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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-23694
HEARTLAND WIRELESS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1435149
(State or other jurisdiction of incorporation or (I.R.S. employer identification no.)
organization)
200 CHISHOLM PLACE, SUITE 200, 75075
PLANO, TEXAS (Zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 423-9494
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g):
(TITLE OF CLASS)
Common Stock, par value $.001 per share
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 is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant is $439,897, based on the closing bid of the registrant's common
stock, $.001 par value per share, on March 12, 1999, as reported on the OTC
Bulletin Board quotation service. On April 1, 1999, the outstanding shares of
common stock of the registrant, $ .001 par value will be canceled pursuant to
the terms of a Plan of Reorganization filed by the registrant under Chapter 11
of the U.S. Bankruptcy Code and confirmed on March 15, 1999 by the U.S.
Bankruptcy Court for the District of Delaware. See "Business - Financial
Restructuring."
The number of outstanding shares of common stock of the registrant,
$.001 par value, as of March 12, 1999, was 19,790,551.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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HEARTLAND WIRELESS COMMUNICATIONS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I PAGE.
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Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 34
PART III
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management 44
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
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PART I
ITEM 1. BUSINESS
OVERVIEW
Heartland Wireless Communications, Inc. (the "Company") provides
wireless broadband (i.e., high-capacity) network and multichannel subscription
television services in the 2.1 gigahertz ("GHz") to 2.7 GHz range of the radio
spectrum, primarily in mid-size and small markets in the central United States.
The Company was formed in October 1993 as the successor to Wireless
Communications, Inc., an Oklahoma corporation formed in September 1990 to own
and operate wireless subscription television businesses.
To date, the Company's principal business has been wireless
multichannel video programming distribution over MMDS (defined below) radio
spectrum (a "wireless MVPD"). As a wireless MVPD, the Company provides an
average of 25 analog channels of cable television and local broadcast network
programming to 57 operating markets in the central United States. The Company
also offers up to 185 channels of digital direct broadcast satellite ("DBS")
programming from DIRECTV, Inc. ("DIRECTV") in 51 of its operating markets, under
cooperative marketing agreements with DIRECTV and its distributors. See
"Business - Multichannel Subscription Video." In addition to its 57 operating
markets, the Company owns the BTA authorization (see "Business-Government
Regulation") from the Federal Communications Commission (the "FCC"), or
otherwise has aggregated MMDS channel rights in the 2.1 GHz to 2.7 GHz range, in
29 unconstructed markets. The Company also leases the rights to 20 MHz of
"Wireless Communications Service" ("WCS") spectrum in the 2.3 GHz range in 19
markets, and has entered into an agreement to acquire such spectrum from CS
Wireless Systems, Inc. ("CS Wireless") pending FCC approval. See "Business
Recent Transactions." At December 31, 1998, the Company provided wireless
multichannel video service to approximately 160,000 subscribers. The Company is
the largest wireless MVPD, in terms of subscribers, in the United States.
While the Company is continuing its business as a wireless MVPD, the
Company's primary long-term business strategy encompasses exploiting and
expanding the use of its spectrum through the delivery of broadband network
services such as high-speed Internet access and Internet Protocol (IP) telephony
services and the consolidation of additional MMDS spectrum in other medium-sized
markets in the United States for such use. The Company provides two-way
high-speed wireless digital communications services in one operating market
(Sherman/Denison, Texas) and is constructing a similar system in Austin, Texas.
The Company offers high-speed Internet access in Sherman/Denison, Texas
primarily to medium-sized businesses and small offices/home offices ("SOHOs").
The Company's offerings include Internet access at speeds from 256 Kilobits per
second ("Kbps") to 1.54 Megabits per second ("Mbps"). The Company, through
national independent contractors, also offers technical support, e-mail, Web
design and hosting and domain name registration and maintenance in connection
with its high-speed Internet access business.
Wireless network service providers in the 2.1 GHz to 2.7 GHz range
transmit signals through the air via microwave frequencies from transmission
facilities to a small receiving and/or transmitting antenna at each subscriber's
location, which generally requires a direct, unobstructed line-of-sight from the
transmission facility to the subscriber's receiving antenna. The Company
utilizes up to 196 megahertz ("MHz") of radio spectrum in each market allocated
by the FCC as Multichannel Multipoint Distribution Service ("MMDS"), Multipoint
Distribution Service ("MDS") and Instructional Television Fixed Service
("ITFS"). This spectrum commonly is referred to collectively as "MMDS," and
unless the context requires otherwise, is referred to collectively as such in
this Form 10-K. The Company's wireless multichannel video operations also are
sometimes referred to as "wireless cable."
The executive offices of the Company are located at 200 Chisholm Place,
Suite 200, Plano, Texas 75075, and the telephone number of the executive offices
is (972) 423-9494. Unless the context otherwise requires, all references in this
Form 10-K to the Company refer collectively to the Company, its predecessors and
its majority-owned subsidiaries.
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FORWARD LOOKING STATEMENTS
Certain statements in this report relating to the Company's operating
results, and plans and objectives of management for future operations, including
plans or objectives relating to the Company's business strategy and financing
needs, are forward looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "1934 Act"). These statements
can be identified by the use of forward looking terminology such as "believes,"
"expects," "may," "intends," "will," "should," or "anticipates" or comparable
terminology or by discussions of strategy. Such statements are based on an
assessment of a variety of factors, contingencies and uncertainties deemed
relevant by management, including (i) consummation of the Restructuring in a
timely manner, (ii) the need for additional financing to fund the Company's
business strategy, (iii) business and economic conditions in the Company's
existing markets, (iv) the emergence of one or more national manufacturers of
wireless broadband customer premise and transmission equipment for two-way
Internet, data and IP telephony services provided over MMDS spectrum, (v)
regulatory and interference issues, including the grant of pending applications
for new licenses or for modification of existing licenses and the grant of
applications for new licenses and license modification applications that have
not yet been filed with the FCC, and (vi) competitive products and services, as
well as those matters discussed specifically elsewhere herein. As a result, the
actual results realized by the Company could differ materially from the
statements made herein. Investors are cautioned not to place undue reliance on
the forward looking statements made in this report.
