-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uv27sxlysoIIOy3FIBFVzSF8mhfbRLbenh8erQav9Qhbl7HNUYSzG+WO7enwc2JM Ro1wM381cZqDRskvckwWyA== 0000914749-99-000016.txt : 19990630 0000914749-99-000016.hdr.sgml : 19990630 ACCESSION NUMBER: 0000914749-99-000016 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981202 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAI WIRELESS SYSTEMS INC CENTRAL INDEX KEY: 0000914749 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 061324691 STATE OF INCORPORATION: CT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 033-71662 FILM NUMBER: 99654613 BUSINESS ADDRESS: STREET 1: 18 CORPORATE WOODS BLVD STREET 2: THIRD FLOOR CITY: ALBANY STATE: NY ZIP: 12211 BUSINESS PHONE: 5184622632 MAIL ADDRESS: STREET 1: 18 CORPORATE WOODS BLVD STREET 2: 3RD FLOOR CITY: ALBANY STATE: NY ZIP: 12211 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________________________________ FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) June 29, 1999 (December 2, 1998) CAI WIRELESS SYSTEMS, INC. (Exact name of registrant as specified in its charter)
Connecticut 0-22888 06-1324691 (State or other (Commission File Number) (IRS Employer jurisdiction of Identification No.) incorporation)
18 CORPORATE WOODS BLVD., ALBANY, NY 12211 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (518) 462-2632 (Former name or former address, if changed since last report) Item 2 - ACQUISITION OR DISPOSITION OF ASSETS On December 2, 1998, CAI Wireless Systems, Inc. increased its ownership interest in CS Wireless Systems, Inc., a Delaware corporation, from approximately 60% to 94% by acquiring 3,836,035 shares of CS Wireless common stock from Nucentrix Broadband Networks, Inc. (f/k/a Heartland Wireless Communications, Inc.) for $1,534,000 in cash. Subsequently, CS Wireless acquired the 3,836,035 shares of CS Wireless common stock from CAI for $1,534,000. CS Wireless holds such shares as treasury stock. Concurrently with the purchase by CAI, CAI, CS Wireless and Nucentrix mutually agreed to terminate that certain Stockholders' Agreement dated as of February 23, 1996, among CAI, CS Wireless and Nucentrix. The Stockholders' Agreement (and bylaws of CS Wireless) required the affirmative vote of a supermajority of members of the CS Wireless board of directors or CS Wireless stockholders, as the case may be, for certain actions to be acted upon by the CS Wireless board or stockholders. Consequently, percentage ownership of CS Wireless common stock was not indicative of control of CS Wireless in all instances, so long as the Stockholders' Agreement continued. As a result of the increased ownership in CS Wireless and the termination of the Stockholders' Agreement, CAI may be deemed to control CS Wireless from and after December 2, 1998. Accordingly, the subsequent results of CS Wireless will be consolidated with the results of CAI. In prior periods, as a result of the effect that the Stockholders' Agreement had on the control of CS Wireless, CAI accounted for its investment in CS Wireless under the equity method of accounting, and the difference between CAI's cost and the value of its pro rata ownership of the underlying CS Wireless equity was amortized over 15 years, commensurate with the amortization periods of goodwill and wireless channel rights, to which CAI's investment in CS Wireless primarily related. The purchase of the CS Wireless common stock was governed by the terms of that certain Master Agreement dated as of December 2, 1998 among CAI, CS Wireless and Nucentrix, a copy of which is attached hereto as Exhibit 10.1. The Master Agreement contemplates certain other transactions between CS Wireless and Nucentrix, including the termination of Nucentrix's rights in, and claims against, CS Wireless. The Master Agreement is to be performed in two steps. Stage I, which has been consummated, required the lease by CS Wireless to Nucentrix of certain assets related to CS Wireless' Story City, Iowa market, the sale by CS Wireless to Nucentrix of certain consumer premises equipment at agreed upon prices and the payment by CS Wireless to Nucentrix of $366,000. In consideration, Nucentrix leased to CS Wireless certain assets related to the Portsmouth, New Hampshire market, effected a partial satisfaction of the so- called Heartland Long-Term Note and agreed to various mutual cooperation obligations relative to developmental applications filed by Nucentrix or CS Wireless for two-way authority in adjacent and overlapping markets, including Dallas-Ft. Worth. At the Stage II Closing, which is to occur following receipt of certain necessary governmental approvals, CS Wireless and Nucentrix will transfer to one another their respective ownership interests in the Story City, Iowa and Portsmouth, New Hampshire markets, the Heartland Long-Term Note shall be canceled and CS Wireless shall pay Nucentrix $100,000; additionally, CS Wireless agreed to transfer certain inventory to Nucentrix. In connection with the Master Agreement, the three Nucentrix designees to the CS Wireless board resigned. Item 7 - FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS a. FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. The financial statements of CS Wireless Systems, Inc. set forth on pages F-1 through F-27 of CS Wireless Systems, Inc.'s Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on Form 10-K for the fiscal year ended December 31, 1998 filed with the Securities and Exchange Commission on April 15, 1999 are filed as Exhibit 99.1 hereto pursuant to Rule 12b-23(a)(3) of the Exchange Act. The financial statements of CS Wireless Systems, Inc. set forth on pages 3 through 7 of CS Wireless Systems, Inc.'s Quarterly Report pursuant to Section 13 or 15(d) of the Exchange Act on Form 10-Q for the fiscal quarter ended March 31, 1999 filed with the Securities and Exchange Commission on May 13, 1999 are filed as Exhibit 99.2 hereto pursuant to Rule 12b-23(a)(3) of the Exchange Act. b. PRO FORMA FINANCIAL INFORMATION. The Unaudited Pro Forma Condensed Combined Financial Statements of CAI and CS Wireless for the year ended March 31, 1999 and the six months ended September 30, 1998 are included herein beginning on page F-1.
c. EXHIBITS. 10.1 Master Agreement dated as of December 2, 1998 among CAI, CS Wireless and Nucentrix (f/k/a Heartland Wireless Communications, Inc.) 99.1 Audited Financial Statements of CS Wireless for the year ended December 31, 1998 99.2 Unaudited Financial Statements of CS Wireless for the quarter ended March 31, 1999 99.3 Press Release dated December 3, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
< SIGNATURE TITLE DATE /S/ Vice President and Controller June 28, 1999 Arthur J. Miller
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) We have provided unaudited combined financial statements of CAI after giving effect to CAI's bankruptcy case and the December 2, 1998 increase in percentage ownership by CAI in CS, which are collectively referred to as the "pro forma" information. In presenting the unaudited pro forma combined balance sheet, we treated CAI, CS and TelQuest Satellite Services LLC, a subsidiary of each of CAI and CS, (i) as if these entities had been consolidated for accounting and financial reporting purposes and (ii) as if CAI had emerged from bankruptcy on September 30, 1998. We have presented the unaudited pro forma combined statements of operations for three periods: the fiscal years ended March 31, 1999 and 1998 and the six-month period ended September 30, 1998. In presenting the unaudited pro forma combined statements of operations, we treated CAI, CS and TelQuest (i) as if these entities had been consolidated for accounting and financial reporting purposes, (ii) as if CAI had emerged from bankruptcy at the beginning of each of the periods presented, and (iii) as if CAI's percentage ownership in CS had increased at the beginning of each of the periods presented. The presentation of the unaudited pro forma combined financial statements is in conformity with the so-called fresh-start accounting and financial reporting requirements set forth in the American Institute of Certified Public Accountants' Statement of Position 90-7 with respect to adjustments made as a result of CAI's bankruptcy case, and the use of purchase method of accounting and financial reporting for the increase in percentage ownership by CAI of CS as a result of the December 2, 1998 step acquisition. You should be aware that these unaudited pro forma combined financial statements are presented for illustrative purposes only and may not be indicative of the operating results or financial position that would have occurred if the bankruptcy and acquisition had occurred as of the dates and for the periods indicated or that will occur in the future. THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS FOR ALL PERIODS PRESENTED EXCLUDE ANY POSITIVE EFFECTS OF POTENTIAL COST SAVINGS THAT THE COMPANIES MAY ACHIEVE AS A RESULT OF THE INCREASED PERCENTAGE OWNERSHIP. THE PRO FORMA ADJUSTMENTS ARE BASED ON INFORMATION CURRENTLY AVAILABLE AND UPON CERTAIN ASSUMPTIONS THAT THE MANAGEMENT OF CAI BELIEVES ARE REASONABLE UNDER THE CIRCUMSTANCES. WE STRONGLY URGE YOU TO READ THE NOTES ACCOMPANYING THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS FOR A DESCRIPTION OF THE ASSUMPTIONS MADE BY CAI MANAGEMENT. THERE CAN BE NO ASSURANCE THAT THE ACTUAL ADJUSTMENTS WILL NOT DIFFER SIGNIFICANTLY FROM THE ADJUSTMENTS REFLECTED IN THE PRO FORMA STATEMENTS. FURTHER, THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS PRESENTED SHOULD BE READ IN CONJUNCTION WITH THE HISTORICAL FINANCIAL STATEMENTS OF CAI AND CS.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES Pro Forma Combined Balance Sheet September 30, 1998 (UNAUDITED) (amounts in thousands) PROFORMA ADJUSTMENTS ----------------------------------------------------------------------- CAI CS Historical ELIMINATIONS REORGANIZATION FAIR VALUE Pro Forma CAI CS TELQUEST [A] [B] [C] COMBINED CAI ---------- ------- -------- ------------ -------------- ---------- ------------ ASSETS Cash and cash equivalents $ 1,339 $ 45,394 $ 3 $ - $ - $ - $ 46,736 Restricted cash and cash equivalents 11,204 4,222 - - 15,953 - 31,379 Debt service escrow 16,914 - - - (16,914) - - Subscriber accounts receivables, net 702 1,295 - - - - 1,997 Prepaid expenses 549 929 - - - - 1,478 Property and equipment, net 41,459 54,905 87 - 264 (818) 95,897 Wireless channel rights, net 187,730 168,247 - - 17,113 (25,639) 347,451 Investment in TelQuest Satellite Services LLC 1,220 2,250 - (1,220) - - 2,250 Goodwill, net 22,067 - - - - (22,067) - Debt financing costs, net 5,838 7,656 - - (5,781) (2,555) 5,158 Reorganization value in excess of amounts allocable to identifiable assets - - - - 18,298 - 18,298 Other assets 3,060 5,686 91 - (394) - 8,443 -------- -------- ------ -------- ------- ------- ------- Total Assets $ 292,082 $ 290,584 $ 181 $ (1,220) $ 28,539 $ (51,079) $ 559,087 ======== ======== ===== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES NOT SUBJECT TO COMPROMISE Accounts payable $ 3,125 $ 515 $ 2,409 $ - $ (600) $ - $ 5,449 Accrued expenses 22,738 6,441 318 - (12,999) - 16,498 Wireless channel rights obligations 2,922 - - - - - 2,922 Interim debt financing 60,000 - - - 2,074 - 62,074 Long-term notes 3,765 312,161 3,175 - 100,000 (87,904) 331,197 ------- -------- ------ ----- ------- ------- ------- 92,550 319,117 5,902 - 88,475 (87,904) 418,140 ------- -------- ------ ----- ------- ------- ------- LIABILITIES SUBJECT TO COMPROMISE 307,793 - - - (307,793) - - STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock - - - - - - - Common stock 275,771 11 - (11) (275,599) - 172 Additional paid-in capital 101,712 154,517 5,796 (160,313) 2,238 36,825 140,775 Accumulated deficit (485,744) (183,061) (11,517) 159,104 521,218 - - -------- -------- ------- -------- -------- ------- ------- Total Equity (108,261) (28,533) (5,721) (1,220) 247,857 36,825 140,947 -------- -------- ------- -------- -------- ------- ------- Total Liabilities and Shareholders' Equity $ 292,082 $ 290,584 $ 181 $ (1,220) $ 28,539 $ (51,079) $ 559,087 ======== ======== ====== ======== ======== ======== ========
See notes to Pro Forma Combined Balance Sheet. 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. 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)
PROFORMA ADJUSTMENTS ------------------------------------------------------------------- CAI CS Historical ELIMINATIONS REORGANIZATION FAIR VALUE Pro Forma CAI CS TELQUEST [D] [E] [F] COMBINED CAI ---------- ------- -------- ------------ -------------- ---------- ------------ Revenues $ 18,909 $ 25,376 $ 2 $ - $ - $ - $ 44,287 -------- -------- ------- ---------- ----------- -------- -------- Costs and expenses: Programming and license fees 14,658 16,682 - - - - 31,340 General and administrative 27,522 20,249 9,131 - - - 56,902 Goodwill writedown - 63,907 - - - - 63,907 Depreciation and amortization 30,611 27,503 - 375 2,425 (1,824) 59,090 -------- -------- ------ ---------- ---------- -------- -------- 72,791 128,341 9,131 375 2,425 (1,824) 211,239 -------- -------- ------ ---------- ---------- -------- -------- Operating loss (53,882) (102,965) (9,129) (375) (2,425) 1,824 (166,952) -------- -------- ------ ---------- ---------- -------- -------- Other Income (Expense) Interest expense (33,484) (35,547) (252) - (595) (6,695) (76,573) Equity in losses of affiliates (83,857) (1,717) - 84,700 - - (874) Reorganization expense (17,101) - - - - - (17,101) Interest and other income 4,760 1,379 5 - - - 6,144 ------- ------- ------ ---------- ---------- -------- -------- (129,682) (35,885) (247) 84,700 (595) (6,695) (88,404) ------- ------- ------ ---------- ---------- -------- -------- Net loss $(183,564) $(138,850) $ (9,376) $ 84,325 $ (3,020) $ (4,871) $ (255,356) ======== ======== ======= ========== ========== ======== ========= Basic and diluted loss per new common share $ (10.65) $ (14.81) ======== ========= Weighted new common shares outstanding 17,241,379 17,241,379 ========== ==========
SEE NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS. 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)
PROFORMA ADJUSTMENTS ------------------------------------------------------------------- CAI CS Historical ELIMINATIONS REORGANIZATION FAIR VALUE Pro Forma CAI CS TELQUEST [D] [E] [F] COMBINED CAI ---------- ------- -------- ------------ -------------- ---------- ------------ Revenues $ 28,622 $ 27,065 $ - $ - $ - $ - $ 55,687 --------- -------- ------- ---------- ----------- -------- --------- Costs and expenses: Programming and license fees 15,460 15,189 - - - - 30,649 General and administrative 38,123 16,153 7,025 - - - 61,301 Goodwill writedown 73,500 - - - - - 73,500 Depreciation and amortization 34,714 27,497 - - 4,476 (2,736) 63,951 --------- ------- ------ ---------- --------- --------- --------- 161,797 58,839 7,025 - 4,476 (2,736) 229,401 --------- ------- ------ ---------- --------- --------- --------- Operating loss (133,175) (31,774) (7,025) - (4,476) 2,736 (173,714) --------- ------- ------ ---------- --------- --------- --------- Other Income (Expense) Interest expense (47,227) (32,270) (45) - 11,717 (10,141) (77,966) Equity in losses of affiliates (31,747) (2,335) - 33,781 - - (301) Write down of equity investment (23,570) - - 23,570 - - - Interest and other income 4,459 5,680 6 (117) - - 10,028 --------- ------- ------ ---------- --------- --------- --------- (98,085) (28,925) (39) 57,234 11,717 (10,141) (68,239) --------- ------- ------ ---------- --------- --------- --------- Net loss $(231,260) $(60,699) $(7,064) $ 57,234 $ 7,241 $ (7,405) $ (241,953) ========= ======= ====== ========== ========= ========= ========= Basic and diluted loss per common share $ (5.70) $ (14.03) ========= ========= Weighted average common shares outstanding 40,543,039 17,241,379 ========== ==========
SEE NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS. 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)
PROFORMA ADJUSTMENTS ------------------------------------------------------------------- CAI CS Historical ELIMINATIONS REORGANIZATION FAIR VALUE Pro Forma CAI CS TELQUEST [D] [E] [F] COMBINED CAI ---------- ------- -------- ------------ -------------- ---------- ------------ Revenues $ 10,852 $ 13,253 $ - $ - $ - $ - $ 24,105 --------- ------- ------- ---------- ----------- ------- --------- Expenses Programming and licensing 7,606 8,111 - - - - 15,717 General and administrative 11,019 9,483 6,104 - - - 26,606 Goodwill writedown - 46,378 - - - - 46,378 Depreciation and amortization 13,637 14,779 - - 2,238 (1,368) 29,286 --------- ------- ------- ---------- ----------- ------- --------- 32,262 78,751 6,104 - 2,238 (1,368) 117,987 --------- ------- ------- ---------- ----------- ------- --------- Operating loss (21,410) (65,498) (6,104) - (2,238) 1,368 (93,882) --------- ------- ------- ---------- ----------- ------- --------- Other Income (Expense) Interest expense (18,059) (17,386) (113) - 8,131 (4,994) (32,421) Equity in losses affiliates of (45,292) (1,071) - 46,008 - - (355) Reorganization expense (3,955) - - - - - (3,955) Interest and other income 3,857 1,729 5 - - - 5,591 --------- ------- ------- ---------- ----------- ------- --------- (63,449) (16,728) (108) 46,008 8,131 (4,994) (31,140) --------- ------- ------- ---------- ----------- ------- --------- Net loss $ (84,859) $(82,226) $(6,212) $ 46,008 $ 5,893 $ (3,626) $ (125,022) ========= ======== ======= ========== =========== ======== ========= Basic and diluted loss per common share $ (2.09) $ (7.25) ========= ========= Weighted average common shares outstanding 40,543,039 17,241,379 ========== ==========
SEE NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS Six Months Ended September 30, 1998 and the Years Ended March 31, 1999 and 1998 (unaudited) D. ELIMINATIONS Eliminate the a) equity in losses of CS and TelQuest and b) intercompany income and/or expenses that do not offset in the consolidated statements of operations. E. CAI REORGANIZATION The CAI reorganization pro forma adjustments reflect a) the increased depreciation and amortization relative to the fresh-start adjustments made to the CAI assets upon the emergence from bankruptcy; b) the increase in interest expense on the $100 million of CAI senior discounted notes and the $80 million exit facility, offset in part by the interest eliminated on the $304 million of debt subject to compromise and the interim debt and by the elimination of amortization of debt financing costs that were written off. F. CS FAIR VALUE The adjustments reflect the decreased depreciation and amortization and the increased interest expense relative to the fair value adjustments made to the assets and liabilities pursuant to valuations made under the purchase method of accounting. EX-10 2 Exhibit 10.1 MASTER AGREEMENT AMONG HEARTLAND WIRELESS COMMUNICATIONS, INC., CS WIRELESS SYSTEMS, INC. AND CAI WIRELESS SYSTEMS, INC. DATED AS OF DECEMBER 2, 1998
TABLE OF CONTENTS PAGE Preamble 1 Section 1 - Defined Terms 2 Section 2 - CS Wireless Common Stock 4 Section 3 - Transfers of Assets and Leases of Spectrum Rights at the Stage I Closing 5 Section 4 - Cancellation of Heartland Long-Term Note and Related Transactions at the Stage II Closing 7 Section 5 - Stage I and Stage II Closing Dates 7 Section 6 - FCC Cooperation and Related Spectrum Matters 8 Section 7 - Conditions to All of the Parties' Obligations 9 Section 8 - Representations and Warranties of the Parties 13 Section 9 - Covenants of All of the Parties 20 Section 10 - Covenants of Heartland 21 Section 11 - Covenants of CS Wireless 23 Section 12 - Releases and Indemnification 24 Section 13 - Termination 26 Section 14 - Further Assurances 27 Section 15 - No Waiver 27 Section 16 - Miscellaneous 27
EXHIBITS Exhibit A - Resignation of Heartland Directors and Heartland Independent Director Exhibit B - CS Wireless FCC Assets Spectrum Lease Exhibit C - Heartland FCC Assets Spectrum Lease Exhibit D - Amendment to BTA Lease and Option Agreement Exhibit E - BTA Lease and Option Agreement Exhibit F - Form of CS Wireless Senior Noteholder Consent
SCHEDULES 3(a)(i) - Customer Premises Equipment 3(a)(ii) - CS Wireless FCC Assets 3(b) - Heartland FCC Assets 4(a)(i) - CS Leases 4(a)(ii) - Radcliffe Non-FCC Assets 4(b)(i) -- Condition of Portsmouth Non-FCC Assets 8(b)(ii) - Heartland Leases 4(b)(ii) - Portsmouth Non-FCC Assets 8(a)(ii) - Title to Heartland Assets 8(a)(v) - Heartland Compliance with Laws 8(a)(vi) - Heartland leased FCC Assets 8(a)(vii) - Heartland Litigation 8(a)(x)) - Title to CS Wireless Assets and Leases 8(b)(v) - CS Compliance with Laws 8(b)(vi) - Construction Completion Dates 8(b)(vii) - CS Wireless Litigation 8(b)(x) - Condition of CPE and Radcliffe Non-FCC Assets 8(c)(iii) - CAI Litigation
