<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
[X]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
               FISCAL YEAR ENDED DECEMBER 31, 1996 [FEE REQUIRED]
 
                                       OR
 
[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
        FOR THE TRANSITION PERIOD FROM       TO       [NO FEE REQUIRED]
 
                         COMMISSION FILE NUMBER 0-23008
 
                           AMERICAN TELECASTING, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      54-1486988
(State or other jurisdiction of incorporation       (I.R.S. Employer Identification No.)
                or organization)
      5575 TECH CENTER DRIVE, SUITE 300
          COLORADO SPRINGS, COLORADO                               80919
   (Address of principal executive offices)                      (Zip Code)
</TABLE>
 
         REGISTRANT'S PHONE NUMBER, INCLUDING AREA CODE: (719) 260-5533
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     Class A Common Stock, $0.01 Par Value
 
     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.  YES [X]  NO [ ]
 
     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (SEC. 229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN,
AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K.  [ ]
 
     As of March 11, 1997, the aggregate market value of Class A Common Stock
held by non-affiliates* of the Registrant approximated $59.3 million based upon
the closing price of the Class A Common Stock as reported on Nasdaq as of the
close of business on that date.
 
     As of March 11, 1997, 25,743,607 shares of the registrant's Class A Common
Stock were outstanding.
                             ---------------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     The following documents are incorporated into this Form 10-K by reference:
 
     Proxy Statement for Annual Meeting of Stockholders to be held on April 24,
1997  Part III
                             ---------------------
 
* Without acknowledging that any individual director or executive officer of the
  Company is an affiliate, the shares over which they have voting control have
  been included as owned by affiliates solely for purposes of this computation.
================================================================================
<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS
 
     All statements contained herein that are not historical facts, including
but not limited to, statements regarding the Company's plans for future
development and operation of its business, are based on current expectations.
These statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: a lack of
sufficient capital to finance the Company's business plan on terms satisfactory
to the Company; pricing pressures which could affect demand for the Company's
service; changes in labor, equipment and capital costs; unavailability of
digital compression technology and equipment at reasonable prices; the Company's
inability to incorporate digital compression technology into certain of its
subscription television systems in a cost efficient manner; the Company's
inability to develop and implement new services such as high-speed Internet
access and telephony; the Company's inability to obtain the necessary
authorizations from the Federal Communications Commission ("FCC") for such new
services; competitive factors, such as the introduction of new technologies and
competitors into the wireless communications business; a failure by the Company
to attract strategic partners; general business and economic conditions; and the
other risk factors described from time to time in the Company's reports filed
with the Securities and Exchange Commission ("SEC"). The Company wishes to
caution readers not to place undue reliance on any such forward looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995, and as such, speak only as of the date made.
 
GENERAL
 
     American Telecasting, Inc. ("ATI" or the "Company") was formed in 1988 to
develop wireless cable television systems in mid-sized markets throughout the
United States. As of December 31, 1996, the Company provided subscription
television service to approximately 179,800 subscribers through 38 operational
wireless cable systems located in selected U.S. markets (the "Developed
Markets"). The Company also has significant wireless cable (microwave) frequency
interests in 16 other U.S. markets (the "Undeveloped Markets" and together with
the Developed Markets, the "Markets"). As of December 31, 1996, the Company had
approximately 12.0 million Estimated Households in Service Area in its Markets,
although some of these households will be "shadowed" and unable to receive the
services offered by the Company due to certain characteristics of the particular
market, such as transmitter height and transmission power, terrain and foliage
("Line-of-Sight Constraints"). See "-- Markets".
 
     Wireless cable systems use microwave frequencies licensed by the FCC to
transmit signals over the air from a transmission tower to a microwave receiver
installed at the customer's home or business. Wireless cable systems transmit
signals over coverage areas of approximately 20 to 40 miles from their central
transmission point, although increases in transmission power and other factors
may expand the coverage area of a system to approximately 40 to 50 miles from
the central transmission point. Because microwave signals are transmitted over
the air, wireless cable technology does not require the large networks of cable
and amplifiers utilized by franchise cable operators to deliver services. Thus,
wireless cable technology has been developed as a reliable, yet relatively low
cost medium to provide service to customers in single family homes, multiple
dwelling units and commercial properties.
 
     The Company was incorporated in Delaware in December 1988 and has its
principal executive offices at 5575 Tech Center Drive, Suite 300, Colorado
Springs, Colorado 80919. The Company's telephone number is (719) 260-5533. The
Company operates its business through its subsidiaries. Except as otherwise
indicated, references in this Report to "ATI" or the "Company" refer to American
Telecasting, Inc. and its subsidiaries collectively.
 
BUSINESS STRATEGY
 
     Since inception, the Company has focused principally on developing wireless
cable systems to provide multiple channel television programming similar to that
offered by franchise cable companies. The Company's
<PAGE>   3
 
primary strategy has been to develop systems in mid-sized markets where terrain
and other conditions are well suited to wireless cable service. To attract
subscribers in these markets, the Company has sought to exploit the cost
advantage that wireless cable has over other subscription television services by
offering the most popular programming (including "basic" channels such as ESPN,
CNN, USA Network, Nickelodeon, Discovery, regional sports channels, MTV, local
broadcast channels, and one to three "premium" channels such as Home Box Office,
Showtime and The Disney Channel) at affordable prices and by emphasizing a
strong commitment to customer service. In developing and implementing its
business strategy, the Company also has sought to maintain the flexibility to
adapt to new technologies such as digital compression and interactive services.
 
     During 1996, the Company's business strategy evolved to adapt to the
significant regulatory and technological changes that have occurred recently in
the telecommunications industry and to the Company's capital constraints. See
"-- Regulation" and "-- Competition." Since early 1996 the Company has taken
certain actions aimed at reducing its costs and conserving its capital,
including reductions in the size of the Company's workforce and decreases in
capital expenditures and discretionary expenses. Management now believes that
the most promising use of the Company's wireless assets may be to provide a
variety of digital wireless services, instead of the traditional analog-based
technology utilized by the Company to date. Such digital wireless services could
include digital video (i.e., subscription television), high-speed Internet
access, and telephony services. A successful deployment of such services might
include the full bundle of broad band (i.e., video and high-speed Internet) and
narrow band (i.e., telephony) services.
 
  Digital Video Service
 
     Digital video is capable of delivering a significantly expanded number of
high quality channels of compressed video programming services, including
off-air programming. Digital compression allows the capacity of each wireless
cable channel to increase by four to ten times. The first fully operational
commercial microwave digital video system in North America was launched in
Canada in late 1996. To date, no wireless cable operator has commercially
introduced digital video compression technology in the United States, although a
number of wireless cable operators, including the Company, have successfully
tested such technology in their systems and have announced various plans for
commercial deployment. While management believes that the Company is generally
prepared for the introduction of digital video compression in certain of its
markets, the purchase of digital video compression transmission and receiving
equipment would involve substantial capital expenditures, which the Company is
not in a position to make at this time. In addition, although the FCC generally
authorized the use of digital technologies in 1996, further specific
authorizations must be obtained from the FCC and affected FCC licensees and
applicants on a market-by-market basis in order for the Company to begin
offering digital video service. See "-- Regulation." To the extent that the
Company is able to implement digital compression technology in any of its
markets, management anticipates that this expanded channel capacity will
increase the Company's opportunities to compete with other providers of video
services. In addition, the application of digital compression may result in the
availability of channel capacity for other services, as described below.
 
  High-Speed Internet Access Service
 
     The Company is working to deploy high-capacity, high-speed Internet access
service in certain of its markets. During 1996, the Company, along with other
industry participants, successfully tested a two-way wireless Internet
technology at the Company's Lakeland, Florida system using existing transmission
and reception equipment. This test confirmed that wireless cable frequencies are
capable of delivering two-way Internet access at speeds that are significantly
faster than speeds commonly available using conventional telephone lines.
However, before the Company may begin offering two-way Internet access on a
commercial basis, it must secure certain regulatory approvals from the FCC. The
Company, together with other wireless cable operators, petitioned the FCC in
March 1997 to expand its digital authorizations to permit two-way transmission.
See "-- Regulation."
 
     Prior to any two-way authorization, the Company intends to deploy an
asymmetrical (i.e., one-way) high-speed Internet access service in its Colorado
Springs, Colorado system during the second quarter of 1997.
 
                                        2
<PAGE>   4
 
This technology utilizes a high-speed wireless cable modem for downstream
Internet access, while relying on a telephone line for upstream Internet access.
The Company's plan in deploying a one-way high-speed Internet service in
Colorado Springs is to establish the commercial viability of its service by
confirming the reliability and performance of the technologies involved and
exploring the level of customer demand for such service. Based upon the
Company's experience in Colorado Springs, available capital and other factors,
it will consider a broader deployment of commercial Internet services in other
markets.
 
  Telephony Service
 
     The Company is considering using its wireless spectrum to deliver telephony
services. Although the development of such telephony services is in its early
stages, management believes that the Company's wireless spectrum may be capable
of providing "local loop" telephone service in the future.
 
     While the Company intends to continue its development efforts with respect
to local loop telephone service, the introduction of such service in any of the
Company's markets would involve substantial capital expenditures, which the
Company is not in a position to make at this time. The Company's ability to
commence delivery of wireless local loop service will also depend upon
successful development of wireless local loop technology and equipment and the
availability of appropriate transmission and reception equipment on satisfactory
terms. Regulatory approvals and changes, especially routine two-way licensing of
the radio spectrum used by the Company, also would be required before the
Company could commercially introduce local loop telephone service. See
"-- Regulation."
 
CERTAIN REQUIREMENTS AND UNCERTAINTIES
 
     While the Company has begun planning and testing of the digital wireless
services described above, it has not yet introduced any of these services. The
Company's ability to introduce these services on a commercial basis will depend
on a number of factors, including the availability of sufficient capital, the
success of the Company's development efforts, competitive factors (such as the
introduction of new technologies or the entry of competitors with significantly
greater resources than the Company), the level of consumer demand for such
services, the availability of appropriate transmission and reception equipment
on satisfactory terms, and the Company's ability to obtain the necessary
regulatory changes and approvals. The Company expects that the market for any
such additional services will be extremely competitive. See "-- Competition."
 
     There can be no assurance that sufficient capital will be available on
terms satisfactory to the Company, or at all, to fund the introduction of such
digital wireless services, that the Company's development efforts will be
successful, that the Company will be able to obtain the necessary regulatory
approvals and changes to commercially introduce such services, that there will
be sufficient customer demand for such services to justify the cost of their
introduction in any of the Company's markets, or that the Company will be
successful in competing against existing or new competitors in the market for
such digital wireless services.
 
     The Company will require significant additional capital to fully implement
its digital strategy. To meet such capital requirements, the Company is pursuing
opportunities to enter into strategic relationships or transactions with other
providers of telecommunications services. These relationships could provide the
Company with access to technologies, products, capital and infrastructure. Such
relationships or transactions could involve, among other things, joint ventures,
sales or exchanges of stock or assets, or loans to or investments in the Company
by strategic partners. As of the date of this Report, except for the BellSouth
Agreement (as defined herein), the Company has not reached any agreements or
understandings with respect to such strategic relationships or transactions and
there can be no assurance that any such agreements or understandings will be
reached.
 
     During 1997, the Company intends to continue to operate its Developed
Markets principally as an analog wireless cable business. However, because of
its current financial condition and its revised business strategy, the Company
does not plan to make the capital expenditures necessary to add enough new
subscribers to replace those subscribers that choose to stop receiving the
Company's service. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Moreover, at this time, the Company does
not generally intend to further develop any of its Undeveloped Markets using
analog technology. Thus, the
 
                                        3
<PAGE>   5
 
Company anticipates that its analog customer base will decrease somewhat during
1997. As the Company's analog subscriber base decreases, its revenues are
expected to decrease unless and until it is able to successfully introduce other
revenue-producing wireless services, such as those described above.
 
RECENT DEVELOPMENT
 
     On March 18, 1997, the Company entered into a definitive agreement (the
"BellSouth Agreement") with BellSouth Corporation and BellSouth Wireless
Corporation ("BellSouth Wireless") providing for the sale of all of the
Company's Florida and Louisville, Kentucky wireless cable assets (the
"Southeastern Assets") to BellSouth Wireless (the "BellSouth Transaction"). The
Southeastern Assets include operating wireless cable systems in Orlando,
Lakeland, Jacksonville, Daytona Beach, and Ft. Myers, Florida and Louisville,
Kentucky and wireless cable channel rights in Bradenton, Naples, Sebring and
Miami, Florida. As of December 31, 1996, the Southeastern Assets represented
approximately 2.6 million Estimated Households in Service Area and served over
35,000 subscribers.
 
     Pursuant to the BellSouth Agreement, the purchase price for all of the
Southeastern Assets will range from $67.9 million to $103.2 million, depending
upon the number of wireless cable channel rights that are ultimately transferred
to BellSouth Wireless. A first closing is expected to occur when all necessary
third party and governmental consents to the assignment of a minimum number of
channel positions in Orlando, Jacksonville, Daytona Beach, Ft. Myers, Miami,
Lakeland, Bradenton and Louisville have been obtained, which the Company expects
will occur prior to the end of the fourth quarter of 1997. The remainder of the
Southeastern Assets will be sold upon the satisfaction of certain closing
conditions that are specific to the markets involved, but in no event later than
two years after the date of the first closing.
 
     The BellSouth Agreement grants BellSouth Wireless a right of first refusal
in the event of a proposed sale by the Company of any wireless cable channel
rights that the Company owns or subsequently develops in Florida, Georgia,
Alabama, Mississippi, Louisiana, Kentucky, Tennessee, North Carolina or South
Carolina. The BellSouth Agreement also contains a covenant not-to-compete that
prohibits the Company from competing with BellSouth Wireless in the video
distribution business in the Florida and Louisville, Kentucky BTAs (as defined
herein) for a period of five years from the closing date.
 
     The BellSouth Agreement contains customary conditions to closing, including
the expiration of applicable waiting periods under the federal antitrust laws
and the satisfaction of all applicable regulatory requirements. There can be no
assurance that all of such conditions will be satisfied or that the BellSouth
Transaction will be consummated.
 
     The Company also has granted to BellSouth Wireless an option to purchase
for $9.0 million the Company's wireless cable channel rights in Yuba City,
California and the Company's Yuba City and Sacramento, California BTA
authorizations. The option can be exercised by BellSouth Wireless at any time
within 18 months after the date of the BellSouth Agreement.
 
SUBSCRIPTION TELEVISION INDUSTRY
 
     The subscription television industry began in the late 1940's and 1950's to
serve the needs of residents in predominantly rural areas with limited access to
local off-air VHF/UHF broadcasts. The industry expanded to metropolitan areas
due to, among other things, the fact that subscription television offered better
reception and more programming. Currently, subscription television systems offer
various types of programming, which generally include basic service, expanded
basic service, premium service, and, in some instances, pay-per-view service.
 
     A subscription television customer generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
basic service fee varies from one area to another and is a function, in part, of
the number of channels and services included in the basic service package and
the cost of such services to the subscription television system operator. In
most instances, a separate monthly fee for each premium service and certain
other specific programming is charged to customers, with discounts generally
available to customers receiving multiple premium services. Monthly service fees
for basic, expanded basic, and premium
 
                                        4
<PAGE>   6
 
services constitute the major source of revenue for subscription television
systems. Customers normally are free to discontinue service at any time.
Converter rentals, remote control rentals, installation charges and reconnect
charges are also included in a subscription television system's revenues, but
generally are not a significant component of such revenues.
 
TRADITIONAL HARDWIRE CABLE TECHNOLOGY
 
     Most subscription television systems are franchise (hardwire) cable systems
that currently use a coaxial cable to transmit television signals. Traditional
hardwire cable operators receive, at a headend, signals for programming
services, such as CBS, NBC, ABC, FOX, HBO, Cinemax and CNN, which have been
transmitted to them by a broadcast or satellite transmission. A headend consists
of signal reception equipment and decryption, retransmission, encoding and
related equipment. The operator then delivers the signal from the headend to
customers via a distribution network consisting of coaxial cable, amplifiers and
other components ("Cable Plant"). As a direct result of the use of Cable Plant
to deliver signals throughout a service area, traditional hardwire cable systems
are susceptible to signal problems. Signals can only be transmitted via coaxial
cable a relatively short distance without amplification. Each time a television
signal passes through an amplifier, some measure of noise is added. A series of
amplifiers between the headend and the viewing customer leads to progressively
greater noise, and thus a grainier picture for some viewers. Also, an amplifier
must be properly balanced or the signal may be improperly amplified. Failure of
any one amplifier in the chain of Cable Plant will black out the system
transmission signal from that point on. Regular system maintenance is required
due to water ingress, temperature changes, and other equipment problems, all of
which may affect the quality of signals delivered to customers. Some franchise
cable operators have begun installing fiber optic networks which will
substantially reduce the transmission and reception problems currently
experienced by traditional franchise cable systems and expand channel capacity
of their systems. The installation of such networks will require a substantial
investment by franchise cable operators.
 
WIRELESS CABLE TECHNOLOGY
 
     The wireless cable industry was made commercially possible in 1983 when the
FCC reallocated a portion of the electromagnetic radio spectrum located between
2500 and 2700 MHz and permitted this spectrum to be used for commercial
purposes. At that time, the FCC also modified its rules on the usage of the
remaining portion of such spectrum. Nevertheless, regulatory and other obstacles
impeded the growth of the wireless cable industry through the remainder of the
1980s. For example, before the 1992 Cable Act (as defined herein) became
effective, a continued supply of programming from cable controlled programmers
was not assured. The factors contributing to the growth of wireless cable
systems since that time include: (i) regulatory reforms by the FCC to facilitate
competition for franchise cable operators; (ii) increased availability of
programming for wireless cable systems; (iii) consumer demand for an alternative
to traditional franchise cable; (iv) increasing accumulation by wireless cable
operators of a sufficient number of channels in each market to create a
competitive product; and (v) increased availability of capital to wireless cable
operators in the public and private markets.
 
     Like a traditional franchise cable system, a wireless cable system receives
programming at a headend. Unlike a traditional franchise cable system, however,
the programming is then retransmitted by a microwave transmitter from an antenna
located on a tower associated with the headend to a small microwave receiver
located at the customer's premises. At the customer's location, the signals are
converted to frequencies that can pass through conventional coaxial cable into a
descrambling converter located on top of a television set. Wireless cable
requires a clear line-of-sight because the microwave frequencies used will not
pass through dense foliage, hills, buildings, or other obstructions. Some of
these obstructions can be overcome with the use of signal repeaters, which
retransmit an otherwise blocked signal over a limited area. Since wireless cable
systems do not require extensive Cable Plant, wireless cable operators are
capable of providing customers with a high-quality picture with few transmission
disruptions at a significantly lower system capital cost per installed customer
than traditional hardwire cable systems.
 
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<PAGE>   7
 
REGULATION
 
     The subscription television industry is highly regulated. Wireless cable
companies are subject to both federal and local regulation, as described below.
 
  Federal Communications Commission
 
     The FCC has authorized access for wireless cable service to a series of
channel groups, consisting of certain channel groups specifically allocated for
wireless cable ("MDS"), and other channels originally authorized for educational
purposes ("ITFS"), although excess capacity can be leased from ITFS licensees by
wireless cable providers. Currently, up to 33 total channels are potentially
available for licensing, lease or purchase by wireless cable companies in each
market. Up to 13 channels in any given market typically can be owned by
commercial operators for full-time usage without programming restrictions. The
remaining 20 channels in a given market generally are allocated for ITFS use.
FCC rules generally prohibit the ownership or leasing of MDS and ITFS
authorizations by cable companies if the MDS facility is located within 35
miles, or the ITFS facility is located within 20 miles, of the cable company's
franchise or service areas. Pursuant to the 1996 Act, the cable-MDS rule does
not apply to a cable operator in a franchise area in which the operator is
subject to effective competition.
 
     Authorizations have been issued, or are currently pending, for the majority
of MDS wireless cable licenses in most major U.S. markets, and, as discussed
below, under the current regulatory structure, only holders of a BTA
authorization may apply for available MDS frequencies within the BTA. In a
number of markets, certain ITFS frequencies are still available. However, except
as noted below, eligibility for ownership of ITFS licenses is limited to
accredited educational institutions, governmental organizations engaged in the
formal education of enrolled students and non-profit organizations whose
purposes are educational and include providing educational and instructional
television material to such accredited institutions and governmental
organizations ("qualified ITFS educational entities"). Non-local applicants must
demonstrate that they have arranged with local educational entities to provide
them with programming and that they have established a local programming
committee.
 
     On July 10, 1996, the FCC adopted an Order in which it authorized the
interim use of certain digital compression technologies for the provision of
video, voice and data services over MDS and ITFS frequencies. Such technology
may be utilized by a wireless cable operator or an MDS or ITFS licensee, after
applying for, and being granted, such an authorization by the FCC. The Company
has filed, and will continue to file, applications for digital authorizations in
many of its markets. The FCC has begun granting digital authorizations. Upon
receiving a digital authorization, a licensee also may transmit one-way
downstream Internet service. The Company, along with other wireless cable
industry companies, petitioned the FCC in March 1997 to expand its digital
authorizations to permit the grant of applications for two-way transmission of
interactive services over MDS and ITFS frequencies. The petition proposes rule
changes necessary for the FCC to routinely grant wireless cable companies the
right to implement two-way wireless services without licensing delays. There can
be no assurance that the petition will be granted, or if granted, that the
Company will be able to develop commercially successful products using two-way
transmission.
 
     FCC rules require ITFS operators to transmit a minimum amount of
educational programming per channel per week. If the educational programming
minimums are met, remaining airtime can be leased to wireless cable operators
for profit and used to transmit non-educational programming. ITFS licensees are
now entitled to meet their minimum educational programming requirements for all
licensed channels using only one channel via "channel loading," if desired.
 
     Beginning in November 1995, the FCC auctioned all available MDS rights on
the basis of Basic Trading Areas ("BTAs"), with one such authorization available
per BTA. The winning bidder acquired the right to apply to operate one or more
MDS stations within the BTA, as long as its station proposals complied with the
FCC's interference requirements and other rules. With regard to commercial ITFS
channels, only the BTA license holder may apply for available authorizations
within the BTA. A BTA licensee has a five-year build-out period within which to
expand or initiate new service within its BTA. It may sell, trade or otherwise
alienate all or part of its rights in the BTA and may also partition its BTA
along geopolitical boundaries and
 
                                        6
<PAGE>   8
 
contract with eligible parties to allow them to apply for MDS authorizations
within the partitioned area, and conversely, acquire such rights from other BTA
licensees. The license term for each station authorized under these BTA
procedures is ten years, commencing on the date that the FCC announced that the
auction for the BTA had closed.
 
     The Company was the winning bidder in 59 BTAs and, as of December 31, 1996,
had been issued MDS authorizations in 55 of its BTAs. The Company has filed
applications for MDS licenses in the other four BTAs in which it was the winning
bidder. The FCC must approve these applications before the MDS authorizations
will be issued. Competing applications cannot be filed but the FCC will consider
petitions to deny the Company's applications. There can be no assurance that the
FCC will approve the Company's remaining applications. As long as the Company
continues to hold the BTA rights in any given market, other entities seeking new
licenses or certain modifications to existing licenses within such market must
seek approval from the Company, as the BTA owner. Similarly, to the extent the
Company wishes to obtain new licenses or certain modifications to its existing
licenses in markets in which it was not the BTA winner, it will be required to
negotiate with the BTA owner for approval of such licenses or modifications.
 
     Certain of the Company's MDS applications were filed prior to adoption of
the BTA rules. Once such MDS applications are processed by the FCC and the
Company resolves any deficiencies identified by the FCC, a conditional license
is expected to be issued, allowing construction of the station to commence.
Construction of such stations generally must be completed within one year after
the date of grant of the conditional license. ITFS authorization holders
generally have 18 months within which to construct the station. All ITFS
licenses have terms of ten years and most current non-BTA MDS licenses will
expire on May 1, 2001. The FCC's standards for renewal of MDS and ITFS licenses
are similar to those for other FCC licenses. Licenses also may be revoked for
cause in a manner similar to other FCC licenses. FCC rules prohibit the sale for
profit of an MDS authorization not obtained by auction or of a controlling
interest in the licensee of such a facility prior to construction of the station
or, in certain instances, prior to the completion of one year of operation. The
FCC, however, does permit the leasing of 100% of an MDS licensee's spectrum
capacity to a third party and the granting of options to purchase a controlling
interest in an authorization once the required time period has lapsed.
 
     The Company is also subject to various FCC regulatory limitations relating
to ownership and control. The Communications Act and FCC rules require the FCC's
approval before a license may be assigned or control of the holder of a license
may be transferred. Moreover, the Act provides that certain types of licenses,
including those for MDS stations, may not be held directly by corporations of
which non-U.S. citizens or entities ("Aliens") own of record or vote more than
20% of the capital stock. In situations in which such an FCC license is directly
or indirectly controlled by another corporation, Aliens may own of record or
vote no more than 25% of the controlling corporation's capital stock.
 