FINANCIAL RESTRUCTURING
In the second quarter of 1997, in an effort to conserve capital
resources, the Company suspended new subscription video system launches and
decreased marketing efforts while it undertook a revision of its business plan.
In the first quarter of 1998, the Board of Directors of the Company (the
"Board") directed management to explore alternatives that would enable the
Company to preserve enterprise value and implement a long-term business
strategy. In anticipation of upcoming debt service obligations on certain of its
senior debt instruments, among other things, the Company retained Wasserstein
Perella & Co., Inc. ("WP&Co.") in the first quarter of 1998 as its financial
advisor to analyze the options available to finance the Company's business plan
and service its debt.
In consultation with WP&Co., the Company announced on April 15, 1998
that it would not make a semiannual interest payment of $7.5 million due to the
holders of $115 million 13% senior notes (the "Old 13% Notes"). The Company made
an interest payment of $8.75 million due on that date to the holders of $125
million 14% senior notes (the "Old 14% Notes") from an interest escrow account.
The Old 13% Notes and the Old 14% Notes are referred to collectively as the "Old
Senior Notes."
In May 1998, management met with certain holders of the Old Senior
Notes, and in June 1998, holders of at least 66 2/3% in principal amount of the
Old Senior Notes formed an ad hoc committee to negotiate a restructuring of the
Old Senior Notes. In October 1998, the Company elected not to make interest
payments on the Old Senior Notes totaling $16.2 million. On December 4, 1998,
the Company filed a voluntary, prenegotiated Plan of Reorganization (the "Plan")
and Disclosure Statement under Chapter 11 of the U.S. Bankruptcy Code in U.S.
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") (In re
Heartland Wireless Communications, Inc., Case No. 98-2692 (JJF)). The Company
filed the Plan with the prepetition agreement from the holders of more than 70%
in principal amount of the Old Senior Notes to support the Plan.
On January 19, 1999, the Company filed a revised Plan with the
Bankruptcy Court to reflect certain immaterial additions and revisions to the
original Plan. On the same date, the Bankruptcy Court approved the Company's
Disclosure Statement. Shortly thereafter, the Company commenced the solicitation
of consents to the Plan from the holders of the Senior Notes and other claims
entitled to vote. On February 9, 1999, the Company filed the Plan and Disclosure
Statement with the Securities and Exchange Commission (the "SEC") in a Current
Report on Form 8-K dated January 19, 1999.
The Plan provides for the cancellation of all issued and outstanding
common stock, options granted under the Old Stock Option Plans (defined below),
warrants and any other equity interests of the Company (collectively, the "Old
Common Stock"). Holders of the Old Senior Notes will receive 97% of the issued
and outstanding common stock
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("New Common Stock") of the Reorganized Company (defined below), subject to
claims of holders of certain other miscellaneous unsecured claims under the
Plan. Holders of the Company's $40.2 million 9% convertible subordinated
discount notes ("Convertible Notes") will receive the remaining 3% of the New
Common Stock, plus warrants to purchase up to 7.5% of the New Common Stock on a
diluted basis. Holders of the Old Common Stock will receive warrants to purchase
up to 2.5% of the New Common Stock on a diluted basis, subject to certain
securities litigation claims as set forth in the Plan.
The Plan provides for the cancellation of the Company's 1994 Employee
Stock Option Plan ("Old Employee Stock Option Plan") and 1994 Stock Option Plan
for Non-Employee Directors ("Old Non-Employee Directors Stock Option Plan"), and
the adoption of a new Share Incentive Plan ("New Stock Option Plan"). See
"Executive Compensation - New Stock Option Plan." The Old Employee Stock Option
Plan and Old Non-Employee Directors Stock Option Plan are collectively referred
to as the "Old Stock Option Plans."
On March 15, 1999, the Bankruptcy Court confirmed the Plan, which
received the support of the holders of 99% in principal amount of the Old Senior
Notes voting on the Plan. All classes of claims that voted on the Plan approved
the Plan. The Company's Plan and reorganization proceeding in the Bankruptcy
Court is referred to as the "Restructuring." The Plan will become effective on
April 1, 1999. All conditions to effectiveness of the Plan have been satisfied
or duly waived. The Company after the Restructuring is referred to as the
"Reorganized Company."
GOVERNMENT REGULATION
General. MDS/MMDS and ITFS services are subject to regulation by the
FCC pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act authorizes the FCC, among other things, to issue,
revoke, modify and renew station licenses; approve the assignment and/or
transfer of control of such licenses; approve the location of MDS/MMDS and ITFS
systems; regulate the kind, configuration and operation of equipment used by
MDS/MMDS and ITFS systems; and impose certain equal employment opportunity and
other periodic reporting requirements on MDS/MMDS and ITFS operators.
In the Company's markets, 32 six-MHz channels and one four-MHz channel
are available for wireless broadband communications in the MDS/MMDS/ITFS
frequencies, 13 of which can be licensed to commercial entities, such as the
Company, for full-time operation without programming restrictions (MDS and MMDS
channels). Except in limited circumstances, the other 20 channels (ITFS
channels) generally can only be licensed to qualified non-profit educational
organizations and each must be used a minimum of 20 hours per channel per week
for educational purposes. The remaining excess air time on ITFS channels may be
leased for commercial use, without further programming restrictions (other than
the right of the ITFS license holder, at its option, to recapture up to an
additional 20 hours of air time per channel per week for educational
programming).
With respect to new ITFS stations, the FCC only accepts ITFS
applications for new stations or major changes to existing stations if they are
filed within specific windows set by the FCC (typically five days). These
windows are announced by the FCC at least 60 days in advance. Once a filing
window closes, amendments that demonstrate an applicant's eligibility, improve
its comparative standing, seek rule waivers or request changes to proposed
technical operations cannot be filed. Under this national filing window scheme,
applications filed in a particular window are only subject to competing
proposals filed in that same window. All applications filed during a filing
window are subject to a 30-day public notice period, during which petitions to
deny the applications may be filed. Applications that are mutually exclusive
with other applications filed during the window will be subject to the FCC's
comparative selection process.