MASTER AGREEMENT Master Agreement dated as of the 2nd day of December, 1998 (this "Agreement") by and among Heartland Wireless Communications, Inc., a Delaware corporation having its principal place of business located at 200 Chisholm Place, Suite 200, Plano, Texas 75075 ("Heartland"), CAI Wireless Systems, Inc., a Connecticut corporation having its principal place of business located at 18 Corporate Woods Boulevard, Third Floor, Albany, New York 12211 ("CAI") and CS Wireless Systems, Inc., a Delaware corporation having its principal place of business located at 1101 Summit Avenue, Plano, Texas 75074 ("CS Wireless"). R E C I T A L S WHEREAS, the parties hereto are parties to that certain Participation Agreement (as defined herein), pursuant to which each of Heartland and CAI contributed wireless cable assets or the stock of entities owning wireless cable assets to CS Wireless in exchange for CS Common Stock (as defined herein); and WHEREAS, in connection with the consummation of the transactions contemplated by the Participation Agreement, Heartland received 3,578,834 shares of CS Wireless Common Stock, which amount was subsequently increased to 3,836,035 shares of CS Wireless Common Stock as a result of the issuance by CS Wireless to Heartland of an additional 257,201 shares of CS Wireless Common Stock in satisfaction of that certain true-up obligation owed to Heartland under Section 9.6(a) of the Participation Agreement; and WHEREAS, in connection with the consummation of the transactions contemplated by the Participation Agreement, CS Wireless issued to Heartland the Heartland Long-Term Note (as defined herein) in the principal amount of $15,000,000, which promissory note matures on February 21, 2006; and WHEREAS, there is $2,335,276.00 outstanding on the Heartland Long-Term Note as of November 30, 1998; and WHEREAS, simultaneously with the consummation of the transactions contemplated by the Participation Agreement, the parties hereto entered into that certain Stockholders' Agreement (as defined herein), which agreement requires, among other things, that Heartland and CAI vote their shares of CS Wireless Common Stock in favor of a board of directors comprised of four members designated by CAI and three members designated by Heartland, and that significant decisions affecting CS Wireless requires the approval of at least 70% of the directors of CS Wireless so that neither CAI nor Heartland can unilaterally make significant decisions affecting CS Wireless; and WHEREAS, the parties have disagreed about various matters regarding the operations, valuation, governance and future of CS Wireless; and WHEREAS, with due regard to their respective fiduciary duties to various constituencies including the respective stockholders and creditors of CS Wireless, CAI and Heartland, the parties wish to terminate Heartland's ongoing participation in the governance of CS Wireless on a basis that after prolonged negotiation, investigation and consultation with advisors, the parties believe to be fair and in the best interests of the parties and their respective constituents while ensuring that the future operations of Heartland and CS Wireless and their respective successors can be separated without unnecessary disruption to either party; and WHEREAS, CAI desires to purchase from Heartland and Heartland desires to sell to CAI all of the 3,836,035 shares of CS Wireless Common Stock owned by Heartland, on and subject to the terms and conditions set forth herein; and WHEREAS, CS Wireless desires to assign and transfer to Heartland certain MDS-1 channels, all assets relating to the Radcliffe, Iowa market, WCS Spectrum in 19 markets and certain other equipment, and Heartland desires to assign and transfer to CS Wireless any and all ownership and leasehold interests in MMDS and MDS channels in the Portsmouth, New Hampshire market, including, but not limited to, the MMDS E Group and MDS H1 - 3 channels, together with any and all assets used by Heartland in the Portsmouth market; and WHEREAS, the parties hereto desire to cooperate with each other with respect to proposed two-way use of their MMDS, MDS and ITFS spectrum in contiguous and adjacent markets, including, but not limited to, reaching an agreement with respect to a comprehensive two-way frequency utilization plan, cooperation with respect to the implementation of such, timely provision of requisite interference consent agreements and such other actions as may be consistent with supporting each other's necessary or desirable filings at the FCC (as defined herein) in connection with two-way applications; and WHEREAS, the parties hereto desire to settle certain claims they have against each other; and WHEREAS, the parties shall continue to own and lease spectrum rights in contiguous and adjacent markets, the value of which rights would be materially adversely affected absent agreement with respect to interference and related uses arising out of the contemplated two-way applications of such spectrum. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, each of the parties hereto agree as follows. Section 1. DEFINED TERMS. As used in this Agreement, the following terms shall have the respective meanings set forth below: "Bankruptcy Code" means the United States Bankruptcy Code, as heretofore and hereafter amended, and as codified as 11 U.S.C.
101 ET SEQ. "BTA" means Basic Trading Area, as such term is used by the FCC to denote geographic areas in connection with the public auction of available spectrum in the Multipoint and/or Multichannel Distribution Service. "BTA Lease and Option Agreement" means that certain BTA Lease and Option Agreement dated October 31, 1997 by and between CS Wireless and Heartland. "CPE" means Customer Premises Equipment listed on SCHEDULE 3(a)(i) attached hereto. "Communications Act" means the Communications Act of 1934, as amended, 47 U.S.C.
151 ET SEQ. "CS Leases" means the spectrum leases listed on SCHEDULE 4(a)(i) attached hereto. "CS Senior Notes" means $400,000,000 aggregate principal amount of Series B 11-3/8% Senior Notes due 2006 of CS Wireless Systems, Inc. "CS Wireless Common Stock" means the common stock, par value $.001 per share, of CS Wireless. "CS Wireless FCC Assets" means the FCC licenses owned by CS Wireless and listed on SCHEDULE 3(a)(ii) attached hereto. "Encumbrance" shall have the meaning given to such term in Section 8(a)(i). "FCC Approvals" shall have the meaning given to such term in Section 3(b). "Governmental Authority" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which any party hereto or any of such party's subsidiaries conducts all or any part of its business, or which has jurisdiction over any properties of any party hereto, as the case may be, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "Heartland FCC Assets" means the FCC licenses owned by Heartland and listed on SCHEDULE 3(b) attached hereto. "Heartland Leases" means the spectrum leases listed on SCHEDULE 4(b)(i) attached hereto. "Heartland Long-Term Note" means that certain Subordinated Promissory Note dated February 23, 1996 and issued by CS Wireless to Heartland in the principal amount of $15,000,000. "Hosea" means Frank H. Hosea. "Participation Agreement" means the Participation Agreement dated as of December 12, 1995 by and among CAI, Heartland and CS Wireless, as amended by Amendment No.1 to the Participation Agreement dated as of February 23, 1996 among the parties thereto. "Portsmouth Non-FCC Assets" means all assets owned by Heartland and used in connection with the operation of the channels pursuant to the Heartland FCC Assets and Heartland Leases, including, without limitation, the assets listed on SCHEDULE 4(b)(ii) attached hereto. "Radcliffe Non-FCC Assets" means all assets owned by CS Wireless and used in connection with the Radcliffe, IA wireless cable system, including, without limitation, the assets listed on SCHEDULE 4(a)(ii) attached hereto. "Securities Act" means the Securities Act of 1933, as amended. "Services Agreement" means that certain Administrative Services Agreement dated as of February 23, 1996 by and between Heartland and CS Wireless. "Stage I Closing" shall have the meaning given to such term in Section 5(a). "Stage I Closing Date" shall have the meaning given to such term in Section 5(a). "Stage I Transactions" shall have the meaning given to such term in Section 5(a). "Stage II Closing" shall have the meaning given to such term in Section 5(b). "Stage II Closing Date" shall have the meaning given to such term in Section 5(b). "Stage II Transactions" shall have the meaning given to such term in Section 5(b). "Stockholders' Agreement" means that certain Stockholders' Agreement dated as of February 23, 1996 by and among CS Wireless, CAI and Heartland. Section 2. CS WIRELESS COMMON STOCK. (a) At the Stage I Closing (as defined below), Heartland shall sell, assign, transfer, convey and deliver to CAI, and CAI shall purchase, accept and assume from Heartland, all of Heartland's right, title and interest in and to 3,836,035 shares of CS Wireless Common Stock owned by Heartland, which shares represent the entire equity interest in CS Wireless owned by Heartland as of the date hereof. (b) The parties hereto agree that upon the consummation of the Stage I Transactions (as defined below), Heartland shall cease to have any equity interest in CS Wireless and the Stockholders' Agreement shall, without further action by the parties, permanently and irrevocably lapse and terminate with no further force or effect, and each of the parties thereto shall be relieved of their obligations thereunder, with the same force and effect and as if the parties had never entered into such agreement. Upon such Stage I Closing, the resignation of each of the Heartland Directors and the Heartland Independent Director (as such terms are defined in the Stockholders' Agreement) from the Board of Directors of CS Wireless, in the form attached hereto as EXHIBIT A, shall become immediately effective without further action by the parties; PROVIDED, HOWEVER, that any indemnification obligations of CS Wireless to each of the Heartland Directors, the Heartland Independent Directors and Hosea under CS Wireless' certificate of incorporation, by-laws, contracts, insurance policies (to the extent applicable) or otherwise existing as of the date hereof shall survive such resignation, and CS Wireless expressly agrees to assume any such indemnification obligation in any bankruptcy proceeding filed by or against CS Wireless. Section 3. TRANSFERS OF ASSETS AND LEASES OF SPECTRUM RIGHTS AT THE STAGE I CLOSING. At the Stage I Closing: (a) CS Wireless shall, in partial satisfaction of the Heartland Long- Term Note, which shall cease to accrue interest from and after the Stage I Closing Date: (i) sell, assign, transfer, convey and deliver to Heartland, and Heartland shall purchase, accept and assume from CS Wireless, all of CS Wireless' right, title and interest in and to the CPE listed on SCHEDULE 3(a)(i); (ii) lease to Heartland, and Heartland shall lease from CS Wireless all of CS Wireless' right, title and interest in and to the CS Wireless FCC Assets. The CS Wireless FCC Assets shall be leased pursuant to the Lease Agreement set forth as EXHIBIT B attached hereto. Within ten (10) business days of the signing of this Agreement, CS Wireless and Heartland together shall file with the FCC the necessary applications for the consent of the assignment of the CS Wireless FCC Assets; and (iii) pay Heartland Three Hundred Sixty-six Thousand and 00/100 Dollars ($366,000.00), payable in immediately available funds by wire transfer in accordance with written wire transfer instructions previously delivered by Heartland to CS Wireless; (b) Heartland shall lease to CS Wireless, and CS Wireless shall lease from Heartland all of Heartland's right, title and interest in and to the Heartland FCC Assets. The Heartland FCC Assets shall be leased pursuant to the Lease Agreement set forth as EXHIBIT C attached hereto. Within ten (10) business days of the signing of this Agreement, CS Wireless and Heartland together shall file with the FCC the necessary applications for the consent of the assignment of the Heartland FCC Assets (such consent, together with the consent of the FCC contemplated by Section 3(a)(ii) above, the "FCC Approvals"); (c) CAI shall pay Heartland One Million Five Hundred Thirty-four Thousand and 00/100 Dollars ($1,534,000.00), payable in immediately available funds by wire transfer in accordance with written wire transfer instructions previously delivered by Heartland to CAI; and (d) Heartland and CS Wireless shall execute and deliver an amendment to the BTA Lease and Option Agreement in the form attached hereto as Exhibit D, which amendment shall correct certain ground elevation parameters of Heartland's Sherman, Texas market to reflect a previously proposed or licensed facility and correct certain operating parameter of CS Wireless' Fort Worth, Texas market. The parties acknowledge that it is impracticable for Heartland to inspect, test and select the CPE before the Stage I Closing. Accordingly, CS Wireless shall make the CPE available for inspection by Heartland representatives during normal business hours and Heartland shall inspect, test and select the CPE on or before the Stage II Closing. CS Wireless shall make available for inspection at CS Wireless' offices or warehouse facilities the CPE listed on SCHEDULE 3(A)(I) at the following locations: (Model 8607 BN55) Scientific Atlanta San Antonio converter boxes (with remote) (Model 5508 W or WP) Tocom converter boxes Dallas (with remote) (Cal Amp 2040\011 or PacMono 3191i Dallas or 3192i) Dipoles, PCS filtered and tested In the event that CS Wireless does not make available for delivery to Heartland on or before the Stage II Closing the CPE listed on SCHEDULE 3(A)(I), CS Wireless shall immediately pay to Heartland cash in an amount equal to the difference between $354,000 and the value (as established pursuant to SCHEDULE 3(A)(I)) of the CPE made available for delivery at the Stage II Closing. For a period of One Hundred Eighty (180) days following the earlier of the (i) Stage II Closing or (ii) the date on which Heartland accepts a unit of CPE made available by CS Wireless, Heartland shall have the right to return such unit of CPE which is not in good working order for the purpose for which it was intended. Upon timely receipt of any returned unit, CS Wireless shall immediately (i) pay to Heartland cash in an amount equal to the value of such item as established in SCHEDULE 3(A)(I) or (ii) repair or replace such unit. If CS Wireless elects to repair or replace such unit, Heartland shall have a period of Forty-five (45) days to determine whether such repaired or replacement unit is in good working order for the purpose for which it was intended. Except as provided herein, CS Wireless hereby disclaims all warranties, express or implied, including without limitation any warranties under the UCC or otherwise implied by law. CS Wireless shall use all reasonable commercial efforts to assist Heartland in enforcing the terms of any manufacturer's warranty applicable to any unit of CPE delivered to Heartland pursuant to the terms hereof. Section 4. CANCELLATION OF HEARTLAND LONG-TERM NOTE AND RELATED TRANSACTIONS AT THE STAGE II CLOSING. At the Stage II Closing: (a) CS Wireless shall sell, assign, transfer, convey and deliver to Heartland, and Heartland shall purchase, accept and assume from CS Wireless, all of CS Wireless' right, title and interest in and to the CS Wireless FCC Assets, the lessee's interest under the CS Leases and the Radcliffe Non-FCC Assets; (b) Heartland shall sell, assign, transfer, convey and deliver to CS Wireless, and CS Wireless shall purchase, accept and assume from Heartland, all of Heartland's right, title and interest in and to the Heartland FCC Assets, the lessee's interest under the Heartland Leases and the Portsmouth Non-FCC Assets; (c) CS Wireless shall pay Heartland One Hundred Thousand and 00/100 Dollars ($100,000.00), payable by wire transfer in immediately available funds in accordance with written wire instructions previously delivered by Heartland to CS Wireless; and (d) Heartland shall cancel the Heartland Long-Term Note and deliver such cancelled promissory note to CS Wireless. CS Wireless acknowledges and agrees that Heartland shall not assume any liabilities, obligations or commitments of CS Wireless or any affiliates thereof relating to or arising out of the operation of the CS Wireless FCC Assets, the CS Leases or Radcliffe Non-FCC Assets prior to the Stage II Closing Date including, without limitation, any liabilities associated with employees arising prior to the Stage II Closing Date who are hired by Heartland from and after the Stage II Closing Date. Heartland acknowledges and agrees that CS Wireless shall not assume any liabilities, obligations or commitments of Heartland or any affiliate thereof relating to or arising out of the operation of the Heartland FCC Assets, Heartland Leases or Portsmouth Non-FCC Assets prior to the Stage II Closing Date. Section 5. STAGE I AND STAGE II CLOSING DATES. (a) The sale and transfer of the CS Wireless Common Stock by Heartland to CAI, and the sale and transfer of the CPE, the cash payments by each of CS Wireless and CAI to Heartland contemplated under Section 3, the lease from CS Wireless to Heartland of the CS Wireless FCC Assets and the lease from Heartland to CS Wireless of the Heartland FCC Assets (collectively, the "Stage I Transactions") shall occur at the offices of Heartland, 200 Chisholm Place, Suite 200, Plano, Texas 75075, at 11:30 a.m., at a closing (the "Stage I Closing") on December 2, 1998, or at such other time as the parties hereto may agree (the "Stage I Closing Date"). (b) The sale and transfer of the CS Wireless FCC Assets, the CS Leases, the Radcliffe Non-FCC Assets, the Heartland FCC Assets, the Heartland Leases and the Portsmouth Non-FCC Assets, the cash payment by CS Wireless to Heartland contemplated under Section 4 and the cancellation and delivery of the Heartland Long-Term Note (collectively, the "Stage II Transactions") shall occur at the offices of Heartland, 200 Chisholm Place, Suite 200, Plano, Texas 75075, at 11:30 a.m., at a closing (the "Stage II Closing") on January 30, 1999 or, if later, 3 business days after receipt of the final FCC Approvals, or at such other time as the parties hereto may agree (the "Stage II Closing Date"). Section 6. FCC COOPERATION AND RELATED SPECTRUM MATTERS. As a material inducement to each of the parties to enter into this Agreement and as additional consideration for the transactions contemplated by Sections 2, 3 and 4 above, the parties hereto agree as follows: (a) The parties hereto will cooperate with each other to the maximum extent possible in agreeing to enter into interference agreements requested by the other party that are necessary to facilitate the FCC's grant of applications filed or sponsored by the other party, as more fully described in Article V of the BTA Lease and Option Agreement, dated October 31, 1997 by and between Heartland and CS Wireless and their affiliates (hereinafter the "BTA Lease and Option Agreement"), which agreement is attached hereto as EXHIBIT D and incorporated herein by this reference. Heartland and CS Wireless hereby expressly agree to abide by the BTA Lease and Option Agreement, and that the BTA Lease and Option Agreement, together with this Agreement, supersedes any other agreements to the contrary; provided, however, that neither Heartland nor CS Wireless shall be required to breach any pre-existing agreements with third parties as a result of this Agreement, or pay monetary or other consideration not otherwise due. (b)(i) With respect to markets in which Heartland and CS Wireless have contiguous or adjacent interests, including, without limitation, Dallas and Fort Worth, Texas, Heartland and CS Wireless agree to give high priority to resolving issues surrounding CS Wireless' developmental application for two-way authority in Dallas/Fort Worth, Texas and to cooperate in an expeditious manner so as to permit the other party to file two-way transmission applications in such markets during the first FCC filing window (with priority given to CS