authority on the part of Acquiror or Acquisition Subsidiary is required in
connection with the execution or delivery by Acquiror and Acquisition Subsidiary
of this Agreement and the Acquiror Ancillary Agreements or the consummation by
Acquiror and Acquisition Subsidiary of the transactions contemplated hereby or
thereby other than (i) filings with the SEC, state securities laws
administrators and the NASD and filing and recordation of appropriate merger
documents as required by the Connecticut Code, (ii) Consents from or with
Governmental Authorities, (iii) filings under the HSR Act, and (iv) those
Consents that, if they were not obtained or made, do not or would not have an
Acquiror Material Adverse Effect.
3.4 NO VIOLATIONS. The execution and delivery of this Agreement and the
Acquiror Ancillary Agreements, the consummation of the transactions contemplated
hereby and thereby and compliance by Acquiror and Acquisition Subsidiary with
any of the provisions hereof or thereof will not (i) conflict with or result in
any breach of any provision of the Certificate and/or Articles of Incorporation
or By-Laws or other governing instruments of Acquiror or Acquisition Subsidiary,
(ii) require any Consent under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or augment
the performance required) under any of the terms, conditions or provisions of
any Acquiror Material Contract (as hereinafter defined) or other obligation to
which Acquiror or the Acquisition Subsidiary is a party or by which any of them
or any of their properties or assets may be bound, (iii) result in the creation
or imposition of any lien or encumbrance of any kind upon any of the assets of
Acquiror or the Acquisition Subsidiary, or (iv) subject to obtaining the
Consents from Governmental Authorities referred to in SECTION 3.3, above,
contravene any Law currently in effect to which Acquiror or the Acquisition
Subsidiary or its or any of their respective assets or properties are subject,
except in the case of clauses (ii), (iii) and (iv), above, for any deviations
from the foregoing which do not or would not have an Acquiror Material Adverse
Effect. An "ACQUIROR MATERIAL CONTRACT" is any material note,
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bond, mortgage, indenture, contract, lease, license, agreement, understanding,
instrument, bid or proposal that is required to be described in or filed as an
exhibit to any reports, statements or registration statements filed, or required
be filed, by Acquiror pursuant to the Securities Act or the Securities Exchange
Act.
3.5 FINDERS AND INVESTMENT BANKERS. Neither Acquiror nor any of its
officers or directors has employed any broker or finder other than Donaldson,
Lufkin & Jenrette Securities Corporation or otherwise incurred any liability for
any brokerage fees, commissions or finders' fees in connection with the
transactions contemplated hereby.
3.6 INFORMATION SUPPLIED. None of the information relating solely to
Acquiror or Acquisition Subsidiary supplied or to be supplied by Acquiror or
Acquisition Subsidiary in writing expressly for inclusion or incorporation by
reference in the Proxy Statement (as hereinafter defined) will, at the date such
document is first published, sent or delivered to holders of Target Common Stock
or, at any time during the pendency of the Shareholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, no representation or warranty is made by the
Acquiror or Acquisition Subsidiary with respect to statements made or
incorporated by reference therein based on information supplied by the Target
for inclusion or incorporation by reference in the foregoing document.
3.7 ACQUIROR OWNERSHIP. As of the date of this Agreement, Acquiror is a
party to agreements to purchase an aggregate of approximately 10,555,140 shares
of Target Common Stock, $35,418,097 face amount of 13% Senior Notes due 2004 of
Target and $86,750,000 face amount of 11.375% Senior Discount Notes due 2006 of
CS. The agreements provide, among other things, that Acquiror's obligation to
purchase such securities is subject to certain conditions, including one or more
of the following conditions generally relating to the delivery of the shares,
the accuracy of representations and warranties of the sellers, the performance
of certain covenants by the sellers, the expiration of any waiting period under
the HSR Act, the receipt of the Consent of the FCC, the absence of certain
actions or proceedings or orders or decrees, and the failure of the agreement to
be terminated. The agreements provide, among other things, that the sellers'
obligations to sell such securities are subject to certain conditions, including
one or more of the following conditions generally relating to payment, the
accuracy of representations and warranties of Acquiror, the performance of
certain covenants by Acquiror, the absence of certain actions or proceedings or
orders or decrees, and the failure of the agreement to be terminated. As of the
date of this Agreement, Acquiror is the beneficial owner (as assignee or
otherwise) of approximately (i) $83,994,512 aggregate principal amount of 13%
Senior Notes due 2004 issued by Target, and (ii) $30.0 million principal amount
of the Senior Secured A Note due October 14, 2000 and $50.0 million principal
amount of the Senior Secured B Note due October 14, 2000 (the "SENIOR SECURED
NOTES"), each issued under the Note Purchase Agreement dated as of October 14,
1998 of Target (the "SENIOR SECURED CREDIT FACILITY"), and (iii) $129,000,000
aggregate principal amount of 11.375% Senior Notes due 2006 issued by CS.
ARTICLE IV
ADDITIONAL COVENANTS OF TARGET
Target represents, covenants and agrees as follows:
4.1 CONDUCT OF BUSINESS OF TARGET AND TARGET SUBSIDIARIES. Except as
expressly contemplated by this Agreement, during the period from the date of
this Agreement to the Effective Time, Target shall conduct, and it shall cause
the Target Subsidiaries to conduct, its or their respective businesses in the
ordinary course and consistent with past practice, subject to the limitations
contained in this Agreement, and Target shall, and it shall cause the Target
Subsidiaries to, use its or their respective reasonable business efforts to
preserve intact its or their respective business organizations, to maintain
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and protect the FCC Licenses and Channel Leases, to keep available the services
of its officers, agents and employees and to maintain satisfactory relationships
with all persons with whom any of them does business. Without limiting the
generality of the foregoing, and except as otherwise expressly provided in this
Agreement, after the date of this Agreement and prior to the Effective Time,
neither Target nor any Target Subsidiary will, without the prior written consent
of Acquiror:
(i) amend or propose to amend its Certificate or Articles of
Incorporation or By-Laws (or comparable governing instruments) in any
material respect;
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of or
propose to issue, grant, sell, pledge or dispose of any shares of, or any
options, warrants, commitments, subscriptions or rights of any kind to
acquire or sell any shares of, the capital stock or other securities of
Target or any Target Subsidiary including, but not limited to, any
securities convertible into or exchangeable for shares of stock of any class
of Target or any Target Subsidiary, except for the issuance of shares of
Target Common Stock pursuant to the exercise of stock options or warrants
outstanding on the date of this Agreement or under the Rights Plan in
accordance with their present terms;
(iii) split, combine or reclassify any shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, other than dividends or distributions to Target or a Target
Subsidiary wholly owned by Target, or directly or indirectly redeem,
purchase or otherwise acquire or offer to acquire any shares of its capital
stock or other securities;
(iv)(a) except for debt (including, but not limited to, obligations in
respect of capital leases) not in excess of the amounts set forth in the
Target Approved Budget (except as contemplated in the last paragraph of this
SECTION 4.1), with respect to Target and the Target Subsidiaries (other than
CS and the CS Subsidiaries), or the CS Approved Budget, with respect to CS
and the CS Subsidiaries, create, incur or assume any short-term debt,
long-term debt or obligations in respect of capital leases; (b) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, indirectly, contingently or otherwise) for the obligations of any
person, except for obligations permitted by this Agreement of any wholly
owned Target Subsidiary in the ordinary course of business consistent with
past practice; (c) make any capital expenditures or make any loans, advances
or capital contributions to, or investments in, any other person (other than
customary advances to employees made in the ordinary course of business
consistent with past practice), provided that Target will continue to make
capital expenditures, maintain, upgrade and expand its facilities and those
of the Target Subsidiaries (other than CS and the CS Subsidiaries) and
otherwise operate in accordance with the Target Approved Budget and that CS
will continue to make capital expenditures, maintain, upgrade and expand its
facilities and those of the CS Subsidiaries and otherwise operate in
accordance with the CS Approved Budget; (d) acquire the stock or assets of,
or merge or consolidate with, any other person or business; or (e)
voluntarily incur any material liability or obligation (absolute, accrued,
contingent or otherwise);
(v) sell, transfer, mortgage, pledge or otherwise dispose of, or
encumber, or agree to sell, transfer, mortgage, pledge or otherwise dispose
of or encumber, any material assets or properties, real, personal or mixed;
(vi) increase in any manner the compensation of any of its officers,
agents or employees other than any increases required pursuant to the Target
Material Contracts in accordance with their terms in effect on the date of
this Agreement and increases in the ordinary course of business consistent
with past practice not in excess on an individual basis of the lesser of
8.0% of the current compensation of such individual or $10,000 per annum, or
increase in any manner the compensation of any director;
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(vii) except as required by ERISA and only after reasonable prior
consultation with Acquiror, enter into, establish, amend, make non-routine
or material interpretations or determinations with respect to, or terminate
any employment, consulting, retention, change in control, collective
bargaining, bonus or other incentive compensation, profit sharing, health or
other welfare, stock option, stock purchase, restricted stock, or other
equity, pension, retirement, vacation, severance, deferred compensation or
other compensation or benefit plan, policy, agreement, trust, fund or
arrangement with, for or in respect of, any shareholder, officer, director,
other employee, agent, consultant, affiliate or associate;
(viii) make any elections with respect to Taxes that are inconsistent
with the prior elections reflected in the Target Financial Statements as of
and to the period ended December 31, 1998;
(ix) compromise, settle, forgive, cancel, grant any waiver or release
relating to or otherwise adjust any debts, claims, rights or Litigation,
except routine debts, claims, rights or Litigation in the ordinary course of
business consistent with past practice, involving only a payment not in
excess of $250,000 individually or $1,000,000 when aggregated with all such
payments by Target and the Target Subsidiaries combined;
(x) take any action or omit to take any action, which action or
omission, if taken prior to, on or after the date hereof, would result in a
breach of any of the covenants, representations or warranties of Target set
forth in this Agreement or would have a Target Material Adverse Effect;
(xi) enter into any lease or other agreement, or amend any lease or
other agreement, with respect to real property;
(xii) subject to clauses (xiv) and (xv) below, enter into or amend any
agreement or transaction (a) pursuant to which the aggregate financial
obligation of Target or a Target Subsidiary or the value of the services to
be provided could exceed $500,000 individually or $2,000,000 in the
aggregate for all such agreements or transactions, and (b) which is not
terminable upon no more than 30 days' notice by Target or the Target
Subsidiary involved without penalty in excess of $50,000 individually or
$250,000 when aggregated with the penalties under all such agreements or
transactions;
(xiii) terminate any Channel Lease;
(xiv) enter into, amend, modify or waive any rights under any Channel
Lease (a) outside the ordinary course of business, provided, however, that
Acquiror shall not unreasonably withhold its consent, taking into account
the plans and objectives of Acquiror regarding Target and the Target
Subsidiaries, or (b) without providing notice to, and reasonable
consultation with, Acquiror prior to taking such action;
(xv) enter into, amend, modify, terminate or waive any rights under (a)
any Target Material Contract, including, without limitation, any Tower Site
Lease or System Agreement, other than Channel Leases and FCC Licenses; or
(b) any material agreement or other material obligation that restricts, in
any material respect, the activities of Target or a Target Subsidiary; or
(c) any agreement or obligation that restricts in any material respect any
other person;
(xvi) enter into any leasing or licensing agreements, take-or-pay
arrangements or other affiliations, alignments or agreements with respect to
any Channel Leases, provided, that Acquiror shall not unreasonably withhold
its consent, taking into account the plans and objectives of Acquiror
regarding Target and the Target Subsidiaries, and, provided further, that
Target or any of the Target Subsidiaries may, without the prior written
consent of Acquiror, renegotiate any Channel Leases in the ordinary course
of business and after prior notice to, and reasonable consultation with,
Acquiror;
(xvii) take any action with respect to the indemnification of any
person;
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(xviii) change any accounting practices or policies or depreciation or
amortization rates, except as required by generally accepted accounting
principles or Laws or as agreed to or requested by Target's auditors after
consultation with Acquiror's auditors;
(xix) adopt a plan of liquidation, dissolution, merger, consolidation,
share exchange, restructuring, recapitalization, or other reorganization; or
(xx) resolve, agree, commit or arrange to do any of the foregoing.
Furthermore, Target covenants, represents and warrants that from and after
the date hereof, unless Acquiror shall otherwise expressly consent in writing,
Target shall, and Target shall cause each Target Subsidiary to, use its or their
reasonable business efforts to:
(i) keep in full force and effect insurance comparable in amount and
scope of coverage to insurance now carried by it or them;
(ii) pay all accounts payable and other obligations, when they become
due and payable, in the ordinary course of business consistent with past
practice and with the provisions of this Agreement, except if the same are
contested in good faith, and, in the case of the failure to pay any material
accounts payable or other obligations which are contested in good faith,
only after consultation with Acquiror; and
(iii) comply in all material respects with all Laws applicable to it or
any of them or their respective properties, assets or businesses and
maintain in full force and effect all Target Permits necessary for, or
otherwise material to, such businesses.