Generally, in the case of MDS/MMDS/ITFS stations, the FCC issues the
station licensee a conditional license, allowing construction of the station to
commence. Construction generally must be completed within one year of grant of
the conditional license, in the case of MDS/MMDS channels, or 18 months, in the
case of ITFS channels. MDS/MMDS/ITFS licenses generally have terms of 10 years.
All non-BTA (defined below) MDS/MMDS licenses expire on May 1, 2001. Licenses
must be renewed through application and may be revoked by the FCC for cause in a
manner similar to other FCC station licenses. FCC rules prohibit the sale for
profit of an MDS/MMDS conditional license or of a controlling interest in the
conditional license holder prior to construction of the station or, in certain
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instances, prior to the completion of one year of operation. The FCC, however,
does permit the leasing of 100 percent of an MDS/MMDS license holder's spectrum
capacity to a third party and the granting of options to purchase a controlling
interest in a license once the required license holding period has lapsed and
certain other conditions are met. During the lifetime of any such lease or
option agreement, the licensee must remain in control of its FCC license to
avoid violating FCC transfer-of-control rules.
In March 1996, the FCC concluded its first MDS auction ("BTA Auction")
of available commercial spectrum in the 487 basic trading areas ("BTAs") and six
additional BTA-like geographic areas. The winner of a BTA has the exclusive
right to apply for and develop the available MDS/MMDS frequencies in the BTA,
subject to certain specified interference criteria that protect existing or
previously proposed or authorized MDS/MMDS stations. Existing channel rights
holders also must protect the BTA winner's spectrum from interference caused by
modifications to their stations, including power increases or tower relocations.
BTA Auction winners have a ten-year license term and a five-year
"build-out" period. During the build-out period, BTA licensees can initiate or
expand service within their BTA without competition from other applicants. After
the five-year period, BTA licensees can retain their license for an entire BTA
if their signal covers at least two-thirds of the BTA population within their
control. If the BTA holder fails to cover part or all of the BTA population
after the five-year period, then the BTA license for the portion of the BTA that
is not capable of being served may be subject to forfeiture. The FCC's rules
allow BTAs to be partitioned and BTA authorization holders are permitted to
contract with other entities to allow them to file applications with the FCC for
available channels within the partitioned area. BTA licensees may expect renewal
of their BTA licenses after the expiration of their 10-year term if they provide
"substantial service" and are in compliance with the Communications Act and the
FCC's rules.
The Company was the winning bidder in 93 BTAs at a total cost of
approximately $19.8 million. Under the terms of the BTA Auction, the Company
remitted approximately $4.0 million as down payments and deposits. The remaining
$15.8 million bears interest at 9.5% and is being paid under 10-year installment
notes that began in the fourth quarter of 1996 with interest-only payments.
Quarterly payments of principal and interest began in the fourth quarter of
1998. The Company has been awarded authorizations for all BTAs in which the
Company was the high bidder. All of the Company's BTA authorizations have an
effective date of August 16, 1996 except for one, which has an effective date of
September 17, 1996.
The Company has entered into a lease and purchase option agreement with
CS Wireless for 10 BTAs and portions of four additional BTAs (the "Leased
BTAs"). Under this agreement, CS Wireless has reimbursed the Company, and will
continue to reimburse the Company, for all amounts paid by the Company to the
FCC for the Leased BTAs. In addition, the agreement provides CS Wireless with
the option to purchase the Leased BTAs.
Application for renewal of MDS/MMDS licenses must be filed within a
certain period before expiration of the license term, and petitions to deny
applications for renewal may be filed by other parties during certain periods
following the filing of such applications. Licenses are subject to revocation or
cancellation for violations of the Communications Act or the FCC's rules and
policies. Conviction of certain criminal offenses may also render a licensee or
applicant unqualified to hold a license.
The FCC also regulates transmitter locations and signal strengths. The
operation of an MDS/MMDS/ITFS system typically requires the co-location of a
commercially viable number of channels operating with common technical
characteristics. To co-locate channels, an applicant must demonstrate that its
proposed signal does not violate interference standards in the FCC-protected
area of another MDS/MMDS license holder. An MDS/MMDS license holder generally is
protected from interference from another MDS/MMDS operator within a 35-mile
radius of the transmission site. An ITFS license holder is entitled to
protection to all of its receive sites. In addition, an ITFS station is entitled
to a 35-mile protected service area ("PSA"). If such changes would cause the
Company's signal to cause additional interference within the PSA of another
channel license holder, the Company would be required to obtain the consent of
such other license holder. There can be no assurance that such consent would be
received and the failure to receive such consent could adversely affect the
Company's ability to serve the affected market.
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Two-Way Authorization. In September 1998, the FCC issued a Report and
Order, which amended its rules to allow for the use of MDS/MMDS/ITFS spectrum
for fixed, two-way digital voice, video and data communications. As amended,
these rules are referred to as the "two-way rules." The two-way rules went into
effect January 25, 1999.
The two-way rules are intended to provide licensees and operators in
the MDS/MMDS/ITFS services with the technical and operational flexibility to add
various digital two-way services to their current offerings. The two-way rules
permit the "cellularization" of MDS/MMDS/ITFS systems through the combined use
of high and low-power booster stations and frequency reuse principles, and
provide flexible channelization and modulation schemes. Two-way service is
provided through the use of "response" stations (for example, at subscribers'
homes) and response station "hubs" or main transmit facilities, which serve as
collection points for upstream transmissions. A streamlined
application/authorization process is also a key characteristic of the two-way
rules.