Wireless' Dallas/Fort Worth market) to (A) agree on a comprehensive two-way frequency utilization plan, (B) implement such plan and (C) provide the other party with requisite interference consent agreements in support of such party's two-way applications, as long as such applications meet each party's mutually agreed upon technical parameters, consistent with FCC rules. (ii) Notwithstanding anything to the contrary, CS Wireless and Heartland agree that the preferred use of the MDS-1 and MDS-2 channels, as well as the WCS Spectrum, shall be for upstream transmissions, and that both parties will take all reasonable and appropriate steps to accommodate the other party's applications for and the use of such spectrum so long as such applications meet the mutually agreed upon technical parameters, consistent with FCC rules. (c) Notwithstanding anything in the FCC's rules to the contrary, for purposes of this Agreement, the interference protection criteria applicable to the WCS Spectrum shall be governed by the FCC rules in 47 C.F.R. Part 21, as such rules are amended from time to time, applicable to MMDS spectrum licensed pursuant to BTA authorizations. For example, the maximum power flux density application to the WCS Spectrum shall be equal to or less than -73 dbw/m{2} at the BTA or partitioned service area boundary(ies), or as otherwise provided in any successor rule or regulation of the FCC for MMDS spectrum licensed pursuant to BTA authorizations. (d) Heartland hereby acknowledges its obligation to cooperate with CS Wireless in resolving a dispute with the licensee of the G group channels in Grand Rapids, Michigan, Call Sign WLS-950, including, but not limited to, assigning the lease to CS Wireless on an expeditious basis and permitting CS Wireless to negotiate and execute an excess capacity lease agreement directly with the licensee. Notwithstanding anything to the contrary, nothing in this Section 6(d) shall require Heartland to pay any amount of consideration to the licensor of such channels or to CS Wireless, or to expend any other amounts related to such channels, including, without limitation, construction, tower lease, engineering, legal or other fees . Section 7. CONDITIONS TO ALL OF THE PARTIES' OBLIGATIONS. (a) The respective obligations of Heartland, CAI and CS Wireless to consummate the Stage I Transactions, as appropriate, are subject to the fulfillment prior to or on the Stage I Closing Date of the following conditions (each of which may be waived in whole or in part by the party being benefitted thereby in its sole discretion): (i) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Heartland, CAI and CS Wireless contained in this Agreement shall be complete and correct in all material respects when made and at the Stage I Closing Date. (ii) COMPLIANCE. Each of Heartland, CAI and CS Wireless shall have performed and complied in all material respects with all agreements and conditions contained in this Agreement required to be performed or complied with by each of them prior to or on the Stage I Closing Date. (iii) COMPLIANCE CERTIFICATES. Each of Heartland, CAI and CS Wireless shall have delivered to the other an Officer's Certificate dated the Stage I Closing Date, certifying (A) that the conditions specified in subsections (i) and (ii) of this Section 7(a), solely as such conditions relate to the certifying party, have been fulfilled, (B) as to resolutions adopted by the Board of Directors of Heartland, CAI and CS Wireless, as the case may be, which certificate shall have attached thereto a copy of such resolutions, and (C) as to such other corporate proceedings relating to the authorization, execution and performance of the transactions contemplated hereby. (iv) BOARD AUTHORIZATIONS. The Board of Directors of each of Heartland, CAI and CS Wireless shall have approved this Agreement and the transactions contemplated hereby, and shall have authorized, empowered and directed any or all of their corporate officers to execute and deliver this Agreement and such agreements, certificates, instruments and other documents and to take any and all other actions that may be deemed necessary or desirable by the officer taking such action to give effect to this Agreement and the transactions contemplated hereby. (v) TRANSACTIONS PERMITTED UNDER APPLICABLE LAW. On the Stage I Closing Date, the Stage I Transactions contemplated by this Agreement shall (A) be permitted by the laws and regulations of each jurisdiction or Governmental Authority, including, without limitation, the FCC, to which Heartland, CAI or CS Wireless or any of their respective affiliates, as the case may be, is subject, and (B) not violate any applicable law or regulation. (vi) CERTAIN PROCEEDINGS AND REGULATORY MATTERS. At the Stage I Closing, none of the parties hereto shall be subject to any judgment, writ, order, decree or injunction of any court of competent jurisdiction which restrains, enjoins or otherwise prohibits the consummation of the Stage I Transactions, nor shall there be pending any suit, action, investigation, inquiry or other proceeding by any person (including, without limitation, any Governmental Authority) that (A) seeks injunctive or other relief or remedies in connection with such transactions or that makes consummation of the Stage I Transactions subject to significant uncertainty, (B) could prevent or make illegal the consummation of the Stage I Transactions contemplated hereby, or (C) imposes or would be reasonably expected to impose any remedy, condition or restriction on a party hereto which, in its reasonable judgment, is material and adverse to such party. (vii) THIRD PARTY AUTHORIZATION, CONSENT, ETC. All required authorizations, consents, approvals or waivers of any third party, including, without limitation, consents of Governmental Authorities, if any, and any lender to any of the parties hereto, in connection with the transactions contemplated hereby shall have been obtained, including, without limitation, the consent of the holders of at least a majority of aggregate principal amount of the CS Senior Notes, which consent shall be in substantially the form of EXHIBIT F attached hereto. (viii) BANKRUPTCY PROCEEDINGS. In the event that Heartland or CS Wireless shall have commenced a case under title 11 of the United States Code (the "Bankruptcy Code"), the court(s) having jurisdiction over such case(s) shall have entered an order (or orders, if both Heartland and CS Wireless are debtors under the Bankruptcy Code) (a) authorizing the assumption of this Agreement and the BTA Lease Agreement and (b) approving the transactions contemplated herein, and such order(s) shall become final and non-appealable; PROVIDED, HOWEVER, nothing herein shall preclude the parties from consummating the transactions contemplated herein if the parties, in their discretion, waive the requirement that such order(s) be final and non- appealable. No notice of such waiver of this or any other condition to CAI's obligations to consummate the transactions contemplated hereby need be given except to Heartland, as explicitly required in this Agreement, it being the intention of the parties hereto that CAI shall be entitled to, and is not waiving, the protections of Section 363(m) of the Bankruptcy Code, the mootness doctrine, and any similar statute or body of law if either or both of the Stage I and Stage II Closings occurs in the absence of a final and non-appealable order. (ix) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the Stage I Transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory to Heartland, CAI and CS Wireless, as the case may be, and each party hereto shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. (b) The obligations of Heartland and CS Wireless to consummate the Stage II Transactions are subject to the fulfillment prior to or on the Stage II Closing Date of the following conditions (each of which may be waived in whole or in part by the party being benefitted thereby in its sole discretion): (i) CONSUMMATION OF STAGE I TRANSACTIONS. The Stage I Transactions shall have been consummated. (ii) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Heartland and CS Wireless contained in this Agreement shall be complete and correct in all material respects when made and at the Stage II Closing Date (except to the extent that such representations and warranties relate specifically to an earlier date). (iii) COMPLIANCE. Each of Heartland and CS Wireless shall have performed and complied in all material respects with all agreements and conditions contained in this Agreement required to be performed or complied with by each of them prior to or on the Stage II Closing Date. (iv) COMPLIANCE CERTIFICATES. Each of Heartland and CS Wireless shall have delivered to the other an Officer's Certificate dated the Stage II Closing Date, certifying that (A) the conditions specified in subsections (i) through (iii) of this Section 7(b), solely as such conditions relate to the certifying party, have been fulfilled, (B)(1) resolutions adopted by the Board of Directors of Heartland and CS Wireless delivered at the Stage I Closing, and (2) such other corporate proceedings relating to the authorization, execution and performance of the transactions contemplated hereby are still in full force and effect and have not been rescinded, modified or amended. (v) TRANSACTIONS PERMITTED UNDER APPLICABLE LAW. On the Stage II Closing Date, the Stage II Transactions shall (A) be permitted by the laws and regulations of each jurisdiction or Governmental Authority, including, without limitation, the FCC, to which Heartland or CS Wireless or any of their respective affiliates, as the case may be, is subject, and (B) not violate any applicable law or regulation. (vi) CERTAIN PROCEEDINGS AND REGULATORY MATTERS. At the Stage II Closing, none of the parties hereto shall be subject to any judgment, writ, order, decree or injunction of any court of competent jurisdiction which restrains, enjoins or prohibits the consummation of the Stage II Transactions contemplated by this Agreement, nor shall there be pending any suit, action, investigation, inquiry or other proceeding by any person (including, without limitation, any Governmental Authority) that (A) seeks injunctive or other relief or remedies in connection with such transactions or that makes consummation of the Stage II Transactions subject to significant uncertainty, (B) could prevent or make illegal the consummation of the Stage II Transactions contemplated hereby, of (C) imposes or would be reasonably expected to impose any remedy, condition or restriction on a party hereto which, in its reasonable judgment, is material and adverse to such party. (vii) THIRD PARTY AUTHORIZATION, CONSENT, ETC. All required authorizations, consents, approvals or waivers of any third party, including, without limitation, consents of Governmental Authorities, if any, and any lender to any of the parties hereto, in connection with the Stage II Transactions contemplated hereby shall have been obtained. (viii) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the Stage II Transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory to Heartland, CAI and CS Wireless, as the case may be, and each party hereto shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. (ix) DUE DILIGENCE COMPLETE. Each of Heartland and CS Wireless shall have completed their business and legal due diligence investigation of the assets to be transferred under Section 4, the results of which shall be reasonably acceptable to the party performing such investigation. (c) The obligations of CAI and CS Wireless to consummate the Stage I Transactions are subject to the fulfillment prior to or on the Stage I Closing Date, of the following condition (which may be waived in whole or in part by the party being benefitted thereby in its sole discretion): (i) RESIGNATION OF HEARTLAND DIRECTORS. The Heartland Directors and the Heartland Independent Director shall have resigned from the Board of Directors of CS Wireless, and all committees thereof effective as of the Stage I Closing Date. Section 8. REPRESENTATIONS AND WARRANTIES OF THE PARTIES. (a) HEARTLAND REPRESENTATIONS AND WARRANTIES. As a material inducement to CAI and CS Wireless to enter into this Agreement and effect the transactions contemplated hereby, Heartland hereby represents and warrants that: (i) TITLE TO CS WIRELESS COMMON STOCK HELD BY HEARTLAND. Heartland has and, subject to the terms and conditions of this Agreement, will sell, assign, transfer, convey and deliver, good and indefeasible title to 3,836,035 shares of CS Wireless Common Stock, which shares comprise Heartland's entire equity interest in CS Wireless, free and clear of any security interest, claim, lien, pledge, option, encumbrance, charge, agreement, voting trust, proxy or other restriction (each, an "Encumbrance"), other than those Encumbrances created or existing by virtue of the Stockholders' Agreement. (ii) TITLE TO HEARTLAND ASSETS TRANSFERRED HEREUNDER. Except as set forth on SCHEDULE 8(a)(ii) attached hereto, Heartland has and, subject to the terms and conditions of this Agreement, will sell, assign, transfer, convey and deliver, good and indefeasible title to (or a valid leasehold interest in) all of the Heartland FCC Assets, the Heartland Leases and the Portsmouth Non-FCC Assets transferred hereunder, free and clear of any and all Encumbrances. (iii) ORGANIZATION AND QUALIFICATION. Heartland is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified as a foreign corporation and in good standing in each other jurisdiction in which the ownership, lease or operation of its property and assets or the conduct of its business requires such qualification. Heartland has all corporate and other necessary power and authority, and the legal right, to own or to hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. Heartland has all corporate and other necessary power and authority, and the legal right, to execute and deliver this Agreement, and each of the other documents contemplated hereby to which it is or is to be a party, and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. (iv) AUTHORIZATION. The execution, delivery and performance of this Agreement by Heartland does not and will not (A) conflict with or result in a breach of the terms, conditions or provisions of, (B) constitute a default under, (C) result in the creation of any Encumbrance upon any of the Heartland FCC Assets or Heartland Leases pursuant to, (D) give any third party the right to modify, terminate or accelerate any obligation under, (E) result in a violation of, or (F) require any authorization, consent, approval, exemption or other action by or notice or declaration or filing with any Governmental Authority or any other Person (other than as has been duly made or obtained) pursuant to, the charter or bylaws of Heartland, or any law, statute, rule or regulation to which Heartland or any of its assets is subject, or any agreement, instrument, order, judgment or decree to which Heartland or any of its assets is subject. (v) COMPLIANCE WITH LAWS. Except as set forth on SCHEDULE 8(a)(v), Heartland is in compliance in all material respects with all laws, rules and regulations applicable to the Portsmouth Non-FCC Assets, the Heartland FCC Assets and Heartland Leases (including obtaining all authorizations, consents, approvals, orders, licenses, exemptions from, and making all filings or registrations or qualifications with, any Governmental Authority), the noncompliance with which reasonably could have a material adverse effect on such assets or the use thereof, and Heartland is in compliance in all material respects with all provisions of applicable FCC licenses including, without limitation, any build-out requirements and other obligations, and with all leases, subleases and sublicenses to it of MMDS or MDS channels comprising the Heartland FCC Assets or the Heartland Leases, as the case may be. The FCC licenses and channel leases comprising the Heartland FCC Assets and Heartland Leases conform in all material respects to all applicable laws, ordinances, codes, licensing requirements, rules and regulations, and Heartland has not received any notice to the contrary. Except as set forth on SCHEDULE 8(a)(v), there are no proceedings or complaints or, to the best of Heartland's knowledge, investigations pending before or by any Governmental Authority which could reasonably be expected to have a material adverse effect on any FCC license or channel lease comprising the Heartland FCC Assets or Heartland Leases. All applications, reports, fees, filings and other submissions required under the Communications Act relating to the Heartland FCC Assets and Heartland Leases have been made or paid in a timely fashion. (vi) FCC LICENSES. Schedule 3(b) attached hereto correctly sets forth all of the FCC licenses comprising the Heartland FCC Assets and correctly sets forth the termination date of each such FCC license, and SCHEDULE 4(b)(i) attached hereto identifies all FCC licenses and the owner thereof with respect to each of the leased channels comprising the Heartland Leases. Each FCC license comprising the Heartland FCC Assets or the Heartland Leases allowing the construction or the operation of radio station facilities by a lessor of channel capacity who is obligated to lease the capacity of the radio station (in whole or in part) under a lease agreement or management/option agreement listed on SCHEDULES 3(b) or 4(b)(i) attached hereto is in full force and effect, and, to the best of Heartland's knowledge, neither the licensee of such FCC license nor the FCC license is subject to any complaint, investigation or proceeding by or before the FCC, or on appeal from the FCC, which looks toward or would result in the revocation, modification or non-renewal of the FCC license. Except as set forth on SCHEDULE 8(a)(vi), each of such FCC licenses for an MMDS or MDS station has a construction completion date which has not elapsed or, if such date has elapsed, a request to the FCC to extend that date for at least six (6) months has been properly filed and is pending, or an application for certification or completion of construction has been properly filed. Except as set forth on SCHEDULE 8(a)(vi), the FCC has granted one or more FCC licenses to each lessor of the channel capacity subject to the lease and lease/option agreements comprising the Heartland FCC Assets or the Heartland Leases allowing that lessor to construct and/or operate each radio station required for the lessor to provide to lessee under each such agreement executed by such lessor the channel capacity subject to that agreement. (vii) LITIGATION. Except as set forth on SCHEDULE 8(a)(vii), there is no action, suit, proceeding, arbitration, litigation or government proceeding (including, without limitation, those related to FCC, environmental or similar matters), or inquiry or investigation by any Governmental Authority known to Heartland, in each case domestic or foreign, pending against, or involving the Heartland FCC Assets, the Heartland Leases or the Portsmouth Non-FCC Assets or the use thereof which (A) questions the validity of this Agreement or any action taken or to be taken by Heartland pursuant to or in connection with this Agreement, (B) is required to be, and has not been, so disclosed in the filings with the SEC by Heartland (and such proceedings as are summarized in such SEC filings are accurately described in all material respects), or (C) could reasonably be expected to materially adversely affect the FCC licenses or channel leases comprising the Heartland FCC Assets and the Heartland Leases or the operation of the channels and transmission facilities relating thereto. (viii) NO VIOLATION, ETC. Heartland has not violated any law or any governmental regulation or requirement which violation has had or would reasonably be expected to have a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of Heartland relating to the Heartland FCC Assets, the Heartland Leases or the Portsmouth Non-FCC Assets, and Heartland has not received notice of any such violation. Heartland is not subject to, or has reason to believe it may become subject to, any material liability (contingent or otherwise) or corrective or remedial obligation arising under any environmental law, rule or regulation relating to the Heartland FCC Assets, the Heartland Leases or the Portsmouth Non-FCC Assets. (ix) COPYRIGHT MATTERS. Heartland has submitted all requisite notices (if