Notwithstanding the foregoing and subject to certain conditions described in
the following sentence, Target may borrow up to $22.0 million from CS on terms
that are reasonably acceptable to Acquiror by increasing the maximum principal
amount of the Senior Secured B Notes due October 14, 2000 under the Senior
Secured Credit Facility, and a non-transferable Senior Secured B Note in such
amount will be issued by Target to CS to evidence such borrowing (the "CS
BORROWING"), provided CS shall waive its right to participate in the Facility B
Fee (as such term is defined in the Senior Secured Credit Facility). The
proceeds of the CS Borrowing shall be used for the purpose of funding general
working capital purposes pursuant to the Target Approved Budget and expenses
incurred in connection with the transactions contemplated hereby prior to the
consummation of the Merger. Target's ability to borrow such sum from CS shall be
subject to the necessary documentation of the CS Borrowing on terms satisfactory
to Acquiror, the compliance with all applicable Laws, the Certificate of
Incorporation and the By-Laws of Target and CS, the obtaining of all necessary
Consents of Governmental Authorities and third parties and the delivery of
appropriate legal opinions, certificates, information and other documentation,
each in form and substance to the satisfaction of Acquiror. Target hereby
represents and warrants that the CS Borrowing shall not give rise to liability
or obligation for any brokerage fees, commissions, finder's fees or other
similar fees or expenses. Subject to and upon satisfaction of the foregoing,
Acquiror agrees that it will grant its consent to the CS Borrowing as a holder
of the Senior Secured Notes, the 13% Senior Notes due 2004 of Target and the
11.375% Senior Notes due 2006 of CS, to the extent permitted thereunder.
4.2 NOTIFICATION OF CERTAIN MATTERS. Target shall give prompt notice to
Acquiror if any of the following occur after the date of this Agreement: (i) any
notice of, or other communication relating to, a default or Event which, with
notice or lapse of time or both, would become a default under any Target
Material Contract; (ii) receipt of any notice or other communication from any
third party alleging that the Consent of such third party is or may be required
in connection with the transactions contemplated by this Agreement; (iii)
receipt of any material notice or other communication from any Governmental
Authority (including, but not limited to, the FCC, the NASD or any other
securities exchange) in connection with the transactions contemplated by this
Agreement; (iv) the occurrence of an Event which would have a Target Material
Adverse Effect; (v) the commencement or threat of any
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Litigation involving or affecting Target or any Target Subsidiary or any
affiliate, or any of their respective properties or assets, or, to its
knowledge, any employee, agent, director or officer of Target or any Target
Subsidiary, in his or her capacity as such or as a fiduciary under a Benefit
Plan of Target, which, if pending on the date hereof, would have been required
to have been disclosed in or pursuant to this Agreement or which relates to the
consummation of the Merger or any material development in connection with any
Litigation disclosed by Target in or pursuant to this Agreement or the Target
Securities Filings; and (vi) the occurrence of any Event that would cause a
breach by Target of any provision of this Agreement or a Target Ancillary
Agreement, including such a breach that would occur if such Event had taken
place on or prior to the date of this Agreement.
4.3 ACCESS AND INFORMATION. Between the date of this Agreement and the
Effective Time, Target and the Target Subsidiaries, upon reasonable notice, will
give, and shall direct its accountants and legal counsel to give, Acquiror, its
lenders and their respective authorized representatives (including, without
limitation, financial advisors, accountants and legal counsel) at all reasonable
times full access to all offices and other facilities, to all personnel and to
all contracts, agreements, commitments, books and records (including, but not
limited to, Tax Returns) of or pertaining to Target and the Target Subsidiaries,
will permit the foregoing to make such inspections as they may reasonably
require and will cause its officers and employees promptly to furnish Acquiror
with (a) such financial and operating data and other information with respect to
the business, assets, liabilities, obligations and operations of Target and the
Target Subsidiaries as Acquiror may from time to time reasonably request
including, but not limited to, data and information required for inclusion in
any of Acquiror's registration statements and/or other filings with the SEC, and
(b) a copy of each material report, schedule and other document filed or
received by Target or any Target Subsidiary pursuant to the requirements of
applicable securities Laws, the NASD or other securities exchange or the FCC.
4.4 SHAREHOLDER APPROVAL; PROXY STATEMENT; SHAREHOLDER LISTS.
(a) As soon as practicable, Target will in accordance with applicable Law,
its Certificate of Incorporation and its By-Laws take all steps necessary to
duly call, give notice of, convene and hold a meeting of its shareholders (the
"SHAREHOLDERS' MEETING") for the purpose of adopting this Agreement and the
Merger and the other transactions contemplated hereby and for such other
purposes as may be necessary or desirable in connection with effectuating the
transactions contemplated hereby. Except as otherwise contemplated in this
Agreement, the Board of Directors of Target (i) will take all steps necessary to
present and recommend to the shareholders of Target that they adopt this
Agreement and approve the transactions contemplated hereby, and (ii) will use
its reasonable best efforts to obtain any necessary adoption and approval by
Target's shareholders of this Agreement and the Merger and the other
transactions contemplated hereby, including, without limitation, voting the
Target Shares held by such Directors for such adoption and approval.
(b) Acquiror and Target will as promptly as practicable following the
execution of this Agreement jointly prepare, and Target shall file, a proxy
statement on an appropriate schedule or other form for distribution to holders
of Target Shares in advance of the Shareholders' Meeting and such other
schedules and other filings as may be necessary or appropriate (collectively,
together with any amendments or supplements thereto, the "PROXY STATEMENT") with
the SEC and will use its reasonable best efforts to respond to the comments of
the SEC and to cause the Proxy Statement to be mailed to the holders of Target
Shares at the earliest practical time. Target shall furnish all information
concerning it and the holders of its capital stock as Acquiror may reasonably
request in connection with such actions. Target will notify Acquiror promptly of
the receipt of the comments of the SEC, if any, and of any request by the SEC
for amendments or supplements to the Proxy Statement or for additional
information with respect thereto, and will supply Acquiror with copies of all
correspondence between Target or its representatives, on the one hand, and the
SEC or members of its staff, on the other hand, with respect to the Proxy
Statement or the Merger or this Agreement, the Target Ancillary Targets or the
other transactions contemplated hereby or thereby. If (A) at any time prior to
the
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Shareholders' Meeting, any event should occur relating to Target or any of the
Target Subsidiaries which should be set forth in an amendment of, or a
supplement to, the Proxy Statement, Target will promptly inform Acquiror and (B)
if at any time prior to the Shareholders' Meeting, any event should occur
relating to Acquiror or Acquisition Subsidiary or any of their respective
associates or affiliates, or relating to the plans of any such persons for
Target after the Effective Time that should be set forth in an amendment of, or
a supplement to, the Proxy Statement, Acquiror will promptly inform Target and
in the case of (A) or (B) Target and Acquiror shall file and, if required, mail
such amendment or supplement to holders of Target Shares; provided, prior to
such filing or mailing, Target and Acquiror shall consult with each other with
respect to such amendment or supplement and shall incorporate the other's
comments thereon. Target will not distribute or file the Proxy Statement, or any
amendment thereof or supplement thereto, to which Acquiror reasonably objects.
(c) Target hereby consents to the inclusion in the Proxy Statement of the
recommendation of the Board of Directors of Target described in SECTION 2.4,
subject to any modification, amendment or withdrawal thereof permitted hereby,
and represents that its financial advisers have, subject to the terms of their
engagement letters with Target and the Board of Directors of Target, consented
to the inclusion of references to their opinions in the Proxy Statement. Target
and its counsel shall permit Acquiror and its counsel to participate in all
communications with the SEC and its staff, including any meetings and telephone
conferences, relating to the Proxy Statement, the Merger or this Agreement or
the other transactions contemplated hereby.
(d) Target shall promptly upon the request by Acquiror, or shall cause its
transfer agent to promptly, furnish Acquiror and Acquisition Subsidiary with
mailing labels containing the names and addresses of all record holders of
shares of Target Common Stock and with security position listings of shares of
Target Common Stock held in stock depositories, each as of the most recent
practicable date, together with all other available listings and computer files
containing names, addresses and security position listings of record holders and
beneficial owners of shares of Target Common Stock. Target shall furnish
Acquiror and Acquisition Subsidiary with such additional information, including,
without limitation, updated listings and computer files of the holders of Target
Common Stock, mailing labels and security position listings, and such other
assistance as Acquiror or their agents may reasonably request.
4.5 REASONABLE BUSINESS EFFORTS. Subject to the terms and conditions
herein provided, Target agrees to use its reasonable best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the Merger and the other transactions contemplated by this Agreement
and the Target Ancillary Agreements, including, without limitation, any
acquisition of Target Common Stock by Acquiror or any of its affiliates or
associates, including, but not limited to (i) obtaining the Consent of others to
this Agreement, the Target Ancillary Agreements and the transactions
contemplated hereby and thereby, including, without limitation, any acquisition
of Target Common Stock by Acquiror or any of its affiliates or associates, (ii)
the defending of any Litigation against Target or any Target Subsidiary
challenging this Agreement, the Target Ancillary Agreements or the consummation
of the transactions contemplated hereby or thereby, including, without
limitation, any acquisition of Target Common Stock by Acquiror or any of its
affiliates or associates, (iii) obtaining all Consents from Governmental
Authorities required for the consummation of the Merger and the transactions
contemplated hereby or thereby, including, without limitation, any acquisition
of Target Common Stock by Acquiror or any of its affiliates or associates, and
(iv) timely making all necessary filings under the HSR Act. Upon the terms and
subject to the conditions hereof, Target agrees to use its reasonable best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary to satisfy the other conditions of the Closing set
forth herein. Target will consult with counsel for Acquiror as to, and will
permit such counsel to participate in, at Acquiror's expense, any Litigation
referred to in clause (ii) above brought against or involving Target or any
Target Subsidiary.
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4.6 PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect, Target
shall not, and shall cause its affiliates not to, without the written consent of
Acquiror, make any announcement or other disclosure relating to this Agreement,
the terms hereof, the Merger or negotiations with respect thereto, except to
their legal, accounting and financial advisers engaged in connection with the
Merger, unless otherwise required by Law or pursuant to any applicable listing
agreement with, or rules of, the NASD or other securities exchange; provided,
that the Target shall give Acquiror notice a reasonable time prior to any such
disclosure required by Law or otherwise, as referred to above, and shall
cooperate with and consult with Acquiror regarding the contents of any such
disclosure.
4.7 COMPLIANCE. In consummating the Merger and the transactions
contemplated hereby and by the Target Ancillary Agreements, Target shall comply
in all material respects with the applicable provisions of the Securities
Exchange Act and shall comply, and/or cause the Target Subsidiaries to comply or
to be in compliance, in all material respects, with all other applicable Laws.
4.8 BENEFIT PLANS. Between the date of this Agreement and through the
Effective Time, no discretionary award or grant under any Benefit Plan of Target
or a Target Subsidiary shall be made without the prior written consent of
Acquiror; nor shall Target or a Target Subsidiary take any action or permit any
action to be taken to accelerate the vesting of any warrants or options
previously granted pursuant to any such Benefit Plan. Neither Target nor any
Target Subsidiary shall make any amendment to any Benefit Plan, any awards
thereunder or the terms of any security convertible into or exchangeable for
capital stock without the prior written consent of Acquiror.
4.9 NO SOLICITATION OF TAKEOVER PROPOSAL.
(a) Target shall, and shall direct and cause its officers, directors,
employees, representatives and agents to, immediately cease any discussions or
negotiations with any parties that may be ongoing with respect to a Takeover
Proposal (as hereinafter defined). Target shall not, nor shall it permit any of
the Target Subsidiaries to, nor shall it authorize or permit any of its
officers, directors or employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by it or any of the Target
Subsidiaries to, directly or indirectly, (i) solicit, initiate or encourage
(including by way of furnishing information), or take any other action designed
or reasonably likely to facilitate, any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any Takeover
Proposal, or (ii) participate in any discussions or negotiations regarding any
Takeover Proposal. Without limiting the generality of the foregoing, it is
understood that any violation of the restrictions set forth in the previous two
sentences by any director, officer, employee, agent or representative of Target
or any of the Target Subsidiaries, including, without limitation, any investment
banker, financial advisor, attorney, accountant or other representative retained
by Target or any of the Target Subsidiaries, whether or not acting on behalf of
Target or any of the Target Subsidiaries, shall be deemed to be a breach of this
Section by Target. For all purposes of this Agreement, "TAKEOVER PROPOSAL" means
any inquiry, proposal or offer relating to any direct or indirect acquisition or
purchase, in one transaction or a series of related transactions, of 15% or more
of the assets of Target or any of the Target Subsidiaries or 5% or more of any
class of equity securities of Target or any of the Target Subsidiaries, any
tender offer or exchange offer that if consummated would result in any person
beneficially owning 15% or more of any class of equity securities of Target or
any Target Subsidiary, any merger, consolidation, share exchange, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving Target or any Target Subsidiary, other than the transactions
contemplated by this Agreement, or any other transaction the consummation of
which could reasonably be expected to impede, interfere with, prevent or
materially delay the Merger or which could reasonably be expected to dilute
materially the benefits to Acquiror of the transactions contemplated by this
Agreement.