     In light of these restrictions, ATI amended its certificate of
incorporation in April 1995 to require that all of its officers and directors be
U.S. citizens and to empower the Board of Directors to redeem ATI's outstanding
capital stock to the extent necessary to protect the loss or secure the
reinstatement of any license or franchise from any governmental agency if a
situation arises whereby more than the permitted percentage of outstanding
capital stock of ATI is owned or voted by Aliens. Moreover, the amendments
adopted in April 1995 provide that, in such circumstances, no transfers of
shares may be made to Aliens and shares causing ATI to exceed the statutory
limit may neither be voted, receive dividends, nor be entitled to any other
rights, until transferred to U.S. citizens.
 
  Telecommunications Act of 1996
 
     On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act")
became law. Among other things, the 1996 Act eliminates the cable/telephone
cross-ownership restriction, allowing a telephone company the option of
providing video programming within its telephone service area over a cable
system or a video platform. Conversely, cable companies are now permitted to
provide telephone service. The 1996 Act also limits, and in some cases
eliminates, FCC regulation of cable rates established by the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"),
depending upon the size of the
 
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<PAGE>   9
 
cable system and whether the system is subject to effective competition and the
nature of the rate. Specifically, regulation of upper tier rates is scheduled to
end March 31, 1999. Moreover, small cable operators and systems subject to
effective competition are now exempt from rate regulation as a result of the
1996 Act. The 1996 Act also vests the FCC with exclusive jurisdiction over the
provision of DBS (as defined herein) service and preempts the authority of local
authorities to impose certain taxes on such services.
 
     While current FCC regulations are intended to promote the development of a
competitive subscription cable television industry, there can be no assurance
that these regulations will have a favorable impact on the Company. Changes in
FCC policies or procedures could have a negative effect on the wireless cable
industry as a whole and/or the Company in particular. In addition, the FCC's
regulation of other spectrum could permit the operation of other wireless
services to interfere with MDS and ITFS frequencies.
 
  Pending Legislation
 
     Legislation has been introduced in several states that would authorize
state and local authorities to impose taxes on providers of subscription
television programming, including wireless cable operators, based upon their
gross receipts. Because the nature of any such legislation, if enacted, is
unknown, the Company cannot predict what impact such legislation would have upon
its operations.
 
  Other Forms of Regulation
 
     Federal law requires that all "cable companies," as defined by Section 602
of the Communications Act, obtain local or state franchises prior to
constructing a subscription television distribution system. Because wireless
cable systems deliver programming to subscribers by means of microwave
facilities rather than through coaxial cable and are not specifically defined as
"cable systems" in Section 602 of the Communications Act, the 1992 Cable Act, or
in earlier statutes or FCC regulations, they have not been considered cable
companies under FCC rules in this context. Accordingly, wireless cable companies
generally are not required to obtain franchises and are generally not subject to
state regulation by public utility or cable commissions.
 
     The Company's Lakeland system (which was acquired in September 1994)
consists of a hybrid of wireless cable and franchise cable, the latter being
utilized to serve areas that are not reached by the system's microwave signals
or to distribute programming to limited areas, such as apartment buildings,
housing subdivisions and mobile home parks. This system is deemed a "cable
company" under the Communications Act and the FCC's rules promulgated
thereunder. As such, this system is subject to regulation under some or all of
the federal, state and local rules that govern traditional franchise cable
operators.
 
     Similarly, the Company's subscription television assets in Cincinnati, Ohio
include both wireless cable and SMATV facilities, the latter of which have been
deemed by the FCC to constitute cable systems. By letter dated October 17, 1996,
the FCC provided a temporary waiver of the cable/MDS cross-ownership rules to
allow the common ownership and operation of these facilities, which will expire
on November 5, 1997. By that date, the Company will be required to take all
actions necessary to comply with these rules, including possible divestiture.
 
     Wireless cable operators also are subject to regulation by the Federal
Aviation Administration and the FCC with respect to construction of transmission
towers and certain local zoning regulations affecting construction of such
towers and other facilities. Additional restrictions may also be imposed by
local authorities, neighborhood associations and other similar organizations
limiting the use of certain types of reception equipment used by the Company and
its subscribers.
 
COMPETITION
 
     The subscription television industry is highly competitive. Currently, the
Company's existing and potential competitors consist of a broad range of
companies engaged in the communications and entertainment businesses, including
cable operators, digital satellite program providers, television networks and
home video products companies. To date, the Company has sought to differentiate
itself from its competitors through lower priced, streamlined pricing plans,
service guarantees, high-quality customer service and system
 
                                        8
<PAGE>   10
 
performance, and local community involvement and support. In the future, the
Company expects to face intense competition from numerous other companies
offering video, audio and data products and services. Many of the Company's
existing or potential competitors have substantially greater name recognition
and financial, technical and human resources than the Company and may be better
equipped to develop and operate systems providing subscription television
service, high-speed Internet access and telephony services. The Company's
principal existing and potential competitors are described below:
 
  Franchise Cable Systems
 
     Currently, the Company's principal competitors are franchise cable
companies that own local franchises to operate their systems in the Company's
markets. Cable television service is currently available to the vast majority of
U.S. television households. In most instances, the franchise cable operators
with which the Company competes serve more subscribers on both a local and
national level. Franchise cable companies typically offer a larger selection of
programming than the Company. The Company seeks to compete with franchise cable
companies by offering the most widely demanded programming choices at lower
prices, combined with high-quality customer service.
 
     The Company believes that a number of franchise cable operators will be
required to significantly upgrade their coaxial systems to provide digital
programming, which will involve a substantial investment of capital. Many cable
television providers are already in the process of upgrading their systems and
other cable operators have announced their intentions to make significant
upgrades. A number of proposed technological improvements, when fully completed,
will permit cable companies to increase channel capacity, thereby increasing
programming alternatives, and to deliver a better quality signal without
significant upgrades to their systems.
 
     Many of the largest cable systems in the United States have announced plans
to offer data and telephony service through upgraded networks, and have entered
into agreements with major telephony providers to further these efforts. In some
cases, trials of data and telephony services are underway. In the event that
these trials are successful, the cable operators who are capable of offering
both data and telephony services will have a competitive advantage over wireless
companies if consumers choose to receive both their cable and telephone service
from the same operator.
 
  Direct Broadcast Satellite ("DBS")
 
     DBS involves the transmission of an encoded signal direct from a satellite
to the customer's home. Because the signal is at a higher power level and
frequency than most satellite-transmitted signals, its reception can be
accomplished with a relatively small (18-inch) dish mounted on a rooftop or in
the customer's yard.
 
     The cost of constructing and launching the satellites used to distribute
DBS programming is substantial. When first introduced, DBS reception equipment
for a single television set cost approximately $650 per customer, plus
installation fees, service charges and off-air antenna installation, where
applicable. Furthermore, each additional, independent outlet requires a separate
descrambling device at additional cost to the subscriber. These prices have
decreased as additional competitors have entered the DBS market. Recent
promotions have offered DBS reception equipment for less than $150 (exclusive of
installation and other charges) when the consumer agrees to prepay a one-year
subscription fee. The Company's principal DBS competitors are described below.
 
     DirecTV, Inc. ("DirecTV"), which is substantially owned by GM-Hughes
Electronics, successfully launched its first satellite in December 1993, its
second satellite in August 1994, and a third satellite as an in-orbit spare in
June 1995. The third satellite may also be operated by DirecTV to provide
additional capacity. Each of DirecTV's satellites are high power satellites. As
of December 31, 1996, according to trade publications, DirecTV served
approximately 2.3 million subscribers. Recently, AT&T Corporation ("AT&T") and
DirecTV entered into an exclusive agreement for AT&T to market and distribute
DirecTV's DBS service and related equipment to AT&T's large customer base. As
part of the agreement, AT&T made an initial investment of approximately $137.5
million to acquire 2.5% of the equity of DirecTV, with an option to
 
                                        9
<PAGE>   11
 
increase its investment to up to 30% over five years. This agreement provides a
significant base of potential customers for DirecTV's DBS systems and allows
AT&T and DirecTV to offer customers a package of digital entertainment and
communications services. AT&T and DirecTV have also announced plans to jointly
develop new multimedia services for DirecTV under the agreement.
 
     United States Satellite Broadcasting Corporation ("USSB") owns and operates
DBS spectrum on DirecTV's first satellite and offers a programming service
separate from DirecTV's service. As of December 31, 1996, this programming
service had over 25 channels of premium video programming not available from
DirecTV. USSB's selection of programming services (and its use of transponders
on the same satellite used by DirecTV, which enables subscribers to receive both
DirecTV and USSB signals with a signal satellite receiver) allows it to be
marketed as a complementary service to DirecTV, partially offsetting the
competitive handicap caused by its relatively limited channel capacity.
According to trade publications, as of December 31, 1996, approximately one-half
of DirecTV's 2.3 million subscribers received USSB programming.
 
     PrimeStar Partners ("PrimeStar") currently offers medium power Ku-band
programming service to customers using dishes approximately three feet in
diameter. PrimeStar is owned by a group of franchise cable operators and
provides service nationwide. According to trade publications, PrimeStar had
approximately 1.6 million subscribers as of December 31, 1996.
 
     EchoStar Communications Corporation ("EchoStar") launched a high power
satellite in December 1995, commenced national broadcasting of programming
channels in March 1996 and, as of December 31, 1996, broadcasted approximately
150 channels of programming. EchoStar has announced plans to increase its
program offering through the launch of two additional satellites (one in each of
1997 and 1998). As of December 31, 1996, EchoStar had approximately 350,000
subscribers, according to trade publications.
 
     During 1996, MCI Communications Corporation ("MCI") acquired high power DBS
spectrum with the capacity to offer over 200 channels of digital video
programming for $682.5 million in an FCC auction. Thereafter, MCI entered into a
joint venture with The News Corporation ("News Corp") to build and launch a high
power digital satellite system. On February 24, 1997, EchoStar and News Corp
announced that News Corp had agreed to acquire a 50% ownership interest in
EchoStar in exchange for aggregate consideration of approximately $1.0 billion
(such consideration consisting of cash and certain DBS assets). The EchoStar/
News Corp alliance, which will do business using the "Sky" brand name, announced
that it plans to provide approximately 500 channels of digital programming,
including local broadcast signals, by the end of 1998 to a majority of the
continental United States. As a result of its alliance with News Corp, EchoStar
will have substantially greater financial and other resources than the Company
and can be expected to increase the competition that the Company encounters in
the overall market for subscription television customers.
 
  C-band Satellite Program Distributors
 
     The Company also competes with C-band satellite program distributors (also
referred to as "backyard dish" or television receive only ("TVRO") systems).
C-band systems have been popular (mostly in rural and semi-rural areas) since
the late 1970s, and currently serve approximately 2.1 million subscribers in the
aggregate, according to trade publications. The primary advantages of wireless
cable systems over TVRO systems are lower equipment costs and broader
availability of local programming. TVRO systems, on the other hand, enjoy the
advantage of access to a wider variety of satellite programming and serve areas
not served by franchise or wireless cable systems. A conventional TVRO antenna
system costs in excess of $1,000 per subscriber, and subscribers are charged
monthly fees for access to certain programming. TVRO systems typically cannot
receive local off-air broadcast channels.
 
  Telephone Companies
 
     Certain regional and long distance telephone companies could become
significant competitors of the Company in the future, as they have expressed an
interest in becoming subscription television providers. The 1996 Act removes
barriers to entry that previously inhibited telephone companies from competing,
or made it more difficult for telephone companies to compete, in the provision
of video programming and information services. Certain telephone companies have
received authorization to test market video and other services in
 
                                       10
<PAGE>   12
 
certain geographic areas using fiber optic cable and digital compression over
existing telephone lines. Estimates for the timing of wide-scale deployment of
such multichannel video service vary, as several telephone companies have pushed
back originally announced deployment schedules.
 
     As more telephone companies begin to provide subscription television
programming and other information and communications services to their
customers, significant additional competition for subscribers is expected to
develop. Among other things, telephone companies have an existing relationship
with substantially every household in their service area, substantial financial
resources and an existing infrastructure, and may be able to subsidize the
delivery of programming through their position as the sole source of telephone
service to the home.
 
  VHF/UHF Broadcasters
 
     Most areas of the United States are covered by traditional territorial
over-the-air VHF/UHF broadcasters. Consumers can receive from three to ten
channels of over-the-air programming in most markets. These stations provide
local, network and syndicated programming free of charge, but each major market
is generally limited in the number of programming channels. Congress is expected
to consider the release of additional digital spectrum for use by VHF/UHF
broadcasters in the delivery of high definition television services later in
1997.
 
  Private Cable
 
     Private cable is a multi-channel subscription television service where the
programming is received by a satellite receiver and then transmitted via coaxial
cable throughout private property, often multiple dwelling units ("MDUs"),
without crossing public rights of way. Private cable operates under an agreement
with a private landowner to service a specific MDU, commercial establishment or
hotel. The FCC recently amended its rules to allow the provision of
point-to-point delivery of video programming by private cable operators and
other video delivery systems in the 18 GHz bandwidth. Private cable operators
compete with the Company for exclusive rights of entry into MDUs.
 
  Local Multi-Point Distribution Service ("LMDS")
 
     On March 13, 1997, the FCC released service and competitive bidding rules
for LMDS, which is located at 27.5 to 28.35 GHZ, 29.1 to 29.25 GHZ and 31.0 to
31.3 GHZ in the frequency band. There will be one 1150 MHz LMDS license and one
150 MHz LMDS license awarded for each BTA, for a total of 986 authorizations.
There will be no restrictions on the number of licenses an entity may hold, but
incumbent LECs and cable companies will not be able to obtain the 1150 MHz
licenses in-region for three years. A simultaneous multiple round auction will
be scheduled for later this year. Certain issues regarding geographic
partitioning and spectrum disaggregation are the subject of a pending
rulemaking. The rules for use of the spectrum are relatively broad, but it is
expected that the spectrum will be used for multichannel video programming,
telephony, video communications and data services, including two-way video
communications.
 
  Wireless Communications Service ("WCS")
 
     On February 19, 1997, the FCC announced service and auction rules for WCS,
which is located at about 2.3 GHz in the frequency band. There will be two 10
MHz WCS licenses for each of 52 major economic areas and two 5 MHz WCS licenses
for each of 12 regional economic area groupings. A simultaneous, multiple-round
electronic auction for the WCS licenses is expected to begin in April 1997. The
rules for use of the spectrum are relatively broad. Since the licenses involve
much less total spectrum than is available to other providers of subscription
television service, such as the Company, in a typical market, it is unlikely
that WCS license winners will be able to effectively compete with such
subscription television providers. However, WCS license winners could increase
competition in the data and wireless telephony businesses in the future. The
Company has not determined the degree of participation, if any, it will have in
the WCS auction.
 
                                       11
<PAGE>   13
 
MARKETS
 
     The Company operates under a decentralized management structure in order to
maximize the Company's local presence in each market. Most of the Company's
operational systems or system clusters are managed by a general or operations
manager who reports directly to a regional manager. General and operations
managers are responsible for the day-to-day operations of their respective
systems. Each operating system is staffed with customer service and sales
representatives and service technicians. Most non-executive employees of the
Company have incentive compensation programs that are tied to service quality
levels and sales goals. Pricing and programming decisions are made at the local
level, subject to review by the Company's executive management. Each of the
Company's analog wireless cable systems typically offers 15 to 25 basic cable
channels, one to three premium channels, and one or two pay-per-view channels.
Pay-per-view programming is offered only on an event-by-event basis in certain
of the Company's markets.
 
     The following table sets forth, by region, certain information relating to
the Company's Markets as of December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                                ESTIMATED
                                                        TOTAL    DEVELOPED     HOUSEHOLDS
                       REGION                          MARKETS    MARKETS    IN SERVICE AREA   SUBSCRIBERS
                       ------                          -------   ---------   ---------------   -----------
<S>                                                    <C>       <C>         <C>               <C>
Rocky Mountain.......................................    11          9          2,045,000         63,200
Southeast............................................     8          5          2,134,000         35,500
Western..............................................    17         11          3,709,000         35,100
Upper Midwest........................................    10          7          1,008,000         14,700
Midwest..............................................     8          6          3,096,000         31,300
                                                         --         --         ----------        -------
                                                         54         38         11,992,000        179,800
                                                         ==         ==         ==========        =======
</TABLE>
 
     Information regarding the Company's Markets as of December 31, 1996 is
presented in the following table. "Estimated Households in Service Area"
represents the approximate number of households within a 35 mile radius of the
Company's tower sites, subject to certain downward adjustments for overlapping
service areas. This information is based upon household estimates provided by
Strategic Mapping, Inc. using data obtained from the Donnelley Marketing Inc.
Residential Database. Some of these households will be "shadowed" and therefore
unable to receive the Company's service due to Line-of-Sight Constraints. The
percentage of Estimated Households in Service Area that the Company estimates
may be shadowed due to Line-of-Sight Constraints generally ranges from 10% to
50% depending upon the market.
 
                                       12
<PAGE>   14
 
                            WIRELESS CABLE CHANNELS
 
<TABLE>
<CAPTION>
                                                                             OWNED OR                   TOTAL EXPECTED
                                                                          LEASED CHANNELS               ANALOG CHANNELS
                                             ESTIMATED        OWNED         SUBJECT TO                    (INCLUDING
                                           HOUSEHOLDS IN    OR LEASED       PENDING FCC       TOTAL         OFF-AIR
                                           SERVICE AREA    FCC CHANNELS   APPLICATIONS(1)   MICROWAVE    CHANNELS)(2)
                                           -------------   ------------   ---------------   ---------   ---------------
<S>                                        <C>             <C>            <C>               <C>         <C>
ROCKY MOUNTAIN REGION
  Denver, CO.............................      689,000          29               4             33             41
  Oklahoma City, OK......................      391,000          28              --             28             37
  Little Rock, AR........................      231,000          30               1             31             37
  Wichita, KS............................      213,000          28               3             31             34
  Colorado Springs, CO(3)................      190,000          33               0             33             38
  Greeley, CO(3).........................      113,000          24               9             33             41
  Fort Collins, CO(3)....................       91,000          29               4             33             41
  Billings, MT...........................       52,000          28               4             32             35
  Pueblo, CO(3)..........................       49,000           8              24             32             37
  Alamoso, CO(3).........................       14,000          13               8             21             21
  Sheridan, WY...........................       12,000          23               4             27             30
                                            ----------
    Regional Total.......................    2,045,000
SOUTHEAST REGION
  Orlando, FL(3).........................      521,000          27              --             27             33
  Lakeland, FL(3)........................      305,000          30               3             33             41
  Jacksonville, FL(3)....................      373,000          19               3             22             29
  Daytona Beach, FL(3)...................      193,000          13               4             17             25
  Ft. Myers, FL(3).......................      175,000          20               8             28             33
  Bradenton, FL..........................      417,000           9               4             13             19
  Naples, FL.............................       99,000          18               5             23             27
  Sebring, FL............................       51,000          --              20             20             20
                                            ----------
    Regional Total.......................    2,134,000
WESTERN REGION
  Seattle, WA............................    1,254,000          13              --             13             23
  Portland, OR(3)........................      579,000          28              --             28             34
  Las Vegas, NV(3).......................      368,000          23               4             27             39
  Fresno, CA.............................      268,000          25              --             25             39
  Salem, OR(3)...........................      180,000          24               3             27             34
  Monterey/Salinas, CA(3)................      171,000          22               5             27             34
  Eugene, OR(3)..........................      124,000          26               3             29             32
  Visalia, CA............................      117,000          31               2             33             44
  Santa Barbara, CA......................      103,000           4               4              8             14
  Anchorage, AK..........................       99,000          25               4             29             36
  Yuba City, CA(3).......................       93,000          27              --             27             38
  Medford, OR(3).........................       92,000          33              --             33             33
  Redding, CA(3).........................       70,000          24               7             31             36
  Merced, CA.............................       69,000          17              16             33             38
  Bend, OR...............................       44,000          28               4             32             36
  Wenatchee, WA(3).......................       41,000           9              12             21             23
  Maui, HI(3)............................       37,000          28               3             31             37
                                            ----------
    Regional Total.......................    3,709,000
UPPER MIDWEST REGION
  Omaha, NE(3)...........................      299,000          13              16             29             33
  Green Bay, WI(3).......................      198,000          21               7             28             34
  Sheboygan, WI(3).......................      198,000          11              10             21             26
  Lincoln, NE(3).........................       50,000          32              --             32             39
  Fargo, ND(3)...........................       85,000          32              --             32             37
  Rapid City, SD.........................       46,000          30              --             30             35
  Grand Island, NE(3)....................       43,000          32              --             32             41
  Tecumseh, NE(3)........................       39,000          16               4             20             20
  Windom, MN(3)..........................       31,000          12              17             29             33
  Geneva, NE(3)..........................       19,000           8              --              8             15
                                            ----------
    Regional Total.......................    1,008,000
MIDWEST REGION
  Columbus, OH(3)........................      575,000          20               9             29             34
  Cincinnati, OH(3)......................      622,000           9               4             13             19
  Louisville, KY.........................      438,000          20               4             24             34
  Youngstown, OH(3)......................      431,000          31               2             33             37
  Toledo, OH.............................      351,000          32              --             32             40
  South Bend/Elkhart, IN(3)..............      292,000          27               4             31             36
  Lansing, MI(3).........................      224,000          15              17             32             38
  Jackson, MI(3).........................      163,000          17              13             30             34
                                            ----------
    Regional Total.......................    3,096,000
Total....................................   11,992,000
                                            ==========
</TABLE>
 
                                       13
<PAGE>   15
 
---------------
 
(1) New station applications, petitions for reconsideration, and petitions for
    reinstatement are subject to approval by the FCC. The entities with which
    the Company has entered into leasing agreements have filed a series of
    applications for wireless cable channels. In many cases, the Company's
    applicant is the sole applicant. Due to the qualifications of the Company's
    applicants relative to competing filings, the Company expects that most of
    these applications will be approved by the FCC. However, there can be no
    assurance that these FCC applications will be approved.
 
(2) Represents total expected wireless channels (including channels not yet in
    service) plus local off-air broadcast channels which are generally available
    in the Company's broadcast signal area and which the Company does not expect
    to rebroadcast over its wireless cable channels.
 
(3) The Company is the BTA holder in this market. In certain cases, two or more
    of the Company's existing or target markets may be contained within a single
    BTA.
 
     In addition to the channel interests detailed above, the Company holds
channel rights in a number of other U.S. markets. The Company may seek
additional channel rights in these markets or sell or exchange the channel
rights it already holds.
 
     Pursuant to an Investment Agreement dated January 19, 1991, between CFW
Communications Company, a diversified publicly-traded telecommunications company
based in Waynesboro, Virginia ("CFW") and ATI (which agreement provided for the
purchase by CFW of 1,209,678 shares of ATI's Series A Convertible Preferred
Stock), the Company is entitled to receive payments equal to 10% of the earnings
(as defined in the agreement) of each wireless cable system developed by CFW in
the Commonwealth of Virginia for a 15-year period after each respective system
has achieved accumulated pre-tax income. In return, the Company is required to
provide certain advisory services to CFW in connection with the development of
such systems. CFW currently operates wireless cable systems in Richmond,
Charlottesville and other cities within the Shenandoah Valley, and maintains
certain wireless cable channel rights in Lynchburg and Winchester, Virginia.
 
ACQUISITIONS AND DIVESTITURES
 
     Since May 1993, the Company has acquired 22 operational wireless cable
systems and wireless cable channel rights in 18 additional markets, and has sold
two operational wireless cable systems and wireless cable channel rights in two
additional markets. On March 18, 1997, the Company entered into the BellSouth
Agreement, which provides for the sale of all of the Company's Southeastern
Assets to BellSouth Wireless. The Southeastern Assets include operating wireless
cable systems in Orlando, Lakeland, Jacksonville, Daytona Beach and Ft. Myers,
Florida and Louisville, Kentucky and wireless cable channel rights in Bradenton,
Naples, Sebring and Miami, Florida. The purchase price for all of the
Southeastern Assets will range from $67.9 million to $103.2 million, depending
upon the number of wireless cable channel rights that are ultimately transferred
to BellSouth Wireless. See "-- Recent Development". The BellSouth Agreement
contains customary conditions to closing, including the expiration of applicable
waiting periods under the federal antitrust laws and the satisfaction of all
applicable regulatory requirements. There can be no assurance that all of such
conditions will be satisfied or that the BellSouth Transaction will be
consummated. The Company may in the future pursue other opportunities to sell or
exchange certain of its wireless cable television assets. There can be no
assurance that the Company will be successful in completing any such
transactions.
 