Under the two-way rules, all 33 MDS/MMDS/ITFS channels can be
used for upstream and/or downstream communications. All MDS/MMDS/ITFS channels
will continue to be subject to the FCC's interference protection requirements
and existing or future channel capacity lease agreements. In addition,
MDS/MMDS/ITFS operators that operate digital two-way transmission systems are
permitted to "shift" required ITFS educational programming to any MDS/MMDS/ITFS
channel within the same operating system and/or, subject to certain limitations,
"swap" their MDS/MMDS/ITFS channels for other channels in the same market.
Channel swaps represent changes in licensees, and require the filing of pro
forma assignment applications with the FCC.
The FCC's streamlined procedure for two-way applications is based to a
significant extent on each applicant's certifications. The FCC will rely on the
accuracy and completeness of an applicant's certification that it is in
compliance with all applicable technical, interference and notification rules,
including all necessary interference consent letters. After an initial one-time
one-week filing window, which is discussed below, the FCC will use a "rolling"
one-day filing window for booster and hub applications. Applications filed on
the same day will not be considered mutually exclusive. Instead, both
applications will be granted and the parties will be required to resolve any
interference issues and file modifications. The FCC has indicated that its staff
will review the applications for completeness, but generally will not conduct
its own interference studies. Applications will be placed on public notice,
giving parties 60 days to file petitions to deny. If no petitions to deny are
filed, the applications are granted on the 61st day. The FCC will perform only
"random" audits of the applications filed.
The FCC has stated that it will, by public notice, announce its plans
to hold a one-time, initial one-week filing window for two-way applications.
That filing window is expected to occur sometime in 1999. All applications filed
during this one-week window will be considered as having been filed on the same
day. Applications will not be considered mutually exclusive. The FCC will issue
a public notice of its receipt of the filed applications, after which applicants
will have 60 days to resolve conflicts and amend their applications. The FCC
will then issue a second public notice accepting the applications that also sets
a 60-day period for parties to file petitions to deny. The rolling one-day
filing window, described above, will start thereafter.
The Cable Act. On October 5, 1992, Congress passed the Cable Television
Consumer Protection and Competition Act of 1992 (the "Cable Act"). Under the
retransmission consent provisions of the Cable Act and the FCC's implementing
regulations, all MVPDs (including both wired and wireless) seeking to retransmit
certain commercial broadcast signals must first obtain the permission of the
broadcast station. Hard-wire cable systems, but not wireless MVPDs, are required
under the Cable Act and the FCC's "must carry" rules to retransmit a specified
number of local commercial and non-commercial television or qualified low power
television signals.
Copyright. Under the Federal copyright laws, permission from the
copyright holder generally must be secured before a video program may be
retransmitted. Under Section 111 of the Copyright Act of 1976 (the "Copyright
Act"), certain "cable systems," including wireless MVPDs, are entitled to engage
in the secondary transmission of programming without the prior permission of the
holders of copyrights in the programming, if a compulsory copyright license is
secured. Such a license may be obtained upon the filing of certain reports and
the payment of certain fees set by copyright arbitration royalty panels.
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Retransmission Consent. Effective October 6, 1993, commercial
broadcasters (other than superstations) could require that cable operators
obtain their consent before retransmitting off-air VHF/UHF broadcasts. The FCC
has exempted wireless MVPDs from the retransmission consent rules if the
receive-site antenna is either owned by the subscriber or within the
subscriber's control and available for purchase by the subscriber upon the
termination of service. In all other cases, wireless MVPDs must obtain consent
to retransmit broadcast signals. The Company has obtained such consents for each
of its existing systems where the Company is retransmitting broadcast signals on
MDS/MMDS/ITFS channels. Such consents will be required in the Company's other
markets. There can be no assurance that the Company will be able to obtain such
consents on terms satisfactory to the Company, if at all.
Other Regulations. MMDS operators are subject to regulation by the FAA
with respect to the construction, maintenance and lighting of transmission
towers and by certain local zoning regulations affecting construction of towers
and other facilities. There may also be restrictions imposed by local
authorities. There can be no assurance that the Company will not be required to
incur additional costs in complying with such regulations and restrictions.
WIRELESS BROADBAND BUSINESS STRATEGY
Overview. The Company's long-term business strategy is to maximize the
value of its broadband spectrum by delivering wireless broadband IP services in
mid-size and small markets. Since its formation, the Company has focused
primarily on the development and operation of MMDS subscription television
systems in small to mid-size markets in the central United States. The Company
currently owns or controls MMDS spectrum and infrastructure and operates a
multichannel video business in 57 markets, and owns the BTA or otherwise
controls MMDS channel rights in an additional 29 markets and 20 MHz of WCS
spectrum in 19 markets. The Company currently intends to continue to operate its
core MMDS multichannel video business for the foreseeable future; however, with
the launch of high-speed Internet access businesses in 1998 by the Company and
other wireless broadband providers, and the FCC's recent approval of two-way,
fixed flexible use of MMDS spectrum, the Company's business strategy has
expanded to incorporate additional applications, as discussed below.
High-Speed Internet/Data. The Company believes that MMDS spectrum
provides a viable broadband option to traditional telephony providers as a
"pipeline" through which Internet and data services can be carried, especially
for small and medium-sized businesses and SOHOs in mid-sized and small markets
who seek a cost-effective means of accessing such on-line services at high
speeds. The Company plans to focus its principal marketing efforts on small to
medium-sized businesses and SOHOs and expects to attract these customers through
both direct sales efforts and in-house telemarketers, as well as through
indirect sales channels such as value-added resellers or "VARs."
In July 1998, the Company entered its first market in Sherman/Denison,
Texas on a developmental basis as a retail business high-speed Internet service
provider ("ISP"). At launch, the Company offered a one-way wireless Internet
service using a six-MHz MMDS channel for downstream transmission and standard
telephone line or ISDN connection for an upstream path. In August 1998, the
Company received developmental authorization from the FCC to conduct two-way
operations in this market, and in February 1999, the Company launched its
two-way service. The Company currently offers a variety of Internet services in
this market for small to mid-size businesses and SOHOs. These services include
Internet access at asynchronous speeds from 256 Kbps to 1.54 Mbps, or up to 53
times faster than traditional telephony speeds of 28.8 Kbps and up to 12 times
faster than Integrated Services Digital Network ("ISDN") speeds of 128 Kbps. The
Company also offers technical support, e-mail, Web design and hosting, domain
name registration and maintenance and domain name changes.