(b) The Board of Directors of Target shall promptly recommend to the
shareholders of Target that they adopt this Agreement and approve the
transactions contemplated hereby. Neither the Board of
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Directors of Target nor any committee thereof shall (i) withdraw or modify, or
propose publicly to withdraw or modify, the approval or recommendation by such
Board of Directors or such committee of the Merger or this Agreement, (ii)
approve or recommend, or propose publicly to approve or recommend, any Takeover
Proposal or (iii) cause Target to enter into any letter of intent, agreement in
principle, acquisition agreement or other similar agreement related to any
Takeover Proposal.
(c) In addition to the obligations of Target set forth in paragraphs (a) and
(b) of this SECTION 4.9, Target shall immediately advise Acquiror orally and in
writing of any request for information or of any Takeover Proposal, the material
terms and conditions of such request or Takeover Proposal and the identity of
the person making such request or Takeover Proposal. Target will keep Acquiror
fully informed of the status and details (including amendments or proposed
amendments) of any such request or Takeover Proposal.
(d) Nothing contained in this SECTION 4.9 shall prohibit Target from taking
and disclosing to its shareholders a position consistent with its obligations
hereunder contemplated by Rule 14e-2(a) promulgated under the Securities
Exchange Act or from making any disclosure consistent with its obligations
hereunder to Target's shareholders if, in the good faith judgment of the Board
of Directors of Target, after consultation with outside counsel, failure so to
disclose would be inconsistent with applicable Law; provided, however, neither
Target nor its Board of Directors nor any committee thereof shall withdraw or
modify, or propose publicly to withdraw or modify, its position with respect to
the Merger or this Agreement or approve or recommend, or propose publicly to
approve or recommend, a Takeover Proposal.
4.10 SECURITIES AND SHAREHOLDER MATERIALS. Target and the Target
Subsidiaries shall send to Acquiror a copy of all material public reports and
materials as and when it sends the same to its shareholders, the SEC, the NASD
or any other securities commission, exchange or market.
4.11 RESIGNATIONS. Target shall cause the officers and/or directors of
Target and the Target Subsidiaries as Acquiror may request to voluntarily resign
their positions as such prior to and as of the Effective Time. The instruments
effecting such resignations are herein referred to as the "RESIGNATIONS." Target
shall cause such directors, prior to their resignation, to appoint new directors
nominated by Acquiror to fill such vacancies.
4.12 NONCOMPETE AND CONFIDENTIALITY AGREEMENTS. Target shall use its
reasonable business efforts to obtain, at or prior to the Closing, duly executed
noncompete and confidentiality agreements in substantially the form attached
hereto as SCHEDULE 4.12(A) (the "NONCOMPETE AND CONFIDENTIALITY AGREEMENTS")
from the persons designated on SCHEDULE 4.12(B) attached hereto.
4.13 COMFORT LETTERS. Upon the request of Acquiror, Target shall use
reasonable business efforts to provide to Acquiror prior to the Effective Time
"comfort letters" from the independent certified public accountants for Target
dated as of the date of the Proxy Statement and the Closing Date, addressed to
the Board of Directors of each of Target and Acquiror, covering such matters as
Acquiror shall reasonably request with respect to facts concerning the financial
condition and results of operations of Target and the Target Subsidiaries and
customary for such certified public accountants to deliver in connection with a
transaction similar to the Merger.
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4.14 TAKEOVER STATUTES. If any Takeover Statute is or may become
applicable to the Merger or this Agreement or the Target Ancillary Agreements or
the transactions contemplated hereby or thereby or the execution, delivery or
performance of any other agreement to acquire, or any other acquisition of,
Target Common Stock by Acquiror or any of its affiliates or associates, Target
and the members of its Board of Directors will grant such approvals, and will
take such other actions as are necessary so that the Merger, this Agreement, the
Target Ancillary Agreements and the other transactions contemplated by hereby or
thereby or the execution, delivery or performance of any other agreement to
acquire, or any other acquisition of, Target Common Stock by Acquiror or any of
its affiliates or associates may be consummated as promptly as practicable on
the terms contemplated hereby and will otherwise act to eliminate or minimize
the effects of any Takeover Statute on the Merger, this Agreement, the Target
Ancillary Agreements and any of the transactions contemplated hereby or thereby
or the execution, delivery or performance of any other agreement to acquire, or
any other acquisition of, Target Common Stock by Acquiror or any of its
affiliates or associates.
4.15 YEAR 2000 PLAN. Target shall use all commercially reasonable efforts
to ensure that the Year 2000 Plan shall be completed in a timely manner. Target
shall (i) allow Acquiror to monitor Target's Year 2000 compliance issues and
Year 2000 Plan, (ii) provide prompt notice to Acquiror if Target does not
achieve, or reasonably expects it shall not achieve, milestones and objectives
identified in the Year 2000 Plan and (iii) cooperate in good faith with
Acquiror's efforts to cause Target to be Year 2000 Compliant.
4.16 PURCHASE OF TARGET COMMON STOCK. Target shall in no way prohibit
Acquiror or any of its affiliates or associates from purchasing shares of Target
Common Stock or entering into option, lock-up, voting or proxy agreements or any
other similar agreements with respect to Target Common Stock (including, but not
limited to, amending the Rights Plan to cause such acquisition or agreement to
trigger a "Stock Acquisition Date" or "Distribution Date" or cause Acquiror or
any of its affiliates or associates to become an "Acquiring Person" (as such
terms are defined in the Rights Plan) at any time prior to the consummation of
the Merger.
4.17 CONVERSION OF OPTIONS. Target shall offer to modify, and shall obtain
such modification to, each outstanding Option which is exercisable on or prior
to the Effective Time, to cause each such Option either to be exercised (if
otherwise exercisable) prior to the Effective Time, or to be canceled as of the
Effective Time in exchange for the Option Consideration, as contemplated by
SECTION 1.7(B). Target shall offer to modify, and shall obtain such modification
to, each outstanding Option which is not exercisable on or prior to the
Effective Time to be converted, as of the Effective Time, to the right to
receive solely the Option Consideration, with such Option otherwise becoming
exercisable following the Effective Time, in accordance with its terms, as
contemplated by SECTION 1.7(B). Target shall effect the foregoing after
reasonable consultation with Acquiror pursuant to written agreements in form and
substance reasonably satisfactory to Acquiror, including, without limitation, in
a form consistent with SECTION 1.7(B) hereof.
ARTICLE V
ADDITIONAL COVENANTS OF ACQUIROR
Acquiror covenants and agrees as follows:
5.1 PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect, Acquiror
shall not, and shall cause its affiliates not to, without the written consent of
Target, make any announcement or other disclosure relating to this Agreement,
the terms hereof, the Merger or negotiations with respect thereto, except to
their legal, accounting and financial advisers engaged in connection with the
Merger, unless otherwise required by Law or pursuant to any applicable listing
agreement with, or rules and regulations of, the NASD or other securities
exchange; provided, that the Acquiror shall give Target
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notice a reasonable time prior to any such disclosure required by Law or
otherwise, as referred to above, and shall cooperate with and consult with
Target regarding the contents of any such disclosure.
5.2 COMPLIANCE. In consummating the Merger and the transactions
contemplated hereby, Acquiror shall comply in all material respects with the
applicable provisions of the Securities Exchange Act and shall comply, and/or
cause the Acquisition Subsidiary to comply or to be in compliance, in all
material respects, with all other applicable Laws applicable thereto.
5.3 PROXY STATEMENT. Acquiror shall cooperate with Target with respect to
the preparation of the Proxy Statement as set forth in SECTION 4.4. and shall
provide Target with such information concerning Acquiror and Acquisition
Subsidiary as shall be required to be included therein. Acquiror shall vote, or
cause to be voted, in favor of the Merger and this Agreement all shares of
Target Common Stock directly or indirectly beneficially owned by it.
5.4 TARGET SENIOR SECURED CREDIT FACILITY. Acquiror shall give its consent
to the Merger in Acquiror's capacity as the assignee of the holder of the Senior
Secured Notes issued by Target under the Senior Secured Credit Facility, at the
Closing, subject to satisfaction of the conditions to Acquiror's obligations to
effect the Merger.
5.5 CS BORROWING. Acquiror shall use its reasonable efforts to request
consents to the CS Borrowing from the sellers of any notes from which Acquiror
has agreements to purchase such notes that are described in SECTION 3.7, above,
to the extent that Acquiror shall not have purchased such notes.
5.6 INDEMNIFICATION AND INSURANCE.
(a) The Certificate of Incorporation and By-Laws of the Surviving
Corporation shall contain provisions with respect to indemnification and
exculpation similar to those set forth in the Certificate of Incorporation and
By-Laws of Target, which provisions the Acquiror shall not and shall cause the
Surviving Corporation not to amend, repeal or otherwise modify for a period of
six (6) years from the Effective Time in any manner that would materially and
adversely affect the rights thereunder of individuals who at the Effective Time
were directors, officers, employees or agents of Target, unless such amendment,
repeal or other modification is required by applicable Law.
(b) From and after the Effective Time, Acquiror agrees that it will
indemnify and hold harmless each present director and officer of Target (when
acting in such capacity) determined as of the Effective Time (the "INDEMNIFIED
PARTIES"), against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities (collectively, "COSTS")
incurred in connection with any claim, action, suit, proceeding or investigation
whether civil, criminal, administrative or investigative, arising out of or
pertaining to matters existing or occurring at or prior to the Effective Time,
whether asserted or claimed prior to, at or after the Effective Time, to the
fullest extent that Target would have been permitted under the Connecticut Code
and its Certificate of Incorporation or By-Laws in effect on the date of this
Agreement to indemnify such person (and Acquiror shall also advance expenses as
incurred to the fullest extent permitted under applicable Law and the
Certificate of Incorporation and the By-Laws of Target, provided that the person
to whom expenses are advanced provides an undertaking to repay such advances if
it is ultimately determined that such person is not entitled to
indemnification).
(c) Any Indemnified Party wishing to claim indemnification under paragraph
(b) of this SECTION 5.6, upon learning of any such claim, action, suit,
proceeding or investigation, shall promptly notify Acquiror thereof in writing,
but the failure to so notify shall not relieve Acquiror of any liability it may
have to such Indemnified Party if such failure does not materially prejudice
Acquiror. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) Acquiror
or the Surviving Corporation shall have the right to assume the defense thereof,
and Acquiror shall not be liable to such Indemnified Parties for any legal
expenses of other
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counsel or any other expenses subsequently incurred by such Indemnified Parties
in connection with the defense thereof, except that if Acquiror or the Surviving
Corporation elects not to assume such defense, or if there are any issues which
raise material conflicts of interest between Acquiror or the Surviving
Corporation and the Indemnified Parties, the Indemnified Parties may retain
counsel reasonably satisfactory to Acquiror, and Acquiror or the Surviving
Corporation shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties; provided, however, that Acquiror shall be obligated
pursuant to this paragraph (c) to pay for only one firm or counsel for all
Indemnified Parties, (ii) the Indemnified Parties will cooperate in the defense
of any such matter, and (iii) Acquiror shall not be liable for any settlement
effected without its prior written consent.
(d) For a period of six (6) years after the Effective Time and to the extent
available, Acquiror or the Surviving Corporation shall maintain in effect
policies of directors' and officers' liability insurance covering those persons
who are currently covered by Target's directors' and officers' liability
insurance policy on terms (including the amounts of coverage and the amounts of
deductibles, if any) that are no less favorable to them in any material respect
than the terms now applicable to them under Target's current insurance policies;
provided that the Surviving Corporation shall not be required to pay an annual
premium for such insurance in excess of 175% of the last annual premium paid
prior to the date hereof, but in such case shall purchase as much coverage as
possible for such amount.
(e) If Acquiror or the Surviving Corporation or any of their successors or
assigns (i) shall consolidate with or merge into any other corporation or entity
and shall not be the continuing or surviving corporation or entity in such
consolidation or merger or (ii) shall transfer all or substantially all of its
properties and assets to any individual, corporation or other entity, then and
in each case, proper provisions shall be made so that the successors and assigns
of Acquiror or the Surviving Corporation, as the case may be, shall assume all
of the obligations set forth in this SECTION 5.6; provided, that the failure to
make such provisions shall not affect the validity of any such consolidation,
merger or transfer.
(f) The provisions of this SECTION 5.6 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and representatives.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each party to effect the Merger shall be subject to the fulfillment or waiver at
or prior to the Effective Time of the following conditions:
6.1.1 SHAREHOLDER APPROVAL. This Agreement and the Merger and the
other transactions contemplated hereby shall have been duly adopted at or
prior to the Effective Time by the requisite vote of the shareholders of
Target in accordance with the Certificate of Incorporation and By-Laws of
Target, the Connecticut Code and the Securities Exchange Act.
6.1.2 NO INJUNCTION OR ACTION. No order, statute, rule, regulation,
executive order, stay, decree, judgment or injunction shall have been
enacted, entered, promulgated or enforced by any court or other
Governmental Authority, which prohibits or prevents the consummation of
the Merger or the other transactions contemplated hereby and which has
not been vacated, dismissed or withdrawn by the Effective Time. Target
and Acquiror shall use their reasonable best efforts to have any of the
foregoing vacated, dismissed or withdrawn by the Effective Time.