any are required) under the Copyright Act for the carriage of all Broadcast Stations as currently carried over any of the Heartland FCC Assets. Heartland has filed in a timely manner with the Copyright Office all required documents, instruments and statements of account and have remitted payments of all required royalty fees with respect to compulsory licenses provided for in Section III of the Copyright Act for the carriage of broadcast signals in connection with the Heartland FCC Assets. Heartland is not liable to any Person for copyright infringement under the Copyright Act as a result of its business operations relating to the Heartland FCC Assets and the Heartland Leases. There have been no inquiries received from the Copyright Office or any other party, which questioned such statements of account or any copyright royalty payments made by Heartland with respect to the Heartland FCC Assets or Heartland Leases, and no claim, action or demand for copyright infringement or for non-payment of royalties is pending or, to the knowledge of Heartland, threatened against Heartland with respect to the Heartland FCC Assets or Heartland Leases. (x) CONDITION OF PORTSMOUTH NON-FCC ASSETS. Except as set forth on SCHEDULE 8(a)(x) and except for ordinary wear and tear, the Portsmouth Non-FCC Assets are in good working order for the purpose for which they were intended. All transmitters included in the Portsmouth Non-FCC Assets used in the Portsmouth market meet all material applicable FCC acceptance and frequency stability requirements. (xi) NO INTERFERENCE CAUSED BY PORTSMOUTH MARKET. With respect to its Portsmouth market, Heartland has not received any written complaint that it, or any channels used in its Portsmouth market, is causing interference to any reception, transmission or detection system. (b) CS WIRELESS REPRESENTATIONS AND WARRANTIES. As a material inducement to Heartland and CAI to enter into this Agreement and effect the transactions contemplated hereby, CS Wireless hereby represents and warrants that : (i) TITLE TO CPE AND RADCLIFFE NON-FCC ASSETS. CS Wireless has and, subject to the terms and conditions of this Agreement, will sell, assign, transfer, convey and deliver, good and indefeasible title to the CPE and Radcliffe Non-FCC Assets, free and clear of any and all Encumbrances. (ii) TITLE TO CS WIRELESS FCC ASSETS AND CS LEASES TRANSFERRED HEREUNDER. Except as set forth on SCHEDULE 8(b)(ii) attached hereto, CS Wireless has and, subject to the terms and conditions of this Agreement, will sell, assign, transfer, convey and deliver, good and indefeasible title to (or a valid leasehold interest in) all of the CS Wireless FCC Assets and CS Leases transferred hereunder, free and clear of any and all Encumbrances. (iii) ORGANIZATION AND QUALIFICATION. CS Wireless is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified as a foreign corporation and in good standing in each other jurisdiction in which the ownership, lease or operation of its property and assets or the conduct of its business requires such qualification. CS Wireless has all corporate and other necessary power and authority, and the legal right, to own or to hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. CS Wireless has all corporate and other necessary power and authority, and the legal right, to execute and deliver this Agreement, and each of the other documents contemplated hereby to which it is or is to be a party, and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. (iv) AUTHORIZATION. The execution, delivery and performance of this Agreement by CS Wireless does not and will not (A) conflict with or result in a breach of the terms, conditions or provisions of, (B) constitute a default under, (C) result in the creation of any Encumbrance upon any of the CPE, the Radcliffe Non-FCC Assets, the CS Leases or the CS Wireless FCC Assets pursuant to, (D) give any third party the right to modify, terminate or accelerate any obligation under, (E) result in a violation of, or (F) require any authorization, consent, approval, exemption or other action by or notice or declaration or filing with any Governmental Authority or any other Person (other than as has been duly made or obtained) pursuant to, the charter or bylaws of CS Wireless, or any law, statute, rule or regulation to which CS Wireless or any of its assets is subject, or any agreement, instrument, order, judgment or decree to which CS Wireless or any of its assets is subject. (v) COMPLIANCE WITH LAW. Except as set forth on SCHEDULE 8(b)(v), CS Wireless is in compliance in all material respects with all laws, rules and regulations applicable to the CPE, the Radcliffe Non-FCC Assets, the CS Leases and the CS Wireless FCC Assets (including obtaining all authorizations, consents, approvals, orders, licenses, exemptions from, and making all filings or registrations or qualifications with, any Governmental Authority), the noncompliance with which reasonably could have a material adverse effect on such assets or the use thereof, and CS Wireless is in compliance in all material respects with all provisions of applicable FCC licenses including, without limitation, any build-out requirements and other obligations, and with all leases, subleases and sublicenses to it of MMDS, MDS, or ITFS channels comprising the CS Wireless FCC Assets and CS Leases, as the case may be. The FCC licenses and channel leases comprising the CS Wireless FCC Assets and CS Leases conform in all material respects to all applicable laws, ordinances, codes, licensing requirements, rules and regulations, and CS Wireless has not received any notice to the contrary. Except as set forth on SCHEDULE 8(b)(v), there are no proceedings or complaints or, to the best of CS Wireless' knowledge, investigations pending before or by any Governmental Authority which could reasonably be expected to have a material adverse effect on any FCC license or channel lease comprising the CS Wireless FCC Assets or CS Leases. All applications, reports, fees, filings and other submissions required under the Communications Act relating to the CS Wireless FCC Assets and CS Leases have been made or paid in a timely fashion. (vi) FCC LICENSES. SCHEDULE 3(a)(ii) attached hereto correctly sets forth all of the FCC licenses comprising any portion of the CS Wireless FCC Assets and correctly sets forth the termination date of each such FCC license, and SCHEDULE 4(a)(i) identifies all FCC licenses and the owner thereof with respect to each of the leased channels comprising the CS Leases. Each FCC license comprising the CS Wireless FCC Assets or CS Leases allowing the construction or the operation of radio station facilities by a lessor of channel capacity who is obligated to lease the capacity of the radio station (in whole or in part) under a lease agreement or management/option agreement listed on SCHEDULES 3(a)(ii) or 4(a)(i) attached hereto is in full force and effect, and, to the best of CS Wireless' knowledge, neither the licensee of such FCC license nor the FCC license is subject to any complaint, investigation or proceeding by or before the FCC, or on appeal from the FCC, which looks toward or would result in the revocation, modification or non-renewal of the FCC license. Except as set forth on SCHEDULE 8(b)(vi), each of such FCC licenses for an ITFS, MMDS or MDS station has a construction completion date which has not elapsed or, if such date has elapsed, a request to the FCC to extend that date for at least six (6) months has been properly filed and is pending, or an application for certification of completion of construction has been properly filed. Except as set forth on SCHEDULE 8(b)(vi), the FCC has granted one or more FCC licenses to each lessor of the channel capacity subject to the lease and lease/option agreements comprising the CS Wireless FCC Assets or the CS Leases allowing that lessor to construct and/or operate each radio station required for the lessor to provide to lessee under each such agreement executed by such lessor the channel capacity subject to that agreement. (vii) LITIGATION. Except as set forth on SCHEDULE 8(b)(vii), there is no action, suit, proceeding, arbitration, litigation or government proceeding (including, without limitation, those related to FCC, environmental or similar matters), or inquiry or investigation by any Governmental Authority known to CS Wireless, in each case domestic or foreign, pending against (or circumstances that may give rise to the same), or involving the CPE, the CS Wireless FCC Assets, the CS Leases or the Radcliffe Non-FCC Assets or the use thereof which (A) questions the validity of this Agreement or any action taken or to be taken by CS Wireless pursuant to or in connection with this Agreement, (B) is required to be, and has not been, so disclosed in the filings with the SEC by CS Wireless (and such proceedings as are summarized in such SEC filings are accurately described in all material respects), or (C) could reasonably be expected to materially adversely affect the FCC licenses or channel leases comprising the CS Wireless FCC Assets or CS Leases or the operation of the channels and transmission facilities relating thereto. (viii) NO VIOLATION, ETC. CS Wireless has not violated any law or any governmental regulation or requirement which violation has had or would reasonably be expected to have a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of CS Wireless relating to the CPE, the CS Wireless FCC Assets, the CS Leases or the Radcliffe Non-FCC Assets, and CS Wireless has not received notice of any such violation. CS Wireless is not subject to, or has reason to believe it may become subject to, any material liability (contingent or otherwise) or corrective or remedial obligation arising under any environmental law, rule or regulation relating to the CPE, the CS Wireless FCC Assets, the CS Leases or the Radcliffe Non-FCC Assets. (ix) COPYRIGHT MATTERS. CS Wireless has submitted all requisite notices (if any are required) under the Copyright Act for the carriage of all Broadcast Stations as currently carried over any of the CS Wireless FCC Assets. CS Wireless has filed in a timely manner with the Copyright Office all required documents, instruments and statements of account and have remitted payments of all required royalty fees with respect to compulsory licenses provided for in Section III of the Copyright Act for the carriage of broadcast signals in connection with the CS Wireless FCC Assets. CS Wireless is not liable to any Person for copyright infringement under the Copyright Act as a result of its business operations relating to the CS Wireless FCC Assets and CS Leases. There have been no inquiries received from the Copyright Office or any other party, which questioned such statements of account or any copyright royalty payments made by CS Wireless with respect to the CS Wireless FCC Assets or CS Leases, and no claim, action or demand for copyright infringement or for non- payment of royalties is pending or, to the knowledge of CS Wireless, threatened against CS Wireless with respect to the CS Wireless FCC Assets or CS Leases. (x) CONDITION OF CPE AND RADCLIFFE NON-FCC ASSETS. Except as set forth on SCHEDULE 8(b)(x) and except for ordinary wear and tear, the CPE and the Radcliffe Non-FCC Assets are in good working order for the purpose for which they were intended. All transmitters included in the Radcliffe Non-FCC Assets used in the Radcliffe market meet all material applicable FCC acceptance and frequency stability requirements. (xi) NO INTERFERENCE CAUSED BY RADCLIFFE MARKET, CS WIRELESS FCC ASSETS OR CS LEASES. With respect to its Radcliffe market, CS Wireless has not received any written complaint that it, or any channels used in its Radcliffe market or otherwise comprising CS Wireless FCC Assets and CS Leases, is causing interference to any reception, transmission or detection system. (c) As a material inducement to Heartland and CS Wireless to enter into this Agreement and effect the transactions contemplated hereby, CAI hereby represents and warrants that as of the date hereof: (i) ORGANIZATION AND QUALIFICATION. CAI is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified as a foreign corporation and in good standing in each other jurisdiction in which the ownership, lease or operation of its property and assets or the conduct of its business requires such qualification. CAI has all corporate and other necessary power and authority, and the legal right, to own or to hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. CAI has all corporate and other necessary power and authority, and the legal right, to execute and deliver this Agreement, and each of the other documents contemplated hereby to which it is or is to be a party, and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. (ii) AUTHORIZATION. The execution, delivery and performance of this Agreement by CAI does not and will not (A) conflict with or result in a breach of the terms, conditions or provisions of, (B) constitute a default under, (C) give any third party the right to modify, terminate or accelerate any obligation under, (D) result in a violation of, of (E) require any authorization, consent, approval, exemption or other action by or notice or declaration or filing with any Governmental Authority or any other Person (other than as has been duly made or obtained) pursuant to, the charter or bylaws of CAI, or any law, statute, rule or regulation to which CAI or any of its assets in subject, or any agreement, instrument, order, judgment or decree to which CAI or any of its assets is subject. (iii) Litigation. Except as set forth on SCHEDULE 8(c)(iii), there is no action, suit, proceeding, arbitration, litigation or government proceeding (including, without limitation, those related to FCC, environmental or similar matters), or inquiry or investigation by any Governmental Authority known to CAI, in each case domestic or foreign, pending against or involving CAI which (A) questions the validity of this Agreement or any action taken or to be taken by CAI pursuant to or in connection with this Agreement or (B) is required to be, and has not been, so disclosed in the filings with the SEC by CAI (and such proceedings as are summarized in such SEC filings are accurately described in all material respects). (iv) NO VIOLATION, ETC. CAI has not violated any law or any governmental regulation or requirement which violation has had or would reasonably be expected to have a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of CAI, and CAI has not received notice of any such violation. CAI is not subject to, or has reason to believe it may become subject to, any material liability (contingent or otherwise) or corrective or remedial obligation arising under any environmental law, rule or regulation. (v) INVESTMENT REPRESENTATION. CAI is purchasing the CS Wireless Common Stock for its own account and not with a view to the public distribution thereof. CAI acknowledges that the CS Wireless Common Stock has not been registered under the Securities Act , and that such shares may be resold only if registered pursuant to the provisions of the Securities Act, or if an exemption from registration is available. Section 9. COVENANTS OF ALL OF THE PARTIES. (a) Unless otherwise indicated: (i) Each of the parties hereto agrees to use commercially reasonable efforts to bring about the fulfillment of the conditions precedent to the Stage I Closing. (ii) Subject to the terms and conditions provided herein, each of the parties hereto agrees to (A) use commercially reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable law and regulation to consummate and make effective the Stage I Transactions in accordance with the terms of this Agreement, perform each of its obligations hereunder, including without limitation, the obligations of the parties set forth in Section 6 hereof, and (B) cooperate following the Stage I Closing in the taking of any actions necessary or desirable in order to effect the purposes of this Agreement with respect to the Stage I Transactions. (iii) Each party hereto shall promptly inform each of the other parties hereto of any circumstance or set of circumstances which could reasonably be expected to impair such party's ability to perform any of its obligations under this Agreement. (b) Unless otherwise indicated: (i) Each of the parties hereto agrees to use commercially reasonable efforts to bring about the fulfillment of the conditions precedent to the Stage II Closing. (ii) Subject to the terms and conditions provided herein, each of the parties hereto agrees to (A) use commercially reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable law and regulation to consummate and make effective the Stage II Transactions in accordance with the terms of this Agreement and (B) cooperate following the Stage II Closing in the taking of any actions necessary or desirable in order to effect the purposes of this Agreement with respect to the Stage II Transactions. (iii) Each party hereto shall promptly inform each of the other parties hereto of any circumstance or set of circumstances which could reasonably be expected to impair such party's ability to perform any of its obligations under this Agreement. Section 10. COVENANTS OF HEARTLAND. In addition to the covenants set forth in Section 9 above: (a) Between the date hereof and the Stage I Closing, Heartland shall: (i) Retain and safeguard the CS Wireless Common Stock held by it, and maintain such CS Wireless Common Stock free and clear of any and all Encumbrances and shall not allow, permit or suffer to exist any Encumbrance, sale, assignment, lease, waiver of rights or granting of a proxy with respect to, voting agreement or trust affecting other than the Stockholders' Agreement, or otherwise transfer or dispose of the CS Wireless Common Stock held by Heartland. (ii) Within three business days of its commencement of a case under the Bankruptcy Code, if prior thereto the Stage I Closing has not occurred, (a) file with the bankruptcy court a motion (together with appropriate supporting papers) requesting the bankruptcy court to enter, an order in form and substance reasonably acceptable to CAI and CS Wireless (1) authorizing Heartland to assume this Agreement, (2) approving the transactions contemplated herein, and (3) authorizing Heartland to assume the BTA Lease Agreement, and (b) seek a hearing on such motion to be held within 20 days of the date of the filing thereof. (b) Between the date hereof and the Stage II Closing, Heartland shall: (i) Use its reasonable efforts (A) to cause to be maintained in full force and effect, and (B) to cause the holders to renew when required to prevent the lapse of, all FCC-issued licenses, conditional licenses and authorizations comprising any portion of the Heartland FCC Assets or Heartland Leases. (ii) Use reasonable efforts to perform each and every obligation of the lessee under any and all excess channel capacity lease agreements or MDS transmission capacity lease agreements comprising any portion of the Heartland FCC Assets or Heartland Leases. (iii) Use reasonable efforts to cause each of its lessors to prosecute in good faith and diligently pursue each MDS application and ITFS application for facilities subject to a lease agreement with Heartland that comprise any portion of the Heartland FCC Assets or Heartland Leases. (iv) Operate the Heartland FCC Assets in the ordinary course of business in accordance with past practices for such operation (except where such conduct would conflict with any covenant or other obligation of Heartland under this Agreement). (v) Promptly notify CAI and CS Wireless in writing of any unusual or material developments with respect to the business or operations of any of the Heartland FCC Assets or Heartland Leases and of any material changes in any of the information contained in Heartland's representation and warranties contained in this Agreement. (vi) Subsequent to its commencement of a case under the Bankruptcy Code, seek bankruptcy court approval of, and use its best efforts to obtain, an order in form and substance reasonably acceptable to CAI and CS Wireless (1) authorizing the assumption of this Agreement, (2) approving the transactions contemplated herein, and (3) authorizing Heartland to assume the BTA Lease and Option Agreement. (c) Between the date hereof and the Stage II Closing, Heartland shall not allow, permit or suffer to exist: (i) The creation, assumption or permitting to exist of any Encumbrance, other