PROGRAMMING
 
     The Company's analog wireless cable systems seek to offer popular
programming at affordable prices. The Company selects its basic programming
channels to appeal to a specific customer base and generally does not offer
programming which appeals to small, specialized market segments. The Company's
typical analog channel offering includes between 15 and 25 basic cable channels,
one to three premium channels (typically HBO, Showtime or the Disney Channel)
and one or two pay-per-view channels. Pay-per-view service is offered in certain
markets only on an event-by-event basis. Specific programming packages vary
according to
 
                                       14
<PAGE>   16
 
particular market demand. Local off-air channels are received by the subscriber
along with the Company's wireless channels, thereby adding, on average, four to
eight channels to the number of basic channels offered and resulting in
aggregate offerings currently ranging from 14 to 44 channels. Programming
expenses typically equal approximately one-third of the Company's revenue and
have been increasing relative to revenues. The Company could be adversely
affected if it cannot increase subscriber rates, because of market pressures or
otherwise, to offset increases in programming and other expenses.
 
SERVICE
 
     The Company's subscription television business emphasizes a strong
commitment to high-quality customer service. This commitment is evidenced, in a
number of the Company's Developed Markets, by seven-day-a-week,
fixed-appointment-time installations; same-day response to service call
requests; short telephone hold times; and extended office, telephone and
technical service hours.
 
SALES AND MARKETING
 
     In marketing its subscription television service, the Company continues to
target specific consumer segments which have demonstrated a propensity toward
value-added choices and offers specific marketing programs based on local
demand, general market characteristics, and customer surveys.
 
EQUIPMENT AND FACILITIES
 
     The Company's analog wireless cable systems utilize fully addressable
subscriber equipment. In-home wireless subscriber equipment components used in
the Company's systems are generally similar to those used in franchise cable
systems. Subscriber equipment includes a microwave receiver, downconverter,
set-top converter and remote control unit. The Company is not dependent upon any
one supplier for its equipment needs.
 
LICENSES AND CHANNEL LEASES
 
     The Company generally does not hold FCC licenses for channels that it uses
to broadcast programming; instead, it has acquired the right to broadcast under
long-term leases with third party licensees. The average term of the Company's
channel leases, including renewals at the Company's option, is more than ten
years. Although the Company anticipates that it will continue to have access to
a sufficient number of channels to operate a successful wireless cable system,
if a significant number of the Company's channel leases are not renewed, a
significant number of its pending FCC applications are not granted, or the FCC
terminates, forfeits, revokes or fails to renew the authorizations held by the
Company's channel lessors, ATI may be unable to provide a viable programming
package to subscribers in some or all of its markets.
 
     Prior to November 1993, the Company was a direct FCC licensee with respect
to approximately ten wireless cable authorizations used by its systems to
broadcast programming and had applications pending with the FCC regarding 39
other authorizations. In November and December 1993, the Company assigned its
FCC licenses, and filed amendments to assign these pending FCC applications, to
Wireless Properties, Inc., Wireless Properties of Virginia, Inc., Wireless
Properties -- East, Inc. or Wireless Properties -- West, Inc. (collectively, the
"Wireless Companies"). The Wireless Companies are owned and controlled by Donald
R. DePriest, Chairman of the Board of Directors and a Director of ATI. In
return, the Wireless Companies agreed to grant to the Company the exclusive
right to use such FCC licenses for an initial term of five years and, at the
Company's option, for an unlimited number of successive one-year terms
thereafter, pursuant to certain channel lease agreements. The Wireless Companies
assigned the majority of such licenses back to the Company during 1996. The
annual lease payments required to be paid by the Company pursuant to its channel
lease agreements with the Wireless Companies were nominal.
 
                                       15
<PAGE>   17
 
EMPLOYEES
 
     As of December 31, 1996, the Company had approximately 640 employees. The
Company considers relations with its employees to be satisfactory. The Company
also uses independent contractors to perform some installations and door-to-door
sales.
 
ITEM 2. PROPERTIES
 
     The principal physical assets of a wireless cable system consist of
satellite signal reception equipment, radio transmitters and transmission
antennas, as well as office space and transmission tower space. The Company's
principal office is located in approximately 18,000 square feet of leased office
space in Colorado Springs, Colorado. The Company occupies this space under a
lease agreement that expires in 2000. The Company believes that such office
space in Colorado Springs is adequate for the near future. The Company currently
leases additional office and warehouse space in each of its Developed Markets
and certain of its Undeveloped Markets pursuant to lease agreements that expire
at various times over the next three to five years.
 
     The Company also leases tower transmission space in all of its Developed
Markets (except for three markets where it owns transmission towers) and certain
of its Undeveloped Markets, pursuant to long-term lease arrangements. The
Company's tower lease agreements provide for locating transmitter, antenna and
other equipment at existing towers to broadcast wireless cable signals. The
agreements generally cover a period of five to seven years and are subject to
renewal upon expiration. To date, the Company has been able to obtain suitable
tower space on satisfactory terms in each of its Developed Markets. In the event
that any one or more of these tower space leases is terminated or not renewed
upon expiration, the Company will be required to obtain alternative tower space
in order to broadcast its programming.
 
ITEM 3. LEGAL PROCEEDINGS
 
     On or about February 17, 1994, Fresno Telsat, Inc. ("FTI"), the 35% general
partner of Fresno MMDS Associates ("the Fresno Partnership") which operates the
Company's Fresno, Merced and Visalia wireless cable systems, filed a Complaint
in the Superior Court of the State of California for the County of Monterey
against Robert D. Hostetler, Terry J. Holmes, the Company, and certain other
named and unnamed defendants. From 1989 through June 10, 1993, Mr. Hostetler was
a member of the Board of Directors and President of FTI. Mr. Hostetler and his
wife currently own 28% of the outstanding capital stock of FTI. Mr. Hostetler
has been employed by the Company since December 10, 1993 and became a Director
of the Company on March 22, 1994. In January 1996, Mr. Hostetler was appointed
President and Chief Executive Officer of the Company. From 1991 until June 1995,
Mr. Holmes was General Manager of the Fresno Partnership. He is currently
Managing Director of the Fresno Partnership. Mr. Holmes has been employed by the
Company since June 1995, and became Vice President -- Operations of the Company
in January 1996. The Complaint alleges that, while he was a director and
employee of FTI, Mr. Hostetler engaged in wrongful conduct, including
misappropriation of corporate opportunity, fraud and unfair competition by
exploiting business opportunities that were the property of FTI. The Complaint
also alleges that Mr. Holmes engaged in a misappropriation of corporate
opportunities belonging to FTI. The Complaint further alleges that all
defendants, including the Company, participated in a conspiracy to
misappropriate corporate opportunities belonging to FTI and that the Company and
the unnamed defendants engaged in wrongful interference with fiduciary
relationship by intentionally causing Mr. Hostetler to breach his fiduciary duty
to FTI and causing Mr. Hostetler to wrongfully transfer FTI's corporate
opportunities to the Company.
 
     On August 28, 1996, ATI filed a Cross-Complaint (the "Cross-Complaint")
against FTI and certain of its officers and directors (the "Cross-Defendants").
The Cross-Complaint alleges that the Cross-Defendants have engaged in a
violation of Section 26-1-8-401 of the Indiana Code, conversion, conspiracy, and
breach of trust by failing to acknowledge and record ATI's ownership of
approximately 7% of FTI's capital stock purchased by ATI from a former
shareholder of FTI, and continuing to represent that FTI qualifies for
Subchapter S status under the Internal Revenue Code. The Cross-Complaint seeks
specific performance of the transfer of shares to ATI, compensatory damages,
punitive damages, an injunction against any further
 
                                       16
<PAGE>   18
 
actions by the Cross-Defendants in breach of trust or with the effect of
dissipating and diverting the property and assets of FTI, and the appointment of
a receiver to handle the affairs of FTI during the pendency of the FTI
proceeding.
 
     On or about February 24, 1997, the Company and Mr. Holmes each filed a
motion for summary judgment seeking dismissal of the claims in the Complaint
relating to an alleged conspiracy to misappropriate corporate opportunities of
FTI. The motion to dismiss is scheduled to be heard on April 25, 1997. On or
about March 5, 1997, FTI filed a motion for leave to amend the Complaint to add
allegations that ATI aided and abetted Mr. Hostetler's misappropriation of
corporate opportunity and that all defendants wrongfully interfered with FTI's
prospective business opportunities.
 
     The Complaint seeks compensatory damages (in an unspecified amount but
estimated by the plaintiff to be no less than $5 million) and exemplary damages
against all defendants, costs, an accounting, injunctive relief prohibiting Mr.
Hostetler from continuing to engage in unfair competition against FTI and
prohibiting all defendants from engaging in misappropriation of corporate
opportunities belonging to FTI, and the imposition of a constructive trust upon
the corporate opportunities of FTI utilized in the Company's initial public
offering. While discovery has commenced in this proceeding, no trial date has
been scheduled. Although the ultimate outcome of the litigation cannot be
predicted at this time, management believes, based upon its review of the
Complaint and after consultation with counsel, that resolution of this matter
will not have a material adverse impact on the Company's financial position or
future results of operations.
 
     On January 12, 1996, Videotron (Bay Area) Inc. filed a complaint against
ATI in the Circuit Court of the Thirteenth Judicial Circuit in and for
Hillsborough County, Florida. The Complaint alleges that ATI has caused certain
entities from which ATI leases channels and airtime for its Bradenton and
Lakeland, Florida wireless cable markets (the "ATI Lessors") to actively oppose
Videotron's FCC applications to increase broadcast power in Videotron's Tampa,
Florida wireless cable system (the "Tampa market") in violation of a
Non-Interference Agreement between Videotron and ATI (the "Non-Interference
Agreement"). The Complaint seeks injunctive relief directing ATI to perform all
acts, services and undertakings required under the Non-Interference Agreement,
including but not limited to using reasonable best efforts to cause the ATI
Lessors not to object to Videotron's attempt to increase broadcast power in the
Tampa market and to enter into certain non-interference agreements with respect
thereto. In the alternative, the Complaint seeks damages for breach of the
Non-Interference Agreement (in an unspecified amount but exceeding $15,000).
Recently, in responding to written interrogatories, Videotron estimated its
damages to be approximately $113.5 million. Although the ultimate outcome of
this litigation cannot be predicted at this time, management of ATI believes,
based upon its review of the Complaint and after consultation with counsel, that
resolution of this matter will not have a material adverse impact on the
Company's financial position or future results of operations.
 
     In addition, the Company is occasionally a party to legal actions arising
in the ordinary course of its business, the ultimate resolution of which cannot
be ascertained at this time. However, in the opinion of management, resolution
of these matters will not have a material adverse effect on the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1996.
 
                                       17
<PAGE>   19
 
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
         (FURNISHED IN ACCORDANCE WITH ITEM 401(B) OF REGULATION S-K, PURSUANT
         TO GENERAL INSTRUCTION G(3) OF FORM 10-K)
 
     The following table sets forth certain data concerning the Company's
executive officers as of the date of this Report:
 
<TABLE>
<CAPTION>
          NAME            AGE         PRESENT POSITION          BUSINESS EXPERIENCE AND OTHER INFORMATION
          ----            ---         ----------------          -----------------------------------------
<S>                       <C>   <C>                           <C>
Donald R. DePriest......  57    Chairman of the Board of      Chairman of the Board of Directors since March
                                  Directors                   1990; President of the Company from 1988
                                                              through March 1990; Chairman of the Board of
                                                              Directors, President and sole stockholder of
                                                              MedCom Development Corporation ("MedCom"), the
                                                              sole general partner of MCT, an investment
                                                              partnership specializing in the communications
                                                              and health care industries and ATI's largest
                                                              stockholder; also a limited partner of MCT;
                                                              Chairman of the Board and President of
                                                              Boundary Healthcare Products Corporation, a
                                                              hospital products manufacturer, from 1987
                                                              through its sale to Maxxim Medical, Inc.
                                                              ("Maxxim") in December 1992; Director of
                                                              Maxxim, a publicly-traded hospital products
                                                              manufacturer, since December 1992.
Richard F. Seney........  42    Vice Chairman of the Board    Vice Chairman of the Board of Directors since
                                  of Directors and Secretary  October 1993; Secretary of the Company since
                                                              1988; Treasurer of the Company from 1988 to
                                                              March 1994; Vice President and General Manager
                                                              of MedCom since 1987; limited partner of MCT.
Robert D. Hostetler.....  55    President and Chief           President and Chief Executive Officer of the
                                  Executive Officer           Company since January, 1996; Vice President --
                                                              Development from January 1995 through December
                                                              1995; Director of Mergers and Acquisitions of
                                                              the Company from December 1993 through
                                                              December 1994; a member of the Board of
                                                              Directors of the Company since March 1994;
                                                              Director and/or officer of several affiliated
                                                              wireless cable entities in the Choice TV Group
                                                              (as defined herein) and President of FTI from
                                                              1988 to December 1993.
David K. Sentman........  46    Senior Vice President, Chief  Senior Vice President and Chief Financial
                                  Financial Officer, and      Officer since January 1996; Vice
                                  Treasurer                   President -- Finance and Chief Financial
                                                              Officer from July 1995 through December 1995;
                                                              served in various capacities, including Chief
                                                              Financial Officer, with Artisoft, Inc. from
                                                              July 1992 through February 1995; prior to July
                                                              1992, held various management positions with
                                                              CTS Corporation.
Terry J. Holmes.........  42    Vice President -- Operations  Vice President -- Operations since January
                                                              1996; Regional Manager -- Western Region from
                                                              June 1995 through December 1995; currently
                                                              Managing Director of the Fresno Partnership;
                                                              General Manager of the Fresno Partnership from
                                                              June 1991 to June 1995; prior to June 1991,
                                                              held various positions with
                                                              Telecommunications, Inc., Prime Cable and
                                                              other private cable operators.
John B. Suranyi.........  36    Vice President -- Operations  Vice President -- Operations since January
                                                              1996; Regional Manager -- Rocky Mountain and
                                                              Upper Midwest Regions from September 1993
                                                              through December 1995; prior to September
                                                              1993, held various positions with
                                                              Telecommunications, Inc. and United Artists
                                                              Cable.
</TABLE>
 
                                       18
<PAGE>   20
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's Class A Common Stock is quoted on the Nasdaq Stock Market
under the symbol "ATEL." The high and low closing sale prices of the Class A
Common Stock for 1995 and 1996 on the Nasdaq Stock Market (as reported by
Nasdaq) are set forth below:
 
                           NASDAQ DAILY CLOSING PRICE
 
<TABLE>
<CAPTION>
                                                              HIGH    LOW
                                                              ----    ----
<S>                                                           <C>     <C>
1995
First Quarter...............................................  $17 3/4 $ 9 1/4
Second Quarter..............................................   16 1/2  11 3/4
Third Quarter...............................................   13 3/4   9 1/2
Fourth Quarter..............................................   15      12
1996
First Quarter...............................................  $17     $13 3/4
Second Quarter..............................................   16      11 1/4
Third Quarter...............................................   14 1/4   8 3/4
Fourth Quarter..............................................   11 1/2   5 1/4
</TABLE>
 
     As of March 11, 1997, there were approximately 408 record holders of the
Company's Class A Common Stock, not including stockholders who beneficially own
Class A Common Stock held in nominee or street name. As of March 11, 1997, there
were approximately 5,000 beneficial owners of the Company's Class A Common Stock
held in nominee or street name.
 
     The Company has never declared or paid any cash dividends on its Class A
Common Stock and does not expect to declare dividends in the foreseeable future.
Payment of any future dividends will depend upon the earnings and capital
requirements of the Company, the Company's debt facilities, and other factors
the Board of Directors considers appropriate. The Company currently intends to
retain its earnings, if any, to support future growth and expansion. The
Company's ability to declare dividends is affected by covenants in certain debt
facilities that prohibit the Company from declaring dividends and the Company's
subsidiaries from transferring funds in the form of cash dividends, loans or
advances to ATI. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
                                       19
<PAGE>   21
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The selected consolidated financial data as of and for each period in the
five year period ended December 31, 1996 have been derived from, and are
qualified by reference to, the Company's Consolidated Financial Statements which
have been audited by Arthur Andersen LLP, independent public accountants. This
data should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes thereto for the three years ended December 31,
1996, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Report.
 
<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                              ----------------------------------------------------
                                                               1992     1993(1)    1994(2)    1995(3)      1996
                                                              -------   --------   --------   --------   ---------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND
                                                                                OPERATING DATA)
<S>                                                           <C>       <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
  Total revenues............................................  $ 3,534   $  7,178   $ 21,629   $ 47,501   $  62,032
  Costs and expenses:
    Operating...............................................    2,563      4,524     13,128     26,021      36,029
    Marketing, general and administrative...................    1,729      2,937     13,486     27,870      26,256
    Depreciation and amortization...........................    1,158      2,563     12,032     29,276      44,665
    Impairment of wireless cable assets.....................       --         --         --         --      21,271
                                                              -------   --------   --------   --------   ---------
  Loss before interest and taxes............................   (1,916)    (2,846)   (17,017)   (35,666)    (66,189)
  Interest expense and other, net...........................     (258)    (1,665)    (7,271)   (22,300)    (35,488)
                                                              -------   --------   --------   --------   ---------
  Loss before income tax benefit............................  $(2,174)  $( 4,511)  $(24,288)  $(57,966)  $(101,677)
                                                              =======   ========   ========   ========   =========
  Net loss applicable to Class A Common Stock(4)............  $(2,174)  $ (4,511)  $(15,478)  $(66,635)  $(104,630)
                                                              =======   ========   ========   ========   =========
  Net loss per share(5).....................................            $  (0.46)  $  (1.07)  $  (4.17)  $   (5.78)
                                                                        ========   ========   ========   =========
  Weighted average shares outstanding(5)....................               9,831     14,445     15,977      18,096
                                                                        ========   ========   ========   =========
OPERATING AND OTHER DATA:
  Earnings (loss) before interest, income taxes,
    depreciation and amortization(6)........................  $  (758)  $   (283)  $ (4,985)  $ (6,390)  $    (253)
  Number of operational systems (at end of period)..........        3         10         26         38          38
  Number of subscribers (at end of period)..................   15,300     31,400    106,500    173,700     179,800
CONSOLIDATED BALANCE SHEET DATA:
  Cash, cash equivalents and short-term investments.........  $    81   $ 36,377   $ 33,331   $ 32,514   $  18,476
  Intangible assets, net....................................    1,678     46,273    118,397    166,194     160,052
  Total assets..............................................   11,275    101,653    226,920    317,049     283,572
  Long-term obligations (net of current portion and deferred
    income taxes)...........................................    3,871     11,641    117,761    225,512     256,354
  Stockholders' equity......................................    2,903     79,056     93,843     53,736       3,113
</TABLE>
 
---------------
 
(1) Includes the results of operations of the Billings, Denver and South
    Bend/Elkhart systems from their respective acquisition dates.
 
(2) Includes the results of operations of the Bend, FEN/WEN Group, Oklahoma
    City, Wichita and Lakeland systems from their respective acquisition dates.
 
(3) Includes the results of operations of the Medford, Sheridan, Redding, Las
    Vegas and Rapid City systems and Fresno Wireless Cable Television, Inc.
    ("FWCTI") from their respective acquisition dates.
 
(4) Reflects the cumulative effect of the change in accounting for installation
    costs effected January 1, 1995 (income, net of income taxes, of $602,000 or
    $0.04 per share) and the extraordinary charge on early retirement of debt
    recognized during the quarter ended September 30, 1995 (charge of $11.5
    million or $0.72 per share). Net loss for the year ended December 31, 1996
    includes dividend embedded in conversion feature of Series B Convertible
    Preferred Stock of $6.25 million.
 
(5) Net loss per share and weighted average shares outstanding for the years
    ended December 31, 1993 and 1994 give effect to the conversion in January
    1994 of all outstanding shares of ATI's Series A Convertible Preferred Stock
    into 2,014,098 shares of Common Stock. Net loss per share for the year ended
    December 31, 1996 gives effect to the dividend embedded in conversion
    feature of Series B Convertible Preferred Stock of $6.25 million.
 
(6) Earnings (loss) before interest, taxes, depreciation and amortization is a
    commonly used measure of performance within the wireless cable industry.
    However, it does not purport to represent cash used by operating activities
    and should not be considered in isolation or as a substitute for measures of
    performance in accordance with generally accepted accounting principles. The
    amount for 1996 excludes impairment of wireless cable assets of
    approximately $21.3 million. See "Management's Discussion and Analysis of
    Financial Condition and Results of Operations -- Fiscal Year 1996 Compared
    to Fiscal Year 1995."
 
                                       20
<PAGE>   22
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     All statements contained herein that are not historical facts, including
but not limited to, statements regarding the Company's plans for future
development and operation of its business, are based on current expectations.
These statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: a lack of
sufficient capital to finance the Company's business plan on terms satisfactory
to the Company; pricing pressures which could affect demand for the Company's
wireless communications services; changes in labor, equipment and capital costs;
the unavailability of digital compression technology and equipment at reasonable
prices; the Company's inability to incorporate digital compression technology
into certain of its subscription television systems in a cost efficient manner;
the Company's inability to develop and implement new services such as high-speed
Internet access and telephony; the Company's inability to obtain the necessary
authorizations from the FCC for such new services; competitive factors, such as
the introduction of new technologies and competitors into the wireless
communications business; a failure by the Company to attract strategic partners;
general business and economic conditions; and the other risk factors described
from time to time in the Company's reports filed with the SEC. The Company
wishes to caution readers not to place undue reliance on any such forward
looking statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995, and as such, speak only as of the date made.
 
INTRODUCTION
 
     During 1996, the Company's business strategy evolved to adapt to the
significant regulatory and technological changes that have occurred recently in
the telecommunications industry and to the Company's capital constraints. See
"Business -- Regulation" and "Business -- Competition." Management now believes
that the most promising use of the Company's wireless assets may be to provide a
variety of digital wireless services, instead of the traditional analog-based
technology utilized by the Company to date. Such digital wireless services could
include digital video (i.e., subscription television), high-speed Internet
access and telephony services. A successful deployment of such services might
include the full bundle of broad band (i.e., video and high-speed Internet) and
narrow band (i.e., telephony) services. While the Company has begun planning and
testing of these wireless services, it has not yet introduced any of these
services. As more fully described above under "Business -- Certain Requirements
and Uncertainties," the Company's ability to introduce these services will
depend on a number of factors, including the availability of sufficient capital,
competitive factors (such as the introduction of new technologies or the entry
of competitors with significantly greater resources than the Company), the level
of consumer demand for such services, and the Company's ability to obtain the
necessary regulatory changes and approvals.
 
     During 1997, the Company intends to continue to operate its Developed
Markets principally as an analog wireless cable business. However, because of
its current financial condition and its revised business strategy, the Company
does not plan to make the capital expenditures necessary to add enough new
subscribers to replace those subscribers that choose to stop receiving the
Company's service. Moreover, at this time, the Company does not generally intend
to further develop any of its Undeveloped Markets using analog technology. Thus,
the Company anticipates that its analog customer base will decrease somewhat
during 1997. As the Company's analog subscriber base decreases, its revenues are
expected to decrease unless and until it is able to successfully introduce other
revenue-producing wireless services, such as digital video, high-speed Internet
access and telephony.
 
     Since early 1996, the Company has taken certain actions aimed at reducing
its costs and conserving its capital, including reductions in the size of the
Company's workforce and decreases in capital expenditures and discretionary
expenses. As a result, the Company currently expects that its existing cash and
investment balances, proceeds from the Credit Facility (as defined herein), and
cash generated from operations will be sufficient to finance its operations
during 1997. Thereafter, additional financing will be required. If the Company's
capital resources are not sufficient to finance its operations, either in 1997
or thereafter, the Company will be required to curtail its operations and
development plans, which curtailment could involve, among other things, a
complete cessation of new customer additions. In March 1997, the Company entered
into an agreement to sell certain assets to BellSouth Wireless with anticipated
proceeds to the Company
 
                                       21
<PAGE>   23
 
ranging from $67.9 million to $103.2 million, depending on the number of
wireless cable channel rights that are ultimately transferred to BellSouth
Wireless. See "Business -- Recent Development." Any such proceeds will provide
further resources to help finance the Company's operations and development
plans. In addition, the Company is pursuing strategic relationships or
transactions with other providers of telecommunications services. One of the
Company's primary objectives in pursuing such relationships and transactions is
to facilitate access to additional capital. See "-- Liquidity and Capital
Resources -- Sources and Uses of Funds -- Strategic Relationship Objectives."
 
     The Company's Developed Markets generate negative operating cash flow until
the subscriber base becomes sufficiently large for incremental revenues, net of
incremental costs, to offset fixed costs, other than depreciation and other
non-cash expenses. Certain costs, such as programming costs, generally increase
in proportion to the number of subscribers, while other costs, such as tower
rental and related maintenance costs, remain constant or increase at
proportionately lower levels. Accordingly, systems with larger subscriber bases
generally produce higher operating margins, and systems with small subscriber
bases usually produce negative operating margins. For the year ended December
31, 1996, 24 of the Company's 38 Developed Markets generated positive operating
cash flow.
 