6.1.3 HSR ACT. Any waiting period applicable to the Merger under
the HSR Act shall have expired or earlier termination thereof shall have
been granted and no action shall have been instituted by either the
United States Department of Justice or the Federal Trade
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Commission to prevent the consummation of the transactions contemplated
by this Agreement or to modify or amend such transactions in any material
manner, or if any such action shall have been instituted, it shall have
been withdrawn or a final judgment shall have been entered against such
Department or Commission, as the case may be.
6.1.4 OPINION OF FINANCIAL ADVISOR. The fairness opinion referenced
in SECTION 2.4(C) above shall not have been withdrawn at or prior to the
Effective Time.
6.1.5 GOVERNMENTAL APPROVALS. All Consents, other than Consents the
failure of which to be obtained or made, in the judgment of Acquiror,
would not have a material adverse effect on the business, assets,
condition (financial or otherwise), properties, liabilities, prospects or
the result of operations of the Surviving Corporation and its
subsidiaries taken as a whole ("SURVIVING CORPORATION MATERIAL ADVERSE
EFFECT"), of any Governmental Authority required for the consummation of
the Merger and the transactions contemplated by this Agreement shall have
been obtained by Final Order (as hereinafter defined), provided that any
Consent relating to any FCC License shall be so obtained or made by Final
Order. The term "FINAL ORDER" with respect to any Consent of a
Governmental Authority shall mean an action by the appropriate
Governmental Authority as to which: (i) no request for stay by such
Governmental Authority of the action is pending, no such stay is in
effect, and, if any deadline for filing any such request is designated by
statute or regulation, it has passed; (ii) no petition for rehearing or
reconsideration of the action is pending before such Governmental
Authority, and no appeal or comparable administrative remedy is pending
before such Governmental Authority, and the time for filing any such
petition, appeal or administrative remedy has passed; (iii) such
Governmental Authority does not have the action under reconsideration on
its own motion and the time for such reconsideration has passed; and (iv)
no appeal to a court, or request for stay by a court, of the Governmental
Authority action is pending or in effect, and if any deadline for filing
any such appeal or request is designated by statute or rule, it has
passed. The condition contained in this SUBSECTION 6.1.5 may be waived by
Acquiror, in its sole judgment.
6.2 CONDITIONS TO OBLIGATIONS OF TARGET. The obligation of Target to
effect the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following additional conditions, any one or more of which
may be waived by Target:
6.2.1 ACQUIROR REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Acquiror contained in this Agreement that are modified
by materiality or Acquiror Material Adverse Effect ("ACQUIROR MODIFIED
REPRESENTATION") shall be true and correct in all respects and those that
are not so modified ("ACQUIROR NONMODIFIED REPRESENTATION") shall be true
and correct in all material respects, on the date hereof and, except for
changes not prohibited by this Agreement, as of the Effective Time as if
made at the Effective Time. Furthermore, none of the representations or
warranties of Acquiror contained in this Agreement, disregarding any
qualifications therein or in this SECTION 6.2.1 regarding materiality or
Acquiror Material Adverse Effect, shall be untrue or incorrect to the
extent that such untrue or incorrect representations or warranties, when
taken together as a whole, have had or would have an Acquiror Material
Adverse Effect.
6.2.2 PERFORMANCE BY ACQUIROR. Acquiror shall have performed and
complied with all of the covenants and agreements in all material
respects and satisfied in all material respects all of the conditions
required by this Agreement to be performed or complied with or satisfied
by Acquiror at or prior to the Effective Time.
6.2.3 CERTIFICATE. Acquiror shall have delivered to Target a
certificate executed on its behalf by its President or another authorized
officer to the effect that the conditions set forth in SUBSECTIONS 6.2.1
AND 6.2.2, above, have been satisfied.
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6.3 CONDITIONS TO OBLIGATIONS OF ACQUIROR. The obligations of Acquiror to
effect the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following additional conditions, any one or more of which
may be waived by Acquiror:
6.3.1 TARGET REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Target contained in this Agreement that are modified by
materiality or Target Material Adverse Effect ("TARGET MODIFIED
REPRESENTATION") shall be true and correct in all respects, and those
that are not so modified ("TARGET NONMODIFIED REPRESENTATION") shall be
true and correct in all material respects, on the date hereof and, except
for changes not prohibited by this Agreement, as of the Effective Time as
if made at the Effective Time. Furthermore, none of the representations
or warranties of Target contained in this Agreement, disregarding any
qualifications therein or in this SECTION 6.3.1 regarding materiality or
Target Material Adverse Effect, shall be untrue or incorrect to the
extent that such untrue or incorrect representations or warranties, when
taken together as a whole, have had or would have a Target Material
Adverse Effect.
6.3.2 PERFORMANCE BY TARGET. Target shall have performed and
complied with all the covenants and agreements in all material respects
and satisfied in all material respects all the conditions required by
this Agreement to be performed or complied with or satisfied by Target at
or prior to the Effective Time.
6.3.3 NO MATERIAL ADVERSE CHANGE. There shall have not occurred
after the date hereof any Event that has or reasonably could be expected
to have a Target Material Adverse Effect or a Surviving Corporation
Material Adverse Effect (as hereinafter defined) (except for (A) any
decrease in monthly average GAAP-based revenues of Target and the Target
Subsidiaries (other than CS and the CS Subsidiaries) of no more than 5.5%
per month, subject to adjustment by percentage increase or decrease of
0.7% for seasonal trends (e.g., college population subscribers), (B)
deviations of cash flow from operations of Target and the Target
Subsidiaries (other than CS and the CS Subsidiaries) of 25% or less on a
month-to-month basis as compared to cash flow from operations projected
in the Target Approved Budget, (C) any decrease in monthly average
GAAP-based revenues of CS and the CS Subsidiaries of no more than 5.5%
per month, subject to adjustment by percentage increase or decrease of
0.7% for seasonal trends (e.g., college population subscribers), and (D)
deviations of cash flow from operations of CS and the CS Subsidiaries of
25% or less on a month-to-month basis as compared to cash flow from
operations projected in the CS Approved Budget).
6.3.4 NO PENDING ACTION There shall not be instituted, pending or
threatened any action, investigation or proceeding by any Governmental
Authority, and there shall not be instituted, pending or threatened any
action or proceeding by any other person, domestic or foreign, before any
Governmental Authority, which is reasonably likely to be determined
adversely to Acquiror or Acquisition Subsidiary, (A) challenging or
seeking to make illegal, to delay materially or otherwise, directly or
indirectly, to restrain or prohibit the consummation of the Merger,
seeking to obtain material damages or imposing any material adverse
conditions in connection therewith or otherwise, directly or indirectly
relating to the transactions contemplated by the Merger, (B) seeking to
restrain, prohibit or delay the exercise of full rights of ownership or
operation by Acquiror or Acquisition Subsidiary or their affiliates of
all or any portion of the business or assets of Target and the Target
Subsidiaries, taken as a whole, or of Acquiror or Acquisition Subsidiary
or any of their affiliates, or to compel Acquiror or Acquisition
Subsidiary or any of their affiliates to dispose of or hold separate all
or any material portion of the business or assets of Target and the
Target Subsidiaries, taken as a whole, or of Acquiror or Acquisition
Subsidiary or any of their affiliates, (C) seeking to impose or confirm
material limitations on the ability of Acquiror or Acquisition Subsidiary
or any of their affiliates to exercise full rights of the ownership of
the
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shares of Target Common Stock, including, without limitation, the right
to vote the shares of Target Common Stock acquired or owned by Acquiror
or Acquisition Subsidiary or any of their affiliates on all matters
properly presented to the holders of Target Common Stock, (D) seeking to
require divestiture by Acquiror or Acquisition Subsidiary or any of their
affiliates of the shares of Target Common Stock, or (E) that otherwise
would reasonably be expected to have a Target Material Adverse Effect.
6.3.5 DISSENTING SHARES. At the Effective Time, Dissenting Shares
shall not exceed 10% of the Target Shares.
6.3.6 REQUIRED CONSENTS. All required Consents of any person (other
than a Governmental Authority) to the Merger or the transactions
contemplated hereby shall have been obtained or made on terms and
conditions reasonably acceptable to Acquiror and be in full force and
effect, except for those the failure of which to obtain or be made, in
the judgment of Acquiror, would not have a Surviving Corporation Material
Adverse Effect; provided that any Consents relating to any Channel Leases
or Tower Site Leases, the failure of which to obtain, in the aggregate,
are or would be material to Target and the Target Subsidiaries or are or
would be material to the future plans or objectives of Acquiror or the
failure of which to obtain would otherwise have a Target Material Adverse
Effect shall be so obtained or made.
6.3.7 CERTIFICATES AND OTHER DELIVERIES. Target shall have
delivered, or caused to be delivered, to Acquiror (i) a certificate
executed on its behalf by its President or another duly authorized
officer to the effect that the conditions set forth in SUBSECTIONS 6.1.1,
6.1.4, 6.1.5, 6.3.1, 6.3.2, 6.3.3, 6.3.4, 6.3.5 AND 6.3.6, above, have
been satisfied; (ii) a certificate of good standing or of legal
existence, as applicable, from the Secretary of State of each state or
comparable authority in other jurisdictions in which Target and the
Target Subsidiaries are incorporated or qualified to do business stating
that each is a validly existing corporation in good standing or of legal
existence, as applicable; (iii) duly adopted resolutions of the Board of
Directors and shareholders of Target approving the execution, delivery
and performance of this Agreement, the Target Ancillary Agreements and
the instruments contemplated hereby and thereby, certified by the
Secretary or Assistant Secretary of Target; (iv) a true and complete copy
of the Articles or Certificate of Incorporation or comparable governing
instruments, as amended, of Target and each of the Target Subsidiaries
certified by the Secretary of State of the state of incorporation or
comparable authority in other jurisdictions, and a true and complete copy
of the By-Laws or comparable governing instruments, as amended, of Target
and each of the Target Subsidiaries certified by the Secretary thereof;
(v) the duly executed Noncompete and Confidentiality Agreements; (vi) the
duly executed Resignations on terms and conditions reasonably acceptable
to Acquiror; (vii) a list of the shareholders of Target entitled to vote
on the adoption of this Agreement and an undertaking from Target's
transfer agent to deliver a list of the shareholders of Target as of the
Effective Time as soon thereafter as it is available, each such list to
be certified by the transfer agent of Target; and (viii) such other
documents and instruments as Acquiror reasonably may request.
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6.3.8 OPINION OF TARGET COUNSEL. Acquiror shall have received the
opinion of Day, Berry & Howard LLP, counsel to the Target, in form and
substance reasonably satisfactory to Acquiror, covering the matters set
forth in SCHEDULE 6.3.8 attached hereto.
6.3.9 COMFORT LETTERS. Acquiror shall have received "comfort
letters" from the independent certified public accountants for Target
dated as of the date of the Proxy Statement and the Closing Date,
addressed to the Board of Directors of each of Target and Acquiror,
covering such matters as Acquiror shall reasonably request with respect
to facts concerning the financial condition and results of operations of
Target and the Target Subsidiaries and customary for such certified
public accountants to deliver in connection with a transaction similar to
the Merger.
ARTICLE VII
TERMINATION AND ABANDONMENT
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the shareholders of Target
described herein, only:
(a) by mutual written consent of Acquiror and Target;
(b) by either Acquiror or Target if:
(i) the Merger shall not have been consummated on or prior to February
1, 2000; provided, however, that if Target or Acquiror determines that
additional time is necessary in connection with obtaining a Consent from the
FCC or, solely with respect to the HSR Act, any other Governmental Authority
or satisfying any related waiting period, such date may be extended by
Target or Acquiror from time to time by written notice to the other party to
a date no later than May 1, 2000; and provided further, however, that the
right to terminate this Agreement pursuant to this SECTION 7.1(B)(I) shall
not be available to any party whose failure to perform any of its
obligations under this Agreement results in the failure of the Merger to be
consummated by such time;
(ii) the approval of holders of Target Common Stock required by SECTION
6.1.1 shall not have been obtained at a meeting duly convened therefor or at
any adjournment or postponement thereof;
(iii) any court of competent jurisdiction or other Governmental
Authority shall have issued an order, decree or ruling or taken any other
action permanently enjoining, restraining or otherwise prohibiting the
consummation of the Merger and such order, decree or ruling or other action
shall have become final and nonappealable;
(c) by Acquiror, if (i) there are any breaches of any Target Modified
Representation or there are any material breaches of any Target Nonmodified
Representation, or (ii) Target shall have breached or failed to perform,
notwithstanding satisfaction or due waiver of all conditions thereto, any of its
material covenants or agreements contained herein as to which notice specifying
such breach or failure has been given to Target promptly after the discovery
thereof and Target has failed to cure or otherwise resolve the same to the
reasonable satisfaction of Acquiror within twenty (20) days after receipt of
such notice;
(d) by Acquiror, if SECTION 4.9 shall be breached by Target in any material
respect, including, without limitation, by failing to promptly notify Acquiror
as required thereunder;
(e) by Target, if (i) there are any breaches of any Acquiror Modified
Representation or there are any material breaches of any Acquiror Nonmodified
Representation, or (ii) Acquiror shall have breached or failed to perform,
notwithstanding satisfaction or due waiver of all conditions thereto, any
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of its material covenants or agreements contained herein as to which notice
specifying such breach or failure has been given to Acquiror promptly after the
discovery thereof and Acquiror has failed to cure or otherwise resolve the same
to the reasonable satisfaction of Target within twenty (20) days after receipt
of such notice.