The Company currently provides its high-speed two-way Internet access
to customers via a roof-mounted antenna connected to coaxial cable and a
"wireless" modem/router and transceiver. The cable modem/router interfaces to
the customer's personal computer via an Ethernet card connection or to a network
via an Ethernet hub. Upstream and downstream transmission is provided over two
of the Company's existing MMDS channels and Internet connectivity is maintained
through diverse connections to national Internet backbone providers.
The Company is in the process of upgrading its headend facility in
Austin, Texas in preparation for launching a high-speed Internet access service
in that market. The Company currently expects such launch to occur in May 1999.
Except as discussed above, the Company has not conducted Internet access or
service trials in any of its other markets.
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There can be no assurance that the Company will successfully launch such systems
on a commercial basis in 1999 or thereafter.
IP Telephony. The Company believes that to fully exploit the value of
its assets in the future, it will be required to implement an IP telephony
application for its MMDS spectrum in selected markets. The most logical initial
application is the use of a part of its spectrum as the transmission path for
the loop between the local telephone exchange and the subscriber on the fixed
public switched telephone network ("PSTN"), or "wireless local loop."
To date the Company has not conducted tests involving wireless local
loop telephony over MMDS spectrum. The Company has had discussions with several
prospective manufacturers of network platforms over MMDS spectrum that would be
capable of delivering both high-speed Internet access and IP telephony services.
Although the Company believes that an MMDS system can be designed to
deliver IP telephony services on a commercial basis, there can be no assurance
that such a system can be designed or if such a system could be designed, that
the Company would receive the requisite regulatory approval to offer such
services, that the Company would have the financial resources required to design
and construct such a system, or that such service could be deployed in a
commercially successful manner or at all.
New High-Speed Internet Markets. The Company's current business plan
provides for the launch of a two-way high-speed Internet access business in up
to 20 existing and unconstructed markets by 2001. Any such expansion is subject
to and conditioned on the Company obtaining the requisite regulatory approval,
additional financing and long-term equipment supply commitments in a timely
manner and on terms acceptable to the Company. There can be no guarantee that
such approval, financing or vendor commitments will be available. See "Business
Government Regulation," "MD&A - Future Cash Requirements" and "MD&A - Vendors."
MULTICHANNEL SUBSCRIPTION VIDEO BUSINESS.
Wireless MVPDs operate from a transmission facility ("headend"),
consisting of satellite reception and other equipment necessary to receive the
desired video programming. Programming is then transmitted by microwave
transmitters from an antenna located on a tower to a receiving antenna located
at the subscriber's premises. At the subscriber's premises, the microwave
signals are converted to frequencies that can pass through conventional coaxial
cable into an addressable descrambling converter and then to a television set.
Wireless MVPDs require a clear line-of-sight, because the microwave frequencies
used will not pass through large trees, hills, tall buildings or other
obstructions. However, certain signal blockages can be overcome with the use of
signal boosters which retransmit an otherwise blocked signal over a limited
area. The Company's operating systems transmit at 10 to 100 watts of power from
a transmission tower that generally has a signal pattern covering a radius of 35
miles.
The Company generally can offer its subscribers local off-air VHF/UHF
channels from ABC, NBC, CBS and Fox affiliates and other local independent
broadcast stations, as well as HBO, HBO2, Cinemax, Showtime, Disney, ESPN, CNN,
USA, WGN, WTBS, Discovery, the Nashville Network, A&E and other cable
programming. The channels that the Company offers in each market will vary
depending upon the channel rights secured in such market at the time of system
launch and as the Company continues to acquire channel rights. Generally, the
Company's operating systems lease the majority of their wireless channels. The
terms of such leases typically expire five to 10 years from the license grant
date, ranging from years 1999 to 2009. The majority of such leases provide for
(i) a right of first refusal to purchase the channels after the expiration of
the lease if FCC rules and regulations permit, (ii) an automatic renewal of the
lease of five to 10 years if such automatic renewals are then permitted by the
FCC, and/or (iii) an agreement to negotiate a lease renewal in good faith.
Although the Company does not believe that the termination of or failure to
renew a single channel lease would adversely affect the Company, several of such
terminations or failures in one or more operating systems could have a material
adverse effect on the Company.
Currently, wireless MVPDs can offer a maximum of 33 channels of analog
video programming. Because the Company historically has not used downconverters
that convert signals over the MDS-1 channel (2150 MHz-2156 MHz), and the MDS-2A
channel (2156 MHz-2160 MHz) will not accommodate color video programming
satisfactorily, the Company can offer a maximum of 31 channels of video
programming in its operating and unconstructed markets.
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The Company has supplemented its analog channel capacity by entering into
cooperative marketing alliances with DIRECTV, which allow the Company to offer
up to 185 channels of digital DIRECTV programming in combination with the
Company's MMDS offering or as a stand-alone offering.
The Company expects its marketing alliances with DIRECTV and DIRECTV's
distributors to mitigate historical competitive disadvantages of limited channel
capacity in the single family unit ("SFU") marketplace. The five-year SFU
agreement, signed in April 1998, allows the Company to offer up to 185 channels
of DIRECTV digital programming to SFU subscribers, either alone or in
combination with the Company's local and premium MMDS programming (referred to
as a "combo" package). This agreement provides for a commission to be paid to
the Company for each SFU subscriber to whom the Company sells a DIRECTV
programming package, as well as equipment and marketing subsidies that the
Company believes could materially reduce the capital expenditure costs required
for such new subscribers. The Company currently offers DIRECTV programming to
SFU subscribers in 51 markets. In October 1997, the Company signed a seven-year
agreement with DIRECTV to provide DIRECTV programming to multiple dwelling units
("MDUs"), such as apartment buildings, hotels and condominium complexes. The MDU
agreement is substantially similar to the SFU agreement for this programming.