     Operating cash flow is a commonly used measure of performance in the
wireless cable industry. However, operating cash flow does not purport to
represent cash used by operating activities and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
 
     The Company leases many of the channels used to transmit its programming
from FCC license holders. Typically, these leases provide for payments based
upon the number of subscribers, subject in many cases to certain minimums, as
more fully discussed in the Notes to the Company's Consolidated Financial
Statements included herein. Total channel lease payments approximated 4.1% of
total revenues during the year ended December 31, 1996. Total programming
expenses approximated 31.2% of total revenues during the same period. Such
expenses vary from system to system depending upon the number of channels
offered and pay channel penetration. Marketing costs are expensed in the period
incurred. As a result, operating results in any period are negatively affected
by expenditures for marketing and promotion. Since the Company's monthly
services are billed in advance, accounts receivable are relatively small.
 
     The Company capitalizes all installation costs (labor, subcontractor costs
and supplies). Such capitalized installation costs generally are amortized over
three years. Headend equipment is generally depreciated over ten years.
Equipment purchased and awaiting installation into subscriber premises is
classified as part of property and equipment in the Company's Consolidated
Financial Statements.
 
     Management believes that period-to-period comparisons of the Company's
financial results to date are not necessarily meaningful and should not be
relied upon as an indication of future performance due to the Company's
historically high growth rate and the number of system launches and acquisitions
during the periods presented.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  SOURCES AND USES OF FUNDS
 
     The Company has experienced negative cash flows from operations in each
year since its formation, and although certain of the Company's more established
systems currently generate positive cash flow from operations, the Company
expects to continue to experience negative consolidated free cash flow from
operations. Until sufficient cash flow is generated from operations, the Company
will be required to utilize its current capital resources or external sources of
funding to satisfy its working capital and capital expenditure needs.
 
     The Company expects that its principal capital expenditure requirements for
1997 will relate to replacement of customer churn, launch of high-speed Internet
services in one or more markets and the purchase of transmission equipment for
new channels. The Company intends to finance these capital expenditures from
existing cash and investment balances, borrowings under the Credit Facility, and
cash
 
                                       22
<PAGE>   24
 
generated from system operations. The commercial introduction by the Company of
digital services, such as digital video, high-speed Internet access and
telephony, would require substantial additional capital expenditures. While the
Company may use a portion of the proceeds from the BellSouth Transaction to
acquire assets for the development of such digital services, management does not
expect that such proceeds will be sufficient to fully implement its digital
strategies for video, Internet access and telephony throughout its markets. As
further described below, the Company is pursuing relationships or transactions
with other providers of telecommunications services to facilitate access to
additional capital, among other things. See "-- Strategic Relationship
Objectives." The Company's ability to fully implement its revised business
strategy will depend on its ability to attract sufficient additional capital
through relationships with strategic partners or otherwise. There can be no
assurance that sufficient capital will be available on terms satisfactory to the
Company, or at all.
 
     On March 18, 1997, the Company entered into the BellSouth Agreement, which
provides for the sale of all of the Company's Southeastern Assets to BellSouth
Wireless. The Southeastern Assets include operating wireless cable systems in
Orlando, Lakeland, Jacksonville, Daytona Beach and Ft. Myers, Florida and
Louisville, Kentucky and wireless cable channel rights in Bradenton, Naples,
Sebring and Miami, Florida. The purchase price for all of the Southeastern
Assets will range from $67.9 million to $103.2 million, depending upon the
number of wireless cable channel rights that are ultimately transferred to
BellSouth Wireless. See "Business -- Recent Development." The BellSouth
Agreement contains customary conditions to closing, including the expiration of
applicable waiting periods under the federal antitrust laws and the satisfaction
of all applicable regulatory requirements. There can be no assurance that all of
such conditions will be satisfied or that the BellSouth Transaction will be
consummated.
 
     To date, the Company's operations have required substantial amounts of
capital for (i) the installation of equipment in new subscribers' homes, (ii)
the construction of additional transmission and headend facilities and related
equipment purchases, (iii) the funding of start-up losses and other working
capital requirements, (iv) the acquisition of wireless cable channel rights and
systems, and (v) investments in, and maintenance of, vehicles and administrative
offices. The Company's capital expenditures, exclusive of acquisitions of
wireless cable systems and additions to deferred license and leased license
acquisition costs, during the years ended December 31, 1994, 1995 and 1996 were
approximately $35.5 million, $49.3 million, and $32.5 million, respectively.
Such expenditures were primarily for the construction and expansion of the
Company's wireless cable systems and the installation of equipment in new
subscribers' homes.
 
     In addition, the Company was involved in the bidding process for wireless
cable channel authorizations in certain basic trading areas ("BTAs"), which was
completed in March 1996. The Company was the highest bidder in 59 markets. In
the aggregate, the Company's bids in these markets totaled approximately $10.1
million. Of such amount, a total of approximately $9.3 million has been paid.
The remaining amount (approximately $800,000) is due upon the FCC's notification
to the Company of the issuance of the remainder of its BTA licenses, which the
Company expects will occur in 1997.
 
     On June 28, 1996, the Company entered into a definitive agreement to
acquire wireless cable channel rights and certain other subscription television
assets in Cincinnati, Ohio (the "Cincinnati Acquisition") for aggregate
consideration of approximately $5.2 million (of which approximately $3.5 million
had been paid as of January 31, 1997). Also on June 28, 1996, the Company
acquired certain of the Cincinnati subscription television assets and entered
into a management agreement to operate the subscription television assets that
it has not yet acquired. The subscription television assets acquired or to be
acquired by the Company in connection with the Cincinnati Acquisition served
approximately 3,100 subscribers as of the date of acquisition. Completion of the
Cincinnati Acquisition is subject to certain contingencies, such as FCC
approvals, the satisfactory completion of due diligence, and other customary
conditions to closing, which may or may not be satisfied. There can be no
assurance that the Cincinnati Acquisition will be consummated.
 
     In February 1996, $2.5 million of notes issued in connection with the
Company's September 1995 acquisition of Superchannels of Las Vegas, Inc. were
converted into 162,854 shares of ATI Common Stock. In May 1996, the Company
completed an offering of 1,700,000 shares of its Class A Common Stock resulting
in net proceeds of approximately $19.9 million. In August 1996, the Company
completed a private placement
 
                                       23
<PAGE>   25
 
of 100,000 shares of its Series B Convertible Preferred Stock, resulting in net
proceeds to the Company of $9.4 million. In October 1996, the Company completed
a private placement of 150,000 shares of its Series B Convertible Preferred
Stock, resulting in net proceeds to the Company of $14.3 million. During 1996,
the Company also completed the sale of wireless cable systems in St. James,
Minnesota and Yankton, South Dakota and wireless cable channel assets in Sioux
Falls, South Dakota for cash consideration totaling $3.1 million (of which
approximately $355,000 is being held in escrow pending completion of certain
post closing events).
 
     Under the terms of a Supplemental Indenture dated August 10, 1995,
governing the Company's Senior Discount Notes due 2004 (the "2004 Notes"), the
yield to maturity of the 2004 Notes was to be adjusted to 15 1/2% per annum
(from 14 1/2% per annum) if the Company did not, between August 10, 1995 and
November 10, 1996, issue equity securities having a value at the time of
issuance of at least $50.0 million in the aggregate. Subsequent to August 10,
1995, the Company issued equity securities which had an aggregate value at the
time of issuance in excess of $50.0 million. These issuances satisfied the
condition set forth in the Supplemental Indenture. Accordingly, the yield to
maturity of the 2004 Notes will remain at 14 1/2%.
 
  STRATEGIC RELATIONSHIP OBJECTIVES
 
     As described above, the Company will require significant additional capital
to fully implement its revised business strategy (including costs associated
with the provision of digital video service in certain of its Developed Markets
and the introduction of other digital wireless services such as high-speed
Internet access and telephony). To meet such capital requirements, the Company
is pursuing opportunities to enter into strategic relationships or transactions
with other providers of telecommunications services. Such relationships or
transactions could involve, among other things, joint ventures, sales or
exchanges of stock or assets, or loans to or investments in the Company by
strategic partners. As of the date of this Report, other than the BellSouth
Transaction, the Company has not reached any agreements or understandings with
respect to such relationships or transactions and there can be no assurance that
any such agreements or understandings will be reached.
 
  CREDIT FACILITIES
 
     Credit Facility
 
     On February 26, 1997, the Company entered into a $17.0 million credit
facility the ("Credit Facility") with Banque Indosuez, New York Branch (the
"Bank"). Proceeds of the Credit Facility are to be used to repay a portion of
the Company's existing debt, for capital expenditures, to complete certain
pending acquisitions of wireless cable channel rights, and for working capital
and other general corporate purposes.
 
     The term of the Credit Facility is up to twelve months. The loan must be
repaid earlier than the specified termination date and certain mandatory
prepayments must be made with proceeds from debt issuances or certain asset
sales, including the BellSouth Transaction. The Credit Facility bears interest
at a rate of 12.5%, which rate shall increase by 0.50% per quarter. Borrowings
under the Credit Facility are secured by a security interest in favor of the
Bank in substantially all of the assets of ATI and its subsidiaries. The Credit
Facility is further secured by a pledge of the stock of substantially all of
ATI's subsidiaries as well as a pledge of the note due to the Company from its
Fresno subsidiary under the Fresno Facility (as defined herein).
 
     The Company paid the Bank a commitment fee of $340,000. At closing, the
Company paid an additional fee of $340,000 and reimbursed the Bank for its out
of pocket expenses incurred in conjunction with the making of the loan. During
the term of the Credit Facility, the Company is required to pay to the Bank a
commitment commission on the unused loan balance at the annual rate of 0.50%.
 
     At closing, the Company also delivered 4,500 bond appreciation rights
("BARs") and an option to exercise 141,667 debt warrants or 141,667 equity
warrants. The debt warrants give the holder the right to increase the principal
amount of the loan by $6.00 per warrant, or the right to require the Company to
purchase the debt warrant for $6.00 per warrant. The debt warrants are
exercisable or puttable during a five-day period beginning on the earlier of one
year from the date of issuance, or notice that payment in full of
 
                                       24
<PAGE>   26
 
the Credit Facility has occurred or will occur shortly. The equity warrants give
the holder the right to purchase up to 141,667 shares of the Company's Class A
Common Stock for a price of $3.281 per share. Pursuant to the option agreement
relating to the warrants, the equity warrants become exercisable only to the
extent that the holder elects not to exercise or put the debt warrants or, if
the holder elects to put the debt warrants to the Company, the Company fails to
make payment therefor within the time required. Amounts payable in connection
with the BARs are based upon the appreciation in price of $4.5 million face
value of the Company's 2004 Notes. The BARs are exercisable after the earlier of
June 15, 1999 or the occurrence of an Event of Default under the 2004 Notes. The
payment due upon exercise of each BAR is equal to the market price of the 2004
Notes on the closing date less $290. The net value of the BARs is payable to
holders of the BARs in cash. The Company has deposited $1.0 million in escrow to
satisfy certain interest obligations under the Credit Facility.
 
     Fresno Facility
 
     During 1996, the Fresno Partnership maintained a revolving credit facility
(the "Fresno Facility") with a bank that provided for borrowings for the Fresno,
Visalia and Merced systems. However, no amounts were available for borrowing
under such facility as of December 31, 1996. Effective June 30, 1996, the Fresno
Facility was amended (the "Amended Agreement") to, among other things (i) permit
the incurrence by the Fresno Partnership of up to $2.3 million in subordinated
debt due ATI; (ii) permit the payment to ATI by the Fresno Partnership of a loan
fee of up to $23,000; and (iii) modify certain of the financial and other
operating covenants specified in the original agreement. In addition, past
violations of certain financial and other operating covenants associated with
the Fresno Facility were waived by the bank. In exchange for the bank's entering
into the Amended Agreement, the Fresno Partnership agreed to cause the bank's
participation in the Fresno Facility to be eliminated by March 31, 1997, through
prepayment by the Fresno Partnership of all amounts due, assignment of the
bank's participation to a third party lender or lenders (including ATI), or some
combination of the foregoing. In connection therewith, as of December 31, 1996
ATI had purchased, in the aggregate, a $5.5 million participation in the Fresno
Facility from the bank. In February 1997, ATI purchased the remaining $3.0
million participation in the Fresno Facility from the bank. As a result, the
Fresno Facility is now an obligation of the Fresno Partnership to ATI. The
Fresno Facility contains various financial and other restrictive covenants that,
among other things, prohibit the payment of dividends. As of December 31, 1996,
the Fresno Partnership was not in compliance with certain of the restrictive
covenants contained in the Fresno Facility. Outstanding borrowings under the
Fresno Facility bear interest at the banks' prime rate plus 2.25% (10.5% at
December 31, 1996). Interest expense relating to the Fresno Facility during the
year ended December 31, 1996 totaled $763,000. The Fresno Facility is secured by
the assets of the Fresno, Visalia and Merced systems.
 
  OTHER LIQUIDITY AND CAPITAL RESOURCES REQUIREMENTS AND LIMITATIONS
 
     As a result of certain limitations contained in the Indentures (the
"Indentures") relating to the 2004 Notes and the Company's 14.5% Senior Discount
Notes due 2005 (the "2005 Notes"), the Company's total borrowing capacity
outside the 2004 Notes and the 2005 Notes is currently limited to $17.5 million
and its additional borrowing capacity is currently limited to approximately $8.2
million. The Company expects that it will utilize the Credit Facility to borrow
all amounts that it is permitted to borrow under the terms of the Indentures.
Thus, the Company does not expect to be able to raise additional debt capital in
the foreseeable future. Moreover, under current market conditions, the Company
does not expect to be able to raise additional capital by issuing equity
securities. In the future, the issuance of moderate amounts of certain types of
new equity could, under Section 382 of the Internal Revenue Code, require the
Company to pay income taxes on gains received on asset sales because of the
Company's inability to fully offset such gains against net operating loss
carryforwards.
 
     The Company has taken certain actions aimed at reducing its costs and
conserving its capital, including reductions in the size of its workforce and
decreases in capital expenditures and discretionary expenses. As a result of
these actions, the Company currently expects that its existing cash and
investment balances, proceeds from the Credit Facility, and cash generated from
operations will be sufficient to finance its operations during
 
                                       25
<PAGE>   27
 
1997. Thereafter, additional financing will be required. If the Company's
capital resources are not sufficient to finance its operations, either in 1997
or thereafter, the Company will be required to curtail its operations and
development plans, which curtailment could involve, among other things, a
complete cessation of new customer additions. If the BellSouth Transaction or
any strategic relationships or transactions with other providers of
telecommunications services are consummated, the proceeds therefrom will provide
further resources to help finance the Company's operations and development
plans.
 
     Historically, the Company has generated operating and net losses on a
consolidated basis and can be expected to do so for the foreseeable future. Such
losses may increase as the Company's analog subscriber base declines, unless and
until the Company is able to successfully introduce other revenue-producing
wireless services. As a result of its history of net losses, the Company
currently has a negative tangible net worth and expects that negative
stockholders' equity will result before March 31, 1997. A negative tangible net
worth or stockholders' equity position has significant implications, including,
but not limited to, non-compliance with Nasdaq National Market listing criteria.
If the Company ceases to satisfy the Nasdaq National Market listing criteria,
its Class A Common Stock will be subject to delisting, unless an exception is
granted by the National Association of Securities Dealers. If an exception is
not granted, trading in the Company's Class A Common Stock would thereafter be
conducted in the over-the-counter market. Consequently, it would be more
difficult to dispose of, or to obtain accurate quotations as to the price of the
Class A Common Stock. Delisting could result in a decline in the trading market
for the Class A Common Stock, which could potentially depress the Company's
stock and bond prices, among other things. The Company believes that the
proceeds of the BellSouth Transaction, if consummated, will help bring the
Company into compliance with the Nasdaq National Market listing criteria.
However, there can be no assurance that the Company will be able to achieve or
sustain positive tangible net worth, stockholders' equity or net income in the
future.
 
RESULTS OF OPERATIONS
 
  Fiscal Year 1996 Compared to Fiscal Year 1995
 
     Service revenues increased $14.5 million, or 31.4%, during the year ended
December 31, 1996 to $60.7 million, as compared to $46.2 million during the year
ended December 31, 1995. This increase resulted primarily from the addition of
new subscribers. Subscriber increases resulted primarily from the 1996
acquisition of subscription television subscribers in Cincinnati, the 1995
acquisitions of the Redding, Las Vegas and Rapid City systems, and the
completion of construction and commencement of operation of systems in Yuba City
and Lincoln during 1995 and Anchorage and Portland during 1996. Service price
increases contributed only a small portion of the aggregate increase in service
revenues. The number of subscribers to the Company's wireless cable systems
increased to 179,800 at December 31, 1996, compared to 173,700 at December 31,
1995.
 
     On a "same system" basis (comparing systems that were operational for all
of each of the years ended December 31, 1996 and 1995), service revenues
increased $6.7 million, or 16.9%, to $46.3 million during the year ended
December 31, 1996, as compared to $39.6 million for the year ended December 31,
1995. Same systems during these periods totaled 24 systems. The average number
of same-system subscribers increased approximately 13.2% during the year ended
December 31, 1996, as compared to the year ended December 31, 1995.
 
     Installation revenues totaled $1.3 million in each of the years ended
December 31, 1996 and 1995. The number of installations completed during the
year ended December 31, 1996 decreased approximately 22.0% as compared to the
year ended December 31, 1995. However, this decrease was fully offset by less
discounting of installation rates. Installation rates vary widely by system
based upon competitive conditions. The Company occasionally reduces installation
charges as part of selected promotional campaigns.
 
     Operating expenses, principally programming, site costs and other direct
expenses, aggregated $36.0 million (or 58.1% of total revenues) during the year
ended December 31, 1996, compared to $26.0 million (or 54.8% of total revenues)
during the year ended December 31, 1995. The increase of $10.0 million was
primarily the result of additional systems and subscribers, as well as increased
programming costs for additions to channel line-ups and increased pay-per-view
offerings in various systems.
 
                                       26
<PAGE>   28
 
     Marketing and selling expenses totaled $7.4 million (or 12.0% of total
revenues) during the year ended December 31, 1996, compared to $8.7 million (or
18.3% of total revenues) during the year ended December 31, 1995. The decrease
in such expenses of $1.3 million resulted from decreased marketing activity, net
of marketing expenses associated with the addition of new systems. During the
year ended December 31, 1996, general and administrative expenses totaled $18.8
million (or 30.4% of total revenues), a $400,000 decrease over the year ended
December 31, 1995 ($19.2 million or 40.4% of total revenues). The decrease in
general and administrative expenses principally resulted from reductions in the
number of employees and certain non-recurring expenses totaling $1.1 million
recognized during 1995 relating to the recognition of certain lease termination
and severance costs. Such decreases were partially offset by increased general
and administrative expenses associated with the addition of new systems.
 
     In the fourth quarter of 1996, after considering the Company's 1996
operating loss, its history of such operating losses and the expectation of
future operating losses, changes in the Company's strategic direction,
developments relating to previously scheduled industry transactions and
ventures, and the industry factors described above under
"Business -- Regulation" and "Business -- Competition", the Company evaluated
the ongoing value of its wireless cable business in each Developed Market. Based
on this valuation, the Company determined that assets with a carrying value of
$95.1 million were impaired according to the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and wrote
down the carrying value of such assets by $21.3 million to their fair value. An
evaluation was made for each of the Company's Developed Markets individually,
not for the Company's markets as a whole. Fair value was based on recent
transactions in the wireless cable industry. In addition, during the fourth
quarter of 1996, the Company prospectively revised the lives of its subscriber
premise equipment from seven years to three or four years.
 
     The Company's loss from operations was $66.2 million during the year ended
December 31, 1996, as compared to $35.7 million during the year ended December
31, 1995. The increase in the loss from operations of $30.5 million during 1996
resulted primarily from the impairment loss of $21.3 million described above and
increased depreciation and amortization expense. Depreciation and amortization
expense (principally depreciation of property and equipment and amortization of
deferred license and leased license acquisition costs, goodwill and covenants
not-to-compete) increased $15.4 million in the year ended December 31, 1996,
compared to the year ended December 31, 1995, due to increases in deferred
license costs, goodwill and subscriber equipment resulting from the acquisition
and addition of new systems and the addition of equipment installed in new
subscribers' homes.
 
     Interest expense increased $12.8 million during the year ended December 31,
1996 to $37.3 million, as compared to $24.5 million during the year ended
December 31, 1995. The increase in interest expense primarily resulted from
noncash interest charges associated with the Company's 2004 Notes and 2005
Notes. Interest expense associated with the 2004 Notes also increased due to an
increase in the interest rate on the 2004 Notes from 12.5% to 14.5% effected in
August 1995 in conjunction with the Company's offering of the 2005 Notes.
 
     Loss before interest, taxes, depreciation and amortization and the
impairment write down described above totaled $253,000 for the year ended
December 31, 1996, as compared to a loss before interest, taxes, depreciation,
and amortization of $6.4 million during the year ended December 31, 1995.
 
  Fiscal Year 1995 Compared to Fiscal Year 1994
 
     Service revenues increased $25.5 million, or 122.5%, during the year ended
December 31, 1995 to $46.2 million, as compared to $20.7 million during the year
ended December 31, 1994. This increase resulted primarily from the addition of
new subscribers. Subscriber increases resulted not only from the 1994
acquisitions of the Bend, FEN/WEN Group, Oklahoma City, Wichita and Lakeland
systems, the 1995 acquisitions of the Medford, Sheridan, Fresno, Visalia,
Merced, Redding, Las Vegas and Rapid City systems, and the commencement of
operations in Columbus, Youngstown, Jacksonville, Lansing and Monterey during
1994 and Ft. Collins, Greeley, Yuba City, and Lincoln during 1995, but also from
increased marketing and promotional efforts in all markets. Service price
increases contributed only a small portion of the aggregate
 
                                       27
<PAGE>   29
 
increase in service revenues. The number of subscribers to the Company's
wireless cable systems increased to approximately 173,700 at December 31, 1995
compared to approximately 106,500 at December 31, 1994.
 
     On a "same system" basis (comparing systems that were operational for all
of each of the years ended December 31, 1994 and 1995), service revenues
increased $8.0 million, or 57.5%, to $21.9 million for the year ended December
31, 1995, as compared to $13.9 million for the year ended December 31, 1994.
This increase resulted primarily from the addition of new subscribers. Same
systems during this period consisted of the Company's Colorado Springs, Orlando,
Ft. Myers, Billings, Toledo, Daytona Beach, Michiana, Denver, Little Rock and
Louisville systems. The number of subscribers in these systems increased
approximately 40.7% during the year ended December 31, 1995.
 
     Installation revenues for the year ended December 31, 1995 totaled $1.3
million, as compared to $871,000 during the year ended December 31, 1994. The
increase in installation revenues of $441,000, or 50.6%, was primarily the net
result of more subscriber installations in each system, less the effect of lower
per-subscriber installation charges in certain systems.
 
     Operating expenses aggregated $26.0 million (or 54.8% of total revenues)
during the year ended December 31, 1995, as compared to $13.1 million (or 60.7%
of total revenues) during the year ended December 31, 1994. The increase of
$12.9 million was primarily the result of additional systems and subscribers as
well as increased programming costs from additions to channel line-ups in
various systems. In 1995, the Company began capitalizing all subscriber
installation costs. Previously, the Company expensed an amount equal to
installation revenues and capitalized installation costs in excess of
installation revenues. This change in accounting method was effected to better
match installation costs with related subscriber service revenues. Operating
expenses for the year ended December 31, 1994 include installation costs which
were expensed of approximately $871,000.
 
     Marketing and selling expenses totaled $8.7 million (or 18.3% of total
revenues) during the year ended December 31, 1995, as compared to $4.1 million
(or 18.8% of total revenues) during the year ended December 31, 1994. The
increase in such expenses of $4.6 million resulted primarily from the addition
of new systems, intensified sales and marketing efforts (including the
introduction of the WANTV(SM) brand name in certain of the Company's systems),
and from increased media spending. During 1995, general and administrative
expenses totaled $19.2 million (or 40.4% of total revenues), a $9.8 million
increase over the year ended December 31, 1994 (43.6% of total revenues). This
increase resulted not only from the addition of new systems and increased
corporate and regional overhead expenses, but also from the recognition of
severance costs totaling $711,000 and lease termination costs of $420,000
related to the relocation of the Company's corporate headquarters to larger
office space in Colorado Springs.
 