The party desiring to terminate this Agreement pursuant to the preceding
paragraphs (b), (c), (d) or (e), shall give written notice of such termination
to the other party in accordance with SECTION 8.5 below.
7.2 TERMINATION FEES AND RIGHTS.
(a) In the event of termination of this Agreement and the abandonment of the
Merger pursuant to this Article VII, this Agreement (other than as set forth in
this SECTION 7.2, SECTION 7.3, SECTION 8.1 and SECTION 8.7) shall become void
and of no effect with no liability on the part of any party hereto (or of any of
its directors, officers, employees, agents, legal or financial advisers or other
representatives); provided, however, that no such termination shall relieve any
party hereto from any liability for breach of this Agreement.
(b) In the event that (A) a bona fide Takeover Proposal shall have been made
known to Target or any of the Target Subsidiaries and made known to the holders
of Target Common Stock generally or has been made directly to holders of Target
Common Stock generally or any person shall have publicly announced an intention
(whether or not conditional) to make a bona fide Takeover Proposal and such
Takeover Proposal or announced intention shall not have been withdrawn and
thereafter this Agreement is terminated by either Acquiror or Target pursuant to
SECTION 7.1(B)(I), or (B) this Agreement is terminated by Acquiror pursuant to
SECTION 7.1(D), then Target shall promptly, but in no event later than two days
after the date of such termination, pay Acquiror a fee equal to $18 million (the
"TERMINATION FEE"), payable by wire transfer of same day funds. Target
acknowledges that the agreements contained in this SECTION 7.2(B) are an
integral part of the transactions contemplated by this Agreement, and that,
without these agreements, Acquiror would not enter into this Agreement;
accordingly, if Target fails to promptly pay the amount due pursuant to this
SECTION 7.2(B), and in order to obtain such payment, Acquiror commences a suit
which results in a judgment against Target for the Termination Fee set forth in
this paragraph (b), Target shall also pay to Acquiror its costs and expenses
(including attorneys' fees) in connection with such suit, together with interest
on the amount of the Termination Fee at the prime rate of NationsBank, N.A. in
effect on the date such payment was required to be made.
7.3 PROCEDURE UPON TERMINATION. In the event of termination pursuant to
this ARTICLE VII, this Agreement shall terminate and the Merger shall be
abandoned without further action by Target or Acquiror, provided that the
agreements contained in SECTIONS 7.2, 7.3, 8.1 AND 8.7 hereof shall remain in
full force and effect. If this Agreement is terminated as provided herein, each
party shall use its reasonable best efforts to redeliver all documents, work
papers and other material (including any copies thereof) of any other party
relating to the transactions contemplated hereby, whether obtained before or
after the execution hereof, to the party furnishing the same. Nothing contained
in this Agreement shall relieve any party from any liability for any inaccuracy,
misrepresentation or breach of this Agreement prior to termination.
ARTICLE VIII
MISCELLANEOUS
8.1 CONFIDENTIALITY. Unless (i) otherwise expressly provided in this
Agreement, (ii) required by applicable Law or any listing agreement with, or the
rules and regulations of, any applicable securities exchange or the NASD, (iii)
necessary to secure any required Consents as to which the other party has been
advised, or (iv) consented to in writing by Acquiror and Target, this Agreement
and any
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information or documents furnished in connection herewith shall be kept strictly
confidential by Target and the Target Subsidiaries, Acquiror and Acquisition
Subsidiary and their respective officers, directors, employees and agents. Prior
to any disclosure pursuant to the preceding sentence, the party intending to
make such disclosure shall consult with the other party regarding the nature and
extent of the disclosure. Nothing contained herein shall preclude disclosures to
the extent necessary to comply with accounting, SEC and other disclosure
obligations imposed by applicable Law. In connection with any filing with the
SEC under the Securities Exchange Act, Target or Acquiror, after consultation
with the other party, may include any information required to be included
therein with respect to the Merger. Acquiror and Target shall cooperate with the
other and provide such information and documents as may be required in
connection with any such filings. In the event the Merger is not consummated,
Acquiror and Target shall return to the other all documents furnished by the
other and will hold in absolute confidence all information obtained from the
other party except to the extent (i) such party is required to disclose such
information by Law or such disclosure is necessary or desirable in connection
with the pursuit or defense of a claim, (ii) such information was known by such
party prior to such disclosure or was thereafter developed or obtained by such
party independent of such disclosure, (iii) such party received such information
on a non-confidential basis from a source, other than the other party, which is
not known by such party to be bound by a confidentiality obligation with respect
thereto or (iv) such information becomes generally available to the public or is
otherwise no longer confidential. Prior to any disclosure of information
pursuant to the exception in clause (i) of the preceding sentence, the party
intending to disclose the same shall so notify the party which provided the same
in order that such party may seek a protective order or other appropriate remedy
should it choose to do so.
8.2 AMENDMENT AND MODIFICATION. To the extent permitted by applicable Law,
this Agreement may be amended, modified or supplemented only by a written
agreement among Target, Acquiror and Acquisition Subsidiary, whether before or
after approval of the Merger and this Agreement by the holders of Target Common
Stock and the holders of the common stock of Acquisition Subsidiary.
8.3 WAIVER OF COMPLIANCE; CONSENTS. Any failure of Target on the one hand,
or Acquiror on the other hand, to comply with any obligation, covenant,
agreement or condition herein may be waived by Acquiror on the one hand, or
Target on the other hand, only by a written instrument signed by the party
granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Section
8.3.
8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties of Target and Acquiror contained herein or in any
certificates or other documents delivered prior to or at the Closing shall
survive the execution and delivery of this Agreement, notwithstanding any
investigation made or information obtained by the other party, but shall
terminate at the Effective Time.
8.5 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person, by
facsimile, receipt confirmed, or on the next business day when sent by overnight
courier or on the second succeeding business day when sent by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(i) if to Target, to:
CAI Wireless Systems, Inc.
18 Corporate Woods Blvd., Third Floor
Albany, NY 12211
Attention: James P. Ashman, Executive Vice President
Telecopy: 518-462-3045
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with a copy to:
Day, Berry & Howard LLP
One Canterbury Green
Stamford, CT 06901
Attention: Sabino Rodriguez III, Esq.
Telecopy: 203-977-7301
and
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Attention: J. Gregory Milmoe, Esq.
Telecopy: 212-735-2000
and
(ii) if to Acquiror or Acquisition Subsidiary, to:
Robert M. Finch
Vice President--Strategic Development
MCI WORLDCOM, Inc.
3060 Williams Drive, Suite 600
Fairfax, VA 22031
Telecopy: 703-645-4637
with copies to:
P. Bruce Borghardt, Esq.
General Counsel--Corporate Development
MCI WORLDCOM, Inc.
10777 Sunset Office Drive, Suite 330
St. Louis, MO 63127
Telecopy: 314-909-4101
and
Bryan Cave LLP
211 N. Broadway, Suite 3600
St. Louis, MO 63102
Attention: R. Randall Wang, Esq.
Telecopy: 314-259-2020
8.6 BINDING EFFECT; ASSIGNMENT. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto prior to the Effective Time without the prior written
consent of the other party hereto, except that Acquisition Subsidiary may assign
to Acquiror or any other Subsidiary of Acquiror any and all rights, interests
and obligations of Acquisition Subsidiary under this Agreement.
8.7 EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs or expenses, subject to the rights of such party
contemplated under SECTION 7.2, above.
8.8 GOVERNING LAW. This Agreement shall be deemed to be made in, and in
all respects shall be interpreted, construed and governed by and in accordance
with the internal laws of, the State of New
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York (without regard for its choice of law rules), except for matters governed
by the Connecticut Code, which shall be interpreted, construed and governed by
the Connecticut Code.
8.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.10 INTERPRETATION. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. No rule of construction shall apply to this Agreement which
construes ambiguous language in favor of or against any party by reason of that
party's role in drafting this Agreement. As used in this Agreement, (i) the term
"PERSON" shall mean and include an individual, a partnership, a joint venture, a
corporation, a limited liability company, a trust, an association, an
unincorporated organization, a Governmental Authority and any other entity; (ii)
the terms "AFFILIATE" and "ASSOCIATE" shall have the same meanings as set forth
in Rule 12b-2 under the Securities Exchange Act; and (iii) the term
"SHAREHOLDER" of any specified person shall mean any holder of capital stock or
other equity interest in such person.
8.11 ENTIRE AGREEMENT. This Agreement and the other agreements, documents
or instruments referred to herein or executed in connection herewith including,
but not limited to, the Schedules attached hereto, which Schedules are
incorporated herein by reference, embody the entire agreement and understanding
of the parties hereto in respect of the subject matter contained herein. There
are no restrictions, promises, representations, warranties, covenants, or
undertakings, other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and the understandings between the
parties with respect to such subject matter, including, without limitation, the
letter agreement dated April 15, 1999 between Acquiror and Target.
8.12 SEVERABILITY. In case any provision in this Agreement or in any of
the other agreements, documents or instruments referred to herein shall be held
invalid, illegal or unenforceable in any jurisdiction, such provision shall be
modified or deleted, as to the jurisdiction involved, only to the extent
necessary to render the same valid, legal and enforceable, and the validity,
legality and enforceability of the remaining provisions hereof or thereof shall
not in any way be affected or impaired thereby nor shall the validity, legality
or enforceability of such provision be affected thereby in any other
jurisdiction.
8.13 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. Accordingly, the parties further agree that each party shall be
entitled to an injunction or restraining order to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other right or remedy to which such party may be entitled under
this Agreement, at law or in equity.
8.14 THIRD PARTIES. Nothing contained in this Agreement or in any
instrument or document executed by any party in connection with the transactions
contemplated hereby shall create any rights in, or be deemed to have been
executed for the benefit of, any person that is not a party hereto or thereto,
or, a successor or permitted assign of such a party, provided that the
Indemnified Parties shall be entitled to the benefits of SECTION 5.6 hereof.
8.15 SCHEDULES. The Schedules in this Agreement shall be arranged in
separate parts corresponding to the numbered and lettered sections, and the
disclosure in any numbered or lettered part shall be deemed to relate to and to
qualify only the particular representation or warranty set forth in the
corresponding numbered or lettered section, and not any other representation or
warranty (unless an express and specific reference to any other Schedule which
clearly identifies the particular item being referred is set forth therein).
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8.16 CONTROL. Neither Acquiror nor Acquisition Subsidiary have exercised,
and neither shall exercise, any control over Target, the Target Subsidiaries or
the FCC Licenses held by Target or any of the Target Subsidiaries prior to the
grant of necessary approvals by the FCC, to the extent such approvals are
required by Law prior to the exercise of any such control.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, Acquiror, Acquisition Subsidiary and Target have caused
this Agreement to be signed and delivered by their respective duly authorized
officers as of the date first above written.
CAI WIRELESS SYSTEMS, INC.
By: /s/ JARED E. ABBRUZZESE
-----------------------------------------
Name: Jared E. Abbruzzese
Title: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
MCI WORLDCOM, INC.
By: /s/ JOHN SIDGMORE
-----------------------------------------
Name: John Sidgmore
Title: VICE CHAIRMAN OF THE BOARD
CARDINAL ACQUISITION SUBSIDIARY, INC.
By: /s/ JOHN SIDGMORE
-----------------------------------------
Name: John Sidgmore
Title: PRESIDENT
A-56
ANNEX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of April 26, 1999 (the "Agreement"), by and
between MCI WORLDCOM, INC., a Georgia corporation ("MCI WorldCom"), and CAI
WIRELESS SYSTEMS, INC., a Connecticut corporation ("CAI").
RECITALS
(A) MERGER AGREEMENT. MCI WorldCom, CAI and Cardinal Acquisition Subsidiary,
Inc., a Connecticut corporation and wholly owned subsidiary of MCI WorldCom
("Acquisition Subsidiary"), have entered into an Agreement and Plan of Merger
dated as of the date hereof (the "Merger Agreement"), which provides, upon the
terms and subject to the conditions set forth therein, for the merger of
Acquisition Subsidiary with and into CAI (the "Merger"); and
(B) CONDITION TO MERGER AGREEMENT. As a condition and inducement to MCI
WorldCom's pursuit of the transactions contemplated by the Merger Agreement, and
in consideration therefor, CAI has agreed to grant MCI WorldCom the Option (as
hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, and intending to be legally bound hereby, MCI WorldCom and
CAI, agree as follows:
1. DEFINED TERMS. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement.
2. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
CAI hereby grants to MCI WorldCom an irrevocable option (the "OPTION") to
purchase a number of shares of common stock, par value $.01 per share ("CAI
COMMON"), of CAI up to 6,090,481 of such shares (as adjusted as set forth
herein, the "Option Shares", which shall include the Option Shares before and
after any transfer of such Option Shares, and which represents 24.4% of the
fully diluted shares of CAI Common as of the date hereof), at a purchase price
per Option Share (as adjusted as set forth herein, the "PURCHASE PRICE") equal
to $28.