The Company believes the additional programming offering will allow it to target
higher income properties and renegotiate existing and renewing contracts with
more advantageous economic terms. The Company currently offers DIRECTV
programming to residential MDUs in 50 markets. DIRECTV is a registered trademark
of DIRECTV, Inc., a unit of Hughes Electronics Corp.
Heartland's business plan currently does not include the launch of any
new subscription video-only markets, except to the extent necessary for channel
maintenance and preservation of existing channel rights in unlaunched markets by
building out of transmission facilities in accordance with FCC license
perfection regulations, as well as renegotiation of certain spectrum leases when
and as such leases mature. Moreover, the Company may determine not to expend
additional capital on certain nonstrategic channel leases and/or channel and BTA
licenses where the Company has not aggregated sufficient channel capacity or the
area does not have sufficient line-of-sight households or businesses to provide
an acceptable return on investment, thereby subjecting such leases and licenses
to forfeiture. The launch of any new video markets is contingent on, among other
things, additional financing opportunities and regulatory and interference
issues, including the grant of pending applications for new licenses or for
modification of existing licenses and the grant of applications for new licenses
and license modification applications that have not yet been filed with the FCC.
MMDS operators, including the Company, have experienced interference
from operators of personal communications systems, or PCS, because of proximity
to PCS cell sites and the orientation of individual MMDS receive sites in
certain markets. To date, the Company has experienced moderate PCS interference
in 14 of its 57 operating markets. The Company has addressed such interference
on an individual subscriber basis, replacing the subscriber's integrated down
converter or adding a filter to the subscriber's stand-alone down converter when
necessary. The Company expects that interference from PCS will continue in these
markets and may increase in these and other markets. For all new subscribers in
existing systems and any new systems, the Company intends to purchase integrated
down converters or external filters to eliminate the problem of PCS
interference.
COMPETITIVE ADVANTAGES
The Company believes that it maintains several competitive advantages
in offering wireless broadband IP services to small and medium-sized businesses
in its markets, including the following:
Existing Broadband Network. The Company owns or leases MMDS and/or WCS
spectrum and headends in 57 operating markets and 29 additional unconstructed
markets. The Company believes that because of favorable characteristics of its
spectrum band discussed below, initially it will be able to provide high-speed
Internet service to any of these markets using a single headend design. The
Company expects the incremental cost to upgrade an existing headend for this
service to be from $200,000 to $400,000. Additionally, because of its DBS
alliance with DIRECTV, the Company believes it will control sufficient MMDS or
WCS spectrum in its markets to offer new wireless broadband IP services while
continuing to maintain a multichannel digital video product in an effort to
generate positive operating cash flow to help finance the development of other
broadband wireless services.
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Lower Network Cost. The Company believes that the incremental capital
required for launching IP service in a market and for connecting each customer
will be lower than that of its competitors. The Company's wireless network
involves no wires to install and maintain between the Company's headend and the
end user. Copper and fiber-based systems require significant installation and
maintenance costs, including significant labor costs. The majority of the
Company's network costs will involve technology and transmission, integration
and reception equipment. The Company believes these costs will decrease in time
as technologies improve and economies of scale are achieved.
Demand for Affordable Broadband Last-Mile Connectivity. The Company
believes that there is significant demand among medium-sized and small
businesses in mid-sized markets for affordable broadband IP services like
high-speed Internet access. Internet access and other telecommunications
services to such businesses traditionally have been carried over the PSTN. The
portion of this network that ultimately connects to customer buildings, called
the "last mile," is typically narrowband copper wire, as opposed to fiber, in
the majority of the Company's markets. Additionally, the Company believes that a
significant percentage of its target business customers are unpassed by hardwire
broadband providers. Providers of wireless broadband services other than MMDS,
such as 24 GHz, 28 GHz (local multipoint distribution service or "LMDS") and 38
GHz service, continue to focus on more densely populated urban areas because of
their limited coverage areas. Accordingly, the Company believes that increased
demand for bandwidth-intensive applications, plus a shortage of fiber or other
broadband last-mile solutions in medium-sized markets, will facilitate demand
for broadband network solutions that the Company intends to offer over its MMDS
and WCS spectrum.
High Capacity and Flexible Spectrum. Although the Company will face
competition from other Internet service providers ("ISPs") and
telecommunications service providers, the Company expects to benefit from its
radio frequency band (2.1 GHz to 2.7 GHz), which allows high-capacity broadband
service to be provided over large geographic areas. The Company's MMDS spectrum
is capable of delivering data at speeds of up to 27 Mbps per six-MHz channel.
Through enhanced modulation techniques, sectorization and control of up to 33
channels per market, the Company will have the ability to deliver multi-gigabits
per second transmission capacity. Although other companies may offer wired
services at comparable speeds, the Company believes that such services have
distance limitations which prevent such service providers from guaranteeing
these speeds to all customers. Additionally, while high-speed cable modem
services may provide comparable Internet connectivity, the Company believes that
the majority of its target businesses currently are not passed by such cable
services. In addition to high capacity, the Company's spectrum will allow it to
cover significantly larger coverage areas than other wireless competitors from a
single main transmit facility, to the extent such wireless competitors offer
service in the Company's markets. The Company believes that its typical coverage
area for a single-headend design will be up to 35 miles for high-speed Internet
service, compared to one to three miles for LMDS and 24 GHz service.
Superior Value and Service. The Company's high-speed business Internet
service provides higher bandwidth digital connections than alternative services
at similar prices. The Company's mid-range services provide access speeds of 256
Kbps and 384 Kbps, or two to three times faster than ISDN, at prices comparable
to prevailing ISDN rates. The Company also offers speeds of 768 Kbps to 1.54
Mbps, or the equivalent of T-1 speeds and up to 12 times faster than ISDN, at
prices substantially less than prevailing T-1 rates in the Company's markets.