than the lien for taxes not yet due and payable, on any of the Heartland FCC Assets or Heartland Leases. (ii) The sale, assignment, lease, waiver of rights with respect to, sublease or other transfer or disposal of any and all FCC-issued licenses, conditional licenses and authorizations, or the lessee's leasehold interest in any excess channel capacity lease agreements or MDS transmission capacity lease agreements comprising any portion of the Heartland FCC Assets or Heartland Leases. (iii) Any material action, or material failure to act under excess channel capacity lease agreements or MDS transmission capacity lease agreements comprising any portion of the Heartland FCC Assets or Heartland Leases, which would constitute a default or a potential default thereunder (assuming that any requirements of notice or lapse of time have occurred). Section 11. COVENANTS OF CS WIRELESS. In addition to the covenants set forth in Section 9 above: (a) Between the date hereof and the Stage I Closing, (i) CS Wireless shall retain and safeguard the CS Wireless Non- FCC Assets and the CS Wireless FCC Assets held by it, and maintain such CS Wireless Non-FCC Assets free and clear of all Encumbrances and shall not allow, permit or suffer to exist any Encumbrance, sale, assignment, lease, waiver of rights with respect to, or otherwise transfer or dispose of the CS Wireless Non-FCC Assets and the CS Wireless FCC Assets held by CS Wireless; and (ii) Within three business days of its commencement of a case under the Bankruptcy Code, if prior thereto the Stage I Closing has not occurred, (a) file with the bankruptcy court a motion (together with appropriate supporting papers) requesting the bankruptcy court to enter, an order in form and substance reasonably acceptable to Heartland and CAI (1) authorizing CS Wireless to assume this Agreement, (2) approving the transactions contemplated herein, and (3) authorizing CS Wireless to assume the BTA Lease Agreement, and (b) seek a hearing on such motion to be held within 20 days of the date of the filing thereof. (b) Between the date hereof and the Stage II Closing, CS Wireless shall: (i) Use its reasonable efforts (A) to cause to be maintained in full force and effect, and (B) to cause the holders to renew when required to prevent the lapse of, all FCC-issued licenses, conditional licenses and authorizations comprising any portion of the CS Wireless FCC Assets or CS Leases. (ii) Use reasonable efforts to perform each and every obligation of the lessee under any and all excess channel capacity lease agreements or MDS transmission capacity lease agreements comprising any portion of the CS Wireless FCC Assets or CS Leases. (iii) Use reasonable efforts to cause each of its lessors to prosecute in good faith and diligently pursue each MDS application and ITFS application for facilities subject to a lease agreement with CS Wireless that comprise any portion of the CS Wireless FCC Assets or CS Leases. (iv) Operate the CS Wireless FCC Assets in the ordinary course of business in accordance with past practices for such operation (except where such conduct would conflict with any covenant or other obligation of CS Wireless under this Agreement). (v) Promptly notify Heartland and CAI in writing of any unusual or material developments with respect to the business or operations of any of the CS Wireless FCC Assets or CS Leases and of any material changes in any of the information contained in CS Wireless' representation and warranties contained in this Agreement. (vi) Subsequent to its commencement of a case under the Bankruptcy Code, seek bankruptcy court approval of, and use its best efforts to obtain, an order in form and substance reasonably acceptable to Heartland (1) authorizing the assumption of this Agreement, (2) approving the transactions contemplated herein, and (3) authorizing CS Wireless to assume the BTA Lease and Option Agreement. (c) Between the date hereof and the Stage II Closing, CS Wireless shall not allow, permit or suffer to exist: (i) The creation, assumption or permitting to exist of any Encumbrance, other than the lien for taxes not yet due and payable, on any of the CS Wireless FCC Assets or CS Leases. (ii) The sale, assignment, lease, waiver of rights with respect to, sublease or other transfer or disposal of any and all FCC-issued licenses, conditional licenses and authorizations, or the lessee's leasehold interest in any excess channel capacity lease agreements or MDS transmission capacity lease agreements comprising any portion of the CS Wireless FCC Assets or CS Leases. (iii) Any material action, or material failure to act under excess channel capacity lease agreements or MDS transmission capacity lease agreements comprising any portion of the CS Wireless FCC Assets or CS Leases, which would constitute a default or a potential default of the lessee thereunder (assuming that any requirements of notice or lapse of time have occurred). Section 12. RELEASES AND INDEMNIFICATION. As further consideration for the transactions contemplated hereby, the parties agree as follows: (a) At the Stage I Closing, without further action by the parties, CS Wireless shall release and forever discharge Heartland, its subsidiaries, affiliates, stockholders, officers, directors, agents, employees, successors and assigns from any and all actions claims, liabilities, damages, demands, responsibility and accountability of every nature whatsoever ("Claims"), whether known or unknown, which CS Wireless ever had, then has or may have for, upon or by reason of any matter, cause or thing whatsoever against Heartland arising out of that certain Administrative Services Agreement dated as of February 23, 1996 (the "Services Agreement") by and between Heartland and CS Wireless, including, without limitation, CS WIRELESS SYSTEMS, INC. V. HEARTLAND WIRELESS COMMUNICATIONS, INC.; CAUSE NO. 98-CI-15104; 225{TH} DISTRICT COURT, BEXAR COUNTY, TEXAS, from the beginning of the world to the Stage I Closing Date, or which CS Wireless may from and after the Stage I Closing Date have against Heartland by reason of any matter, act, omission, cause or event arising solely out of the Services Agreement, which has occurred or which has been done or suffered to be done before the Stage I Closing Date. CS Wireless hereby agrees to withdraw, with prejudice, CS WIRELESS SYSTEMS, INC. V. HEARTLAND WIRELESS COMMUNICATIONS, INC.; CAUSE NO. 98-CI-15104; 225{TH} DISTRICT COURT, BEXAR COUNTY, TEXAS on or before the Stage I Closing. (b) At the Stage I Closing, without further action by the parties, Heartland shall release and forever discharge CS Wireless, its subsidiaries, affiliates, stockholders, officers, directors, agents, employees, successors and assigns from any and all Claims, whether known or unknown, which Heartland ever had, then has or may have for, upon or by reason of any matter, cause or thing whatsoever against CS Wireless arising out of the Services Agreement and any Claim capable of being asserted in connection therewith from the beginning of the world to the Stage I Closing Date, or which Heartland may hereafter have against CS Wireless by reason of any matter, act, omission, cause or event arising solely out of the Services Agreement, which has occurred or which has been done or suffered to be done before the Stage I Closing Date. (c) At the Stage I Closing, without further action by the parties, each of the parties hereto shall release and forever discharges the other parties hereto, their respective subsidiaries, affiliates, stockholders, officers, directors, agents, employees, successors and assigns from any and all Claims, whether known or unknown, which each such party ever had, then has or may have for, upon or by reason of any matter, cause or thing whatsoever against the other parties hereto arising solely out of the Participation Agreement or the Stockholders' Agreement from the beginning of the world to the Stage I Closing Date, or which each such party may hereafter have against the other parties hereto by reason of any matter, act, omission, cause or event arising solely out of the Participation Agreement or the Stockholders' Agreement, which has occurred or which has been done or suffered to be done before the date hereof. (d) CS Wireless acknowledges and ratifies the terms and conditions of that certain Separation Agreement dated as of October 19, 1998 (the "Separation Agreement") by and between Frank H. Hosea ("Hosea") and CS Wireless. CS Wireless acknowledges that (i) Hosea has been employed by Heartland as Senior Vice President - Video Operations and (ii) Hosea's employment by Heartland does not violate or breach the Non-Compete Restrictions as defined and set forth in Section 5 of the Separation Agreement or any non-disclosure covenants contained in Paragraph 9(a) of the Employment Agreement dated as of April 2, 1997 or the Non-Disclosure Agreement dated as of April 2, 1997 between Hosea and CS Wireless. Notwithstanding anything to the contrary set forth in this Section 12(d), CS Wireless' acknowledgment set forth herein shall not modify or constitute a waiver of CS Wireless' rights to enforce Hosea's non-disclosure covenants relating to any person or entity other than Heartland or its existing wholly-owned subsidiaries set forth in Section 2 of the Separation Agreement or Hosea's obligations relating to any person or entity other than Heartland or its existing wholly-owned subsidiaries under the Employment Agreement and Non-Disclosure Agreement referred to above CS Wireless expressly agrees to assume the Separation Agreement described above in any bankruptcy proceeding filed by or against CS Wireless. (e) Notwithstanding anything to the contrary, CAI shall indemnify and hold Heartland harmless from any and all Claims arising from or in connection with CAI's purchase from Heartland of the CS Wireless Common Stock at the Stage I Closing pursuant to Section 2 of this Agreement, including any such Claims arising from, in connection with, or related to any subsequent disposition or transfer of the CS Wireless Common Stock by CAI; PROVIDED, HOWEVER, any liability of CAI to Heartland arising by operation of this Section 12(e) arising from, in connection with, or related to a subsequent disposition or transfer of the CS Wireless Common Stock by CAI to CS Wireless shall be deemed fully satisfied by CAI with the return to CS Wireless of any and all consideration received by CAI from CS Wireless for such disposition or transfer, and thereafter, Heartland shall no longer have any claim for indemnification against CAI under this Section 12(e). (f) In the event CS Wireless commences a bankruptcy proceeding, CAI shall use its best efforts in its capacity as a stockholder of CS Wireless, and shall cause the CAI Directors and CAI Independent Directors (each as defined in the Stockholders' Agreement) to use their best efforts, recognizing and taking into consideration the various fiduciary duties owed by such directors to various CS Wireless constituencies, to cause (i) CS Wireless to fulfill its obligations to the Heartland Directors, the Heartland Independent Directors and Hosea, and (ii) CS Wireless to treat its indemnity obligations to the Heartland Directors, the Heartland Independent Directors and Hosea no less favorably than CS Wireless treats its indemnity obligations to any other person who has served, is serving or may hereafter serve as a member of the board of directors of CS Wireless. Section 13. TERMINATION. (a) This Agreement may be terminated at any time prior to the Stage I Closing by mutual written consent of the parties hereto. (b) This Agreement shall terminate (without further action or notice (in writing or otherwise) by any of the parties hereto), unless CAI and Heartland shall have extended in writing date or the period set forth in this Section 13 (or any of the extended dates or periods), if the Stage I Closing shall not have occurred by December 4, 1998. (c) In the event of a termination of this Agreement in accordance with this Section 13, this Agreement shall forthwith become void and of no further force and effect, and there shall be no liability hereunder on the part of any party or its affiliates, directors, officers, shareholders, agents or other representatives; PROVIDED, HOWEVER, that Sections 2(b), 13, 15 and 16, inclusive, shall survive any termination of this Agreement, and (ii) nothing herein shall relieve any party from liability for any breach of this Agreement; PROVIDED FURTHER, HOWEVER, that if the Stage I Closing shall have occurred prior to the termination of this Agreement, Section 12 shall survive and nothing contained herein shall limit, abridge or otherwise affect, or relieve any party from, the continuing rights and obligations arising out of such Stage I Closing. Section 14. FURTHER ASSURANCES. The parties hereto agree to take all actions necessary or advisable, in the opinion of the party taking such action, to effect the terms of the provisions hereof. Section 15. NO WAIVER. Failure by any party hereto to insist on strict performance or observance of any provision of this Agreement or to exercise any right or remedy shall not be construed as a waiver of any right or remedy with respect to any existing or subsequent breach or default. Section 16. MISCELLANEOUS. (a) ENTIRE AGREEMENT. This Agreement and the exhibits and schedules attached hereto and the BTA Lease and Option Agreement, as amended, constitute the entire agreement among the parties with respect to the subject matter hereof and supersedes any and all previous agreements, representations and understandings among the parties hereto with respect to such matters whether oral or in writing. (b) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, without regard to the principles of conflicts of laws thereof. (c) SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validly or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect. (d) NO THIRD PARTY BENEFICIARIES. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except for the persons not parties to this Agreement who are being released or indemnified pursuant to Section 12, nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any person not party to this Agreement, including, without limitation, (i) any receiver appointed for any party hereto, or (ii) any trustee, responsible officer or other person or entity appointed to manage business or property of any party hereto in such party's case under any chapter of the Bankruptcy Code. (e) AMENDMENTS. This Agreement may be amended, supplemented or modified, and any provision hereof may be waived, only pursuant to a written instrument making specific reference to this Agreement signed by each of the parties hereto. (f) EXPENSES. Each of the parties hereto shall be solely responsible for its fees and expenses incurred in connection with the negotiation, execution, delivery and performance of this Agreement and the transactions contemplated hereby. (g) COUNTERPARTS. This Agreement may be executed by facsimile and in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (h) PUBLIC ANNOUNCEMENTS. The parties hereto will agree upon the timing and content of an initial press release to be issued describing the transactions contemplated by this Agreement, and will not make any public announcement thereof prior to reaching such agreement unless required to do so by applicable law or regulation. (i) NAMES, CAPTIONS, ETC. The name assigned this Agreement and the section captions used herein are for convenience or reference only and shall not affect the interpretation or construction thereof. (j) NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of authorship of any of the provisions of this Agreement. (k) ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable damage would occur in the event that any provision of this Agreement was not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce the terms and provisions hereof in any state or federal court in the State of Delaware, this being in addition to any other remedy to which they are entitled at law or in equity. [The balance of this page intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have executed this Agreement through their duly authorized representatives on the day and year first above written. HEARTLAND WIRELESS COMMUNICATIONS, INC. By:___________________________________ Name: Title: CS WIRELESS SYSTEMS, INC. By:___________________________________ Name: Title: CAI WIRELESS SYSTEMS, INC. By:___________________________________ Name: Title: EX-99 3 EXHIBIT 99.1
CS WIRELESS SYSTEMS, INC. ITEMS 8 AND 14(A) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE CS Wireless Systems, Inc. and Subsidiaries: Independent Auditors' Report F-2 Consolidated Balance Sheet as of December 31, 1998 and 1997 F-3 Consolidated Statement of Operations for the years ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 F-6 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-7 Notes to Consolidated Financial Statements F-8
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CS Wireless Systems, Inc.: We have audited the accompanying consolidated balance sheets of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits{ }in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in note 1(f) to the consolidated financial statements, the Company changed its method of accounting for the costs of start-up activities in 1998 to adopt the provisions of Statement of Accounting Position 98-5, "Reporting on the Costs of Start-up Activities." KPMG LLP Dallas, Texas April 12, 1999 F-2
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 (dollars in thousands, except share data) ASSETS 1998 1997 ----------- -------- Current assets: Cash and cash equivalents $ 41,839 74,564 Restricted cash (note 4) - 5,030 Subscriber receivables, less allowance for doubtful accounts of $339 and $257 in 1998 and 1997, respectively 1,542 1,026 Prepaid expenses and other 638 939 -------- ------- Total current assets 44,019 81,559 Property and equipment, net (note 5) 43,645 50,519 License and leased license investment, net of accumulated amortization of $25,481 and $16,159 in 1998 and 1997, respectively (notes 2 and 3) 157,269 170,689 Goodwill, net of accumulated amortization of $7,707 in 1997 (notes 2 and 3) - 48,243 Assets held for sale (note 3) 2,102 - Investments in and loans to equity affiliates 3,884 8,503 Debt issuance costs, net of accumulated amortization of $2,101 and $1,286 in 1998 and 1997, respectively 7,444 8,260 Other assets, net 454 2,930 -------- -------- $ 258,817 370,703
See accompanying notes to consolidated financial statements F-3
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued December 31, 1998 and 1997 (dollars in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997 ---------- ---------- Current liabilities: Accounts payable and accrued expenses, including payable to affiliates of $282 in 1997 (note 6) $ 5,490 8,652 Current portion of long-term debt (note 7) 199 217 Current portion of BTA auction payable to affiliates including accrued interest payable (note 7) 354 1,122 Deferred revenue 1,237 628 Other current liabilities - 895 Total current liabilities 7,280 11,514 Long-term debt, excluding current portion (note 7) 316,720 283,686 BTA auction payable to affiliates, excluding current portion (note 7) 3,505 3,274 --------- -------- Total liabilities 327,505 298,474 Stockholders' equity (deficit) (notes 3 and 9): Preferred stock, $.01 par value; authorized 5,000,000 shares in 1997; none in 1998 - - Common stock, $.001 par value; authorized 40,000,000 shares in 1997, 15,000,000 in 1998; issued and outstanding 10,702,609 shares in 1998 and 1997 11 11 Treasury stock, at cost; 3,838,138 and 2,103 shares in 1998 and 1997, respectively (1,574) (40) Additional paid-in capital 154,557 154,557 Accumulated deficit (221,682) (82,299) --------- -------- Total stockholders' equity (deficit) (68,688) 72,229 Commitments and contingencies (notes 8 and 13) ---------- -------- $ 258,817 370,703 =========== =========
See accompanying notes to consolidated financial statements. F-4