3. EXERCISE OF OPTION.
(a) Provided that no preliminary or permanent injunction or other order
against the delivery of Option Shares issued by any court of competent
jurisdiction in the United States shall be in effect, Holder (as hereinafter
defined) may exercise the Option, in whole or in part, at any time and from time
to time following the occurrence of a Purchase Event (as hereinafter defined);
PROVIDED that the Option shall terminate and be of no further force or effect as
follows:
(A) If the Merger is consummated, upon the Effective Time;
(B) If the Merger Agreement is terminated for any reason and a Purchase
Event has occurred prior to such termination, eighteen (18) months after the
occurrence of such Purchase Event;
(C) If the Merger Agreement is terminated pursuant to SECTIONS 7.1(A),
7.1(B)(I), 7.1(B)(III), OR 7.1(E) and a Purchase Event has not occurred prior to
such termination, upon such termination;
(D) If the Merger Agreement is terminated for any reason other than those
enumerated in clause (C) above and a Purchase Event has not occurred prior to
such termination, eighteen (18) months after such termination; and
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(E) Thirty (30) months from the date hereof if the Merger has not been
consummated and the Merger Agreement has not been terminated by such date.
PROVIDED, HOWEVER, that any purchase of Option Shares shall be subject to
compliance with applicable law. The term "HOLDER" shall mean the holder or
holders of the Option from time to time, and which is initially MCI WorldCom.
(b) As used herein, a "Purchase Event" means any of the following events:
(i) CAI shall have recommended to its shareholders, or CAI or any person
(other than MCI WorldCom or any affiliate or associate of MCI WorldCom)
shall have publicly proposed or publicly announced, a bona fide Takeover
Proposal that shall not have been withdrawn at the time of the exercise
of the Option; or
(ii) any person (other than MCI WorldCom or any affiliate or associate of
MCI WorldCom) shall have acquired beneficial ownership (as such term is
defined in Rule 13d-3 promulgated under the Securities Exchange Act) of
or the right to acquire beneficial ownership of, or any "GROUP" (as
such term is defined in Section 13(d)(3) of the Securities Exchange
Act), other than a group of which MCI WorldCom or any affiliate or
associate of MCI WorldCom is a member, shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of,
15% or more of the voting power of CAI; or
(iii) CAI's Board of Directors shall have withdrawn or modified in a manner
adverse to MCI WorldCom the recommendation of CAI's Board of Directors
with respect to the Merger Agreement and the Merger.
As used in this Agreement, "PERSON" shall have the meaning specified in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act.
(c) CAI shall notify Holder promptly in writing of the occurrence of any
Purchase Event, it being understood that the giving of such notice by CAI shall
not be a condition to the right of Holder to exercise the Option.
(d) In the event Holder wishes to exercise the Option, it shall send to CAI
a written notice (the date of which being herein referred to as the "NOTICE
DATE") specifying (i) the total number of Option Shares it intends to purchase
pursuant to such exercise and (ii) a place and date not earlier than three (3)
business days nor later than fifteen (15) business days from the Notice Date for
the closing (the "CLOSING") of such purchase (the "CLOSING DATE"). If prior
notification to or approval of any Governmental Authority is required in
connection with such purchase, CAI shall cooperate with Holder in the filing of
the required notice or application for approval and the obtaining of such
approval and the Closing shall occur immediately following such regulatory
approvals (and any mandatory waiting periods). Any exercise of the Option shall
be deemed to occur on the Notice Date relating thereto.
(e) Holder, which is initially MCI WorldCom, by this Agreement, with respect
to any Option Shares acquired by it on or prior to the record date for the
meeting of shareholders of CAI called to consider the Merger Agreement and the
Merger, does hereby constitute and appoint CAI, or any nominee of CAI, with full
power of substitution, from the date hereof to the earlier to occur of the
termination of the Merger Agreement or the Effective Time, as its true and
lawful attorney and proxy (its "PROXY"), for and in its name, place and stead,
to vote each of such Option Shares as its Proxy, at every annual, special or
adjourned meeting of the shareholders of CAI, including the right to sign its
name (as shareholder) to any consent, certificate or other document relating to
CAI that the law of the State of Connecticut may permit or require:
(i) in favor of the Merger Agreement and the Merger; and
B-2
(ii) against any proposal for any recapitalization, merger (other than the
Merger), sale of assets or other business combination between CAI and
any person or entity (other than MCI WorldCom or Acquisition Subsidiary
or other permitted assignee thereof under the Merger Agreement) or any
other action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or
agreement of MCI WorldCom under the Merger Agreement or which could
result in any of the conditions to the Merger Agreement not being
fulfilled.
THIS POWER OF ATTORNEY IS IRREVOCABLE, IS GRANTED IN CONSIDERATION OF CAI
ENTERING INTO THE MERGER AGREEMENT AND IS COUPLED WITH AN INTEREST SUFFICIENT IN
LAW TO SUPPORT AN IRREVOCABLE POWER. This appointment shall revoke all prior
powers of attorney and proxies appointed by Holder at any time with respect to
the Option Shares and no subsequent powers of attorney or proxies will be
appointed by Holder, or be effective, with respect thereto during the term of
this Agreement.
Holder shall perform such further acts and execute such further documents
and instruments as may reasonably be required to vest in CAI the power to carry
out and give effect to the provisions of this Agreement.
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On each Closing Date, Holder shall (i) pay to CAI, in immediately
available funds by wire transfer to a bank account designated by CAI, an amount
equal to the Purchase Price multiplied by the number of Option Shares to be
purchased on such Closing Date, and (ii) present this Agreement to CAI at the
address of CAI specified in SECTION 11(F) and CAI shall mark and return this
Agreement to Holder to reflect the exercise of this Option.
(b) At each Closing, simultaneously with the delivery of immediately
available funds, and presentation of this Agreement as provided in SECTION 4(A),
(i) CAI shall deliver to Holder (A) a certificate or certificates representing
the Option Shares to be purchased at such Closing, which Option Shares shall be
free and clear of all liens, fully paid and nonassessable and subject to no
preemptive rights, and (B) an executed new agreement with the same terms as this
Agreement evidencing the right to purchase the balance of the Option Shares
purchasable hereunder, if any, and the remaining rights of the Holder, and (ii)
Holder shall deliver to CAI a letter agreeing that Holder shall not offer to
sell or otherwise dispose of such Option Shares in violation of applicable
federal and state law or of the provisions of this Agreement.
(c) In addition to any other legend that is required by applicable law,
certificates for the Option Shares delivered at each Closing shall be endorsed
with a restrictive legend which shall read substantially as follows:
THE TRANSFER AND VOTING OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND A STOCK OPTION AGREEMENT DATED AS OF APRIL 26, 1999. A COPY OF SUCH
AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY
CAI OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that the portion of the above legend relating to
restrictions on transfer shall be removed by delivery of substitute
certificate(s) without such legend if Holder shall have delivered to CAI a copy
of a letter from the staff of the SEC, or an opinion of counsel in form and
substance reasonably satisfactory to CAI and its counsel, to the effect that
such legend is not required for purposes of the Securities Act. It is understood
and agreed that the portion of the above legend relating to voting shall be
removed upon expiration or termination of the proxy referred to in SECTION 3(E)
hereof.
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(d) Upon the giving by Holder to CAI of the written notice of exercise of
the Option provided for under SECTION 3(D), the tender of the applicable
purchase price in immediately available funds and the tender of this Agreement
to CAI, Holder shall be deemed to be the holder of record of the shares of CAI
Common issuable upon such exercise, notwithstanding that the stock transfer
books of CAI shall then be closed or that certificates representing such shares
of CAI Common shall not then be actually delivered to Holder. CAI shall pay all
expenses, and any and all United States federal, state, and local taxes and
other charges that may be payable in connection with the preparation, issuance
and delivery of stock certificates under this Section in the name of Holder or
its assignee, transferee, or designee.
(e) CAI agrees (i) that it shall at all times maintain, free from preemptive
rights, sufficient authorized but unissued or treasury shares of CAI Common so
that the Option may be exercised without additional authorization of CAI Common
after giving effect to all other options, warrants, convertible securities and
other rights to purchase CAI Common, (ii) that it will not, by charter amendment
or through reorganization, consolidation, merger, dissolution or sale of assets,
or by any other voluntary act, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by CAI, and (iii) promptly to take all action as may from
time to time be required (including (A) complying with all premerger
notification, reporting and waiting period requirements, (B) in the event prior
approval of or notice to any governmental regulatory agency is necessary before
the Option may be exercised, cooperating fully with Holder in preparing such
applications or notices and providing such information to such Governmental
Authority as it may require and (C) amending, redeeming or taking such other
action with respect to the Rights Plan so as to preclude MCI WorldCom from
becoming an "Acquiring Person" (as defined in the Rights Plan) and to preclude a
"Stock Acquisition Date" (as defined in the Rights Plan) or a "Distribution
Date" (as defined in the Rights Plan) (or similar events) from occurring
thereunder in order to permit Holder to exercise the Option and CAI duly and
effectively to issue shares of the CAI Common pursuant hereto.
5. REPRESENTATIONS AND WARRANTIES OF CAI. CAI hereby represents and warrants
to MCI WorldCom (and Holder, if different from MCI WorldCom) as follows:
(a) CORPORATE AUTHORITY. CAI has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby; the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of CAI, and no other corporate proceedings
on the part of CAI are necessary to authorize this Agreement or to consummate
the transactions so contemplated; this Agreement has been duly and validly
executed and delivered by CAI.
(b) BENEFICIAL OWNERSHIP. To the best knowledge of CAI, as of the date of
this Agreement, no person or group has beneficial ownership of more than 10% of
the issued and outstanding shares of CAI Common other than persons or other
entities affiliated with Merrill Lynch Asset Management, L.P. and Moore Capital
Management, Inc., as reflected in Schedule 13Gs, publicly filed with the SEC on
or prior to April 15, 1999.
(c) SHARES RESERVED FOR ISSUANCE; CAPITAL STOCK. CAI has taken all necessary
corporate action to authorize and reserve and permit it to issue, and at all
times from the date hereof through the termination of this Agreement in
accordance with its terms will have reserved for issuance upon the exercise of
the Option, that number of shares of CAI Common equal to the maximum number of
shares of CAI Common at any time and from time to time purchasable upon exercise
of the Option, and all such shares, upon issuance pursuant to the Option, will
be duly authorized, validly issued, fully paid and nonassessable, and will be
delivered free and clear of all claims, liens, encumbrances, and security
interests (other than those created by this Agreement) and not subject to any
preemptive rights.
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(d) NO VIOLATIONS. The execution, delivery and performance of this Agreement
does not and will not, and the consummation by CAI of any of the transactions
contemplated hereby will not, constitute or result in (A) a breach or violation
of, or a default under, its certificate of incorporation or by-laws, or the
comparable governing instruments of any of its subsidiaries, or (B) a breach or
violation of, or a default under, any agreement, lease, contract, note,
mortgage, indenture, arrangement or other obligation of it or any of its
subsidiaries (with or without the giving of notice, the lapse of time or both)
or under any law, rule, ordinance or regulation or judgment, decree, order,
award or governmental or non-governmental permit or license to which it or any
of its subsidiaries is subject, that would, in any case, give any other person
the ability to prevent or enjoin CAI's performance under this Agreement in any
material respect.
6. REPRESENTATIONS AND WARRANTIES OF MCI WORLDCOM. MCI WorldCom hereby
represents and warrants to CAI as follows:
(a) CORPORATE AUTHORITY. MCI WorldCom has full corporate power and authority
to enter into this Agreement and, subject to obtaining the approvals referred to
in this Agreement, to consummate the transactions contemplated by this
Agreement; the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of MCI WorldCom; and this Agreement has been duly
executed and delivered by MCI WorldCom.
(b) INVESTMENT REPRESENTATIONS.
(i) MCI WorldCom is acquiring the Option and the Option Shares
(collectively, the "SECURITIES") for its own account for investment
only, and not with a view to, or for sale in connection with, any
distribution of the Securities in violation of the Securities Act, or
any rule or regulation under the Securities Act.
(ii) MCI WorldCom has had such opportunity as it deems adequate to obtain
from representatives of CAI such information as is necessary to permit
MCI WorldCom to evaluate the merits and risks of its investment in CAI.
(iii) MCI WorldCom has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the
purchase of the Securities and to make an informed investment decision
with respect to such purchase.
(iv) MCI WorldCom acknowledges that (1) the Securities have not been
registered under the Securities Act and are "restricted securities"
within the meaning of Rule 144 under the Securities Act and (2) the
Securities cannot be sold, transferred or otherwise disposed of unless
they are subsequently registered under the Securities Act or an
exemption from registration is then available.