The Company has engineered its network architecture to provide a minimum of
99.99% reliability, along with fully diverse back-haul traffic routes to the
closest Internet Network Access Point. The Company, through national independent
contractors, also provides technical support, e-mail, Web design and hosting,
and domain name registration and maintenance.
Consolidation Opportunity. The Company believes that it can maximize
its opportunity as a provider of wireless broadband IP services in medium-sized
markets by increasing its geographic scope of service. The Company expects that
increasing its scope would allow it to achieve significant cost efficiencies by,
among other things, leveraging executive management over a larger base of
operations, centralizing certain business functions (e.g., license maintenance,
technology evaluation and deployment, purchasing and inventory, billing,
customer service, general accounting and finance), clustering regionally
adjacent market operations and attracting higher quality sales agents and VARs.
The Company believes that, upon consummation of the Restructuring, it will be in
a unique position to lead a consolidation effort, as an MMDS service provider
with no material long-term debt (except for approximately $12.0 million net debt
relating to BTA licenses) and the largest existing video customer base to help
fund future growth in other wireless broadband services. In February 1999, the
Company filed a Schedule 13D with the SEC indicating that
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it had requested that Wireless One, Inc. ("Wireless One"), the largest MMDS
multichannel video provider in the southeastern U.S., consider an alternative
plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code that would
involve a merger of Wireless One with the Company. See "Business - Recent
Transactions - Wireless One Reorganization Proposal." There can be no assurance
that the Company will be able to consummate any transaction with Wireless One or
any other MMDS company.
Additional Financing. Realization of the above-described competitive
advantages assumes that the Company will be able to obtain additional capital to
implement its wireless broadband IP business strategy. Such strategy is capital
intensive and the Company currently does not expect to generate sufficient cash
flow to fully implement its business strategy. Accordingly, the growth of the
Company's revenue base and the implementation of its business strategy is
subject to and dependent upon consummating the Restructuring and obtaining
additional capital on terms and conditions acceptable to the Company and in a
timely manner. Options for obtaining such capital include the sale or exchange
of debt or equity securities, borrowings under secured or unsecured loan
arrangements, and the sale of assets, including MMDS subscription video systems
and channel rights.
There can be no assurance that the Company will be able to obtain
capital in a timely manner and on terms satisfactory to the Company that will be
necessary to implement the above-described business strategy and grow the
Company's revenue base. If the Company is unable to obtain financing in a timely
manner and on acceptable terms, management has developed and intends to
implement a plan that would allow the Company to continue operating in the
normal course of business at least into 2000. More specifically, this plan would
include delaying, reducing or eliminating the launch of new systems (including
high-speed Internet access systems), reducing or eliminating new video
subscriber installations and related marketing expenditures and reducing or
eliminating other discretionary expenditures. See "MD&A - Future Cash
Requirements."
EXISTING SYSTEMS AND UNCONSTRUCTED MARKETS
The following tables provide information regarding the 86 markets in
which the Company operates an MMDS multichannel video business, owns the BTA
authorization and/or has acquired, or expects to acquire, MMDS channel rights
that it intends to retain as of December 31, 1998. Although the Company has
suspended the launch of new video-only businesses and, subject to obtaining
additional financing, intends to develop alternative wireless broadband
communications services, the following information is presented to provide basic
information about the size, location and channel position in the existing and
unconstructed markets in which the Company holds MMDS and WCS spectrum rights.
Certain of the Company's channel rights in the unconstructed markets are in the
form of lease agreements with educational entities that have pending
applications for ITFS channels. These ITFS applications undergo review by the
FCC's engineering and legal staff. Because the FCC's application review process
does not lend itself to complete certainty, and given the considerable number of
applications involved, no assurance can be given as to the precise number of
applications that will be granted.
"Estimated Total Households" represents the Company's current estimates
of the approximate number of households within a 35-mile radius of the Company's
tower sites (or projected tower sites for certain unconstructed markets), plus
line-of-sight households ("LOSHH") outside the 35-mile radius that may be served
from such tower sites and calculated as set forth below. The 35-mile radius is
an arbitrary radius chosen because of industry practice, certain FCC
interference protection criteria and capital expenditure considerations. Total
household information within the 35-mile radius is based on 1990 Census Bureau
(defined below) data obtained using a commercially available population software
program called POP90(TM), created by EDX Engineering, Inc. ("EDX"). Due to the
relatively flat terrain in certain of the Company's markets, the estimated LOSHH
capable of being served may exceed the estimated total households within the
35-mile radius. Because LOSHH outside of the 35-mile radius are added to
estimated total households, the number of estimated total households may equal
the number of estimated LOSHH. A total average annual growth rate of
approximately 1% since 1990, based on population growth rate estimates of the
U.S. Bureau of the Census (the "Census Bureau") released in March 1998, is
included in the estimates.
"Estimated Line-of-Sight Households" represents the Company's estimates
of the approximate number of LOSHH that can receive an adequate signal from the
Company in its service areas. This information was calculated by using a
commercially available engineering software program called Signal(TM), created
by EDX. The EDX program
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determines LOSHH from 1990 Census Bureau data, using actual antenna heights,
antenna locations and the surrounding three arc second terrain data. LOSHH in
overlapping service areas in existing systems are divided proportionately among
such areas. LOSHH in unconstructed markets are not divided among such markets.
The program considers topographical features, but does not take into account
potential signal blockage due to foliage or buildings. Due to the relatively
flat terrain in certain of the Company's markets, the estimated LOSHH capable of
being served may exceed the estimated total households within the 35-mile
radius. Because LOSHH outside of the 35-mile radius are added to estimated total
households, the number of estimated LOSHH in a market may equal the number of
estimated total households in such market. The calculation of LOSHH assumes (1)
the grant of pending applications for new licenses or for modification of
existing licenses, and (2) the grant of applications for new licenses and
license modification applications that have not yet been filed with the FCC. The
LOSHH estimates include a total average annual growth rate of approximately 1%
since 1990, based on Census Bureau population growth rate estimates released in
March 1998.