     The Company's loss from operations was $35.7 million during the year ended
December 31, 1995, as compared to $17.0 million during the year ended December
31, 1994. The increase in the loss from operations of $18.7 million resulted
from increased depreciation and amortization expense, as well as from the
increases in marketing and general and administrative expenses described above.
Depreciation and amortization expense (principally depreciation of property and
equipment and amortization of deferred license and leased license acquisition
costs, goodwill and covenants not-to-compete) increased $17.2 million due to
increases in deferred license costs, goodwill and subscriber equipment resulting
from the acquisition and addition of new systems and the addition of equipment
installed in new subscribers' homes. Approximately $644,000 of the increase in
depreciation and amortization expenses was attributable to the change in
accounting for installation costs previously described.
 
     Interest expense increased $15.2 million during the year ended December 31,
1995 to $24.5 million, as compared to $9.3 million during the year ended
December 31, 1994. The increase in interest expense primarily resulted from
noncash interest charges associated with the 2004 Notes and 2005 Notes and
additional borrowings under, and higher interest rates associated with, the
Company's various revolving credit facilities. The Company's loss before
interest, taxes, depreciation and amortization totaled $6.4 million for the year
ended December 31, 1995, as compared to $5.0 million during the year ended
December 31, 1994 (a pro forma amount of $4.1 million assuming the change in
accounting method was applied retroactively). The increase in the loss before
interest, taxes, depreciation and amortization of $1.4 million primarily
resulted from
 
                                       28
<PAGE>   30
 
proportionately larger start-up losses of the Company's systems that commenced
operation during 1994, pre-opening costs and start-up losses of the Company's
systems that commenced operations during 1995, increased marketing expenses, and
increased corporate overhead related to significant system development and
market expansion activities. Such increases were partially offset by improved
operating results from growth in the Company's other systems. The Medford,
Sheridan, Redding, Fresno, Visalia, Merced, Las Vegas and Rapid City systems
acquired during 1995 generated, in the aggregate, earnings before interest,
taxes, depreciation and amortization of $1.3 million. Excluding these
acquisitions, the Company's loss before interest, taxes, depreciation and
amortization for the year ended December 31, 1995 approximated $7.7 million.
 
INCOME TAX MATTERS
 
     ATI and its subsidiaries file a consolidated federal tax return. The
Company has had no state or federal income tax expense since inception. As of
December 31, 1996, the Company had approximately $156.6 million in net operating
loss carryforwards for tax purposes, expiring through 2011. Section 382 of the
Internal Revenue Code limits the amount of loss carryforwards that a company can
use to offset future income upon the occurrence of certain changes in ownership.
The issuance of moderate amounts of certain types of new equity could limit the
Company's ability to use net operating losses to offset future gains from the
sale of assets, thus requiring the Company to pay income taxes on gains received
in such asset sales.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In March 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recognized for long-lived assets used in operations when indicators of
impairment are present and the future undiscounted cash flows are not sufficient
to recover the assets' carrying amount. The resultant impairment loss is
measured by comparing the fair value of the asset to its carrying amount. The
Company adopted SFAS No. 121 in the first quarter of 1996. SFAS No. 121 did not
have a material effect on the Company's financial position or results of
operations at the time of adoption. As previously described, during the fourth
quarter of 1996, the Company determined that indicators of impairment were
present. As a result, a charge of $21.3 million was recognized to write down the
carrying value of certain assets to their fair value.
 
     The Company follows the guidelines established by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. In October 1995,
the FASB issued SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation," which established an alternative method of expense recognition
for stock-based compensation awards to employees based on fair values. The
Company elected not to adopt the statement for expense recognition purposes.
 
     On March 3, 1997, the FASB released SFAS No. 128, "Earnings Per Share."
SFAS No. 128 requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all periods presented. Basic earnings
per share excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for 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 or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted earnings per share
is computed similarly to fully diluted earnings per share pursuant to Accounting
Principles Bulletin No. 15. SFAS No. 128 is effective for fiscal years ending
after December 15, 1997, and when adopted, it will require restatement of prior
years' earnings per share.
 
     Since the effect of outstanding options is antidilutive, they have been
excluded from the Company's computation of net loss per share. Accordingly,
management does not believe that SFAS No. 128 will have an impact upon
historical net loss per share as reported.
 
                                       29
<PAGE>   31
 
INFLATION
 
     Inflation has not affected the Company's operations significantly during
the past three years. The Company believes that its ability to increase charges
for services in future periods will depend primarily on competitive pressures.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Company's Consolidated Financial Statements included in this Report at
pages F-1 through F-25 are incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this Item with respect to the identity and
business experience of the Company's Directors is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 24,
1997, under the caption "Election of Directors," which information is hereby
incorporated herein by reference.
 
     The information required by this Item with respect to the identity and
business experience of the Company's Executive Officers is set forth on page 18
of this Report under the Caption "Executive Officers of the Registrant."
 
     The information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is set forth in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 24, 1997, under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance," which information is hereby incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 1997,
under the captions "Compensation and Other Information Concerning Executive
Officers," and "Board of Directors Interlocks and Insider Participation," which
information is hereby incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 1997,
under the caption "Stock Ownership of Certain Beneficial Owners and Management,"
which information is hereby incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 1997,
under the caption "Certain Relationships and Related Transactions," which
information is hereby incorporated herein by reference.
 
                                       30
<PAGE>   32
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) The following documents are filed as part of this Report:
 
  (1) Financial Statements
 
<TABLE>
<CAPTION>
                                                                    PAGE
                                                                    ----
      <S>                                                           <C>
      Report of Independent Public Accountants....................  F-2
      Consolidated Balance Sheets as of December 31, 1995 and
        1996......................................................  F-3
      Consolidated Statements of Operations for the years ended
        December 31, 1994, 1995 and 1996..........................  F-4
      Consolidated Statements of Stockholders' Equity for the
        years ended December 31, 1994, 1995 and 1996..............  F-5
      Consolidated Statements of Cash Flows for the years ended
        December 31, 1994, 1995 and 1996..........................  F-6
      Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
  (2) Exhibits
 
        3.1  -- Certificate of Designation for Series B Convertible Preferred
                Stock of American Telecasting, Inc. dated August 6, 1996
                (incorporated by reference to Exhibit 4.1 to the Company's Form
                8-K filed on August 7, 1996).
 
        3.2  -- Amendment to Restated Certificate of Incorporation of American
                Telecasting, Inc. dated April 24, 1996 (incorporated by
                reference to Exhibit 3.1(i) to the Company's Quarterly Report on
                10-Q for the period ended June 30, 1996).
 
        3.3  -- Restated Certificate of Incorporation of American Telecasting,
                Inc., dated April 27, 1995 (incorporated by reference to Exhibit
                3.1 to the Company's Quarterly Report on Form 10-Q for the
                period ended March 31, 1995).
 
        3.4  -- Amended and Restated By-Laws of American Telecasting, Inc.
                (incorporated by reference to Exhibit 3.2 to the Company's
                Quarterly Report on Form 10-Q for the period ended March 31,
                1995).
 
        4.1  -- Specimen Common Stock Certificate (incorporated by reference to
                Exhibit 2 to the Company's Registration Statement on Form 8-A
                filed on December 6, 1993).
 
        4.2  -- Specimen Class A Common Stock Certificate (incorporated by
                reference to Exhibit 4.2 to the Company's Registration Statement
                on Form S-3 filed on April 26, 1996).
 
        4.3  -- Specimen Class B Common Stock Certificate.
 
        4.4  -- Specimen Series B Convertible Preferred Stock Certificate.
 
        4.5  -- Supplemental Indenture dated as of August 10, 1995 between
                American Telecasting, Inc. and First Trust National Association,
                Trustee, supplementing and amending the Indenture dated as of
                June 23, 1994 (incorporated by reference to Exhibit 4.1 to the
                Company's Quarterly Report on Form 10-Q for the period ended
                June 30, 1995).
 
        4.6  -- Indenture dated as of June 23, 1994 between American
                Telecasting, Inc. and First Trust National Association, Trustee
                (incorporated by reference to Exhibit 4.2 to the Company's
                Annual Report on Form 10-K for the period ended December 31,
                1994).
 
        4.7  -- Form of Senior Discount Note due 2004 (included within Exhibits
                4.5 and 4.6).
 
                                       31
<PAGE>   33
 
        4.8  -- Supplemental Warrant Agreement dated as of August 10, 1995
                between American Telecasting, Inc. and First Union National Bank
                of North Carolina, as warrant agent (incorporated by reference
                to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
                for the period ended June 30, 1995).
 
        4.9  -- Warrant Agreement dated as of June 23, 1994 between American
                Telecasting, Inc. and First Union National Bank of North
                Carolina, as warrant agent (incorporated by reference to Exhibit
                4.4 to the Company's Annual Report on Form 10-K for the period
                ended December 31, 1994).
 
        4.10 -- Form of Warrant (included within Exhibits 4.8 and 4.9).
 
        4.11 -- Collateral and Disbursement Agreement dated as of June 23, 1994
                between First Trust National Association and American
                Telecasting, Inc. (incorporated by reference to Exhibit 4.3 to
                the Company's Annual Report on Form 10-K for the period ended
                December 31, 1994).
 
        4.12 -- Indenture dated as of August 10, 1995 between American
                Telecasting, Inc., as Issuer, and First Trust National
                Association, as Trustee (incorporated by reference to Exhibit
                4.3 to the Company's Quarterly Report on Form 10-Q for the
                period ended June 30, 1995).
 
        4.13 -- Form of Senior Discount Note due 2005 (included within Exhibit
                4.12).
 
        4.14 -- Warrant Agreement dated as of August 10, 1995 between American
                Telecasting, Inc. and First Union National Bank of North
                Carolina, as warrant agent (incorporated by reference to Exhibit
                4.5 to the Company's Quarterly Report on Form 10-Q for the
                period ended June 30, 1995).
 
        4.15 -- Form of Warrant (included within Exhibit 4.14).
 
        4.16 -- Registration Rights Agreement dated as of August 10, 1995 by and
                among American Telecasting, Inc. and Dillon Read & Co., Inc. and
                CS First Boston Corporation (incorporated by reference to
                Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for
                the period ended June 30, 1995).
 
       10.1  -- Stock Purchase and Sale Agreement dated as of June 7, 1995 by
                and between Bruce Merrill and Virginia Merrill and their
                successors in trust, as trustees of the Merrill Revocable Trust
                dated August 20, 1982 and American Telecasting, Inc.
                (incorporated by reference to Exhibit 10.1 to the Company's
                Quarterly Report on Form 10-Q for the period ended June 30,
                1995).
 
       10.2  -- Binding Letter Agreement dated as of July 6, 1995 by and between
                Red Rock Communications, Inc. and American Telecasting, Inc.
                (incorporated by reference to Exhibit 10.2 to the Company's
                Quarterly Report on Form 10-Q for the period ended June 30,
                1995).
 
       10.3  -- Management Agreement dated as of February 3, 1996 between Fresno
                MMDS Associates and American Telecasting Development, Inc.
                (incorporated by reference to Exhibit 10.12 to the Company's
                Annual Report on Form 10-K for the year ended December 31,
                1995).
 
       10.4  -- Standard Commercial Lease Agreement, dated as of September 18,
                1995, between Tech Center VI Associates, L.P., as Lessor, and
                American Telecasting, Inc., as Lessee (incorporated by reference
                to Exhibit 10.13 to the Company's Annual Report on Form 10-K for
                the year ended December 31, 1995).
 
       10.5  -- Employment Agreement effective as of January 4, 1996 between
                American Telecasting, Inc. and Robert D. Hostetler (incorporated
                by reference to Exhibit 10.1 to the Company's Quarterly Report
                on Form 10-Q for the period ended March 31, 1996).
 
                                       32
<PAGE>   34
 
       10.6  -- Employment Agreement dated August 10, 1995 between American
                Telecasting, Inc. and David K. Sentman (incorporated by
                reference to Exhibit 10 to the Company's Quarterly Report on
                Form 10-Q for the period ended September 30, 1995).
 
       10.7  -- First Amendment to Amended and Restated Revolving Credit
                Agreement dated as of June 30, 1996 among Fresno MMDS
                Associates, First Union National Bank of North Carolina, Fresno
                Telsat, Inc. and Fresno Wireless Cable Television, Inc.; related
                Subordination Agreement dated as of June 30, 1996 by American
                Telecasting, Inc. and Fresno MMDS Associates in favor of First
                Union National Bank of North Carolina; related Assignment
                Acceptance and Intercreditor Agreement dated as of July 18, 1996
                among First Union National Bank of North Carolina as agent and
                Fresno MMDS Associates (incorporated by reference to Exhibit
                10.4 to the Company's Quarterly Report on Form 10-Q for the
                period ended June 30, 1996).
 
       10.8  -- Side agreement between Fresno Telsat, Inc. and American
                Telecasting, Inc. dated July 18, 1996 (incorporated by reference
                to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
                for the period ended June 30, 1996).
 
       10.9  -- Amended and Restated Revolving Credit Agreement between Fresno
                MMDS Associates, First Union National Bank of North Carolina,
                Fresno Telsat, Inc. and Fresno Wireless Cable Television, Inc.
                dated as of September 30, 1994; related Amended and Restated
                Revolving Credit Note by Fresno MMDS Associates in favor of
                First Union National Bank of North Carolina; related Pledge and
                Security Agreement dated as of September 30, 1994 between Fresno
                MMDS Associates and First Union National Bank of North Carolina;
                related Collateral Assignment and Security Agreement dated as of
                September 30, 1994 by and between FMA Licensee Subsidiary, Inc.
                and First Union National Bank of North Carolina (incorporated by
                reference to Exhibit 10.21 to the Company's Form S-4
                Registration Statement filed on September 22, 1995).
 
       10.10 -- Credit Agreement dated as of February 26, 1997, among American
                Telecasting, Inc. and Banque Indosuez, New York Branch, as
                Agent, and the lending institutions listed therein (the
                "Banks"); related Option Agreement dated as of February 26, 1997
                among American Telecasting, Inc. and Indosuez CM II, Inc.;
                related Bond Appreciation Rights Certificate dated February 26,
                1997; related Securities Pledge Agreement dated as of February
                26, 1997 in favor of Banque Indosuez, New York Branch, as
                pledgee, assignee and secured party, in its capacity as
                collateral agent for the Banks; related Securities Pledge
                Agreement dated as of February 26, 1997 made by American
                Telecasting of Green Bay, Inc. in favor of Banque Indosuez, New
                York Branch, as pledgee, assignee and secured party, in its
                capacity as collateral agent for the Banks; related General
                Security Agreement dated as of February 26, 1997 made by certain
                subsidiaries of American Telecasting, Inc. in favor of Banque
                Indosuez, New York Branch, as pledgee, assignee and secured
                party, in its capacity as collateral agent for the Banks;
                related Registration Rights Agreement dated as of February 26,
                1997 among American Telecasting, Inc. and the holders of the
                warrants to purchase an aggregate of 141,667 shares of the Class
                A Common Stock of American Telecasting, Inc.; related Securities
                Pledge Agreement dated as of February 26, 1997 made by American
                Telecasting, Inc. in favor of Banque Indosuez, New York Branch,
                as pledgee, assignee and secured party, in its capacity as
                collateral agent for the Banks.
 
       10.11 -- Form of Underwriting Agreement dated as of May 21, 1996 among
                Alex. Brown & Sons Incorporated, Dillon, Read & Co. Inc., and
                American Telecasting, Inc. (incorporated by reference to Exhibit
                1.1 to the Company's Registration Statement on Form S-3 filed on
                April 10, 1996).
 
                                       33
<PAGE>   35
 
       10.12 -- Stock Purchase Agreement dated as of August 6, 1996 by and among
                American Telecasting, Inc., Museum Assets Ltd., and Ashline,
                Ltd. (incorporated by reference to Exhibit 10.2 to the Company's
                Quarterly Report on Form 10-Q for the period ended September 30,
                1996).
 
       10.13 -- Stock Purchase Agreement dated October 25, 1996 by and among
                American Telecasting, Inc., Wartone Property Holdings, Ltd.,
                Harleko Ltd., and Tarian Properties, Ltd. (incorporated by
                reference to Exhibit 10.2 to the Company's Quarterly Report on
                Form 10-Q for the period ended September 30, 1996).
 
       10.14 -- Agreement for Purchase and Sale of Assets dated June 28, 1996
                among Novner Enterprises, Inc., Alvin Novick, Phyllis Novick,
                American Telecasting of Cincinnati, Inc. and American
                Telecasting, Inc. (incorporated by reference to Exhibit 10.1 to
                the Company's Quarterly Report on Form 10-Q for the period ended
                June 30, 1996).
 
       10.15 -- Management Agreement dated as of June 28, 1996 between Novner
                Enterprises, Inc. and American Telecasting of Cincinnati, Inc.
                (incorporated by reference to Exhibit 10.2 to the Company's
                Quarterly Report on Form 10-Q for the period ended June 30,
                1996).
 
       10.16 -- Agreement for Exchange of Assets dated July 10, 1996 among
                Heartland Wireless Communications, Inc., Heartland Wireless
                South Dakota Properties, Inc., Heartland Wireless Florida
                Properties, Inc. and American Telecasting, Inc. (incorporated by
                reference to Exhibit 10.3 to the Company's Quarterly Report on
                Form 10-Q for the period ended June 30, 1996).
 
       10.17 -- American Telecasting, Inc. 1990 Stock Option Program, As Amended
                (Effective April 25, 1996) (incorporated by reference to Exhibit
                10.6 to the Company's Quarterly Report on Form 10-Q for the
                period ended June 30, 1996).
 
       10.18 -- Form of Registration Rights Agreement between American
                Telecasting, Inc. and Stockholder (incorporated by reference to
                Exhibit 10.40 to the Company's Form S-1 Registration Statement
                filed on October 8, 1993).
 
       11.1  -- Statement regarding computation of per share earnings.
 
       21.1  -- Subsidiaries of American Telecasting, Inc.
 
       23.1  -- Consent of Independent Public Accountants.
 
       27.1  -- Financial Data Schedule.
 
(b) Reports on Form 8-K
 
     No reports on Form 8-K were filed during the quarter ended December 31,
1996.
 
                                       34
<PAGE>   36
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
CONSOLIDATED FINANCIAL STATEMENTS:
 
  Report of Independent Public Accountants..................  F-2
 
  Consolidated Balance Sheets as of December 31, 1995 and
     1996...................................................  F-3
 
  Consolidated Statements of Operations for the years ended
     December 31, 1994, 1995 and 1996.......................  F-4
 
  Consolidated Statements of Stockholders' Equity for the
     years ended December 31, 1994, 1995 and 1996...........  F-5
 
  Consolidated Statements of Cash Flows for the years ended
     December 31, 1994, 1995 and 1996.......................  F-6
 
  Notes to Consolidated Financial Statements................  F-7
</TABLE>
 
                                       F-1
<PAGE>   37
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To American Telecasting, Inc.:
 
     We have audited the accompanying consolidated balance sheets of American
Telecasting, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Telecasting, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
 
                                         /s/ ARTHUR ANDERSEN LLP
 
Washington, D.C.
February 21, 1997 (except with respect to the
  Facility and the BellSouth Transaction
  discussed in Notes 1 and 7, as to which
  the date is March 18, 1997)
 