7. ADJUSTMENT UPON CHANGES IN CAI CAPITALIZATION, ETC.
(a) In the event of any change in the CAI Common by reason of a stock
dividend, stock split, split-up, recapitalization, combination, exchange of
shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that Holder shall receive, upon exercise of the Option, the
number and class of shares or other securities or property that Holder would
have received in respect of CAI Common if the Option had been exercised
immediately prior to such event, or the record date therefor, as applicable. If
any additional shares of CAI Common are issued after the date of this Agreement
(other than pursuant to an event described in the first sentence of this SECTION
7(A), upon exercise of any option to purchase CAI Common outstanding on the date
hereof or upon conversion into CAI Common of any convertible security of CAI
outstanding on the date hereof), the number of shares of CAI Common subject to
the Option
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shall be adjusted so that, after such issuance, it, together with any shares of
CAI Common previously issued pursuant hereto, equals [24.4]% of the number of
shares of CAI Common then issued and outstanding, giving effect to any shares
subject to or issued pursuant to the Option. No provision of this SECTION 7
shall be deemed to affect or change, or constitute authorization for any
violation of, any of the covenants or representations in the Merger Agreement.
(b) In the event that CAI shall enter into an agreement (i) to consolidate
with or merge into any person, other than MCI WorldCom or one of its
subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than MCI WorldCom or
one of its subsidiaries, to merge into CAI and CAI shall be the continuing or
surviving corporation, but, in connection with such merger, the then outstanding
shares of CAI Common shall be changed into or exchanged for stock or other
securities of CAI or any other person or cash or any other property or the
outstanding shares of CAI Common immediately prior to such merger shall after
such merger represent less than 50% of the outstanding shares and share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than MCI WorldCom or one of
its subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provisions so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option to acquire the number and
class of shares or other securities or property that Holder would have received
in respect of CAI Common if the Option had been exercised immediately prior to
such consolidation, merger, sale or transfer, or the record date therefor, as
applicable.
8. REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS. CAI shall, subject to the conditions of
SECTION 8(C) below, if requested by Holder, including MCI WorldCom and any
permitted transferee acquiring at least 10% of the shares of CAI Common
represented by the Option on the date hereof (each, a "SELLING SHAREHOLDER"), as
expeditiously as possible prepare and file a registration statement under the
Securities Act if such registration is necessary in order to permit the sale or
other disposition of any or all shares of CAI Common or other securities that
have been acquired by or are issuable to the Selling Shareholder upon exercise
of the Option in accordance with the intended method of sale or other
disposition stated by the Selling Shareholder in such request, including without
limitation a "shelf" registration statement under Rule 415 under the Securities
Act or any successor provision, and CAI shall use its best efforts to qualify
such shares or other securities for sale under any applicable state securities
laws, PROVIDED, HOWEVER, that CAI shall not be required to consent to general
jurisdiction or qualify to do business in any state where it is not otherwise
required to so consent to such jurisdiction or to so qualify to do business.
(b) ADDITIONAL REGISTRATION RIGHTS. If CAI at any time after the exercise of
the Option proposes to register any shares of CAI Common under the Securities
Act, CAI will promptly give written notice to the Selling Shareholders of its
intention to do so and, upon the written request of any Selling Shareholder
given within thirty (30) days after receipt of any such notice (which request
shall specify the number of shares of CAI Common intended to be included in such
public offering by the Selling Shareholder), CAI will cause all such shares for
which a Selling Shareholder requests participation in such registration to be so
registered and included in such public offering, PROVIDED, HOWEVER, that CAI may
elect to not cause any such shares to be so registered (i) if such public
offering is to be underwritten and the underwriters in good faith object for
valid business reasons, or (ii) in the case of a registration solely to
implement an employee benefit plan or a registration filed on Form S-4 of the
Securities Act or any successor Form; PROVIDED, FURTHER, HOWEVER, that such
election pursuant to (i) may only be made two times. If some but not all the
shares of CAI Common, with respect to which CAI shall have received requests for
registration pursuant to this SECTION 8(B), shall be excluded from such
registration, CAI shall make appropriate allocation of shares to be registered
among the Selling Shareholders desiring to register their shares pro rata in the
proportion that the number of shares requested to be registered by each such
Selling Shareholder bears to the total number of shares requested to be
registered by all such Selling Shareholders then desiring to have CAI Common
registered for sale.
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(c) CONDITIONS TO REQUIRED REGISTRATION. CAI shall use all reasonable
efforts to cause each registration statement referred to in SECTION 8(A) above
to become effective and to obtain all consents or waivers of other parties which
are required therefor and to keep such registration statement effective;
PROVIDED, HOWEVER, that CAI may delay any registration of Option Shares required
pursuant to SECTION 8(A) above for a period not exceeding ninety (90) days
provided CAI shall in good faith determine that any such registration would
adversely affect CAI (provided that this right may not be exercised more than
once during any twelve month period), and CAI shall not be required to register
Option Shares under the Securities Act pursuant to SECTION 8(A) above:
(i) on more than one occasion during any calendar year;
(ii) within ninety (90) days after the effective date of a registration
referred to in SECTION 8(B) above pursuant to which the Selling
Shareholder or Selling Shareholders concerned were afforded the
opportunity to register such shares under the Securities Act and such
shares were registered as requested;
(iii) unless a request therefor is made to CAI by Selling Shareholders that
hold at least 25% or more of the aggregate number of Option Shares
(including shares of CAI Common issuable upon exercise of the Option)
then outstanding; or
(iv) if all the Option Shares proposed to be registered could be sold by the
Selling Shareholders in a 90-day period in accordance with Rule 144.
In addition to the foregoing, CAI shall not be required to maintain the
effectiveness of any registration statement after the expiration of six (6)
months from the effective date of such registration statement. CAI shall use all
reasonable efforts to make any filings, and take all steps, under all applicable
state securities laws to the extent necessary to permit the sale or other
disposition of the Option Shares so registered in accordance with the intended
method of distribution for such shares; PROVIDED, HOWEVER, that CAI shall not be
required to consent to general jurisdiction or qualify to do business in any
state where it is not otherwise required to so consent to such jurisdiction or
to so qualify to do business.
(d) EXPENSES. Except where applicable state law prohibits such payments, CAI
will pay all expenses (including without limitation registration fees,
qualification fees, blue sky fees and expenses, including the fees and expenses
of counsel, legal expenses, including the reasonable fees and expenses of one
counsel to the holders whose Option Shares are being registered (not to exceed
$15,000), printing expenses, the costs of special audits or "cold comfort"
letters, expenses of underwriters, excluding discounts and commissions but
including liability insurance if CAI so desires or the underwriters so require,
and the reasonable fees and expenses of any necessary special experts) in
connection with each registration pursuant to SECTION 8(A) OR 8(B) above
(including the related offerings and sales by holders of Option Shares) and all
other qualifications, notifications or exemptions pursuant to SECTION 8(A) OR
8(B) above.
(e) INDEMNIFICATION. In connection with any registration under SECTION 8(A)
OR 8(B) above, CAI hereby indemnifies the Selling Shareholders, and each
underwriter thereof, including each person, if any, who controls such Holder or
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, losses, claims, damages and liabilities caused by any untrue, or
alleged untrue, statement of a material fact contained in any registration
statement or prospectus or notification or offering circular (including any
amendments or supplements thereto) or any preliminary prospectus, or caused by
any omission, or alleged omission, to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such expenses, losses, claims, damages or liabilities of such
indemnified party are caused by any untrue statement or alleged untrue statement
that was included by CAI in any such registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto) in reliance upon
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and in conformity with, information furnished in writing to CAI by such
indemnified party expressly for use therein, and CAI and each officer, director
and controlling person of CAI shall be indemnified by such Selling Shareholders,
or by such underwriter, as the case may be, for all such expenses, losses,
claims, damages and liabilities caused by any untrue, or alleged untrue,
statement, that was included by CAI in any such registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) in reliance upon, and in conformity with, information
furnished in writing to CAI by or on behalf of such Selling Shareholder or such
underwriter, as the case may be, expressly for such use.
Promptly upon receipt by a party indemnified under this SECTION 8(E) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this SECTION 8(E), such indemnified party shall notify
the indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may otherwise have to any indemnified party under this
SECTION 8(E) except to the extent the indemnified party is materially prejudiced
thereby. In case notice of commencement of any such action shall be given to the
indemnifying party as above provided, the indemnifying party shall be entitled
to participate in and, to the extent it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense of such action at
its own expense, with counsel chosen by it and reasonably satisfactory to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel (other than reasonable costs of investigation)
shall be paid by the indemnified party unless (i) the indemnifying party either
agrees to pay the same, (ii) the indemnifying party fails to assume the defense
of such action with counsel reasonably satisfactory to the indemnified party, or
(iii) the indemnified party has been advised by counsel that one or more legal
defenses may be available to the indemnifying party that may be contrary to the
interest of the indemnified party, in which case the indemnifying party shall be
entitled to assume the defense of such action notwithstanding its obligation to
bear fees and expenses of such counsel. No indemnifying party shall be liable
for any settlement entered into without its consent, which consent may not be
unreasonably withheld.
If the indemnification provided for in this SECTION 8(E) is unavailable to a
party otherwise entitled to be indemnified in respect of any expenses, losses,
claims, damages or liabilities referred to herein, then the indemnifying party,
in lieu of indemnifying such party otherwise entitled to be indemnified, shall
contribute to the amount paid or payable by such party to be indemnified as a
result of such expenses, losses, claims, damages or liabilities in such
proportion as is appropriate to reflect the relative benefits received by CAI,
the Selling Shareholders and the underwriters from the offering of the
securities and also the relative fault of CAI, the Selling Shareholders and the
underwriters in connection with the statements or omissions which resulted in
such expenses, losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The amount paid or payable by a party as a
result of the expenses, losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim, PROVIDED, HOWEVER, that in no case shall any Selling Shareholder be
responsible, in the aggregate, for any amount in excess of the net offering
proceeds attributable to its Option Shares included in the offering. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. Any obligation by any Selling
Shareholder to indemnify shall be several and not joint with other holders.
In connection with any registration pursuant to SECTION 8(A) OR 8(B) above,
CAI and each Selling Shareholder (other than MCI WorldCom) shall enter into an
agreement containing the indemnification provisions of this SECTION 8(E). In the
event of an underwritten public offering pursuant to SECTION 8(B), the Company
and the Selling Shareholders shall enter into an underwriting agreement
containing
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customary terms and provisions; PROVIDED that the indemnification provisions as
they relate to Selling Shareholders shall contain substantially the same
limitations as the provisions set forth herein.
(f) MISCELLANEOUS REPORTING. CAI shall comply with all reporting
requirements and will do all such other things as may be necessary to permit the
expeditious sale at any time of any Option Shares by the Selling Shareholders
thereof in accordance with and to the extent permitted by any rule or regulation
promulgated by the SEC from time to time, including, without limitation, Rule
144. CAI shall at its expense provide the Selling Shareholders with any
information necessary in connection with the completion and filing of any
reports or forms required to be filed by them under the Securities Act or the
Securities Exchange Act, or required pursuant to any state securities laws or
the rules of any stock exchange.
(g) ISSUE TAXES. CAI will pay all stamp taxes in connection with the
issuance and the sale of the Option Shares and in connection with the exercise
of the Option, and will hold the Selling Shareholders harmless, without
limitation as to time, against any and all liabilities, with respect to all such
taxes.
9. QUOTATION; LISTING. If CAI Common or any other securities to be acquired
in connection with the exercise of the Option are then authorized for quotation
or trading or listing on any securities exchange or market, CAI, upon the
request of Holder, will promptly file an application, if required, to authorize
for quotation or trading or listing the shares of CAI Common or other securities
to be acquired upon exercise of the Option on such securities exchange or market
and will use its best efforts to obtain approval, if required, of such quotation
or listing as soon as practicable.
10. DIVISION OF OPTION. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Holder, upon presentation and
surrender of this Agreement at the principal office of CAI for other Agreements
providing for Options of different denominations entitling the holder thereof to
purchase in the aggregate the same number of shares of CAI Common purchasable
hereunder. The terms "AGREEMENT" and "OPTION" as used herein include any other
Agreements and related Options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by CAI of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, CAI will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of CAI, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
11. MISCELLANEOUS.
(a) EXPENSES. Except as expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
(b) WAIVER AND AMENDMENT. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the parties hereto.
(c) ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES; SEVERABILITY. This
Agreement, together with the Merger Agreement and the other documents and
instruments referred to herein and therein, between MCI WorldCom and CAI (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof, and (ii) is not intended to confer upon any person other
than the parties hereto (other than the indemnified parties under SECTION 8(E)
and any transferees of the Option Shares or any permitted
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transferee of this Agreement pursuant to SECTION 11(H)) any rights or remedies
hereunder. If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction or Governmental Authority to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. If for any
reason such court or Governmental Authority determines that the Option does not
permit Holder to acquire the full number of shares of CAI Common as provided in
SECTION 3 (as may be adjusted herein), it is the express intention of CAI to
allow Holder to acquire such lesser number of shares as may be permissible
without any amendment or modification hereof.
(d) GOVERNING LAW. This Agreement shall be interpreted, construed and
governed in accordance with the internal laws of the State of New York (without
regard to any applicable conflicts of law rules), except for matters governed by
the Connecticut Code, which shall be interpreted, construed and governed by
Connecticut Code.
(e) DESCRIPTIVE HEADINGS. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the addresses set forth in the Merger Agreement (or
at such other address for a party as shall be specified by like notice).
(g) COUNTERPARTS. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed and
delivered, it being understood that both parties need not sign the same
counterpart.