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES Consolidated statements of Operations Years ended December 31, 1998, 1997 and 1996 (in thousands, except share data) 1998 1997 1996 --------- ------- ------- Revenues $ 26,259 26,920 22,738 Operating expenses: Systems operations 16,409 14,976 13,258 Selling, general and administrative 18,984 15,849 13,934 Depreciation and amortization 29,222 26,858 20,345 Impairment of long-lived assets (note 2) 63,907 - - -------- -------- ------- Total operating expenses 128,522 57,683 47,537 -------- -------- ------- Operating loss (102,263) (30,763) (24,799) -------- -------- ------- Other income (expense): Interest expense (34,679) (31,995) (24,959) Interest income 3,399 5,469 6,600 Equity in net losses of affiliates (note 4) (2,553) (1,349) - Other (1,419) 644 - -------- ------- ------- Other income (expense), net (35,252) (27,231) (18,359) -------- ------- ------- Loss before income taxes and cumulative effect of change in accounting principle (137,515) (57,994) (43,158) Income tax benefit (note 10) - 5,429 14,631 --------- -------- ------- Loss before cumulative effect of change in accounting principle (137,515) (52,565) (28,527) Cumulative effect of change in accounting principle (1,868) - - ---------- -------- ------- Net loss $ (139,383) (52,565) (28,527) ========== ======== ======= Basic and diluted loss per common share before cumulative effect of change in accounting principle $ (13.23) (4.94) (3.06) ========= ========= ========= Basic and diluted loss per common share $ (13.41) (4.94) (3.06) ========= ========= ========= Weighted average basic and dilutive shares outstanding $ 10,395,558 10,639,190 9,170,169 =========== ========== =========
See accompanying notes to consolidated financial statements. F-5
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Years ended December 31, 1998, 1997 and 1996 (in thousands, except share data) ADDITIONAL COMMON STOCK PAID-IN DIVISION TREASURY ACCUMULATED SHARES AMOUNT CAPITAL EQUITY STOCK DEFICIT TOTAL ------ ------ ---------- -------- -------- ----------- ------- Balance, December 31, 1995 1,000 $ 1 $ 15,950 $ 45,572 $ - $ (1,207) $ 60,316 Contribution to Company - true- up adjustment (note 3) 9,999,000 9 131,503 (45,572) - - 85,940 Issuance of common stock pursuant to Unit offering 110,000 - 800 - - - 800 Issuance of common stock in acquistion 335,408 - 6,305 - - - 6,305 Net loss - - - - - (28,527) (28,527) --------- ------ ------- -------- ------- ---------- ------- Balance, December 31, 1996 10,445,408 10 154,558 - - (29,734) 124,834 Contribution to Company - true-up adjustment (note 3) 257,201 1 (1) - - - - Treasury stock purchases (note 3) - - - - (40) - (40) Net loss - - - - - (52,565) (52,565) ---------- ------ ------- ------- ------- -------- ------- Balance, December 31, 1997 10,702,609 11 154,557 - (40) (82,299) 72,229 Treasury stock purchases (note 3) - - - - (1,534) - (1,534) Net loss - - - - - (139,383) (139,383) ---------- ------ ------- ------- ------- -------- ------- Balance, December 31, 1998 10,702,609 $ 11 $ 154,557 $ - $ (1,574) $ (221,682) $ (68,688) ========== ====== ======== ======= ========
See accompanying notes to consolidated financial statements. F-6
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flow Years ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net loss $ (139,383) (52,565) (28,527) Adjustments to reconcile net loss to net cash used in operating activities: Deferred income taxes - (5,429) (14,631) Depreciation and amortization 29,222 26,858 20,345 Accretion on discount notes and amortization of debt issuance costs 33,934 30,395 23,483 Non-cash interest expense on other long term debt 770 1,524 1,275 Impairment of long-lived assets (note 2) 63,907 - - Discount and provision for long-term notes receivable (note 4) 1,770 - - Write-off of start-up and organizational costs (note 1 (f)) 1,868 - - Gain on sale of assets, net - (644) - Equity in losses of affiliates 2,553 1,349 - Changes in assets and liabilities, net of effects of contributions, acquisitions and assets held for sale: Subscriber receivables, net (516) 63 (115) Prepaid expenses and other 301 41 (345) Accounts payable, accrued expenses and other liabilities (2,485) 1,545 928 -------- ------- ------ Net cash provided by (used in) operating activities (8,059) 3,137 2,413 -------- ------- ------- Cash flows from investing activities: Purchases of property and equipment (18,930) (22,685) (13,243) Additions to intangible assets (4,853) (4,329) (3,816) Subscriber acquisition, net of property and equipment - (448) - Investment in assets held for sale (423) (943) (8,766) Proceeds from sale of assets - 16,350 - Issuance of notes receivable - - (1,510) Utilization of (investment in) in restricted cash 5,030 (5,030) - Investment in equity affiliates (1,257) (6,555) - Other (895) (540) 81 -------- ------- ------- Net cash used in investing activities (21,328) (24,180) (27,254) -------- ------- ------- Cash flows from financing activities: Proceeds from long-term debt - 500 - Payments of capital lease obligations (139) (95) (198) Payments on BTA auction payable and other (1,665) (493) (20,125) Payment in settlement of USA acquisition - (2,103) - Payments on Heartland Short-Term Note - - (25,000) Payments on Heartland Long-Term Note - (15,274) - Purchase of shares into treasury (note 3(c)) (1,534) - - Proceeds from Unit Offering - - 229,484 Debt issuance costs - - (9,793) Cash distributed pursuant to Contributions (note 3) - - (36,639) -------- ------- ------- Net cash provided by (used in) financing activities (3,338) (17,465) 137,729 -------- ------- ------- Increase (decrease) in cash and cash equivalents (32,725) (38,508) 112,888 Cash and cash equivalents at beginning of year 74,564 113,072 184 -------- ------- ------- Cash and cash equivalents at end of year $ 41,839 74,564 113,072 ======== ======= ======= Cash paid for interest $ 446 263 114 ======== ======= =======
See accompanying notes to consolidated financial statement F-7 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) December 31, 1998, 1997 and 1996 (tables in thousands, except per share data) (1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) DESCRIPTION OF BUSINESS CS Wireless Systems, Inc. and subsidiaries (the "Company" or "CS Wireless") develop, own and operate a network of wireless cable television systems providing subscription television and high-speed Internet access services. The Company has a portfolio of wireless cable channel rights in various markets in the United States. The Company currently has systems in operation in eleven markets, and it owns or holds lease rights in several other markets. Wireless cable television is a relatively new industry within the highly competitive subscription television industry. The Company's principal subscription television competitors in each of its markets are traditional hard-wire cable companies, direct broadcast satellite, private cable companies and other alternate methods of distributing and receiving television transmissions. Hard-wire cable companies generally are well-established and known to potential customers and have significantly greater financial and other resources than the Company. As the telecommunications industry continues to evolve, the Company may face additional competition from new providers of entertainment and data services. In addition, until the Company can increase its channels offered through the deployment of digital compression technology, the Company's existing competitors generally have more channels to offer subscribers. There can be no assurance that the Company will be able to compete successfully with existing or potential competitors in the subscription television industry. In addition to wireless cable television services, the Company intends to expand the use of wireless channel rights spectrum to include telecommunications services. These new services are expected to include two-way data transmission services and telephony services, possibly through the participation of a strategic partner. The Company has incurred significant operating losses since inception and has negative stockholders' equity at December 31, 1998. Losses are expected for at least the next year as the Company continues to develop its wireless communications businesses. The Company has approximately $41,800,000 in cash and cash equivalents at December 31, 1998, and, based on its current operating plan, believes that it has sufficient cash to fund its anticipated capital expenditures and operating losses through at least the first quarter of 2000. However, the growth of the Company's wireless communications businesses may require substantial continuing investment to finance capital expenditures related to the acquisition of channel rights and infrastructure development of digital video programming, two-way frequency utilization and telephony systems. Additionally, significant debt service begins in September 2001. Without additional funding through debt or equity offerings, joint ventures, the sale or exchange of its wireless cable channel rights or the participation of a strategic partner, or the restructuring of its debt agreements, the Company may not be able to meet its future debt and interest payments. There can be no assurance that the Company will achieve positive cash flow from operations, that the Company will consummate the sale of any wireless cable channel rights or that sufficient debt or equity financing will be available to the Company. In addition, subject to restrictions under its outstanding debt, the Company may pursue other opportunities to acquire additional wireless cable channel rights and businesses that may utilize the capital currently expected to be available for its current markets. The amount and timing of the Company's future capital requirements will depend upon a number of factors, including programming, equipment costs and marketing costs, staffing levels, subscriber growth, competitive conditions, and the presence of a strategic partner, many of which are beyond the control of the Company. Failure to obtain any required additional financing could materially affect the growth, cash flow or operating results of the Company. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial information for the period from January 1, 1996 through February 23, 1996 reflects the combined financial position and results of operations for the Company's wireless cable system serving the Cleveland, Ohio market, which is comprised of the accounts of the Company and certain assets of Atlantic Microsystems, Inc. For the period subsequent to February 23, 1996, the Company's consolidated financial statements include the results of operations of the entities and assets contributed to the Company on February 23, 1996 (see note 3). On September 29, 1995, ACS Enterprises, Inc. (including ACS Ohio, Inc., the predecessor of the Company and a wholly-owned subsidiary of ACS Enterprises, Inc.) was acquired by CAI Wireless Systems, Inc. ("CAI") in a business combination accounted for as a purchase. (C) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, including all direct labor costs of new customer installations. Depreciation and amortization of property and equipment are computed using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance costs are charged to expense when incurred; renewals and betterments are capitalized. (d) License and Leased License Investment License and leased license investment includes costs incurred to acquire and/or develop wireless cable channel rights. Costs incurred to acquire channel rights issued by the Federal Communications Commission ("FCC") are deferred and amortized ratably over estimated useful lives of 15 years beginning with inception of service in each respective market. As of December 31, 1998 and 1997, $17,900,000 and $54,800,000, respectively, of the license and leased license investment was not yet subject to amortization. (E) GOODWILL Goodwill represents excess purchase price of acquisitions over identifiable net tangible and intangible assets. Goodwill is amortized ratably over an estimated useful life of 15 years beginning with the acquisition of the market. The Company assesses the recoverability of goodwill by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved (note 2). (F) OTHER ASSETS Other assets includes a non-compete agreement with a former officer and certain other intangible assets, including organizational costs at December 31, 1997, totaling approximately $469,000 and $2,085,000 at December 31, 1998 and 1997, respectively, net of accumulated amortization of approximately $240,000 and $486,000, respectively. These assets are being amortized over the respective lives of the underlying agreements. The Company adopted the provisions of Statement of Position 98-5 ("SOP 98-5"), REPORTING ON THE COSTS OF START-UP ACTIVITIES, effective January 1, 1998. This pronouncement requires that costs of start-up activities, including organizational costs, should be expensed as incurred. As a result of adopting SOP 98-5, the Company recorded a charge of $1,868,000 as a cumulative effect of the change in accounting principle as of January 1, 1998. (g) Long-Lived Assets Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell or otherwise dispose of (note 2). (H) INCOME TAXES Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable earnings. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax expense is the total of tax payable for the period and the change in deferred tax assets and liabilities during the period. (I) REVENUE RECOGNITION Revenues from subscribers are recognized in the period of service. Amounts paid in advance are recorded as deferred revenue. (J) SYSTEMS OPERATIONS Systems operations expenses consist principally of programming fees, channel lease costs, tower rental and other costs for providing service. The Company is party to several contract arrangements with related parties to provide programming, installation and other services (see note 11). (K) STATEMENT OF CASH FLOWS For purposes of the statements of cash flows, the Company considers temporary cash investments purchased with original maturities of three months or less and which are available for use in operations to be cash equivalents. The Company had cash equivalents of $41,520,000 and $75,352,000 at December 31, 1998 and 1997, respectively. (l) Investments in Affiliates Investments in affiliates are accounted for under the equity method as the Company's investment in each of three companies represents greater than 20% interest and the Company has the ability to exercise significant influence over each of the entities. Under this method, the investment originally recorded at cost is adjusted to recognize the Company's share of net earnings or losses of the affiliate as they occur. The Company's share of net earnings or losses of affiliates includes the amortization of purchase adjustments. (m) Net Loss Per Common Share The Company adopted SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"), in 1997. Accordingly, the Company has presented basic loss per share, computed on the basis of the weighted average number of common shares outstanding during the year, and diluted loss per share, computed on the basis of the weighted average number of common shares and all dilutive potential common shares outstanding during the year. The potentially dilutive effect of the Company's stock options has not been considered in the computation of diluted net loss per common share since their effect would be antidilutive. (N) ACCOUNTING FOR STOCK OPTIONS On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No. 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. Under APB Opinion No. 25, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. (O) COMPREHENSIVE INCOME The Company adopted the provisions of Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," in the first quarter of 1998, which required companies to disclose comprehensive income separately from net income. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-ownership sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners. The adoption of this statement had no effect on the Company at December 31, 1998, because the Company has no elements of other comprehensive income. Accordingly, compensation income and net income are the same amount for each period presented. (P) SEGMENT REPORTING In January 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS No. 131"). SFAS No. 131 requires that public companies report operating segments based upon how management allocates resources and assesses performance. Based on the criteria outlined in SFAS No. 131, the Company is comprised of a single reportable segment - distribution of wireless cable television subscription services. No additional disclosure is required by the Company to conform to the requirements of SFAS No. 131. (q) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (R) RECLASSIFICATIONS Certain reclassifications have been made to prior year consolidated financial statements to conform to the current year presentation. (2) IMPAIRMENT OF LONG-LIVED ASSETS During the second and third quarters of 1998, CAI and a wholly-owned subsidiary announced their intention to file a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code and Heartland Wireless Communications, Inc. ("Heartland") announced its intent not to pay interest on certain of its bonds. As a result of these negative industry events, combined with continuing net losses, the Company reassessed its business strategy and evaluated its long-lived assets for impairment based on these bankruptcy petitions and determined that cash flows from operations would not be adequate to fund the capital outlay required to build out non-operating markets while continuing the build out of the digital market in Dallas, Texas. Thus, in accordance with SFAS No. 121, the Company began the process of estimating the fair values of the long-lived assets. Although this process was not complete prior to filing the June 30, 1998 Quarterly Report on Form 10-Q, the Company recorded a non- cash impairment charge of $46,378,000 to write off the carrying value of the Company's goodwill based on preliminary estimates of fair value. During the third quarter, the Company engaged a third party to assist in completing the recoverability analysis in conjunction with a Company-wide valuation analysis. This process was completed during the fourth quarter of 1998. In assessing the fair value of its long-lived assets, the Company and the third party considered relevant cash flows, estimated future operating results, trends, management's strategic plans, competition and other available information including the fair value of wireless channel rights owned and leased. Based on the results of this internal analysis and the third-party valuation, the Company recorded additional impairment charges to certain operating and non-operating markets' long-lived assets in the fourth quarter of 1998. This impairment charge, combined with the second quarter charge, totaled $63,907,000, as follows:
DESCRIPTION OF WRITE-DOWNS Property and equipment $ 9,400 License and leased license investment 8,129 Goodwill 46,378 --------- $ 63,907 =========
The Company's estimates of future gross revenues and operating cash flows, the remaining estimated lives of long-lived assets, or both, could be reduced in the future due to changes in, among other things, technology, government regulation, available financing, interference issues or competition. As result, the carrying amounts of long-lived assets could be reduced by additional amounts which would be material to the Company's financial position and results of operations. (3) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS (a) Contributions to Company On February 23, 1996, CAI and Heartland contributed to the Company (the "Contributions") certain wireless cable television assets comprising various markets in the United States. In connection with the Contributions, CAI and Heartland received approximately 5.4 million and 3.6 million shares, respectively, of the Company's newly- issued common stock. In addition, CAI received approximately $750,000 in cash and Heartland received approximately $30.9 million in cash, a nine-month note for $25 million (the "Heartland Short-Term Note") and a 10-year note for $15 million (the "Heartland Long-Term Note"). The Heartland Short-Term Note was repaid on March 1, 1996 with a portion of the net proceeds from the Unit Offering (see note 7). Additionally, in connection with the Contributions, MMDS Holdings II, Inc., an affiliate of Bell Atlantic, and NYNEX MMDS Holding Company, an affiliate of NYNEX, each received 500,000 shares of common stock of the Company for certain non-cash consideration. The consummation of the Contributions has been accounted for at CAI's and Heartland's historical cost basis, reduced by the amount of cash and notes distributed to CAI and Heartland in connection with the Contributions. A substantial portion of the net assets contributed by Heartland were purchased by Heartland on February 23, 1996. Accordingly, Heartland's cost basis with respect to such net assets was determined based on Heartland's allocation of the purchase price to the net assets acquired and liabilities assumed. On November 8, 1996, the Company distributed an additional $5 million in cash to Heartland as part of the equity true-up per the provisions of the agreement governing the contributions. Effective March 31, 1997, an additional 257,201 shares of common stock of the Company were issued to Heartland in satisfaction of certain post-closing adjustments. The net assets contributed to the Company consist primarily of plant and equipment and various wireless cable channel rights. The following is a summary of the net assets contributed to the Company on February 23, 1996 (in thousands):