                                       F-2
<PAGE>   38
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1995        1996
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................  $ 32,514    $ 18,476
  Trade accounts receivable, net of allowance for
     uncollectible accounts of $916 and $687,
     respectively...........................................     2,171       1,867
  Notes receivable from officers and employees..............       543         322
  Prepaid expenses and other current assets.................     2,331       2,468
                                                              --------    --------
          Total current assets..............................    37,559      23,133
Property and equipment, net.................................   112,377      99,271
Deferred license and leased license acquisition costs,
  net.......................................................   143,006     139,537
Goodwill, net...............................................    16,030      15,163
Deferred financing costs, net...............................     5,268       4,704
Other assets, net...........................................     2,809       1,764
                                                              --------    --------
          Total assets......................................  $317,049    $283,572
                                                              ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable and accrued expenses.....................  $ 20,003    $ 15,022
  Current portion of long-term obligations..................    11,062       5,852
  Customer deposits.........................................       605         397
                                                              --------    --------
          Total current liabilities.........................    31,670      21,271
Deferred income taxes.......................................     6,131       2,834
Long-term obligations, net of current portion:
  2004 Notes................................................   116,864     135,484
  2005 Notes................................................   100,262     116,480
  Notes payable.............................................     6,938       2,434
  Capital lease obligations.................................     1,432       1,053
  Minority interest and other...............................        16         903
                                                              --------    --------
          Total long-term obligations, net of current
            portion.........................................   225,512     256,354
                                                              --------    --------
          Total liabilities.................................   263,313     280,459
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity (Notes 2, 8 and 9):
  Preferred Stock, $.01 par value; 2,500,000 shares
     authorized, none issued and outstanding................        --          --
  Series B Convertible Preferred Stock, $.01 par value;
     500,000 shares authorized; 250,000 shares issued and
     110,000 shares outstanding.............................        --      13,237
  Class A Common Stock, $.01 par value; 30,000,000 shares
     authorized; 16,435,974 and 20,784,238 shares issued and
     outstanding, respectively..............................       164         208
  Class B Common Stock, $.01 par value; 10,000,000 shares
     authorized; no shares issued and outstanding...........        --          --
  Additional paid-in capital................................   135,364     176,091
  Common Stock warrants outstanding.........................    10,130      10,129
  Accumulated deficit.......................................   (91,922)   (196,552)
                                                              --------    --------
          Total stockholders' equity........................    53,736       3,113
                                                              --------    --------
          Total liabilities and stockholders' equity........  $317,049    $283,572
                                                              ========    ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-3
<PAGE>   39
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                          ---------------------------------------
                                                             1994          1995          1996
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
Revenues:
  Service and other.....................................  $    20,758   $    46,189   $    60,713
  Installation..........................................          871         1,312         1,319
                                                          -----------   -----------   -----------
Total revenues..........................................       21,629        47,501        62,032
Costs and Expenses:
  Operating.............................................       13,128        26,021        36,029
  Marketing.............................................        4,056         8,678         7,429
  General and administrative............................        9,430        19,192        18,827
  Depreciation and amortization.........................       12,032        29,276        44,665
  Impairment of wireless cable assets...................           --            --        21,271
                                                          -----------   -----------   -----------
Total costs and expenses................................       38,646        83,167       128,221
                                                          -----------   -----------   -----------
Loss from operations....................................      (17,017)      (35,666)      (66,189)
Interest expense........................................       (9,349)      (24,473)      (37,281)
Interest income.........................................        2,062         2,178         1,106
Other income (expense), net.............................           16            (5)          687
                                                          -----------   -----------   -----------
Loss before income tax benefit..........................      (24,288)      (57,966)     (101,677)
Income tax benefit......................................        8,810         2,270         3,297
                                                          -----------   -----------   -----------
Loss before extraordinary charge and cumulative effect
  of
  change in accounting for installation costs...........      (15,478)      (55,696)      (98,380)
Extraordinary charge on early retirement of debt........           --       (11,541)           --
Cumulative effect of change in accounting for
  installation
  costs, net of income taxes of $369 in 1995............           --           602            --
                                                          -----------   -----------   -----------
Net loss................................................      (15,478)      (66,635)      (98,380)
Dividend embedded in conversion of Series B Convertible
  Preferred Stock.......................................           --            --        (6,250)
                                                          -----------   -----------   -----------
Net loss applicable to Class A Common Stock.............  $   (15,478)  $   (66,635)  $  (104,630)
                                                          ===========   ===========   ===========
Net income (loss) per share (pro forma for 1994 -- see
  Note 2):
     Loss per share applicable to Class A Common Stock
       before extraordinary charge and cumulative effect
       of accounting change.............................  $     (1.07)  $     (3.49)  $     (5.78)
     Loss per share from extraordinary charge...........           --         (0.72)           --
     Income per share from cumulative effect of
       accounting change................................           --          0.04            --
                                                          -----------   -----------   -----------
     Net loss per share applicable to Class A Common
       Stock............................................  $     (1.07)  $     (4.17)  $     (5.78)
                                                          ===========   ===========   ===========
Weighted average number of shares outstanding...........   14,445,405    15,977,377    18,095,961
                                                          ===========   ===========   ===========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-4
<PAGE>   40
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                            CONVERTIBLE            CLASS A
                                          PREFERRED STOCK        COMMON STOCK      ADDITIONAL    COMMON
                                         ------------------   ------------------    PAID-IN      STOCK     ACCUMULATED
                                         SHARES   PAR VALUE   SHARES   PAR VALUE    CAPITAL     WARRANTS     DEFICIT      TOTAL
                                         ------   ---------   ------   ---------   ----------   --------   -----------   --------
<S>                                      <C>      <C>         <C>      <C>         <C>          <C>        <C>           <C>
Balance, December 31, 1993.............. 2,014    $     20    11,559     $115       $ 87,890    $   840     $  (9,809)   $ 79,056
  Conversion of Series A Convertible
    Preferred Stock..................... (2,014)       (20)   2,014        20             --         --            --          --
  Issuance of Class A Common Stock
    pursuant to initial public offering,
    net of stock issuance costs of
    $217................................    --          --      172         2          2,886         --            --       2,888
  Exercise of Class A Common Stock
    warrants............................    --          --      225         2          2,062       (828)           --       1,236
  Income tax benefit of deduction for
    income tax purposes on exercise of
    stock options.......................    --          --       --        --            491         --            --         491
  Exercise of Class A Common Stock
    options.............................    --          --       93         1            220         --            --         221
  Issuance of Class A Common Stock for
    acquisitions........................    --          --    1,186        12         19,875         --            --      19,887
  Issuance of Class A Common Stock
    warrants............................    --          --       --        --             --      5,490            --       5,490
  Deferred compensation pursuant to
    issuance of Class A Common Stock
    options.............................    --          --       --        --             52         --            --          52
  Net loss..............................    --          --       --        --             --         --       (15,478)    (15,478)
                                         ------   --------    ------     ----       --------    -------     ---------    --------
Balance, December 31, 1994..............    --          --    15,249      152        113,476      5,502       (25,287)     93,843
  Exercise of Class A Common Stock
    warrants............................    --          --        3        --             30        (12)           --          18
  Exercise of Class A Common Stock
    options.............................    --          --      176         2            491         --            --         493
  Issuance of Class A Common Stock for
    acquisitions........................    --          --    1,008        10         15,806         --            --      15,816
  Issuance of Class A Common Stock
    warrants............................    --          --       --        --             --     10,130            --      10,130
  Amendment of 1994 Warrants............    --          --       --        --          5,490     (5,490)           --          --
  Deferred compensation pursuant to
    issuance of Class A Common Stock
    options.............................    --          --       --        --             71         --            --          71
  Net loss..............................    --          --       --        --             --         --       (66,635)    (66,635)
                                         ------   --------    ------     ----       --------    -------     ---------    --------
Balance, December 31, 1995..............    --          --    16,436      164        135,364     10,130       (91,922)     53,736
  Exercise of Class A Common Stock
    warrants............................    --          --       62         1            172         (1)           --         172
  Exercise of Class A Common Stock
    options.............................    --          --       85         1            484         --            --         485
  Issuance of Class A Common Stock for
    acquisitions........................    --          --       64         1            706         --            --         707
Issuance of Class A Common Stock
  pursuant to public offering, net of
  issuance costs of $1,532..............    --          --    1,700        17         19,913         --            --      19,930
Issuance of Series B Convertible
  Preferred Stock, net of issuance costs
  of $1,233.............................   250      23,766       --        --             --         --            --      23,766
Dividend embedded in conversion of
  Series B Convertible Preferred
  Stock.................................    --       6,250       --        --             --         --        (6,250)         --
Conversion of Series B Convertible
  Preferred Stock.......................  (140)    (16,779)   2,274        23         16,860         --            --         104
Conversion of note payable..............    --          --      163         1          2,524         --            --       2,525
Deferred compensation pursuant to
  issuance of Class A Common Stock
  options...............................    --          --       --        --             68         --            --          68
Net loss................................    --          --       --        --             --         --       (98,380)    (98,380)
                                         ------   --------    ------     ----       --------    -------     ---------    --------
Balance, December 31, 1996..............   110    $ 13,237    20,784     $208       $176,091    $10,129     $(196,552)   $  3,113
                                         ======   ========    ======     ====       ========    =======     =========    ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-5
<PAGE>   41
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1994         1995        1996
                                                            ---------    --------    --------
<S>                                                         <C>          <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss................................................  $ (15,478)   $(66,635)   $(98,380)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization........................     12,032      29,276      44,665
     Impairment of wireless cable assets..................         --          --      21,271
     Deferred income taxes................................     (8,810)     (2,270)     (3,297)
     Amortization of debt discount and deferred financing
       costs..............................................      7,311      21,363      35,402
     Minority interest income.............................         --          --        (708)
     Extraordinary charge on early retirement of debt.....         --      11,541          --
     Cumulative effect of change in accounting for
       installation costs, net of income taxes............         --        (602)         --
     Gain on disposition of wireless cable systems and
       assets.............................................         --          --        (157)
     Other................................................        (79)        379         267
     Changes in operating assets and liabilities, net of
       acquisitions:
       Trade accounts receivable..........................       (258)       (906)        307
       Prepaid expenses and other current assets..........       (768)         65         214
       Other assets.......................................        (13)       (249)       (247)
       Accounts payable and other current liabilities.....      3,476       4,387      (6,876)
                                                            ---------    --------    --------
          Net cash used in operating activities...........     (2,587)     (3,651)     (7,539)
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments.....................    (26,500)         --          --
  Maturities of short-term investments....................      6,498      20,002          --
  Collections of (and loans to) related parties and
     others...............................................       (623)       (170)        252
  Purchases of property and equipment.....................    (35,465)    (49,342)    (32,474)
  Additions to deferred license and leased license
     acquisition costs....................................     (6,217)     (7,412)    (12,492)
  Proceeds from disposition of wireless cable systems and
     assets...............................................         --          --       2,776
  Net cash used in acquisitions...........................    (52,588)    (21,653)     (1,956)
                                                            ---------    --------    --------
          Net cash used in investing activities...........   (114,895)    (58,575)    (43,894)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of Common Stock, net of stock
     issuance costs.......................................      4,345         511      20,587
  Proceeds from issuance of Series B Convertible Preferred
     Stock, net of stock issuance costs...................         --          --      23,766
  Proceeds from issuance of Common Stock warrants.........      5,490       5,480          --
  Proceeds from issuance of 2004 Notes....................     91,185          --          --
  Proceeds from issuance of 2005 Notes....................         --      91,001          --
  Borrowings under revolving credit facilities............        925      24,600         200
  Principal payments on revolving credit facilities.......     (2,584)    (35,429)     (5,500)
  Increase in deferred financing costs....................     (3,413)     (1,976)         --
  Contributions by minority interest holder...............         --          --       1,240
  Principal payments on notes payable.....................     (1,230)     (2,359)     (2,030)
  Principal payments on capital lease obligations.........       (284)       (417)       (868)
                                                            ---------    --------    --------
          Net cash provided by financing activities.......     94,434      81,411      37,395
                                                            ---------    --------    --------
  Net increase (decrease) in cash and cash equivalents....    (23,048)     19,185     (14,038)
  Cash and cash equivalents, beginning of year............     36,377      13,329      32,514
                                                            ---------    --------    --------
  Cash and cash equivalents, end of year..................  $  13,329    $ 32,514    $ 18,476
                                                            =========    ========    ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-6
<PAGE>   42
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. BUSINESS DESCRIPTION
 
  Organization
 
     American Telecasting, Inc. ("ATI") owns and operates a network of wireless
cable television systems providing subscription television service to
residential and commercial customers. ATI and its subsidiaries are collectively
referred to herein as the "Company." As of December 31, 1995 and 1996, the
Company owned and operated 38 wireless cable systems located throughout the
United States (the "Developed Markets"). The Company also has significant
wireless cable (microwave) frequency interests in 16 other U.S. markets (the
"Undeveloped Markets").
 
  Risks and Other Important Factors
 
     Since inception, the Company has focused principally on developing wireless
cable systems to provide multiple channel television programming. During 1996,
the Company's business strategy evolved to adapt to the significant regulatory
and technological changes that have occurred recently in the telecommunications
industry and to the Company's capital constraints. Management now believes that
the most promising use of the Company's wireless assets may be to provide a
variety of digital wireless services, instead of the traditional analog-based
technology utilized by the Company to date. Such digital wireless services could
include digital video (i.e., subscription television), high-speed Internet
access and telephony services. While the Company has begun planning and testing
of these digital wireless services, it has not yet introduced any of these
services. The Company's ability to introduce these services on a commercial
basis will depend on a number of factors, including the availability of
sufficient capital, the success of the Company's development efforts,
competitive factors (such as the introduction of new technologies or the entry
of competitors with significantly greater resources than the Company), the level
of consumer demand for such services, the availability of appropriate
transmission and reception equipment on satisfactory terms, and the Company's
ability to obtain the necessary regulatory changes and approvals. The Company
expects that the market for any such additional services will be extremely
competitive.
 
     Since early 1996, the Company has taken certain actions aimed at reducing
its costs and conserving its capital. Such measures include reductions in the
size of the Company's workforce and decreases in capital expenditures and
discretionary expenses. During 1997, the Company does not plan to make the
capital expenditures necessary to add enough subscribers to replace those
subscribers who choose to stop receiving the Company's service. Moreover, at
this time, the Company does not generally intend to further develop any of its
Undeveloped Markets using analog technology. Thus, the Company anticipates that
its analog customer base will decrease somewhat during 1997. As the Company's
analog subscriber base decreases, its revenues are expected to decrease unless
and until it is able to successfully introduce other revenue-producing wireless
services, such as digital video, high-speed Internet access and telephony. The
Company currently expects that its existing cash and investment balances,
proceeds from the Facility (see Note 7) and cash generated from operations will
be sufficient to finance its operations during 1997. Thereafter, additional
financing will be required. If the Company's capital resources are not
sufficient to finance its operations, either in 1997 or thereafter, the Company
will be required to curtail its operations and development plans, which
curtailment could involve, among other things, a complete cessation of new
customer additions. Any proceeds received by the Company from the BellSouth
Transaction (as defined below) will provide further resources to help finance
the Company's operations and development plans.
 
     The Company will require significant additional capital to fully implement
its digital strategy. To meet such capital requirements, the Company is pursuing
opportunities to enter into strategic relationships or transactions with other
providers of telecommunications services. Such relationships or transactions
could involve, among other things, joint ventures, sales or exchanges of stock
or assets, or loans to or investments in the Company by strategic partners. As
of the date of this Report, except for the BellSouth Transaction, the
 
                                       F-7
<PAGE>   43
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Company has not reached any agreements or understandings with respect to such
relationships or transactions and there can be no assurance that any such
agreements or understandings will be reached.
 
     Interest payments on the Company's 2004 Notes and 2005 Notes will commence
on December 15, 1999 and February 15, 2001, respectively. Interest payments in
1999, 2000, and 2001 are expected to be approximately $14.3 million, $28.5
million and $59.1 million, respectively.
 
  Recent Development
 
     On March 18, 1997, the Company entered into a definitive agreement with
BellSouth Corporation and BellSouth Wireless Corporation ("BellSouth Wireless")
providing for the sale of all of the Company's Florida and Louisville, Kentucky
wireless cable assets (the "Southeastern Assets") to BellSouth Wireless (the
"BellSouth Transaction"). Depending upon the number of wireless cable channel
rights that are ultimately transferred to BellSouth Wireless, the purchase price
will range from $67.9 million to $103.2 million. A first closing is expected to
occur when all necessary third party and governmental consents to the assignment
of a minimum number of channel positions in Orlando, Jacksonville, Daytona
Beach, Ft. Myers, Miami, Lakeland, Bradenton and Louisville have been obtained,
which the Company expects will occur prior to the end of the fourth quarter of
1997. The remainder of the Southeastern Assets will be sold upon the
satisfaction of certain closing conditions that are specific to the markets
involved, but in no event later than two years after the date of the first
closing. The agreement contains customary conditions to closing, including the
expiration of applicable waiting periods under the federal antitrust laws and
the satisfaction of all applicable regulatory requirements. There can be no
assurance that all of such conditions will be satisfied or that the BellSouth
Transaction will be consummated.
 
     The Company also has granted to BellSouth Wireless an option to purchase
for $9.0 million the Company's wireless cable channel rights in Yuba City,
California and the Company's Yuba City and Sacramento, California BTA
authorizations. The option can be exercised by BellSouth Wireless at any time
within 18 months after the date of the agreement.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of ATI and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
 
  Use of Estimates in Preparation of Financial Statements
 
     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.
 
  Cash and Cash Equivalents
 
     The Company considers all short-term investments with original maturities
of 90 days or less to be cash equivalents. As of December 31, 1995 and 1996,
cash equivalents principally consisted of money market funds, commercial paper,
federal government/agency debt securities, and other short-term,
investment-grade, interest-bearing securities. The carrying amounts reported in
the balance sheet for cash and cash equivalents approximate the fair values of
those assets.
 
                                       F-8
<PAGE>   44
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Long-Lived Assets
 
     Long-lived assets and identifiable assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed. Impairment is measured by comparing the
carrying value to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual dispositions for each of
the Company's markets. The Company considers relevant cash flow, estimated
future operating results, trends and other available information including the
fair value of frequency rights owned, in assessing whether the carrying value of
the asset can be recovered.
 
     In the fourth quarter of 1996, after considering the Company's 1996
operating loss, its history of such operating losses and the expectation of
future operating losses, changes in the Company's strategic direction,
developments relating to previously scheduled industry transactions and ventures
and certain industry factors, the Company evaluated the ongoing value of its
wireless cable business in each Developed Market. Based on this valuation, the
Company determined that assets with a carrying value of $95.1 million were
impaired according to the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
and wrote down the carrying value of such assets by $21.3 million to their fair
value. An evaluation was made for each of the Company's Developed Markets
individually, not for the Company's markets as a whole. Fair value was based on
recent transactions in the wireless cable industry.
 
     The Company's estimates of anticipated gross revenues, the remaining
estimated lives of tangible and intangible assets, or both, could be reduced
significantly in the future due to changes in technology, regulation, available
financing or competitive pressures in any of the Company's individual markets.
As a result, the carrying amount of long-lived assets and intangibles including
goodwill could be reduced materially in the future.
 
          Property and Equipment. Property and equipment are stated at cost.
     Depreciation and amortization, including amortization of assets acquired
     under capitalized lease agreements, are recorded on a straight-line basis
     for financial reporting purposes. Repair and maintenance costs are charged
     to expense when incurred. Renewals and betterments are capitalized.
     Subscriber installation costs are capitalized and amortized over a three
     year period, the approximate average subscription term of a subscriber.
     Prior to January 1, 1995, the Company expensed subscriber installation
     costs to the extent of installation revenues and capitalized installation
     costs in excess of installation revenues. The cumulative effect of this
     change in accounting method for the periods prior to January 1, 1995 was a
     reduction in the Company's net loss of approximately $602,000, net of
     deferred income taxes of approximately $369,000. The effect of this change
     on the Company's results of operations for the year ended December 31, 1995
     was to decrease the net loss before cumulative effect of change in
     accounting method by approximately $668,000. Pro forma net loss and net
     loss per share for the years ended December 31, 1994 and 1995, assuming the
     change in accounting for installation costs was applied retroactively, were
     $(15,352,000) and $(1.07), and $(67,237,000) and $(4.21), respectively.
 
          Deferred License and Leased License Acquisition Costs. Deferred
     license and leased license acquisition costs include costs incurred to
     develop or acquire wireless cable licenses. Costs incurred to acquire or
     lease licenses issued by the Federal Communications Commission ("FCC") are
     deferred and are amortized ratably over useful lives of 20 years beginning
     with inception of service in each respective market, or charged to expense
     if development is not pursued. As of December 31, 1996, approximately $15.8
     million of the Company's deferred license and leased license acquisition
     costs were not yet subject to amortization. Accumulated amortization
     related to deferred license and leased license acquisition costs
     approximated $7.7 million and $14.9 million at December 31, 1995 and 1996,
     respectively.
 
                                       F-9
<PAGE>   45
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
          Goodwill. Goodwill is amortized on a straight-line basis for financial
     reporting purposes over a period of 20 years. Accumulated amortization
     related to goodwill was approximately $1.3 million and $2.2 million at
     December 31, 1995 and 1996, respectively.
 
          Deferred Financing Costs. Deferred financing costs represent fees and
     other costs incurred in connection with the issuance of long-term debt.
     These costs are amortized over the term of the related debt using the
     effective interest rate method.
 
     Other Assets. Other assets, net of accumulated amortization, consist of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ----------------
                                                              1995      1996
                                                             ------    ------
<S>                                                          <C>       <C>
Covenants not-to-compete, net..............................  $1,890    $  648
Long-term deposits.........................................      83       394
Other......................................................     836       722
                                                             ------    ------
Other assets, net..........................................  $2,809    $1,764
                                                             ======    ======
</TABLE>
 
     Covenants not-to-compete are amortized over their respective terms, which
is typically three years. Accumulated amortization related to covenants
not-to-compete and other intangible assets was $2.5 million and $3.6 million as
of December 31, 1995 and 1996, respectively.
 
  Revenue Recognition
 
     Monthly service fees are recognized in the period service is provided.
Installation revenue is recognized upon origination of service to a customer to
the extent of direct selling costs incurred. To date, direct selling costs have
exceeded installation revenues.
 
  Operating Costs and Expenses
 
     Operating costs and expenses consist principally of programming fees,
channel lease costs, tower rental and other costs of providing services. The
Company capitalizes certain pre-launch costs for non-operating systems. These
costs include tower and site rentals and channel lease payments. The total of
such costs capitalized in 1994, 1995 and 1996 approximated $163,000, $411,000
and $445,000, respectively.
 
  Marketing and Direct Selling Costs
 
     Marketing and direct selling costs are expensed as incurred.
 
  Net Loss Per Share
 
     Net loss per share is computed on the weighted-average number of common
shares outstanding for the respective periods. All Common Stock equivalents are
excluded as they are antidilutive. Fully diluted loss per share is not presented
as it would not materially differ from primary loss per share.
 
     Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock issued by the Company during the 12 months immediately preceding
the Company's initial public offering (see Note 8), plus the number of Common
Stock equivalent shares which became issuable during the same period, were
treated as if they were outstanding for all periods presented prior to the
offering using the Treasury Stock method. The effect of other Common Stock
equivalents for periods prior to the offering have been excluded from the
calculation as their effect would be antidilutive. Historical net loss per share
and weighted-average number of shares outstanding were $(1.08) and 14,357,116
for the year ended December 31, 1994. The number of pro forma weighted-average
shares outstanding is computed as described above and also gives
 
                                      F-10
<PAGE>   46
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
effect to the conversion in January 1994 of all outstanding shares of Series A
Convertible Preferred Stock into 2,014,098 shares of Common Stock.
 
     In 1997, the Financial Accounting Standards Board released SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all periods
presented. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for 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 or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Diluted earnings per share is computed similarly to fully diluted earnings per
share pursuant to Accounting Principles Bulletin No. 15. SFAS No. 128 is
effective for fiscal years ending after December 15, 1997, and when adopted, it
will require restatement of prior years' earnings per share.
 
     Since the effect of outstanding options is antidilutive, they have been
excluded from the Company's computation of net loss per share. Accordingly,
management does not believe that SFAS No. 128 will have an impact upon
historical net loss per share as reported.
 
  Reclassifications
 
     Certain amounts from the prior years' consolidated financial statements
have been reclassified to conform with the 1996 presentation.
 
  Supplemental Cash Flow Disclosures
 
     Noncash investing and financing activities consisted of the acquisition of
vehicles and equipment by acceptance of bank notes, capitalized leases and other
financing arrangements totaling approximately $992,000, $1.9 million, and
$604,000 during 1994, 1995 and 1996, respectively. Cash paid during 1994, 1995
and 1996 for interest approximated $2.0 million, $2.9 million and $2.0 million,
respectively. As discussed in Notes 3 and 7, the Company acquired property and
equipment, leased licenses, covenants not-to-compete and other assets in
acquisitions for notes totaling $6.8 million, Class A Common Stock valued at
$19.9 million and assumed liabilities of approximately $1.5 million during the
year ended December 31, 1994; notes totaling $3.8 million, Class A Common Stock
valued at $15.8 million, assumption of certain liabilities totaling $11.2
million during the year ended December 31, 1995, and Class A Common Stock valued
at $707,000 during the year ended December 31, 1996. During 1994, 1995 and 1996,
the Company acquired certain wireless cable channel rights for which the final
purchase consideration of approximately $1.7 million, $1.1 million and $1.0
million, respectively, was payable upon the FCC's consent to the assignment of
such licenses (see Note 6). Of such amounts, approximately $1.0 million remained
payable at December 31, 1996.
 
3. ACQUISITIONS AND DIVESTITURES
 
  1994 Acquisitions
 
     During 1994, the Company acquired wireless cable systems in Bend, Oregon
(from Central Vision, Inc.), a total of seven operating wireless cable systems
operating in Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin (the
"FEN/WEN Group") (from Family Entertainment Network, Inc. and Wireless
Entertainment Network, Inc.), Oklahoma City, Oklahoma and Wichita, Kansas (from
Multimedia Cablevision, Inc.), and Lakeland, Florida (from People's Cable,
Inc. -- "People's Cable"). In addition, the Company acquired wireless cable
frequency rights in a number of other U.S. markets in connection with the
acquisition of the FEN/WEN Group. The aggregate purchase price for these
acquisitions of approximately $80.6 million was paid through a combination of
cash ($53.4 million, of which approximately $6.8 million was funded from the
proceeds of debt -- see Note 7), shares of ATI Common Stock (1,151,950 shares
valued at approximately
 
                                      F-11
<PAGE>   47
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
$19.7 million), and assumption of certain liabilities (approximately $7.5
million, of which approximately $6.0 million was retired immediately subsequent
to closing). In addition, the Company recognized a deferred income tax liability
of approximately $5.0 million for the excess of the value allocated to certain
of the assets acquired over their related tax basis.
 
  1995 Acquisitions
 
     During 1995, the Company acquired wireless cable systems in Medford, Oregon
(from Cardiff Communications Partners III), Sheridan, Wyoming (from Cardiff
Communications Partners I), Redding, California (from the Cardiff Communications
Partners IV), and Rapid City, South Dakota (from Rapid Choice TV, Inc.). Also
during 1995, the Company acquired Fresno Wireless Cable Television, Inc.
("FWCTI") and a 58% ownership interest in Superchannels of Las Vegas, Inc.
("Superchannels"). FWCTI is the 65% general partner of Fresno MMDS Associates
which owns wireless cable systems and frequency rights in the Fresno, Visalia
and Merced, California markets. Superchannels operates a wireless cable system
in the Las Vegas, Nevada market. The aggregate purchase price for these
acquisitions of approximately $46.7 million was paid through a combination of
cash ($16.5 million), notes ($3.8 million), shares of ATI Common Stock
(approximately 964,000 shares valued at approximately $15.2 million), and
assumption of certain liabilities (approximately $11.2 million). In addition,
the Company recognized a deferred income tax liability of approximately $6.3
million for the excess of the value allocated to certain of the assets acquired
over their related tax basis. In February 1996, $2.5 million of the notes issued
in connection with the acquisition of the Las Vegas system were converted into
162,854 shares of ATI Common Stock.
 
     All of the Company's acquisitions have been accounted for as purchases for
financial reporting purposes. The Company's consolidated statements of
operations for the years ended December 31, 1994 and 1995 include the results of
operations for each of the entities described above from their respective
acquisition dates. The aggregate purchase prices for the acquisitions completed
during 1994 and 1995 were allocated as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               1994        1995
                                                              -------    --------
<S>                                                           <C>        <C>
Deferred license and leased license acquisition costs.......  $54,323    $ 33,999
Property and equipment......................................   23,662      11,579
Goodwill....................................................    5,019       6,335
Covenants not-to-compete....................................    2,170         425
Cash, receivables and other assets..........................      442         682
Deferred income taxes.......................................   (5,019)     (6,335)
Assumed liabilities.........................................   (1,685)    (14,972)
                                                              -------    --------
                                                              $78,912    $ 31,713
                                                              =======    ========
</TABLE>
 
     The unaudited pro forma information presented below for the year ended
December 31, 1995 reflects the 1995 acquisitions of the Medford, Sheridan,
Redding, Las Vegas and Rapid City systems and FWCTI as if each had occurred on
January 1, 1995. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisitions been
consummated at that time (dollars in thousands, except per share amounts).
 
<TABLE>
<S>                                                           <C>
Revenues....................................................  $ 52,979
Loss before extraordinary charge and cumulative effect of
  accounting change.........................................   (57,939)
Net loss....................................................   (68,878)
Loss per share before extraordinary charge and cumulative
  effect of
  accounting change.........................................     (3.55)
Net loss per share..........................................     (4.22)
</TABLE>
 
                                      F-12
<PAGE>   48
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During 1996, the Company acquired certain subscription television assets in
Cincinnati, Ohio for aggregate consideration of approximately $2.2 million and
wireless cable channel rights in various markets for aggregate consideration of
$1.1 million. The Company also acquired the remaining interest in its Little
Rock, Arkansas operating system for $707,000 in Class A Common Stock. Also
during 1996, the Company sold its wireless cable systems in St. James, Minnesota
and Yankton, South Dakota and its wireless cable channel assets in Sioux Falls,
South Dakota for aggregate cash consideration totaling $3.1 million (of which
approximately $355,000 is being held in escrow pending completion of certain
post-closing events). On June 28, 1996 the Company entered into a definitive
agreement to acquire wireless cable assets in Cincinnati, Ohio for approximately
$3.0 million. The pro forma effects of 1996 acquisitions and divestitures on
revenues, net loss and net loss per share as if such acquisitions and
divestitures had been made as of the beginning of the year are not presented as
they do not differ materially from historical results. During the years ended
December 31, 1994 and 1995, the Company acquired wireless cable channel rights
in various markets for aggregate consideration of $186,000 (Class A Common
Stock) and $7.0 million (cash -- $6.3 million and Class A Common Stock valued at
$653,000), respectively.
 