(h) ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party, except that Holder may assign this Agreement
to a wholly-owned subsidiary of Holder and Holder may assign its rights
hereunder in whole or in part after the occurrence of a Purchase Event. Subject
to the preceding sentence, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors and
assigns.
(i) FURTHER ASSURANCES. In the event of any exercise of the Option by
Holder, CAI and Holder shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
(j) SPECIFIC PERFORMANCE. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief and
other equitable relief. Both parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
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IN WITNESS WHEREOF, CAI and MCI WorldCom have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
CAI WIRELESS SYSTEMS, INC.
By: /s/ Jared E. Abbruzzese_____________
Name: Jared E. Abbruzzese
Title: Chairman and Chief Executive
Officer
MCI WORLDCOM, INC.
By: /s/ Charles T. Cannada______________
Name: Charles T. Cannada
Title: Senior Vice President
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BT Alex. Brown Incorporated [LOGO]
April 26, 1999
Board of Directors
CAI Wireless Systems, Inc.
18 Corporate Woods Boulevard
Albany, New York 12211
Members of the Board:
BT Alex. Brown Incorporated ("BT Alex. Brown") has acted as financial
advisor to CAI Wireless Systems, Inc. ("CAI") in connection with the proposed
merger transaction involving CAI and MCI WorldCom, Inc. ("WCOM") pursuant to the
Agreement and Plan of Merger, dated as of April 26, 1999 (the "Merger
Agreement"), among WCOM, Cardinal Acquisition Subsidiary Inc., a wholly owned
subsidiary of WCOM ("Acquisition Subsidiary"), and CAI. The Merger Agreement
provides, among other things, for the merger of Acquisition Subsidiary with and
into CAI (the "Merger") pursuant to which CAI will become a wholly owned
subsidiary of WCOM. As set forth more fully in the Merger Agreement, as a result
of the Merger, each outstanding share of the common stock, par value $0.01 per
share, of CAI ("CAI Common Stock") will be converted into the right to receive
$28.00 in cash (the "Merger Consideration"). The terms and conditions of the
Merger are more fully set forth in the Merger Agreement.
You have requested BT Alex. Brown's opinion as to the fairness, from a
financial point of view, of the Merger Consideration to the holders of CAI
Common Stock (other than WCOM and its affiliates).
In connection with BT Alex. Brown's role as financial advisor to CAI, and in
arriving at its opinion, BT Alex. Brown has reviewed certain publicly available
financial and other information concerning CAI and certain internal analyses and
other information furnished to or discussed with it by CAI and its advisors. BT
Alex. Brown has also held discussions with members of the senior management of
CAI regarding the business and prospects of CAI. In addition, BT Alex. Brown has
(i) reviewed the reported prices and trading activity for CAI Common Stock, (ii)
compared certain financial and stock market information for CAI with similar
information for certain other companies whose securities are publicly traded,
(iii) reviewed the financial terms of certain recent business combinations which
it deemed comparable in whole or in part, (iv) reviewed the terms of the Merger
Agreement and certain related documents, and (v) performed such other studies
and analyses and considered such other factors as it deemed appropriate. Prior
to CAI's execution of a letter of intent with WCOM in April 1999, BT Alex. Brown
was authorized in connection with its engagement to approach, and held
discussions with, certain third parties to solicit indications of interest with
respect to the acquisition of, or joint venture or business combination with,
CAI.
BT Alex. Brown has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning CAI, including, without limitation, any
financial information, forecasts or projections considered in connection with
the rendering of its opinion. Accordingly, for purposes of its opinion, BT Alex.
Brown has assumed and relied upon the accuracy and completeness of all such
information and BT Alex. Brown has not conducted a physical inspection of any of
the properties or assets, and has not prepared or obtained any independent
evaluation or appraisal of any of the assets or liabilities, of CAI. With
respect to the financial forecasts and projections made available to BT Alex.
Brown and used in its analyses, BT Alex. Brown has assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of CAI as to the matters covered thereby. In
rendering its opinion, BT Alex. Brown expresses no view as to the reasonableness
of such forecasts and projections or the assumptions on which they are based. BT
Alex. Brown's opinion is necessarily based upon economic, market and other
conditions as in effect on, and the information made available to it as of, the
date hereof.
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Board of Directors
CAI Wireless Systems, Inc.
April 26, 1999
Page 2
For purposes of rendering its opinion, BT Alex. Brown has assumed that, in
all respects material to its analysis, the representations and warranties of
CAI, WCOM and Acquisition Subsidiary contained in the Merger Agreement are true
and correct, CAI, WCOM and Acquisition Subsidiary will each perform all of the
covenants and agreements to be performed by it under the Merger Agreement and
all conditions to the obligations of each of CAI, WCOM and Acquisition
Subsidiary to consummate the Merger will be satisfied without any waiver
thereof. BT Alex. Brown has also assumed that all material governmental,
regulatory or other approvals and consents required in connection with the
consummation of the Merger will be obtained and that in connection with
obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which either CAI or WCOM is a party or is subject or by
which it is bound, no limitations, restrictions or conditions will be imposed or
amendments, modifications or waivers made that would have a material adverse
effect on CAI or WCOM or materially reduce the contemplated benefits of the
Merger to CAI.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of CAI and is not a recommendation to any shareholder as to how such
shareholder should vote with respect to matters relating to the proposed Merger.
This opinion is limited to the fairness, from a financial point of view, of the
Merger Consideration to the holders of CAI Common Stock (other than WCOM and its
affiliates), and BT Alex. Brown expresses no opinion as to the merits of the
underlying decision by CAI to engage in the Merger.
BT Alex. Brown, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. BT Alex. Brown has acted as
financial advisor to CAI in connection with the Merger and will receive a fee
for its services contingent upon consummation of the Merger. BT Alex. Brown and
its affiliates have in the past provided financial services to CAI and WCOM
unrelated to the proposed Merger, including having acted as financial advisor to
CAI in connection with its Chapter 11 bankruptcy proceeding in 1998 and as
managing agent in connection with WCOM's senior bank debt financing in August
1998, for which services BT Alex. Brown and its affiliates have received
compensation. BT Alex. Brown currently holds warrants to purchase shares of CAI
Common Stock. BT Alex. Brown maintains a market in the securities of CAI and
WCOM and regularly publishes research reports regarding WCOM and the businesses
and securities of publicly traded companies in the telecommunications industry.
In the ordinary course of business, BT Alex. Brown and its affiliates may
actively trade or hold the securities and other instruments and obligations of
CAI and WCOM for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities,
instruments or obligations.
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Board of Directors
CAI Wireless Systems, Inc.
April 26, 1999
Page 3
Based upon and subject to the foregoing, it is BT Alex. Brown's opinion
that, as of the date of this letter, the Merger Consideration is fair, from a
financial point of view, to the holders of CAI Common Stock (other than WCOM and
its affiliates).
Very truly yours,
/s/ BT Alex. Brown Incorporated
BT ALEX. BROWN INCORPORATED
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ANNEX D
CONNECTICUT GENERAL STATUTES
TITLE 33. CORPORATIONS
CHAPTER 601. BUSINESS CORPORATIONS
PART XIII. DISSENTERS' RIGHTS
SECTION 33-855. DEFINITIONS
As used in sections 33-855 to 33-872, inclusive:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 33-856 and who exercises that right when and in
the manner required by sections 33-860 to 33-868, inclusive.
(3) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SECTION 33-856. RIGHT TO DISSENT
(a) A shareholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event of, any of the following corporate
actions:
(1) Consummation of a plan of merger to which the corporation is a party
(A) if shareholder approval is required for the merger by section 33-817 or
the certificate of incorporation and the shareholder is entitled to vote on
the merger or (B) if the corporation is a subsidiary that is merged with its
parent under section 33-818;
(2) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
(4) An amendment of the certificate of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it: (A)
alters or abolishes a preferential right of the shares; (B) creates, alters
or abolishes a right in respect of redemption, including a provision
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respecting a sinking fund for the redemption or repurchase, of the shares;
(C) alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities; (D) excludes or limits the right of the
shares to vote on any matter, or to cumulate votes, other than a limitation
by dilution through issuance of shares or other securities with similar
voting rights; or (E) reduces the number of shares owned by the shareholder
to a fraction of a share if the fractional share so created is to be
acquired for cash under section 33-668; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the certificate of incorporation, bylaws or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) Where the right to be paid the value of shares is made available to a
shareholder by this section, such remedy shall be his exclusive remedy as holder
of such shares against the corporate transactions described in this section,
whether or not he proceeds as provided in sections 33-855 to 33-872, inclusive.
SECTION 33-857. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if: (1) He submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and (2) he does so with
respect to all shares of which he is the beneficial shareholder or over which he
has power to direct the vote.
SECTIONS 33-858, 33-859. RESERVED FOR FUTURE USE
SECTION 33-860. NOTICE OF DISSENTERS' RIGHTS
(a) If proposed corporate action creating dissenters' rights under section
33-856 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under sections 33-855 to 33-872, inclusive, and be accompanied by a copy
of said sections.
(b) If corporate action creating dissenters' rights under section 33-856 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in section 33-862.
SECTION 33-861. NOTICE OF INTENT TO DEMAND PAYMENT
(a) If proposed corporate action creating dissenters' rights under section
33-856 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (1) shall deliver to the corporation before
the vote is taken written notice of his intent to demand payment for his shares
if the proposed action is effectuated and (2) shall not vote his shares in favor
of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) of
this section is not entitled to payment for his shares under sections 33-855 to
33-872, inclusive.
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SECTION 33-862. DISSENTERS' NOTICE
(a) If proposed corporate action creating dissenters' rights under section
33-856 is authorized at a shareholders' meeting, the corporation shall deliver a
written dissenters' notice to all shareholders who satisfied the requirements of
section 33-861.
(b) The dissenters' notice shall be sent no later than ten days after the
corporate action was taken and shall:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not he acquired beneficial ownership of the shares
before that date;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the
date the subsection (a) of this section notice is delivered; and
(5) Be accompanied by a copy of sections 33-855 to 33-872, inclusive.
SECTION 33-863. DUTY TO DEMAND PAYMENT
(a) A shareholder sent a dissenters' notice described in section 33-862 must
demand payment, certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenters' notice pursuant to
subdivision (3) of subsection (b) of said section and deposit his certificates
in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) of this section retains all other rights of a shareholder
until these rights are cancelled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under sections 33-855 to 33-872,
inclusive.
SECTION 33-864. SHARE RESTRICTIONS
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under section 33-866.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action.
SECTION 33-865. PAYMENT
(a) Except as provided in section 33-867, as soon as the proposed corporate
action is taken, or upon receipt of a payment demand, the corporation shall pay
each dissenter who complied with section 33-863 the amount the corporation
estimates to be the fair value of his shares, plus accrued interest.
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(b) The payment shall be accompanied by: (1) The corporation's balance sheet
as of the end of a fiscal year ending not more than sixteen months before the
date of payment, an income statement for that year, a statement of changes in
shareholders' equity for that year and the latest available interim financial
statements, if any; (2) a statement of the corporation's estimate of the fair
value of the shares; (3) an explanation of how the interest was calculated; (4)
a statement of the dissenter's right to demand payment under section 33-868; and
(5) a copy of sections 33-855 to 33-872, inclusive.
SECTION 33-866. FAILURE TO TAKE ACTION
(a) If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 33-862 and repeat the payment demand procedure.
SECTION 33-867. AFTER-ACQUIRED SHARES
(a) A corporation may elect to withhold payment required by section 33-865
from a dissenter unless he was the beneficial owner of the shares before the
date set forth in the dissenters' notice as the date of the first announcement
to news media or to shareholders of the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated and a statement of the dissenter's right to demand payment under
section 33-868.
SECTION 33-868. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment of
his estimate, less any payment under section 33-865, or reject the corporation's
offer under section 33-867 and demand payment of the fair value of his shares
and interest due, if:
(1) The dissenter believes that the amount paid under section 33-865 or
offered under section 33-867 is less than the fair value of his shares or
that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under section 33-865 within
sixty days after the date set for demanding payment; or
(3) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(b) A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection (a) of
this section within thirty days after the corporation made or offered payment
for his shares.
SECTIONS 33-869, 33-870. RESERVED FOR FUTURE USE
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SECTION 33-871. COURT ACTION
(a) If a demand for payment under section 33-868 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(b) The corporation shall commence the proceeding in the superior court for
the judicial district where a corporation's principal office or, if none in this
state, its registered office is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the superior court for the judicial district where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
(c) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment
(1) for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation, or (2) for
the fair value, plus accrued interest, of his after-acquired shares for which
the corporation elected to withhold payment under section 33-867.
SECTION 33-872. COURT COSTS AND COUNSEL FEES
(a) The court in an appraisal proceeding commenced under section 33-871
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment under section 33-868.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable: (1) Against
the corporation and in favor of any or all dissenters if the court finds the
corporation did not substantially comply with the requirements of sections
33-860 to 33-868, inclusive; or (2) against either the corporation or a
dissenter, in favor of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously
or not in good faith with respect to the rights provided by sections 33-855 to
33-872, inclusive.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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