Working capital deficit $ (141) Plant and equipment, net 25,755 License and leased license investment and goodwill 144,340 Deferred income taxes (6,982) Other liabilities (393) --------- 162,579 Cash and notes distributed to CAI and Heartland 76,639 --------- Net assets contributed $ 85,940 =========
(B) ACQUISITIONS On October 11, 1996, the Company acquired all of the issued and outstanding common stock ("USA Common Stock") of USA Wireless Cable, Inc. ("USA") in a transaction (the "USA Wireless Acquisition") accounted for under the purchase method. USA provided wireless cable service in certain Midwest markets, including but not limited to the Effingham and Wellsville, Kansas; Radcliffe, Iowa; Scottsbluff, Nebraska; Kalispell, Montana; and Rochester, Minnesota markets (the "USA Markets"). At the effective time of the USA Wireless Acquisition, the outstanding shares of USA Common Stock were converted into rights to receive an aggregate $17,635,000 of which approximately $6,305,000 was paid in the form of CS Wireless common stock and approximately $11,330,000 of indebtedness and payables assumed by the Company. In connection with this acquisition, the Company extended two notes receivable to affiliates of USA. A note receivable for $1,260,000 with an interest rate of 12% was settled in February 1997, and a note receivable for $250,000 with an interest rate of 12% was July 1, 1998. However, the affiliates of USA defaulted on this note and the Company wrote-off the balance as uncollectible during the year ended December 31, 1998. On July 17, 1996, the Company acquired from Heartland (i) leases and licenses for wireless cable channel rights in Adairsville, Powers Crossroads and Rutledge, Georgia (the "Atlanta (suburbs) markets") and (ii) leases for four tower sites. The purchase price was $7.2 million in cash. The acquisitions discussed above were accounted for as purchases. Accordingly, the accompanying consolidated financial statements include the results of operations of the acquired entities from the dates of acquisition. A summary of the net assets acquired follows:
Working capital deficit $ (1,155) Property and equipment 1,354 Assets held for sale 11,800 Intangible assets 13,959 Deferred tax liability (2,333) Notes payable assumed (10,120) --------- Total purchase price $ 13,505 =========
(C) DISPOSITION AND EXCHANGE On December 2, 1998, the Company, CAI and Heartland entered into a Master Agreement providing for, among other things, the termination of Heartland's rights in, and claims against, the Company. As part of the Master Agreement, in December 1998, CAI purchased from Heartland Heartland's ownership in the Company, or 3,836,035 shares of CS Wireless common stock, for $1,534,000. The Company subsequently purchased those shares from for the same price. At December 31, 1998, these shares are recorded as treasury stock. Additionally, the Company agreed to lease certain channel rights and sell the net operating assets of its Radcliffe, Iowa market to Heartland primarily in exchange for the forgiveness by Heartland of the outstanding balance owed by the Company of $2,335,000 under the Heartland Long-Term Note (see note 7) and additional cash payments by the Company to Heartland of $466,000. In December 1998, under the terms of the Master Agreement, the Company made a deposit of $366,000 to Heartland in anticipation of the exchange. This deposit, along with the carrying value of the net assets of the Radcliffe, Iowa market, are classified as assets held for sale at December 31, 1998 in the accompanying consolidated balance sheet. On September 3, 1997, pursuant to an agreement dated as of November 6, 1996, the Company consummated an exchange with Peoples Choice TV Corp. of wireless cable channel rights and related assets in Salt Lake City, Utah for wireless cable channel rights and related assets in Kansas City, Missouri. This transaction was accounted for as a non-monetary exchange and, accordingly, the recorded amounts of the assets relinquished were allocated to the assets acquired. In connection with this transaction, the Company exchanged the rights to the BTA license in Salt Lake City with related indebtedness of approximately $330,000 for the rights to a BTA license in Kansas City with related indebtedness of approximately $216,000. On May 22, 1997 the Company sold to BellSouth Corporation, pursuant to the July 25, 1996 purchase agreement, (i) certain leases and licenses for wireless cable channel rights in Adairsville, Power Crossroads and Rutledge, Georgia (Atlanta Suburbs markets) and leases for four tower sites; (ii) the BTA license relating to Atlanta, Georgia and (iii) certain other assets and reimbursable expenses for approximately $16.4 million, resulting in a gain of approximately $0.7 million. (4) INVESTMENTS IN AND LOANS TO AFFILIATES TelQuest Satellite Services LLC ON AUGUST 4, 1997 THE COMPANY ACQUIRED A 25% OWNERSHIP INTEREST IN TELQUEST SATELLITE SERVICES LLC ("TELQUEST"), FOR AN INITIAL CONTRIBUTION OF $2.5 MILLION IN CASH (PAYABLE IN QUARTERLY INSTALLMENTS BEGINNING AUGUST 1997) AND, $2.5 MILLION OF EQUIPMENT LEASED TO TELQUEST UNDER A BARGAIN LEASE. THE COMPANY MADE QUARTERLY PAYMENTS OF APPROXIMATELY $1,394,000 DURING 1997. AS PART OF THE CONTRIBUTIONS, THE COMPANY CONVERTED A NOTE RECEIVABLE FROM TELQUEST ENTERED INTO DURING MARCH 1997 IN THE AMOUNT OF $200,000 PRINCIPAL INTO AN INVESTMENT IN TELQUEST OF $211,000. DURING 1998, THE COMPANY MADE PAYMENTS OF $895,000 WHICH FULFILLED THE CASH CONTRIBUTION REQUIREMENT OF $2,500,000. TELQUEST WAS FORMED TO PROVIDE DIGITAL VIDEO PROGRAMMING SIGNALS THROUGH ITS HEADEND IN THE SKY SATELLITE SERVICE. THE COMPANY ENTERED INTO A TEN-YEAR AFFILIATION AGREEMENT WITH TELQUEST THROUGH WHICH THE COMPANY RECEIVED TELQUEST'S HEADEND IN THE SKY SERVICE AS WELL AS OTHER SERVICES OFFERED BY TELQUEST. TELQUEST SATELLITE SERVICES LLC'S OTHER MEMBERS ARE TELQUEST COMMUNICATIONS, INC. AND CAI. BOTH CAI AND TELQUEST COMMUNICATIONS, INC. ARE AFFILIATED ENTITIES. CAI ACQUIRED A 25% OWNERSHIP IN TELQUEST FOR THE SAME CONSIDERATION GIVEN BY CS WIRELESS. IN JULY 1998, THE COMPANY PURCHASED THE LEASEHOLD RIGHTS OF TELQUEST IN CERTAIN HEADEND EQUIPMENT OWNED BY CAI FOR $1,900,000 AS PART OF A CONTINGENCY PLAN TO ENSURE UNINTERRUPTED PROGRAMMING SERVICE. IN OCTOBER 1998, THE COMPANY COMMENCED THE RELOCATION OF CERTAIN OF THE LEASED HEADEND EQUIPMENT FROM THE TELQUEST FACILITIES AS TELQUEST CEASED ITS HEADEND IN THE SKY SERVICE. ACCORDINGLY, THE COMPANY HAS CLASSIFIED THE CARRYING VALUE OF THE PREVIOUSLY LEASED EQUIPMENT OF $2,125,000 AND THE EQUIPMENT ACQUIRED THROUGH THE $1,900,000 LEASE PAYMENT AS PROPERTY AND EQUIPMENT AT DECEMBER 31, 1998. SUCH AMOUNTS WILL BE DEPRECIATED OVER THE ESTIMATED REMAINING USEFUL LIVES OF THE RELATED EQUIPMENT. DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY RECORDED EQUITY IN LOSSES OF $1,719,000 AND $1,159,000, RESPECTIVELY, RELATED TO ITS INVESTMENT IN TELQUEST. IN 1998 AND 1997, THESE LOSSES WERE COMPRISED OF: (I) THE COMPANY'S EQUITY IN LOSSES OF TELQUEST OF $146,000 AND $1,107,000; (II) AMORTIZATION OF THE COST IN EXCESS OF THE COMPANY'S BASIS IN THE UNDERLYING ASSETS OF TELQUEST OF $1,198,000 AND $52,000, RESPECTIVELY; AND (III) AMORTIZATION OF $375,000 AND $0, RESPECTIVELY, RELATED TO THE COMPANY'S $2,500,000 INVESTMENT IN THE LEASEHOLD RIGHTS IN CERTAIN HEADEND EQUIPMENT. THE CARRYING VALUE OF THE COMPANY'S INVESTMENT IN AND ADVANCES TO TELQUEST WAS $0 AND $3,842,000 AT DECEMBER 31, 1998 AND 1997, RESPECTIVELY. Mexico Investments ON SEPTEMBER 29, 1997, THE COMPANY ACQUIRED 39% OF THE VOTING COMMON STOCK OF TELEVISION INTERACTIVA DEL NORTE, S.A. DE C.V. ("TELINOR") FROM HEARTLAND FOR CASH PROCEEDS OF $915,000 AND ASSUMPTION OF A CASH CALL OBLIGATION IN THE AMOUNT OF $145,000. THE COMPANY ALSO PURCHASED FROM HEARTLAND TWO UNSECURED PROMISSORY NOTES PAYABLE BY TELINOR FOR $2.56 MILLION, INCLUDING ACCRUED INTEREST. THE TWO NOTES WERE IMMEDIATELY RESTRUCTURED INTO ONE UNSECURED NOTE ACCRUING INTEREST AT 12% AND MATURING ON SEPTEMBER 21, 2002. ADDITIONALLY, THE COMPANY CONSUMMATED ANOTHER TRANSACTION WITH THE PRINCIPAL STOCKHOLDERS OF TELINOR WHEREBY THE COMPANY PURCHASED 49% OF THE VOTING STOCK OF TELEVISION INALAMBRICA, S.A. DE C.V. ("TELEVISION") FOR CASH IN THE AMOUNT OF $1.0 MILLION AND COMMITTED TO (I) LOAN TELEVISION UP TO THE SUM OF $5.0 MILLION IN CASH OR (II) FINANCE AN EQUIVALENT AMOUNT IN SALES OF THE COMPANY'S EQUIPMENT TO TELEVISION. THE FUNDS COMMITTED WERE DEPOSITED INTO ESCROW PENDING DISBURSEMENT OR REDUCTION OF THE REQUIRED ESCROW AMOUNT THROUGH EQUIPMENT SALES TO TELEVISION. AS OF DECEMBER 31, 1997, APPROXIMATELY $5.0 MILLION WAS HELD IN ESCROW PURSUANT TO THIS AGREEMENT. DURING 1998, THE ESCROWED FUNDS WERE RELEASED TO THE COMPANY. TELINOR AND TELEVISION WERE FORMED TO DEVELOP WIRELESS CABLE TELEVISION SYSTEMS PROVIDING SUBSCRIPTION TELEVISION SERVICES IN MEXICO. DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY INCURRED REIMBURSABLE COSTS OF APPROXIMATELY $161,000 AND $405,000 ON BEHALF OF TELINOR AND TELEVISION. FURTHER, THE COMPANY FUNDED $145,000 UNDER A CASH CALL OBLIGATION AND ADVANCED ADDITIONAL FUNDS AND EQUIPMENT UNDER THE NOTE RECEIVABLE OF $950,000. DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY RECORDED EQUITY IN LOSSES OF $833,000 AND $190,000, RESPECTIVELY, RELATED TO ITS INVESTMENTS IN TELINOR AND TELEVISION (COLLECTIVELY, "TELINOR INVESTMENTS"). IN 1998 AND 1997, THESE LOSSES WERE COMPRISED OF $256,000 AND $173,000, RESPECTIVELY, OF THE COMPANY'S SHARE IN LOSSES OF TELINOR INVESTMENTS, AND $577,000 AND $17,000, RESPECTIVELY, IN AMORTIZATION OF THE COST IN EXCESS OF THE COMPANY'S BASIS IN THE UNDERLYING ASSETS OF TELINOR INVESTMENTS. ADDITIONALLY, THE COMPANY RECORDED AN ALLOWANCE OF $1,200,000 RELATED TO THE NOTE RECEIVABLE FROM TELINOR DUE TO UNCERTAINTIES REGARDING ITS ULTIMATE COLLECTIBILITY. THE CARRYING VALUE OF THE COMPANY'S INVESTMENTS IN AND ADVANCES TO TELINOR INVESTMENTS WAS $3,844,000 AND $4,661,000 AT DECEMBER 31, 1998 AND 1997, RESPECTIVELY, INCLUDING THE COMPANY'S NOTE RECEIVABLE AT DECEMBER 31, 1998 AND 1997 OF $2,311,000 AND $2,560,000, RESPECTIVELY, (5) PROPERTY AND EQUIPMENT PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING AT DECEMBER 31, 1998 AND 1997:
Estimated 1998 1997 useful life ------ ------- ----------- Subscriber premises equipment and installation costs $ 39,003 52,656 1 - 7 years Transmission equipment and system construction costs 21,928 16,035 5 - 10 years Office furniture and equipment 7,434 4,106 5 years Leasehold improvements 1,156 1,016 5 years -------- ------- 69,521 73,813 Less accumulated depreciation and amortization (25,876) (23,294) -------- ------- $ 43,645 50,519 ======== =======
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES ACCOUNTS PAYABLE AND ACCRUED EXPENSES CONSIST OF THE FOLLOWING AT DECEMBER 31, 1998 AND 1997:
1998 1997 ------ ------- Accounts payable $ 684 4,680 Accrued programming and licenses 1,158 1,319 Accrued personnel costs 806 1,247 Accrued taxes 943 528 Other 1,899 878 -------- ------ $ 5,490 8,652 ======== ======
(7) LONG-TERM DEBT LONG-TERM DEBT CONSISTS OF THE FOLLOWING AT DECEMBER 31, 1998 AND 1997:
1998 1997 -------- -------- Senior Notes $ 314,385 281,266 Heartland Long-Term Note 2,335 2,069 BTA auction payable to affiliates 3,859 4,396 Capital leases and other 199 568 Total long-term debt 320,778 288,299 Less current portion of BTA auction payable 354 1,122 Less current portion of long term debt 199 217 ------- ------- $ 320,225 286,960 ======== =======
Senior Notes ON FEBRUARY 23, 1996, THE COMPANY CONSUMMATED A PRIVATE PLACEMENT OF 100,000 UNITS (THE "UNIT OFFERING" OR "UNITS") CONSISTING OF $400 MILLION AGGREGATE PRINCIPAL AMOUNT OF 11 3/8% SENIOR DISCOUNT NOTES DUE 2006 ("SENIOR NOTES") AND 110,000 SHARES OF COMMON STOCK OF THE COMPANY. THE SENIOR NOTES WILL MATURE ON MARCH 1, 2006. THE ISSUE PRICE OF THE SENIOR NOTES REPRESENTS A YIELD TO MATURITY OF 11 3/8% PER ANNUM COMPUTED ON A SEMI-ANNUAL BOND EQUIVALENT BASIS. CASH INTEREST ON THE SENIOR NOTES WILL NOT BE PAYABLE PRIOR TO MARCH 1, 2001. COMMENCING SEPTEMBER 1, 2001, CASH INTEREST ON THE SENIOR NOTES WILL BE PAYABLE ON MARCH 1 AND SEPTEMBER 1 OF EACH YEAR AT A RATE OF 11 3/8% PER ANNUM. INCLUDING AMOUNTS ATTRIBUTABLE TO THE COMMON STOCK, THE ISSUANCE OF THE UNITS RESULTED IN NET PROCEEDS TO THE COMPANY OF APPROXIMATELY $219.7 MILLION AFTER UNDERWRITING DISCOUNTS AND OTHER DEBT ISSUANCE COSTS AGGREGATING APPROXIMATELY $9.8 MILLION. FOR FINANCIAL REPORTING PURPOSES, THE SHARES OF COMMON STOCK WERE VALUED AT $800,000. THE SENIOR NOTES WERE ISSUED PURSUANT TO AN INDENTURE WHICH CONTAINS CERTAIN RESTRICTIVE COVENANTS AND LIMITATIONS. AMONG OTHER THINGS, THE INDENTURE LIMITS THE INCURRENCE OF ADDITIONAL INDEBTEDNESS, LIMITS THE MAKING OF RESTRICTED PAYMENTS (AS DEFINED) INCLUDING THE DECLARATION AND/OR PAYMENT OF DIVIDENDS, PLACES LIMITATIONS ON DIVIDENDS AND OTHER PAYMENTS BY THE COMPANY'S SUBSIDIARIES, PROHIBITS THE COMPANY AND ITS SUBSIDIARIES FROM ENGAGING IN ANY BUSINESS OTHER THAN THE TRANSMISSION OF VIDEO, VOICE AND DATA AND RELATED BUSINESSES AND SERVICES, AND PLACES LIMITATIONS ON LIENS, CERTAIN ASSET DISPOSITIONS AND MERGER/SALE OF ASSETS ACTIVITY. HEARTLAND LONG-TERM NOTE IN CONNECTION WITH THE CONTRIBUTIONS ON FEBRUARY 23, 1996, HEARTLAND RECEIVED THE HEARTLAND LONG-TERM NOTE. THE HEARTLAND LONG-TERM NOTE HAS A FINAL MATURITY DATE THAT IS 10 YEARS AND ONE DAY AFTER THE CLOSING OF THE CONTRIBUTIONS. THE INTEREST RATE ON THE HEARTLAND LONG- TERM NOTE INCREASES FROM 10% TO 15% IF THE HEARTLAND LONG-TERM NOTE IS NOT REPAID WITHIN ONE YEAR OF ISSUANCE, WITH INTEREST ACCRUING AND ADDED TO THE BALANCE ANNUALLY. NO CASH INTEREST WILL BE PAID ON THE HEARTLAND LONG-TERM NOTE UNTIL AFTER THE SENIOR NOTES (SEE ABOVE) HAVE BEEN PAID IN FULL. DURING 1997, THE COMPANY MADE A PRINCIPAL PAYMENT OF APPROXIMATELY $15.3 MILLION WITH A PORTION OF THE PROCEEDS FROM THE DISPOSITION OF ASSETS AND WIRELESS CHANNEL RIGHTS IN ATLANTA (SEE NOTE 3 (C)). AS PART OF THE MASTER AGREEMENT (NOTE 3(C)), HEARTLAND AGREED TO FORGIVE, DURING 1999, THE OUTSTANDING BALANCE OF THE HEARTLAND LONG- TERM NOTE IN EXCHANGE FOR PRIMARILY CASH AND THE WIRELESS CABLE ASSETS OF THE STORY CITY, IOWA MARKET. THE TRANSACTIONS ARE EXPECTED TO BE CONSUMMATED IN LATE MAY 1999. AS AGREED, INTEREST ON THE HEARTLAND LONG-TERM NOTE DOES NOT ACCRUE SUBSEQUENT TO NOVEMBER 30, 1998. BTA Auction Payable to Affiliates THE FCC CONCLUDED AUCTIONS IN 1997 FOR THE AWARD OF INITIAL COMMERCIAL WIRELESS CABLE LICENSES FOR "BASIC TRADING AREAS" OR "BTAS" (THE "BTA AUCTION"). PURSUANT TO AN AGREEMENT AMONG CAI, HEARTLAND AND THE COMPANY, CAI AND HEARTLAND ARE OBLIGATED TO CONVEY TO THE COMPANY, AT THEIR COST, AND THE COMPANY HAS AGREED TO PURCHASE, ANY RIGHTS ACQUIRED IN THE BTA AUCTION RELATING TO THE COMPANY'S MARKETS, AS WELL AS CERTAIN OTHER BTAS. CAI AND HEARTLAND WERE THE WINNING BIDDERS IN THE AMOUNT OF APPROXIMATELY $17.9 MILLION WITH RESPECT TO BTAS THAT WILL BE CONVEYED TO THE COMPANY. AS OF DECEMBER 31, 1998, THE ACCOMPANYING CONSOLIDATED BALANCE SHEET REFLECTS A BTA AUCTION PAYABLE TO HEARTLAND OF APPROXIMATELY $3,859,000 REPRESENTING THE REMAINING UNPAID BALANCES WITH RESPECT TO BTAS TO BE CONVEYED TO THE COMPANY. AT DECEMBER 31, 1997, THE ACCOMPANYING CONSOLIDATED BALANCE SHEET REFLECTS A BTA AUCTION PAYABLE TO CAI, HEARTLAND, AND OTHER AFFILIATED ENTITIES OF APPROXIMATELY $643,000, $3,543,000, AND $210,000, RESPECTIVELY. THE BTA AUCTION PAYABLE TO HEARTLAND BEARS INTEREST AT 9.5% AND IS BEING PAID OVER A 10-YEAR PERIOD COMMENCING IN THE FOURTH QUARTER OF 1996. THE COMPANY IS REQUIRED TO MAKE QUARTERLY INTEREST-ONLY PAYMENTS FOR THE FIRST TWO YEARS AND QUARTERLY PAYMENTS OF PRINCIPAL AND INTEREST OVER THE REMAINING EIGHT YEARS. DURING 1997, THE COMPANY EXCHANGED AND RETURNED TO HEARTLAND CERTAIN OF ITS RIGHTS TO BTA LICENSES RESULTING IN A DECREASE OF $614,000 IN LICENSE COSTS AND THE CORRESPONDING BTA PAYABLE. Aggregate maturities of long-term debt as of December 31, 1998 are as follows:
1999 $ 553 2000 386 2001 424 2002 465 2003 511 Thereafter 318,439
(8) LEASES AND FCC LICENSES THE COMPANY IS DEPENDENT ON LEASES WITH THIRD PARTIES FOR MOST OF ITS WIRELESS CABLE CHANNEL RIGHTS. UNDER FCC RULES, THE BASE TERM OF EACH LEASE CANNOT EXCEED THE TERM OF THE UNDERLYING FCC LICENSE. FCC LICENSES FOR WIRELESS CABLE CHANNELS GENERALLY MUST BE RENEWED EVERY TEN YEARS, AND THERE IS NO AUTOMATIC RENEWAL OF SUCH LICENSES. THE USE OF SUCH CHANNELS BY THE LESSORS IS SUBJECT TO REGULATION BY THE FCC AND, THEREFORE, THE COMPANY'S ABILITY TO CONTINUE TO ENJOY THE BENEFITS OF THESE LEASES IS DEPENDENT UPON THE LESSORS' CONTINUING COMPLIANCE WITH APPLICABLE REGULATIONS. THE REMAINING INITIAL TERMS OF MOST OF THE COMPANY'S CHANNEL LEASES RANGE FROM 5 TO 10 YEARS, ALTHOUGH CERTAIN OF THE COMPANY'S CHANNEL LEASES HAVE INITIAL TERMS EXPIRING IN THE NEXT SEVERAL YEARS. MOST OF THE COMPANY'S LEASES PROVIDE THAT THE LESSOR MAY NEGOTIATE LEASE RENEWALS WITH ONLY THE COMPANY AND, IF A RENEWAL AGREEMENT IS NOT REACHED WITHIN A SPECIFIED TIME, GRANT THE COMPANY A RIGHT OF FIRST REFUSAL TO MATCH ANY COMPETING OFFERS. ALTHOUGH THE COMPANY DOES NOT BELIEVE THAT THE TERMINATION OF OR FAILURE TO RENEW A SINGLE CHANNEL LEASE WOULD ADVERSELY AFFECT THE COMPANY, SEVERAL OF SUCH TERMINATIONS OR FAILURES IN ONE OR MORE MARKETS THAT THE COMPANY ACTIVELY SERVES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY. CHANNEL RIGHTS LEASE AGREEMENTS GENERALLY REQUIRE PAYMENTS BASED ON THE GREATER OF SPECIFIED MINIMUMS OR AMOUNTS BASED UPON VARIOUS SUBSCRIBER LEVELS. ADDITIONALLY, FCC LICENSES ALSO SPECIFY CONSTRUCTION DEADLINES, WHICH, IF NOT MET, COULD RESULT IN THE LOSS OF THE LICENSE. REQUESTS FOR ADDITIONAL TIME TO CONSTRUCT MAY BE FILED AND ARE SUBJECT TO REVIEW PURSUANT TO FCC RULES. PAYMENTS UNDER THE CHANNEL RIGHTS LEASE AGREEMENTS GENERALLY BEGIN UPON THE COMPLETION OF CONSTRUCTION OF THE TRANSMISSION EQUIPMENT AND FACILITIES AND APPROVAL FOR OPERATION PURSUANT TO THE RULES AND REGULATIONS OF THE FCC. HOWEVER, FOR CERTAIN LEASES, THE COMPANY IS OBLIGATED TO BEGIN PAYMENTS UPON GRANT OF THE CHANNEL RIGHTS. CHANNEL RIGHTS LEASE EXPENSE WAS APPROXIMATELY $1,911,000, $1,883,000 AND $1,810,000 FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996, RESPECTIVELY. THE COMPANY ALSO HAS CERTAIN OPERATING LEASES FOR OFFICE SPACE, EQUIPMENT AND TRANSMISSION TOWER SPACE. RENT EXPENSE INCURRED IN CONNECTION WITH OTHER OPERATING LEASES WAS APPROXIMATELY $1,817,000, $1,656,000 AND $1,405,000 FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 RESPECTIVELY. FUTURE MINIMUM LEASE PAYMENTS DUE UNDER CHANNEL RIGHTS LEASES AND OTHER NONCANCELLABLE OPERATING LEASES AT DECEMBER 31, 1998 ARE AS FOLLOWS:
CHANNEL OTHER YEAR ENDING RIGHTS OPERATING DECEMBER 31, LEASES LEASES ------------- -------- --------- 1999 $ 1,998 1,567 2000 2,289 1,436 2001 2,321 1,309 2002 2,321 1,252 2003 2,321 1,262