     The Company was involved in the bidding process for wireless cable channel
authorizations in certain basic trading areas ("BTAs"), which was completed in
March 1996. The Company was the highest bidder in 59 markets. In the aggregate,
the Company's bids in these markets totaled approximately $10.1 million. Of such
amount, a total of approximately $9.3 million has been paid. The remaining
amount (approximately $800,000) is due upon the FCC's notification to the
Company of the issuance of the remainder of its BTA licenses, which the Company
expects will occur in 1997.
 
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
     Prepaid expenses and other current assets consist of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------
                                                               1995      1996
                                                              ------    ------
<S>                                                           <C>       <C>
Miscellaneous receivables...................................  $  341    $  859
Prepaid rent and other......................................     512       731
Prepaid insurance...........................................     712       422
Prepaid programming and channel leases......................     111       251
Equipment and other short-term deposits.....................     564       162
Accrued investment income...................................      91        43
                                                              ------    ------
          Total prepaid expenses and other current assets...  $2,331    $2,468
                                                              ======    ======
</TABLE>
 
                                      F-13
<PAGE>   49
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5. PROPERTY AND EQUIPMENT
 
     Property and equipment consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                               ----------------------------------------
                                                 1995        1996            LIFE
                                               --------    --------    ----------------
<S>                                            <C>         <C>         <C>
Subscriber premises equipment................  $ 58,674    $ 58,773    3-4 years
Deferred installation costs..................    42,665      28,631    3 years
Transmission equipment and system
  construction costs.........................    34,505      39,278    10 years
Office furniture and equipment...............     6,260       8,108    3-5 years
Vehicles.....................................     3,276       3,827    3-4 years
Land, building and leasehold improvements....     1,248       1,780    Lesser of useful
                                               --------    --------    life or duration
                                                                       of lease
Total property and equipment.................   146,628     140,397
Accumulated depreciation and amortization....   (34,251)    (41,126)
                                               --------    --------
Property and equipment, net..................  $112,377    $ 99,271
                                               ========    ========
</TABLE>
 
     During the fourth quarter of 1996, the Company prospectively revised the
lives of its subscriber premise equipment to three to four years. As described
in Note 2, this revision was a result of a change in the Company's strategic
direction and certain industry factors. The revision decreased net income for
the year ended December 31, 1996 by approximately $600,000.
 
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
     Accounts payable and accrued expenses consist of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1995       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Accounts payable............................................  $11,474    $ 6,996
Accrued payroll and related taxes...........................    1,721      2,114
Accrued programming.........................................    1,718      1,673
Accrued property and sales taxes............................    1,484      1,173
Acquisition of channel rights payable.......................    1,140      1,070
Accrued interest and other..................................      886      1,253
Deferred revenue............................................      449        476
Accrued lease termination costs.............................      420        188
Accrued severance...........................................      711         79
                                                              -------    -------
Total accounts payable and accrued expenses.................  $20,003    $15,022
                                                              =======    =======
</TABLE>
 
7. LONG-TERM DEBT
 
  Senior Discount Notes
 
     On June 23, 1994, ATI issued Units (the "1994 Units Offering") consisting
of Senior Discount Notes due 2004 (the "2004 Notes") which mature on June 15,
2004 and warrants to purchase Common Stock. The 1994 Units Offering resulted in
net proceeds to the Company of approximately $100.1 million (including amounts
attributable to the issuance of the 1994 Warrants (see Note 8) and before
payment of underwriting discounts and other issuance costs aggregating
approximately $4.4 million). On August 10, 1995, ATI issued Units (the "1995
Units Offering") consisting of Senior Discount Notes due 2005 (the "2005 Notes")
which
 
                                      F-14
<PAGE>   50
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
mature on August 15, 2005 and warrants to purchase Common Stock. The 1995 Units
Offering resulted in net proceeds to the Company of approximately $94.9 million,
including amounts attributable to the issuance of the 1995 Warrants (see Note
8), and after payment of underwriting discounts and other issuance costs
aggregating approximately $5.1 million.
 
     The 2004 Notes bear interest at a rate of 14.5%, computed on a semi-annual
bond equivalent basis. The aggregate principal balance at stated maturity of the
2004 Notes approximates $196.9 million. Cash interest will not be payable on the
2004 Notes prior to June 15, 1999. Commencing December 15, 1999, cash interest
on the 2004 Notes will be payable on June 15 and December 15 of each year at a
rate of 14.5% per annum.
 
     The issue price of the 2005 Notes represents a yield to maturity of 14.50%
per annum computed on a semi-annual bond equivalent basis. Cash interest will
not be payable on the 2005 Notes prior to August 15, 2000. Commencing February
15, 2001, cash interest on the 2005 Notes will be payable on February 15 and
August 15 of each year at a rate of 14.50% per annum. The 2005 Notes have an
aggregate principal balance at stated maturity of $201.7 million.
 
     Both the 2004 Notes and the 2005 Notes are effectively subordinated to all
indebtedness of ATI's subsidiaries, including trade payables, and rank pari
passu with all existing and future unsubordinated and unsecured indebtedness of
ATI.
 
     Both the 2004 Notes and the 2005 Notes were issued pursuant to Indentures
which contain certain restrictive covenants and limitations. Among other things,
the Indentures limit the incurrence of additional debt, limit the making of
restricted payments (as defined) including the declaration and/or payment of
dividends, place limitations on dividends and other payments by ATI's
subsidiaries, prohibit ATI and its subsidiaries from engaging in any business
other than the transmission of video, voice and data and related businesses and
services, and place limitations on liens, certain asset dispositions and
merger/sale of assets activity.
 
     Pursuant to the Indentures, the Company may not incur additional debt,
other than Permitted Debt (as defined), unless after giving effect to the
incurrence of such debt and the receipt and application of the net proceeds
thereof on a pro forma basis, the Company's consolidated debt to annualized
operating cash flow (as defined) ratio would be less than 5.0 to 1.0 in the case
of any such incurrence. Permitted Debt is defined as (a) the 2004 Notes and the
2005 Notes; (b) debt of up to $100.0 million in aggregate principal amount lent
by a strategic equity investor (as defined), provided, that such debt (i) is
subordinated in right of payment to the prior payment in full of all obligations
(including principal, interest and premium, if any) of the Company under the
2004 Notes and the 2005 Notes and related Indentures, (ii) is not guaranteed by
any of the Company's subsidiaries and is not secured by any lien on any property
or asset of the Company or any subsidiary of the Company, and (iii) has no
scheduled maturity of principal earlier than a date at least one year after the
scheduled maturity of the 2004 Notes and the 2005 Notes; (c) debt of up to $35.0
million under one or more credit agreements, under other existing debt
facilities, or to a seller, vendor or bank or other financial institution that
has financed or refinanced the purchase or lease of property, materials or a
business, not to exceed $17.5 million until the Company's number of basic
subscribers exceeds 200,000; (d) any debt of the Company (other than debt
described in clause (a), (b), or (c) above) in an amount outstanding not
exceeding, at the time of incurrence, the product of the Company's number of
basic subscribers in excess of 200,000 multiplied by (1) $375, if such debt is
incurred prior to January 1, 1998, (2) $325, if such debt is incurred thereafter
and prior to January 1, 1999, and (3) $275, if such debt is incurred thereafter,
if the net proceeds of such debt are invested exclusively in the transmission of
video, voice and data and related businesses and services conducted by the
Company and its subsidiaries; and (e) replacements, renewals, refundings or
extensions of any debt referred to in clauses (a) - (d) above, subject to
certain restrictions. As a result of such limitations, the Company's additional
borrowing capacity approximated $8.2 million at December 31, 1996.
 
                                      F-15
<PAGE>   51
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The 2004 Notes and the 2005 Notes are redeemable, at the option of ATI at
any time, in whole or in part, on or after June 15, 1999 and August 15, 2000,
respectively, at specified redemption prices, plus accrued and unpaid interest,
if any, to the date of redemption. The redemption prices are as follows:
 
<TABLE>
<CAPTION>
                        YEAR                          2004 NOTES      2005 NOTES
                        ----                          ----------      ----------
<S>                                                   <C>             <C>
1999................................................   107.250%             --
2000................................................   104.833%        107.250%
2001................................................   102.417%        104.833%
2002................................................   100.000%        102.417%
2003 and thereafter.................................   100.000%        100.000%
</TABLE>
 
     Both the 2004 Notes and the 2005 Notes are subject to mandatory redemption
provisions in the event of a change of control (as defined) of ATI. Upon the
occurrence of such an event, each holder of the 2004 Notes will have the right
to require ATI to repurchase all of such holder's 2004 Notes at 101% of the
accreted value (as defined) thereof, or, in the case of any such repurchase on
or after June 15, 1999, 101% of the principal amount at stated maturity thereof
plus accrued and unpaid interest, if any, to the date of repurchase. Similarly,
in the event of a change of control of ATI, each holder of the 2005 Notes will
have the right to require ATI to repurchase all of such holder's 2005 Notes at
101% of the accreted value (as defined) thereof, or, in the case of any such
repurchase on or after August 15, 2000, 101% of the principal amount at stated
maturity thereof plus accrued and unpaid interest, if any, to the date of
repurchase. In addition, in the event of a sale by ATI prior to August 15, 1998
of at least $10 million of its capital stock to a strategic equity investor, up
to a maximum of 35% of the aggregate accreted value of outstanding 2005 Notes
may be redeemed at ATI's option within 30 days after such sale from the net cash
proceeds thereof at 113.50% of accreted value to the date of redemption;
provided that there remain outstanding 2005 Notes having an aggregate principal
amount at maturity equal to at least 65% of the aggregate principal amount at
maturity of all 2005 Notes originally issued.
 
     Future debt service payments on the 2004 Notes and the 2005 Notes
representing interest only, for the next five years are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                   YEAR                       2004 NOTES    2005 NOTES     TOTAL
                   ----                       ----------    ----------    -------
<S>                                           <C>           <C>           <C>
1997......................................     $    --       $    --      $    --
1998......................................          --            --           --
1999......................................      14,273            --       14,273
2000......................................      28,546            --       28,546
2001......................................      28,546        30,518       59,064
</TABLE>
 
  Fresno Facility
 
     During 1996, the Fresno Partnership maintained a revolving credit facility
(the "Fresno Facility") with a bank that provided for borrowings for the Fresno,
Visalia and Merced systems. As of December 31, 1996, no amounts were available
for borrowing under the Fresno Facility. The Fresno Facility was required to be
fully assigned to ATI by March 31, 1997. All amounts due to the bank under the
Fresno Facility were repaid by ATI in February 1997 with proceeds from the
Facility (as defined below). Outstanding borrowings under the Fresno Facility
bore interest at the banks' prime rate plus 2.25% (10.5% at December 31, 1996).
Interest expense relating to this facility during the year ended December 31,
1996 totaled $763,000. The facility was secured by the assets of the Fresno,
Visalia and Merced systems. The Fresno Facility also contained various financial
convenants and other restrictive covenants that, among other things, prohibited
the payment of dividends. As of September 30 and December 31, 1996, the Fresno
Partnership was not in compliance with certain of the restrictive covenants of
the Fresno Facility.
 
                                      F-16
<PAGE>   52
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Credit Facility
 
     On February 26, 1997, the Company entered into a $17,000,000 credit
facility (the "Facility") with Banque Indosuez, New York Branch (the "Bank").
The term of the Facility is up to twelve months. The loan must be repaid earlier
than the specified termination date and certain mandatory prepayments must be
made with proceeds from debt issuances or certain asset sales, including the
BellSouth Transaction. The Facility bears interest at a rate of 12.5%, which
rate shall increase by 0.50% per quarter. Borrowings under the Facility are
secured by a security interest in favor of the Bank in substantially all of the
assets of ATI and its subsidiaries. The Facility is further secured by a pledge
of the stock of substantially all of ATI's subsidiaries as well as a pledge of
the note due to the Company from its Fresno subsidiary under the Fresno
Facility.
 
     The Company paid the Bank a commitment fee of $340,000. At closing, the
Company paid an additional fee of $340,000 and reimbursed the Bank for its out
of pocket expenses incurred in conjunction with the making of the loan. During
the term of the Facility, the Company is required to pay to the Bank a
commitment commission on the unused loan balance at the annual rate of 0.50%.
 
     At closing, the Company also delivered 4,500 bond appreciation rights
("BARs") and an option to exercise 141,667 debt warrants or 141,667 equity
warrants. The debt warrants give the holder the right to increase the principal
amount of the loan by $6.00 per warrant, or the right to require the Company to
purchase the debt warrant for $6.00 per warrant. The debt warrants are
exercisable or puttable during a five-day period beginning on the earlier of one
year from the date of issuance, or notice that payment in full of the Facility
has occurred or will occur shortly. The equity warrants give the holder the
right to purchase up to 141,667 shares of the Company's Class A Common Stock for
a price of $3.281 per share. Pursuant to the option agreement relating to the
warrants, the equity warrants become exercisable only to the extent that the
holder elects not to exercise or put the debt warrants or, if the holder elects
to put the debt warrants to the Company, the Company fails to make payment
therefor within the time required. Amounts payable in connection with the BARs
are based upon the appreciation in price of $4.5 million face value of the
Company's 2004 Notes. The BARs are exercisable after the earlier of June 15,
1999 or the occurrence of an Event of Default under the 2004 Notes. The payment
due upon exercise of each BAR is equal to the market price of the 2004 Notes on
the closing date less $290. The net value of the BARs is payable to holders of
the BARs in cash. The Company has deposited $1.0 million in escrow to satisfy
certain interest obligations under the Facility.
 
  Retired Facilities
 
     Interest expense related to retired revolving credit facilities
approximated $982,000, $1.6 million and $27,000 during the years ended December
31, 1994, 1995 and 1996, respectively.
 
     The following table summarizes the book and fair values of the Company's
debt facilities at December 31, 1996 (dollars in thousands). Fair values for the
Company's 2004 Notes and 2005 Notes are based on quoted market prices. The fair
value of the Company's Fresno Facility and notes payable are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The carrying
amount of accrued interest approximates its fair value.
 
<TABLE>
<CAPTION>
                                                              BOOK VALUE    FAIR VALUE
                                                              ----------    ----------
<S>                                                           <C>           <C>
2004 Notes..................................................   $135,484      $ 76,779
2005 Notes..................................................    116,480        74,629
Fresno Facility.............................................      2,950         2,762
Notes payable...............................................      4,455         3,462
                                                               --------      --------
                                                               $259,369      $157,632
                                                               ========      ========
</TABLE>
 
                                      F-17
<PAGE>   53
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Future maturities of amounts outstanding under the Company's long-term debt
facilities as of December 31, 1996 are summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                            REVOLVING
                                        2004       2005       CREDIT      NOTES
      YEAR ENDING DECEMBER 31,         NOTES      NOTES     FACILITIES   PAYABLE    TOTAL
      ------------------------        --------   --------   ----------   -------   --------
<S>                                   <C>        <C>        <C>          <C>       <C>
1997................................  $     --   $     --     $2,950     $2,026    $  4,976
1998................................        --         --         --      2,314       2,314
1999................................        --         --         --         44          44
2000................................        --         --         --         46          46
2001................................        --         --         --         25          25
Thereafter..........................   196,869    201,700         --         --     398,569
Unamortized discount................   (61,385)   (85,220)        --         --    (146,605)
                                      --------   --------     ------     ------    --------
     Total..........................  $135,484   $116,480     $2,950     $4,455    $259,369
                                      ========   ========     ======     ======    ========
</TABLE>
 
8. COMMON STOCK, STOCK OPTIONS AND WARRANTS
 
  Stock Option Plan
 
     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options is equal to
the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting and Disclosure of Stock-Based Compensation," which
established an alternative method of expense recognition for stock-based
compensation awards to employees based on fair values. The Company elected not
to adopt SFAS No. 123 for expense recognition purposes.
 
     The Company maintains a stock option plan reserving 1,525,000 shares of
Class A Common Stock to be issued to officers and key employees under terms and
conditions to be set by the Company's Board of Directors. The options vest over
periods of up to three years and expire eight years from the date of issuance.
As of December 17, 1996, the Company repriced options for all exempt employees
at the fair market value on that date.
 
     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.31%
during each period; dividend yields of 0.0% during each period; volatility
factors of the expected market price of the Company's common stock of .61 and
 .64, and a weighted-average expected life of the option of four years.
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
 
     The weighted average fair value of options granted during 1995 and 1996 was
$7.43 and $3.91, respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma net loss and pro forma net loss per
share applicable to Class A Common Stock as if the Company had used the fair
value accounting provisions of
 
                                      F-18
<PAGE>   54
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
SFAS No. 123 were $67.0 million and $4.19 and $105.7 million and $5.84 for the
years ended December 31, 1995 and 1996, respectively.
 
     A summary of the Company's stock option activity, and related information
for the years ended December 31, 1994, 1995 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                 1994                       1995                        1996
                       ------------------------   -------------------------   -------------------------
                                   WEIGHTED-                   WEIGHTED-                   WEIGHTED-
                                    AVERAGE                     AVERAGE                     AVERAGE
                       OPTIONS   EXERCISE PRICE   OPTIONS    EXERCISE PRICE   OPTIONS    EXERCISE PRICE
                       -------   --------------   --------   --------------   --------   --------------
<S>                    <C>       <C>              <C>        <C>              <C>        <C>
Options outstanding
  at beginning of
  year...............  574,000       $ 3.49        559,000       $ 6.16        696,000       $ 9.55
Granted..............   85,000        21.68        390,000        13.02        752,000         9.12
Exercised............  (92,500)       17.75       (176,500)       15.47        (85,000)       15.53
Forfeited............   (7,500)        2.69        (76,500)       18.91       (628,200)       13.76
                       -------                    --------                    --------
Options outstanding
  at end of year.....  559,000       $ 6.16        696,000       $ 9.55        734,800       $ 5.96
                       =======                    ========                    ========
Exercisable at end of
  year...............  330,500       $ 2.77        249,250       $ 4.79        178,000       $ 2.69
                       =======                    ========                    ========
</TABLE>
 
     Exercise prices for options outstanding as of December 31, 1996, are as
follows:
 
<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
                  ------------------------------------------------------   -------------------------------------
                  NUMBER OUTSTANDING   WEIGHTED AVERAGE      WEIGHTED      NUMBER EXERCISABLE       WEIGHTED
   RANGE OF       AS OF DECEMBER 31,      REMAINING          AVERAGE       AS OF DECEMBER 31,   AVERAGE EXERCISE
EXERCISE PRICES          1996          CONTRACTUAL LIFE   EXERCISE PRICE          1996               PRICE
---------------   ------------------   ----------------   --------------   ------------------   ----------------
<C>               <C>                  <C>                <C>              <C>                  <C>
  $ 2.00-$ 2.00        110,000               1.82             $ 2.00            110,000              $ 2.00
    2.69-  2.69         50,000               2.33               2.69             50,000                2.69
    5.50-  5.50         22,500               4.73               5.50             15,000                5.50
    6.88-  6.88        538,500               7.96               6.88                 --                0.00
   13.75- 13.75          5,800               6.95              13.75              1,800               13.75
   14.25- 14.25          1,200               6.22              14.25              1,200               14.25
   15.00- 15.00          6,800               7.32              15.00                 --                0.00
                       -------                                                  -------
  $ 2.00-$15.00        734,800               6.54             $ 5.96            178,000              $ 2.69
                       =======                                                  =======
</TABLE>
 
  Warrants
 
     In conjunction with the 1995 Units Offering described in Note 7, ATI issued
201,700 warrants (the "1995 Warrants") to purchase an aggregate of 943,956
shares of ATI's Common Stock at an exercise price of $12.65 per share, subject
to adjustment under certain circumstances. Warrant holders may exercise the 1995
Warrants at any time on or after August 10, 1996 and on or prior to August 10,
2000. The 1995 Warrants will terminate and become void at the close of business
on August 10, 2000. Approximately $5.5 million of the proceeds from the 1995
Units Offering was allocated to the 1995 Warrants. As of December 31, 1996, no
1995 Warrants had been exercised.
 
     In conjunction with the 1994 Units Offering described in Note 7, ATI issued
915,000 warrants (the "1994 Warrants") to purchase an equal number of shares of
ATI's Common Stock. The 1994 Warrants have an exercise price of $12.68 per
share. Warrant holders may exercise the 1994 Warrants for cash at any time after
June 23, 1995 and on or prior to June 23, 1999. The 1994 Warrants will terminate
and become void at the close of business on June 23, 1999. As described in Note
7, the unamortized debt discount (approximately $5.1 million) for amounts
ascribed to the 1994 Warrants was written-off in August 1995 upon execution of
the
 
                                      F-19
<PAGE>   55
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Supplemental Indenture. The 1994 Warrants, as amended, were valued at
approximately $4.6 million. As of December 31, 1996, 1994 Warrants for the
purchase of 100 shares had been exercised.
 
     During the year ended December 31, 1996, additional warrants for the
purchase of 62,286 shares of Common Stock were exercised at a price of $2.74 per
share while warrants for the purchase of 61,284 shares at a price of $4.67 per
share expired unexercised.
 
9. SERIES B CONVERTIBLE PREFERRED STOCK
 
     During August and October 1996, the Company completed private placements of
a total of 250,000 shares of Series B Convertible Preferred Stock, resulting in
net proceeds to the Company of $23.8 million. The shares of Series B Convertible
Preferred Stock have a preferential, cumulative 5% dividend and are non-voting.
Each share of Series B Preferred Stock is convertible, at the option of the
holder, into that number of shares of Common Stock that is determined by
dividing (a) the sum of (i) the original issuance price for each such share of
Series B Preferred Stock plus (ii) the amount of all accrued but unpaid
dividends on each share of Series B Preferred Stock so converted, by (b) the
Conversion Price (as defined herein) in effect at the time of conversion. The
"Conversion Price" at any given time is equal to 80% of the prevailing market
price of the Class A Common Stock, provided that the Conversion Price cannot
exceed $12.50 or be less than $2.00. Accordingly, the Company recognized the
discount on the conversion as a dividend in the amount of $6,250,000.
 
     During 1996, 140,000 shares of Series B Convertible Preferred Stock were
converted into a total of 2,273,785 shares of the Company's Class A Common Stock
at conversion prices ranging from $4.33 to $7.87. Aggregate dividends paid or
payable to holders of the Series B Convertible Preferred Stock totaled
approximately $201,000 and are reflected in the accompanying statements of
operations as interest expense. As of December 31, 1996, 110,000 shares of
Series B Convertible Preferred Stock were outstanding.
 
10. LEASES
 
  Channel Lease Commitments
 
     The Company has entered into various agreements to lease FCC channel
authorizations to provide wireless cable services. Certain of these lease
agreements provide buy-out options to the Company based upon the number of
subscribers at the time of such buy-out. The leases typically provide for
five-year minimum terms and renewals thereafter at the option of the Company.
The Company's obligations under certain of the leases are subject to receipt by
the lessor of all necessary FCC approvals to begin providing service. Channel
lease expense during 1994, 1995 and 1996 approximated $951,000, $1.9 million and
$2.6 million, respectively.
 
     As of December 31, 1996, aggregate minimum annual channel lease payments
are summarized as follows (in thousands):
 
<TABLE>
<S>                                                           <C>
1997........................................................  $1,443
1998........................................................   1,203
1999........................................................     990
2000........................................................     728
2001........................................................     579
Thereafter..................................................   2,053
                                                              ------
Total.......................................................  $6,996
                                                              ======
</TABLE>
 
     The Company assigned certain of its channel licenses to a group affiliated
with the Company in November 1993 and entered into agreements to lease those
channels for an initial term of five years, renewable at the Company's option,
for an unlimited number of one-year terms thereafter. Annual lease payments
 
                                      F-20
<PAGE>   56
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
required to be paid by the Company in connection with the aforementioned channel
leases were nominal. The majority of such licenses were reassigned to the
Company during 1996.
 
  Operating Leases
 
     The Company leases various office, warehouse and transmission tower space
and certain office equipment, furniture and vehicles. Rent expense during 1994,
1995 and 1996 was approximately $1.2 million, $2.4 million and $2.7 million,
respectively. Future minimum commitments as of December 31, 1996 under these
leases are as follows (in thousands):
 
<TABLE>
<S>                                                           <C>
1997........................................................  $ 2,762
1998........................................................    2,408
1999........................................................    1,818
2000........................................................    1,469
2001........................................................      858
Thereafter..................................................    1,892
                                                              -------
Total.......................................................  $11,207
                                                              =======
</TABLE>
 
  Capital Leases
 
     The Company leases certain vehicles and office equipment under
noncancelable capital leases. Equipment capitalized under such leases as of
December 31, 1995 and 1996 was approximately $3.1 million and $2.2 million,
respectively. Future minimum payments for capital leases as of December 31, 1996
are approximately $1,051,000, $896,000, $225,000, $15,000 and $1,000 for the
years ending December 31, 1997 through 2001, respectively, including interest of
approximately $251,000.
 