(9) Stockholders' Equity (A) PREFERRED AND COMMON STOCK At December 31, 1997, the Company had authorized 5,000,000 shares of preferred stock which can be issued in series with varying preferences and conversion features as determined by the Board of Directors of the Company, with no shares issued. On August 21, 1998, the Company filed with the Secretary of State of Delaware a Certificate of Amendment of Amended and Restated Certificate of Incorporation reducing the number of authorized shares of common stock from 40 million to 15 million and eliminating the authorized preferred shares. (B) TREASURY STOCK As part of the Master Agreement (note 3(c)), the Company purchased 3,836,035 shares of its common stock from CAI for $1,534,000 on December 3, 1998. (c) Stock Options In 1996, the Company established the CS Wireless Systems, Inc. Incentive Stock Plan ("Stock Plan") which provides for the issuance of stock options to officers and other key employees of the Company and its subsidiaries. The Stock Plan makes available for issuance 1,500,000 shares of common stock. Options issued under the Stock Plan have varying vesting periods as provided in separate stock option agreements and generally carry an expiration date of ten years subsequent to the date of issuance. Options issued are required to have an exercise price of not less than fair market value of the Company's common stock on the date of grant. The Company applies APB Opinion No. 25 in accounting for its Stock Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
Net loss: 1998 1997 1996 ---- ---- ---- As reported $ (139,383) (52,565) (28,527) Pro forma (139,217) (54,616) (29,404) Basic and diluted loss per common share: As reported $ (13.41) (4.94) (3.06) Pro forma (13.39) (5.11) (3.21)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997 and 1996: dividend yield of 0%; risk-free interest rate of 6.0% and an expected life of 5 years. Following is a summary of activity in the employee option plan discussed above for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ----------------------- ----------------------- ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- ------- ------- -------- ------- --------- Outstanding at beginning of year 898,861 $ 6.88 655,161 $ 9.40 --- $ --- Granted --- --- 833,335 6.50 655,161 9.40 Exercised --- --- --- --- --- --- Canceled (265,044) 6.55 (589,635) (9.14) --- --- -------- ----- -------- ----- ------- ------- Options outstanding at end of year 633,817 $ 7.01 898,861 $ 6.88 655,161 $ 9.40 ======== ====== ======= ====== ======= ====== Options exercisable at year end 444,150 536,818 367,049 ======== ======= ======= Weighted average fair value of options granted during year $ --- $ 6.50 $ 9.40 ======= ======== =======
The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ------------------------------ NUMBER WEIGHTED OUTSTANDING AT AVERAGE WEIGHTED NUMBER WEIGHTED AT REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE PRICE 1998 LIFE PRICE 1998 PRICE -------- --------------- ----------- -------- -------------- -------- $ 6.50 521,291 7.8 years $ 6.50 331,624 $ 6.50 ======== ======= ========= ========= ======= ========= $ 9.40 112,526 7.2 years $ 9.40 112,526 $ 9.40 ======== ======= ========= ========= ======= =========
(10) INCOME TAXES AS THE COMPANY HAS FULLY OFFSET ITS DEFERRED TAX ASSETS BY A VALUATION ALLOWANCE AT DECEMBER 31, 1998, NO INCOME TAX BENEFIT HAS BEEN RECORDED FOR THE YEAR ENDED DECEMBER 31, 1998. FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, INCOME TAX BENEFIT OF $5,429,000 AND $14,631,000, RESPECTIVELY, WERE COMPRISED OF DEFERRED TAX BENEFITS. TOTAL INCOME TAX BENEFIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 DIFFERED FROM THE AMOUNT COMPUTED BY APPLYING THE U.S. FEDERAL STATUTORY INCOME TAX RATE OF 35% TO LOSS BEFORE INCOME TAXES AS A RESULT OF THE FOLLOWING:
1998 1997 1996 --------------- ------------- ------------- Computed "expected" tax benefit $ (48,784) (19,827) (15,105) Amortization of goodwill 18,959 1,394 1,260 State income taxes (2,788) (1,133) (863) Adjustment to prior year deferred taxes 10,382 (2,019) --- Increase in valuation allowance 22,220 16,082 --- Other, net 11 74 77 --------- --------- --------- $ --- (5,429) (14,631) ========= ========= =========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1998 and 1997 are presented below:
1998 1997 -------------- ---------------- Deferred tax assets: Net operating loss carryforwards $ 18,702 14,596 Noncash interest 32,573 19,736 Investments in affiliates 0 499 Property and equipment 3,988 1,443 Other 806 --- -------- Total gross deferred tax assets 56,069 36,274 Less valuation allowance (38,302) (16,082) -------- 17,767 20,192 ======== Deferred tax liabilities: License and leased license investment 17,767 20,143 Other 0 49 -------- Total deferred tax liabilities 17,767 20,192 -------- Net deferred tax liability $ --- --- ========
DEFERRED TAX ASSETS AND LIABILITIES ARE COMPUTED BY APPLYING THE U.S. FEDERAL INCOME TAX RATE IN EFFECT TO THE GROSS AMOUNTS OF TEMPORARY DIFFERENCES AND OTHER TAX ATTRIBUTES, SUCH AS NET OPERATING LOSS CARRYFORWARDS. DEFERRED TAX ASSETS AND LIABILITIES RELATING TO STATE INCOME TAXES ARE NOT MATERIAL. IN ASSESSING THE REALIZABILITY OF DEFERRED TAX ASSETS, THE COMPANY CONSIDERS WHETHER IT IS MORE LIKELY THAN NOT THAT SOME PORTION OR ALL OF THE DEFERRED TAX ASSETS WILL NOT BE REALIZED. THE ULTIMATE REALIZATION OF DEFERRED TAX ASSETS IS DEPENDENT UPON THE GENERATION OF FUTURE TAXABLE INCOME DURING THE PERIODS IN WHICH THOSE TEMPORARY DIFFERENCES BECOME DEDUCTIBLE. THE COMPANY CONSIDERS THE SCHEDULED REVERSAL OF DEFERRED TAX LIABILITIES, PROJECTED FUTURE TAXABLE INCOME, AND TAX PLANNING STRATEGIES IN MAKING THIS ASSESSMENT. BASED UPON THESE CONSIDERATIONS, THE COMPANY HAS RECOGNIZED DEFERRED TAX ASSETS TO THE EXTENT SUCH ASSETS CAN BE REALIZED THROUGH FUTURE REVERSALS OF EXISTING TAXABLE TEMPORARY DIFFERENCES. AT DECEMBER 31, 1998, THE COMPANY HAS NET OPERATING LOSS CARRYFORWARDS AVAILABLE OF APPROXIMATELY $52,695,000 WHICH BEGIN TO EXPIRE IN 2010. APPROXIMATELY $7,520,000 OF THE NET OPERATING LOSS CARRYOVER IS SUBJECT TO AN ANNUAL LIMITATION AND THE SEPARATE RETURN LIMITATION YEAR RULES. (11) OTHER RELATED PARTY TRANSACTIONS IN 1997, THE COMPANY, CAI AND HEARTLAND (SEE NOTE 3), AND A THIRD PARTY WIRELESS CABLE PROVIDER FORMED WIRELESS ENTERPRISES, LLC ("WIRELESS ENTERPRISES"). WIRELESS ENTERPRISES IS A PROGRAMMING COOPERATIVE THAT NEGOTIATES PROGRAMMING AND MARKETING SERVICES WITH SUPPLIERS OF PROGRAMMING. DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY PAID $8,293,000 AND $5,578,000, RESPECTIVELY, TO WIRELESS ENTERPRISES FOR PROGRAMMING AND OTHER ADMINISTRATIVE SERVICES. DURING 1998 AND 1997, THE COMPANY PURCHASED EQUIPMENT FROM CAI FOR $300,000 AND $3,400,000. DURING 1998, THE COMPANY HAD AN ARRANGEMENT WITH CAI WHEREBY CAI PERSONNEL PROVIDE ENGINEERING AND OTHER TECHNICAL CONSULTING SERVICES IN CONNECTION WITH THE DIGITAL BUILD-OUT OF THE DALLAS, TEXAS MARKET. UNDER THIS ARRANGEMENT, CAI RECEIVES $10,000 PER MONTH PLUS REIMBURSEMENT FOR ALL REASONABLE EXPENSES INCURRED IN THE PERFORMANCE OF SUCH SERVICES. THE COMPANY HAS RENEGOTIATED THE TERMS OF THIS ARRANGEMENT AND ENTERED INTO AN ENGINEERING AND SPECTRUM MANAGEMENT AGREEMENT WITH CAI AND A WHOLLY-OWNED SUBSIDIARY WHEREBY EFFECTIVE MARCH 1, 1999, CAI ASSUMED SUPERVISION AND DELIVERY OF ALL ENGINEERING AND TECHNICAL MANAGEMENT SERVICES. THE COMPANY WILL PAY CAI A FEE EQUAL TO 40% OF THE WHOLLY-OWNED SUBSIDIARY'S COSTS PLUS AN ADMINISTRATIVE FEE OF 20% OF SUCH AMOUNT. ADDITIONALLY, THE COMPANY PAID CAI APPROXIMATELY $139,000 AND $472,000 FOR SERVICES RENDERED, RENT, LICENSING AND OTHER FEES DURING 1998 AND 1997, RESPECTIVELY. IN SEPTEMBER 1997, THE COMPANY ENTERED INTO AN TWO-YEAR INSTALLATION CONTRACTOR AGREEMENT WITH ACS TELECOMMUNICATIONS SYSTEMS, INC. ("ACS") WHEREBY FOR A FIXED MONTHLY FEE PER MARKET PLUS ADDITIONAL VARIABLE COSTS, ACS AGREED TO PROVIDE INSTALLATION CONTRACTOR SERVICES IN THE DALLAS, TEXAS AREA AND OTHER MARKETS AS MUTUALLY AGREED UPON. DURING THE YEARS ENDED DECEMBER 31, 1998 AND 1997, THE COMPANY PAID $4,400,000 AND $988,000, RESPECTIVELY, TO ACS UNDER THIS AGREEMENT. THE COMPANY AMENDED THIS AGREEMENT TO SHORTEN THE TERM AND DECREASE THE FIXED MONTHLY PAYMENT. IN CONNECTION WITH THIS AMENDMENT, THE COMPANY HAS AGREED TO MAKE PAYMENTS TOTALING $510,000 TO ACS PURSUANT TO THE ORIGINAL AGREEMENT. A FORMER DIRECTOR OF THE COMPANY, WHO RESIGNED IN DECEMBER 1998, IS THE PRINCIPAL STOCKHOLDER OF ACS. (12) Fair Value of Financial Instruments THE FAIR VALUE OF THE SENIOR NOTES AT DECEMBER 31, 1998 AND 1997 WAS APPROXIMATELY $68.0 MILLION AND $96.0 MILLION, RESPECTIVELY (CARRYING AMOUNTS OF $314.4 MILLION AND $281.2 MILLION, RESPECTIVELY) BASED ON MARKET QUOTES OBTAINED FROM DEALERS. THE CARRYING AMOUNTS OF THE HEARTLAND LONG-TERM NOTE, THE ACQUISITION NOTE AND THE BTA AUCTION PAYABLES APPROXIMATE FAIR VALUE AS THESE NOTES BEAR INTEREST AT CURRENT MARKET RATES. THE CARRYING AMOUNT OF CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE APPROXIMATE FAIR VALUE BECAUSE OF THE SHORT MATURITY OF THESE INSTRUMENTS. (13) COMMITMENTS AND CONTINGENCIES THE COMPANY HAS ENTERED INTO A SERIES OF NONCANCELLABLE AGREEMENTS TO PURCHASE ENTERTAINMENT PROGRAMMING FOR RETRANSMISSION WHICH EXPIRE THROUGH 2000. THE AGREEMENTS GENERALLY REQUIRE MONTHLY PAYMENTS BASED UPON THE NUMBER OF SUBSCRIBERS TO THE COMPANY'S SYSTEMS, SUBJECT TO CERTAIN MINIMUMS. THE COMPANY IS A PARTY TO LEGAL PROCEEDINGS INCIDENTAL TO ITS BUSINESS WHICH, IN THE OPINION OF MANAGEMENT, ARE NOT EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S CONSOLIDATED FINANCIAL POSITION, OPERATING RESULTS OR LIQUIDITY. EX-99 4 Exhibit 99.2 FINANCIAL STATEMENTS
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 1,237 --------- --------- Total current liabilities 4,827 7,280 Long-term debt, less current portion 325,572 316,720 BTA auction payable, less current portion 3,365 3,505 Total liabilities 333,764 327,505 ======= ======= Stockholders' deficit: Common stock, $.001 par value; 15,000,000 shares authorized, 10,702,609 shares issued in 1999 and 1998, and 6,864,471 shares outstanding in 1999 and 1998. 11 11 Treasury stock, at cost; 3,838,138 shares in 1999 and 1998 (1,574) (1,574) Additional paid-in capital 154,557 154,557 Accumulated deficit (239,685) (221,682) -------- -------- Total stockholders' deficit (86,691) (68,688) -------- -------- $ 247,073 $ 258,817 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements 3
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 4
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. 5 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS THE COMPANY. CS Wireless Systems, Inc. and its subsidiaries (the "Company" or "CS Wireless") develop, own and operate a network of wireless cable television systems providing subscription television and high speed Internet access services. The Company has a portfolio of wireless cable channel rights in various markets in the United States. The Company currently has systems in operation in ten markets, and it owns, or holds rights to lease, radio spectrum in its 21 primary markets and certain other markets. The Company is approximately 94% owned by CAI Wireless Systems, Inc. ("CAI"). The subscription television industry is highly competitive. The Company's principal subscription television competitors in each of its markets are traditional hard-wire cable companies, direct broadcast satellite, private cable companies and other alternate methods of distributing and receiving television transmissions. Hard-wire cable companies generally are well- established and known to potential customers and have significantly greater financial and other resources than the Company. As the telecommunications industry continues to evolve, the Company may face additional competition from new providers of entertainment and data services. In addition, until the Company can increase its channels offered in all of its operating markets through the deployment of digital compression technology, the Company's existing competitors generally continue to have more channels to offer subscribers. There can be no assurance that the Company will be able to compete successfully with existing or potential competitors in the subscription television industry. The Company has incurred significant operating losses since inception and has negative stockholders' equity at March 31, 1999. Losses are expected for at least the next year as the Company continues to develop its wireless communications business. The Company has approximately $36 million in cash and cash equivalents at March 31, 1999, and, based on its current operating plan, believes that it has sufficient cash to fund its anticipated capital expenditures and operating losses through at least the first quarter of 2000. However, the growth of the Company's wireless communications business may require substantial continuing investment to finance capital expenditures related to the acquisition of channel rights and infrastructure development of digital video programming, two-way frequency utilization and telephony systems. Additionally, beginning in September 2001, the Company will be required to make payments to the holders of its 11 3/8% Senior Discount Notes due 2006. Without additional funding through debt or equity offerings, joint ventures, the sale or exchange of its wireless cable channel rights or the participation of a strategic partner, or the restructuring of its debt agreements, the Company may not be able to meet its future debt and interest payments. There can be no assurance that the Company will achieve positive cash flow from operations, or consummate the sale of any wireless cable channel rights or that sufficient debt or equity financing will be available to the Company. In addition, subject to restrictions under its outstanding debt, the Company may pursue other opportunities to acquire additional wireless cable channel rights and businesses that may utilize the capital currently expected to be available for its current markets. CAI announced on April 26, 1999 that it executed a definitive Agreement and Plan of Merger with MCI WorldCom, Inc. ("MCI WorldCom") providing for the acquisition by MCI WorldCom of all of the outstanding shares of CAI. The transaction is subject to customary conditions, including the receipt of required regulatory approvals. PRINCIPAL MARKETS OF THE COMPANY. On February 23, 1996, in exchange for approximately 60% of the Company's Common Stock, CAI, directly or indirectly, contributed to the Company the wireless cable television assets and all related liabilities, or the stock of subsidiaries owning wireless cable television assets associated with the wireless cable television markets of Bakersfield and Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio. Simultaneously, in exchange for approximately 40% of the Company's Common Stock, cash, a short-term note and a long-term note (the "Heartland Long-Term Note"), Heartland, directly or indirectly, contributed or sold to the Company the wireless cable television assets and all related liabilities associated with the wireless cable television markets of Grand Rapids, Michigan; Minneapolis, Minnesota; Kansas City (suburbs), Missouri; Dayton, Ohio; Dallas, Fort Worth and San Antonio, Texas; and Salt Lake City, Utah. The Company subsequently acquired wireless cable television rights and related assets in certain Midwest markets, including but not limited to, the Effingham and Wellsville, Kansas; Story City, Iowa; Scottsbluff, Nebraska; Kalispell, Montana and Rochester, Minnesota markets in connection with the Company's merger acquisition of USA Wireless Cable, Inc. on October 11, 1996 ("USA Wireless Acquisition"). The Company consummated on September 3, 1997 an exchange of its wireless cable rights and related assets in Salt Lake City, Utah for wireless cable rights and related assets in Kansas City, Missouri pursuant to an agreement dated as of November 6, 1996 with People's Choice TV Corp. On December 2, 1998, the Company, CAI and Heartland entered into a Master Agreement ("Master Agreement") providing for, among other things, the termination of Heartland's rights in, and claims against, the Company. As part of the Master Agreement, in December 1998, CAI purchased Heartland's ownership in the Company, or 3,836,035 shares of CS Wireless common stock, for $1,534,000. The Company subsequently purchased those shares from CAI for the same price. These shares are recorded as treasury stock for the periods presented. Additionally, the Company agreed to lease certain channel rights and sell the net operating assets of its Story City, Iowa market to Heartland primarily in exchange for the forgiveness by Heartland of the outstanding balance owed by the Company of $2,335,000 under the Heartland Long-Term Note and additional cash payments by the Company to Heartland of $466,000. The deposit, along with the carrying value of the net assets of the Story City, Iowa market, are classified as assets held for sale at December 31, 1998 and March 31, 1999 in the accompanying consolidated balance sheet. (b) BASIS OF PRESENTATION The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) INTERIM FINANCIAL INFORMATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly the Company's financial position as of March 31, 1999, and the results of operations and cash flows for the three months ended March 31, 1999 and 1998. These results are not necessarily indicative of the results to be expected for the full fiscal year. (d) COMMON SHARES OUTSTANDING AND NET LOSS PER COMMON SHARE The Company adopted the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," in the fourth quarter of 1997, which required companies to present basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities have been excluded from the diluted loss per share computation as their inclusion would be antidilutive (5) CONTINGENCIES The Company is a party to legal proceedings incidental to its business. A discussion of certain of these legal proceedings is contained in Part II, Item 1 "Legal Proceedings" of this Form 10-Q. The Company believes that the ultimate resolution of the legal proceedings will not have a material adverse effect on the Company's consolidated financial position, operating results or liquidity. EX-99 5 Exhibit 99.3 MMDS COMPANIES REALIGN THEIR INTERESTS; ANNOUNCE COOPERATION ON FLEXIBLE 2-WAY USE OF THEIR SPECTRUM December 3, 1998. Dallas, Texas. CAI Wireless Systems, Inc. (OTC: CCAI)("CAI"), Heartland Wireless Communications, Inc. (OTC: HARTQ)("Heartland") and CS Wireless Systems, Inc. ("CS Wireless") jointly announced today that they entered into a Master Agreement on December 2, 1998 under which, among other things, CAI acquired Heartland's approximately 36% equity interest in CS Wireless. Additionally, CS Wireless and Heartland agreed to exchange certain spectrum assets and equipment for cash consideration, cancellation of CS Wireless' obligations on certain outstanding CS Wireless indebtedness to Heartland and the mutual release of certain other claims. The parties also agreed to cooperate in a joint effort to permit timely filing with the Federal Communications Commission ("FCC") of developmental and permanent authority for 2-way use of the parties' respective MMDS spectrum in contiguous and adjacent markets to allow full, flexible 2-way use of this spectrum for telephony, high-speed Internet access and other services. The parties have agreed to give priority to the Dallas/Fort Worth, Texas market, where CS Wireless intends to file a developmental application in the near future. In connection with the transactions, a consent and waiver (the "Consent") from the holders of a majority of the principal amount of CS Wireless' outstanding 11-3/8% Series B Senior Notes due 2006 (the "Senior Notes") was obtained, pursuant to which CS Wireless will pay a consent fee of $3.125 per $1,000 principal amount to all holders of record on December 3, 1998. The Consent also contemplates that CS Wireless will redeem the CS Wireless shares purchased by CAI for the same cash consideration paid therefor by CAI. The consent fee is expected to be paid within the next three months. MMDS operators use FCC-licensed microwave frequencies in the 2.1-2.7 GHz range to deliver cable television programming and high-speed Internet services. Heartland Wireless Communications, Inc. is America's largest MMDS operator, servicing approximately 163,500 subscribers in 57 markets. Heartland currently holds wireless cable channel rights in 90 small to mid- size markets located in the central United States. CAI and CS Wireless are among the largest MMDS operators servicing approximately 35,100 and 64,500 subscription video subscribers, respectively. CAI's markets are located in the northeastern and mid-Atlantic United States. CS Wireless' markets are located in the central and southwestern United States. CAI Contact: James P. Ashman Executive Vice President and CFO 518-462-2632 CS Wireless Contact: Albert G. McGrath, Jr. General Counsel 972-398-5300 Heartland Contact: Marjean Henderson Sr. Vice President and CFO (972) 633-4035 -----END PRIVACY-ENHANCED MESSAGE-----