11. COMMITMENTS AND CONTINGENCIES
 
  Seattle Agreement
 
     Pursuant to a consulting agreement, the Company issued 10% of the Common
Stock of American Telecasting of Seattle, Inc., to a third party, and is
required to issue up to an additional 5% in the event that a certain subscriber
level is achieved in the Seattle system once it becomes operational.
 
  Programming Agreements
 
     The Company has entered into a series of noncancelable agreements to
purchase entertainment programming for rebroadcast which expire through 2005.
The agreements generally require monthly payments based upon the number of
subscribers to the Company's systems, subject to certain minimums. Such expenses
totaled approximately $5.9 million, $14.4 million and $19.3 million in 1994,
1995 and 1996, respectively.
 
  Litigation
 
     In February 1994, a complaint was filed by Fresno Telsat, Inc. ("Fresno
Telsat") in the Superior Court of the State of California for the County of
Monterey against a director and officer of the Company, the Company, and other
named and unnamed defendants. The complaint seeks compensatory damages (in an
unspecified amount but estimated by the plaintiff to be no less than $5 million)
and exemplary damages against all defendants, costs, and other relief. The
complaint alleges, among other claims, that all defendants, including the
Company, participated in a conspiracy to misappropriate corporate opportunities
belonging to Fresno Telsat. Although the ultimate outcome of this matter cannot
be predicted, management believes, based on its review of this claim and
discussion with legal counsel, that the resolution of this matter will not have
a material impact on the Company's financial position or future results of
operations.
 
                                      F-21
<PAGE>   57
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On January 12, 1996, Videotron (Bay Area) Inc. filed a complaint against
ATI in the Circuit Court of the Thirteenth Judicial Circuit in and for
Hillsborough County, Florida. The Complaint alleges that ATI has caused certain
entities from which ATI leases channels and airtime for its Bradenton and
Lakeland, Florida wireless cable markets (the "ATI Lessors") to actively oppose
Videotron's FCC applications to increase broadcast power in Videotron's Tampa,
Florida wireless cable system (the "Tampa market") in violation of a
Non-Interference Agreement between Videotron and ATI (the "Non-Interference
Agreement"). The Complaint seeks injunctive relief directing ATI to perform all
acts, services and undertakings required under the Non-Interference Agreement,
including but not limited to using reasonable best efforts to cause the ATI
Lessors not to object to Videotron's attempt to increase broadcast power in the
Tampa market and to enter into certain non-interference agreements with respect
thereto. In the alternative, the Complaint seeks damages for breach of the
Non-Interference Agreement (in an unspecified amount but exceeding $15,000).
Recently, in responding to written interrogatories, Videotron estimated its
damages to be approximately $113.5 million. Although the ultimate outcome of
this litigation cannot be predicted at this time, management of ATI believes,
based upon its review of the Complaint and after consultation with counsel, that
resolution of this matter will not have a material adverse impact on the
Company's financial position or future results of operations.
 
     In addition, the Company is occasionally a party to legal actions arising
in the ordinary course of its business, the ultimate resolution of which cannot
be ascertained at this time. However, in the opinion of management, resolution
of such matters will not have a material adverse effect on the Company.
 
12. INCOME TAXES
 
     As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $156.6 million. The
NOLs expire in years 2003 through 2011. The use of the NOLs is subject to
statutory and regulatory limitations regarding changes in ownership. SFAS No.
109 requires that the tax benefit of NOLs for financial reporting purposes be
recorded as an asset. To the extent that management assesses the realization of
deferred tax assets to be less than "more likely than not," a valuation reserve
is established.
 
     The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1995 and 1996, are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1995        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Deferred tax assets:
  Net operating loss carryforwards..........................  $ 41,123    $ 59,494
  Interest expense not currently deductible.................     9,758      22,278
  Other.....................................................     1,881         664
                                                              --------    --------
Total gross deferred tax assets.............................    52,762      82,436
Deferred tax liabilities:
  Basis differences attributable to purchase accounting
     (Choice TV Group, People's Cable and FWCTI -- see Note
     3).....................................................   (16,643)    (20,897)
  Property and equipment, principally due to differences in
     depreciation and capitalized installation costs........   (14,964)     (9,654)
                                                              --------    --------
Total deferred tax liabilities..............................   (31,607)    (30,551)
Less valuation reserve......................................   (27,286)    (54,719)
                                                              --------    --------
Net deferred tax liability..................................  $( 6,131)   $( 2,834)
                                                              ========    ========
</TABLE>
 
                                      F-22
<PAGE>   58
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The income tax benefit for the years ended December 31, 1995 and 1996 is
comprised of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                              ----------------
                                                               1995      1996
                                                              ------    ------
<S>                                                           <C>       <C>
Currently Payable:
  Federal...................................................  $   --    $   --
  State.....................................................      --        --
Deferred:
  Federal...................................................   1,907     2,769
  State.....................................................     363       528
                                                              ------    ------
                                                              $2,270    $3,297
                                                              ======    ======
</TABLE>
 
     The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax benefit for the years ended December 31, 1995 and 1996 is as
follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                              --------------
                                                              1995      1996
                                                              ----      ----
<S>                                                           <C>       <C>
Tax at U.S. statutory rates.................................   35%       35%
Effect of graduated rates...................................   (1)       (1)
State income taxes, net of federal tax benefit..............    4         4
Losses not benefited for financial reporting purposes.......  (32)      (26)
Other, net..................................................   (2)       (9)
                                                              ---       ---
                                                                4%        3%
                                                              ===       ===
</TABLE>
 
13. BENEFIT PLANS
 
     The Company sponsors a defined contribution profit sharing plan, the
"American Telecasting, Inc. 401(K) Retirement Plan" (the "Plan"). Substantially
all of the Company's employees are eligible to participate in the Plan, which
commenced existence on September 1, 1994. Company contributions to the Plan are
based on a percentage of employee's contributions, subject to certain maximum
limits. The cost of the Plan for the years ended December 31, 1994, 1995 and
1996 approximated $52,000, $249,000 and $122,000, respectively.
 
     The Company also sponsors an employee stock ownership plan, the "American
Telecasting, Inc. Associate Stock Purchase Plan" (the "Stock Purchase Plan").
Generally, all full-time employees who have been employed by the Company for at
least one year are eligible to participate in the Stock Purchase Plan. The
purchase price of each share of the Company's Class A Common Stock purchased by
Stock Purchase Plan participants is 90% of the closing price of the Class A
Common Stock on the last day of each calendar quarter. The shares are purchased
in the open market and the Company pays ten percent of the purchase price and
all administrative costs. An aggregate of 250,000 shares of the Company's Class
A Common Stock may be sold pursuant to the Stock Purchase Plan. As of December
31, 1996, 245,764 additional shares may be sold pursuant to the Stock Purchase
Plan. Employer contributions and administrative costs paid by the Company
related to the Stock Purchase Plan aggregated $16,000 and $22,000 during the
years ended December 31, 1995 and 1996, respectively.
 
                                      F-23
<PAGE>   59
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. RELATED PARTY TRANSACTIONS
 
     As of December 31, 1995 and 1996, the Company had loans in the form of
demand promissory notes to officers, employees and others totaling $543,000 and
$322,000, respectively. Such notes generally bear interest at rates ranging from
the prime rate plus 1.0% to the prime rate plus 1.25% and are due on demand.
 
15. QUARTERLY RESULTS OF OPERATIONS
 
     The following summarizes the Company's unaudited quarterly results of
operations for 1996 and 1995 (dollars in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                            ------------------------------------------------
                                            MARCH 31   JUNE 30    SEPTEMBER 30   DECEMBER 31
                                            --------   --------   ------------   -----------
<S>                                         <C>        <C>        <C>            <C>
Year Ended December 31, 1996:
  Total revenues..........................  $ 15,423   $ 15,422     $ 15,456      $ 15,731
  Loss from operations....................   (10,419)   (10,111)     (11,360)      (34,299)
  Net loss................................   (18,749)   (18,396)     (20,212)      (41,023)
  Net loss applicable to Class A Common
     Stock................................   (18,749)   (18,396)     (20,212)      (47,273)
  Net loss per share applicable to Class A
     Common Stock.........................  $  (1.13)  $  (1.06)    $  (1.09)     $  (2.38)
Year Ended December 31, 1995:
  Total revenues..........................  $  9,444   $ 10,987     $ 13,009      $ 14,061
  Loss from operations....................    (6,146)    (6,744)      (8,146)      (14,630)
  Loss before extraordinary charge and
     cumulative effect of accounting
     change...............................    (7,711)   (10,764)     (14,351)      (22,870)
  Net loss................................    (7,109)   (10,764)     (25,892)      (22,870)
  Loss per share before extraordinary
     charge and cumulative effect of
     accounting change....................  $  (0.51)  $  (0.68)    $  (0.88)     $  (1.39)
  Net loss per share......................     (0.47)     (0.68)       (1.58)        (1.39)
</TABLE>
 
     During the fourth quarter of 1996, the Company recognized an impairment
loss on its wireless cable assets of approximately $21.3 million and a preferred
dividend of approximately $6.3 million relating to its Series B Convertible
Preferred Stock. During the fourth quarter of 1995, the Company recognized
approximately $1.3 million related to certain severance, lease termination and
other costs.
 
     The total of net loss per share for the 1996 and 1995 quarters does not
equal net loss per share for the respective years as per share amounts for each
quarter and for the year are computed based on their respective discrete
periods.
 
                                      F-24
<PAGE>   60
 
                  AMERICAN TELECASTING, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
16. VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                           ADDITIONS
                                             BALANCE AT    CHARGED TO                   BALANCE AT
                                            BEGINNING OF   COSTS AND                      END OF
                                               PERIOD       EXPENSES    DEDUCTIONS(1)     PERIOD
                                            ------------   ----------   -------------   ----------
<S>                                         <C>            <C>          <C>             <C>
For the Year ended December 31, 1994
  Deducted from asset accounts:
     Allowance for uncollectible
       accounts...........................      $156         $  986(2)     $  598          $544
                                                ====         ======        ======          ====
For the Year ended December 31, 1995
  Deducted from asset accounts:
     Allowance for uncollectible
       accounts...........................      $544         $2,714(3)     $2,342          $916
                                                ====         ======        ======          ====
For the Year ended December 31, 1996
  Deducted from asset accounts:
     Allowance for uncollectible
       accounts...........................      $916         $2,322        $2,551          $687
                                                ====         ======        ======          ====
</TABLE>
 
---------------
 
(1) Uncollectible accounts written off, net of recoveries.
 
(2) Includes additions of $155 attributable to purchase accounting.
 
(3) Includes additions of $287 attributable to purchase accounting.
 
                                      F-25
<PAGE>   61
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                            AMERICAN TELECASTING, INC.
 
                                            By:    /s/ ROBERT D. HOSTETLER
                                              ----------------------------------
                                                     Robert D. Hostetler
                                              President, Chief Executive Officer
                                                          and Director
 
Date: March 25, 1997
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 25, 1997:
 
<TABLE>
<CAPTION>
                      SIGNATURE                                            TITLE
                      ---------                                            -----
<C>                                                    <S>
 
             By: /s/ DONALD R. DEPRIEST                Chairman of the Board and Director
  -------------------------------------------------
                 Donald R. DePriest
 
             By: /s/ ROBERT D. HOSTETLER               President, Chief Executive Officer and
  -------------------------------------------------      Director (Principal Executive Officer)
                 Robert D. Hostetler
 
              By: /s/ RICHARD F. SENEY                 Vice Chairman of the Board, Secretary and
  -------------------------------------------------      Director
                  Richard F. Seney
 
              By: /s/ DAVID K. SENTMAN                 Senior Vice President, Chief Financial Officer
  -------------------------------------------------      and Treasurer (Principal Financial Officer)
                  David K. Sentman
 
             By: /s/ FRED C. PATTIN, JR.               Controller (Principal Accounting Officer)
  -------------------------------------------------
                 Fred C. Pattin, Jr.
 
             By: /s/ MITCHELL R. HAUSER                Director
  -------------------------------------------------
                 Mitchell R. Hauser
 
             By: /s/ JAMES S. QUARFORTH                Director
  -------------------------------------------------
                 James S. Quarforth
 
               By: /s/ CARL A. ROSBERG                 Director
  -------------------------------------------------
                   Carl A. Rosberg
</TABLE>
<PAGE>   62
 
                               INDEX TO EXHIBITS
 
      EXHIBIT NO.                           DESCRIPTION
 
        3.1  -- Certificate of Designation for Series B Convertible Preferred
                Stock of American Telecasting, Inc. dated August 6, 1996
                (incorporated by reference to Exhibit 4.1 to the Company's Form
                8-K filed on August 7, 1996).
 
        3.2  -- Amendment to Restated Certificate of Incorporation of American
                Telecasting, Inc. dated April 24, 1996 (incorporated by
                reference to Exhibit 3.1(i) to the Company's Quarterly Report on
                10-Q for the period ended June 30, 1996).
 
        3.3  -- Restated Certificate of Incorporation of American Telecasting,
                Inc., dated April 27, 1995 (incorporated by reference to Exhibit
                3.1 to the Company's Quarterly Report on Form 10-Q for the
                period ended March 31, 1995).
 
        3.4  -- Amended and Restated By-Laws of American Telecasting, Inc.
                (incorporated by reference to Exhibit 3.2 to the Company's
                Quarterly Report on Form 10-Q for the period ended March 31,
                1995).
 
        4.1  -- Specimen Common Stock Certificate (incorporated by reference to
                Exhibit 2 to the Company's Registration Statement on Form 8-A
                filed on December 6, 1993).
 
        4.2  -- Specimen Class A Common Stock Certificate (incorporated by
                reference to Exhibit 4.2 to the Company's Registration Statement
                on Form S-3 filed on April 26, 1996).
 
        4.3  -- Specimen Class B Common Stock Certificate.
 
        4.4  -- Specimen Series B Convertible Preferred Stock Certificate.
 
        4.5  -- Supplemental Indenture dated as of August 10, 1995 between
                American Telecasting, Inc. and First Trust National Association,
                Trustee, supplementing and amending the Indenture dated as of
                June 23, 1994 (incorporated by reference to Exhibit 4.1 to the
                Company's Quarterly Report on Form 10-Q for the period ended
                June 30, 1995).
 
        4.6  -- Indenture dated as of June 23, 1994 between American
                Telecasting, Inc. and First Trust National Association, Trustee
                (incorporated by reference to Exhibit 4.2 to the Company's
                Annual Report on Form 10-K for the period ended December 31,
                1994).
 
        4.7  -- Form of Senior Discount Note due 2004 (included within Exhibits
                4.5 and 4.6).
 
        4.8  -- Supplemental Warrant Agreement dated as of August 10, 1995
                between American Telecasting, Inc. and First Union National Bank
                of North Carolina, as warrant agent (incorporated by reference
                to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
                for the period ended June 30, 1995).
 
        4.9  -- Warrant Agreement dated as of June 23, 1994 between American
                Telecasting, Inc. and First Union National Bank of North
                Carolina, as warrant agent (incorporated by reference to Exhibit
                4.4 to the Company's Annual Report on Form 10-K for the period
                ended December 31, 1994).
 
        4.10 -- Form of Warrant (included within Exhibits 4.8 and 4.9).
 
        4.11 -- Collateral and Disbursement Agreement dated as of June 23, 1994
                between First Trust National Association and American
                Telecasting, Inc. (incorporated by reference to Exhibit 4.3 to
                the Company's Annual Report on Form 10-K for the period ended
                December 31, 1994).
<PAGE>   63
 
      EXHIBIT NO.                           DESCRIPTION
 
        4.12 -- Indenture dated as of August 10, 1995 between American
                Telecasting, Inc., as Issuer, and First Trust National
                Association, as Trustee (incorporated by reference to Exhibit
                4.3 to the Company's Quarterly Report on Form 10-Q for the
                period ended June 30, 1995).
 
        4.13 -- Form of Senior Discount Note due 2005 (included within Exhibit
                4.12).
 
        4.14 -- Warrant Agreement dated as of August 10, 1995 between American
                Telecasting, Inc. and First Union National Bank of North
                Carolina, as warrant agent (incorporated by reference to Exhibit
                4.5 to the Company's Quarterly Report on Form 10-Q for the
                period ended June 30, 1995).
 
        4.15 -- Form of Warrant (included within Exhibit 4.14).
 
        4.16 -- Registration Rights Agreement dated as of August 10, 1995 by and
                among American Telecasting, Inc. and Dillon Read & Co., Inc. and
                CS First Boston Corporation (incorporated by reference to
                Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for
                the period ended June 30, 1995).
 
       10.1  -- Stock Purchase and Sale Agreement dated as of June 7, 1995 by
                and between Bruce Merrill and Virginia Merrill and their
                successors in trust, as trustees of the Merrill Revocable Trust
                dated August 20, 1982 and American Telecasting, Inc.
                (incorporated by reference to Exhibit 10.1 to the Company's
                Quarterly Report on Form 10-Q for the period ended June 30,
                1995).
 
       10.2  -- Binding Letter Agreement dated as of July 6, 1995 by and between
                Red Rock Communications, Inc. and American Telecasting, Inc.
                (incorporated by reference to Exhibit 10.2 to the Company's
                Quarterly Report on Form 10-Q for the period ended June 30,
                1995).
 
       10.3  -- Management Agreement dated as of February 3, 1996 between Fresno
                MMDS Associates and American Telecasting Development, Inc.
                (incorporated by reference to Exhibit 10.12 to the Company's
                Annual Report on Form 10-K for the year ended December 31,
                1995).
 
       10.4  -- Standard Commercial Lease Agreement, dated as of September 18,
                1995, between Tech Center VI Associates, L.P., as Lessor, and
                American Telecasting, Inc., as Lessee (incorporated by reference
                to Exhibit 10.13 to the Company's Annual Report on Form 10-K for
                the year ended December 31, 1995).
 
       10.5  -- Employment Agreement effective as of January 4, 1996 between
                American Telecasting, Inc. and Robert D. Hostetler (incorporated
                by reference to Exhibit 10.1 to the Company's Quarterly Report
                on 10-Q for the period ended March 31, 1996).
 
       10.6  -- Employment Agreement dated August 10, 1995 between American
                Telecasting, Inc. and David K. Sentman (incorporated by
                reference to Exhibit 10 to the Company's Quarterly Report on
                Form 10-Q for the period ended September 30, 1995).
 
       10.7  -- First Amendment to Amended and Restated Revolving Credit
                Agreement dated as of June 30, 1996 among Fresno MMDS
                Associates, First Union National Bank of North Carolina, Fresno
                Telsat, Inc. and Fresno Wireless Cable Television, Inc.; related
                Subordination Agreement dated as of June 30, 1996 by American
                Telecasting, Inc. and Fresno MMDS Associates in favor of First
                Union National Bank of North Carolina; related Assignment
                Acceptance and Intercreditor Agreement dated as of July 18, 1996
                among First Union National Bank of North Carolina as agent and
                Fresno MMDS Associates (incorporated by reference to Exhibit
                10.4 to the Company's Quarterly Report on 10-Q for the period
                ended June 30, 1996).
<PAGE>   64
 
      EXHIBIT NO.                           DESCRIPTION
 
       10.8  -- Side agreement between Fresno Telsat, Inc. and American
                Telecasting, Inc. dated July 18, 1996 (incorporated by reference
                to Exhibit 10.5 to the Company's Quarterly Report on 10-Q for
                the period ended June 30, 1996).
 
       10.9  -- Amended and Restated Revolving Credit Agreement between Fresno
                MMDS Associates, First Union National Bank of North Carolina,
                Fresno Telsat, Inc. and Fresno Wireless Cable Television, Inc.
                dated as of September 30, 1994; related Amended and Restated
                Revolving Credit Note by Fresno MMDS Associates in favor of
                First Union National Bank of North Carolina; related Pledge and
                Security Agreement dated as of September 30, 1994 between Fresno
                MMDS Associates and First Union National Bank of North Carolina;
                related Collateral Assignment and Security Agreement dated as of
                September 30, 1994 by and between FMA Licensee Subsidiary, Inc.
                and First Union National Bank of North Carolina (incorporated by
                reference to Exhibit 10.21 to the Company's Form S-4
                Registration Statement filed on September 22, 1995).
 
       10.10 -- Credit Agreement dated as of February 26, 1997, among American
                Telecasting, Inc. and Banque Indosuez, New York Branch, as
                Agent, and the lending institutions listed therein (the
                "Banks"); related Option Agreement dated as of February 26, 1997
                among American Telecasting, Inc. and Indosuez CM II, Inc.;
                related Bond Appreciation Rights Certificate dated February 26,
                1997; related Securities Pledge Agreement dated as of February
                26, 1997 in favor of Banque Indosuez, New York Branch, as
                pledgee, assignee and secured party, in its capacity as
                collateral agent for the Banks; related Securities Pledge
                Agreement dated as of February 26, 1997 made by American
                Telecasting of Green Bay, Inc. in favor of Banque Indosuez, New
                York Branch, as pledgee, assignee and secured party, in its
                capacity as collateral agent for the Banks; related General
                Security Agreement dated as of February 26, 1997 made by certain
                subsidiaries of American Telecasting, Inc. in favor of Banque
                Indosuez, New York Branch, as pledgee, assignee and secured
                party, in its capacity as collateral agent for the Banks;
                related Registration Rights Agreement dated as of February 26,
                1997 among American Telecasting, Inc. and the holders of the
                warrants to purchase an aggregate of 141,667 shares of the Class
                A Common Stock of American Telecasting, Inc.; related Securities
                Pledge Agreement dated as of February 26, 1997 made by American
                Telecasting, Inc. in favor of Banque Indosuez, New York Branch,
                as pledgee, assignee and secured party, in its capacity as
                collateral agent for the Banks.
 
       10.11 -- Form of Underwriting Agreement dated as of May 21, 1996 among
                Alex. Brown & Sons Incorporated, Dillon, Read & Co. Inc., and
                American Telecasting, Inc. (incorporated by reference to Exhibit
                1.1 to the Company's Registration Statement on Form S-3 filed on
                April 10, 1996).
 
       10.12 -- Stock Purchase Agreement dated as of August 6, 1996 by and among
                American Telecasting, Inc., Museum Assets Ltd., and Ashline,
                Ltd. (incorporated by reference to Exhibit 10.2 to the Company's
                Quarterly Report on 10-Q for the period ended September 30,
                1996).
 
       10.13 -- Stock Purchase Agreement dated October 25, 1996 by and among
                American Telecasting, Inc., Wartone Property Holdings, Ltd.,
                Harleko Ltd., and Tarian Properties, Ltd. (incorporated by
                reference to Exhibit 10.2 to the Company's Quarterly Report on
                10-Q for the period ended September 30, 1996).
 
       10.14 -- Agreement for Purchase and Sale of Assets dated June 28, 1996
                among Novner Enterprises, Inc., Alvin Novick, Phyllis Novick,
                American Telecasting of Cincinnati, Inc. and American
                Telecasting, Inc. (incorporated by reference to Exhibit 10.1 to
                the Company's Quarterly Report on 10-Q for the period ended June
                30, 1996).
<PAGE>   65
 
      EXHIBIT NO.                           DESCRIPTION
 
       10.15 -- Management Agreement dated as of June 28, 1996 between Novner
                Enterprises, Inc. and American Telecasting of Cincinnati, Inc.
                (incorporated by reference to Exhibit 10.2 to the Company's
                Quarterly Report on 10-Q for the period ended June 30, 1996).
 
       10.16 -- Agreement for Exchange of Assets dated July 10, 1996 among
                Heartland Wireless Communications, Inc., Heartland Wireless
                South Dakota Properties, Inc., Heartland Wireless Florida
                Properties, Inc. and American Telecasting, Inc. (incorporated by
                reference to Exhibit 10.3 to the Company's Quarterly Report on
                10-Q for the period ended June 30, 1996).
 
       10.17 -- American Telecasting, Inc. 1990 Stock Option Program, As Amended
                (Effective April 25, 1996) (incorporated by reference to Exhibit
                10.6 to the Company's Quarterly Report on 10-Q for the period
                ended June 30, 1996).
 
       10.18 -- Form of Registration Rights Agreement between American
                Telecasting, Inc. and Stockholder (incorporated by reference to
                Exhibit 10.40 to the Company's Form S-1 Registration Statement
                filed on October 8, 1993).
 
       11.1  -- Statement regarding computation of per share earnings.
 
       21.1  -- Subsidiaries of American Telecasting, Inc.
 
       23.1  -- Consent of Independent Public Accountant.
 
       27.1  -- Financial Data Schedule.