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ESTIMATED ESTIMATED NUMBER OF VIDEO NUMBER OF
TOTAL LINE-OF-SIGHT SUBSCRIBERS CHANNELS
EXISTING SYSTEMS HOUSEHOLDS HOUSEHOLDS 12/31/98 AVAILABLE(1)
---------------- ---------- ---------- -------- -----------
Austin, TX................................ 437,358 390,260 10,220 33
Tulsa, OK................................. 324,859 312,101 10,890 33
Bucyrus, OH............................... 236,856 236,856 840 21
Peoria, IL................................ 204,681 199,764 1,652 22
Greenville, PA............................ 339,291 167,033 681 20
Taylorville, IL........................... 166,567 147,705 1,600 20
Paragould, AR............................. 142,470 142,470 2,198 20
Freeport, IL.............................. 139,485 139,485 1,140 20
Corpus Christi, TX........................ 167,864 126,974 10,803 33
Midland, TX............................... 118,372 118,372 5,669 33
Champaign, IL............................. 104,533 103,827 2,859 23
Temple/Killeen, TX........................ 138,825 103,336 10,224 33
Jourdanton/Charlotte, TX.................. 101,132 101,132 1,583 28
Sikeston, MO.............................. 100,564 100,564 2,387 20
Waco, TX.................................. 113,247 96,118 5,447 33
Corsicana/Athens, TX...................... 95,753 95,753 2,173 29
Vandalia, IL.............................. 93,998 93,998 1,540 20
Montgomery City, MO....................... 91,080 91,080 720 23
Macomb/Walnut Grove, IL................... 84,209 84,209 1,849 20
Sherman/Denison, TX....................... 110,559 82,907 7,938 29
Stillwater, OK............................ 81,586 81,586 5,619 33
Texarkana, TX............................. 80,871 76,561 1,329 29
McLeansboro, IL........................... 88,485 76,277 1,302 31
Olney, IL................................. 71,074 71,074 1,564 20
Monroe City/Lakenan, MO................... 70,196 70,196 1,482 33
Lubbock, TX............................... 112,235 63,191 3,727 33
Lawton, OK................................ 81,960 59,906 5,906 33
O'Donnell, TX............................. 66,006 59,747 705 22
Wichita Falls, TX......................... 65,257 57,175 4,466 33
Abilene, TX............................... 63,808 56,822 3,039 22
Chanute, KS............................... 56,155 56,155 4,277 33
Ardmore, OK............................... 53,076 53,076 3,264 32
Manhattan, KS............................. 52,720 52,720 1,870 33
Marion, KS................................ 55,069 52,639 1,008 22
Mt. Pleasant, TX.......................... 57,951 50,796 2,246 24
Laredo, TX................................ 51,136 50,721 3,694 33
Muskogee, OK.............................. 79,972 50,533 857 20
Paris, TX................................. 42,897 42,897 2,870 26
Strawn/Ranger, TX......................... 42,856 41,089 1,254 33
Enid, OK.................................. 40,118 40,118 3,955 32
Sterling, KS.............................. 45,447 36,561 816 24
Lindsay, OK............................... 58,730 32,767 2,604 29
Kingsville/Falfurrias, TX................. 32,484 32,484 1,495 23
Medicine Lodge/Anthony, KS................ 30,022 30,022 1,297 23
Jacksonville, IL.......................... 48,060 28,865 554 26
McAlester, OK............................. 38,986 24,884 710 20
Watonga, OK............................... 23,946 23,946 750 33
Ada, OK................................... 48,591 21,894 3,204 32
Beloit, KS................................ 20,481 20,481 615 33
Olton, TX................................. 27,333 20,355 814 33
Kerrville, TX............................. 37,046 20,092 426 33
Hamilton, TX.............................. 31,443 19,559 2,734 33
George West, TX........................... 23,237 16,209 2,125 27
Weatherford, OK........................... 28,994 14,185 612 33
Woodward, OK.............................. 14,180 13,704 2,309 33
Uvalde/Sabinal, TX........................ 18,528 12,717 1,490 33
Gainesville, TX........................... 40,444 12,399 1,044 27
--------- --------- ------- -----
Total - Existing Systems........ 5,193,083 4,478,347 160,446 1,585
========= ========= ======= =====
- ----------------------------
(1) The number of channels available includes MMDS, MDS and ITFS channels that
are either licensed or leased to the Company from other
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license holders. The number of channels available includes ITFS channels that
may not currently be available for commercial programming or two-way broadband
wireless communications services. The number of channels available also includes
MDS-1 and MDS-2A channels which the Company does not use to provide multichannel
video service.
ESTIMATED ESTIMATED NUMBER OF
UNCONSTRUCTED TOTAL LINE-OF-SIGHT CHANNELS
MARKETS HOUSEHOLDS HOUSEHOLDS EXPECTED(1)
------- ---------- ---------- ----------
Fischer, TX.............................................. 439,639 363,218 25
Ottawa/LaSalle, IL....................................... 238,510 238,510 16
El Paso, TX.............................................. 235,243 200,770 25
Des Moines, IA........................................... 225,319 200,062 31
Forrest City, AR......................................... 172,317 172,317 20
Springfield, MO.......................................... 143,756 143,756 33
Bartlesville/Ponca City, OK.............................. 128,271 128,271 32
Tyler, TX................................................ 174,025 122,892 21
Columbia, MO............................................. 118,199 113,884 21
Topeka, KS............................................... 112,540 112,540 33
Amarillo/Borger, TX...................................... 132,984 111,278 25
El Dorado, AR............................................ 79,031 79,031 16
Kossuth, TX.............................................. 71,964 71,964 33
Lufkin, TX............................................... 70,954 70,954 13
Paducah/Mayfield, KY..................................... 76,393 70,262 33
Great Bend, KS........................................... 53,865 53,865 33
Lenapah, OK.............................................. 56,147 45,012 33
Magnolia, AR............................................. 58,421 42,155 20
Flagstaff, AZ............................................ 45,693 41,012 6
Charleston, WV........................................... 183,746 39,108 4
Cheyenne, WY............................................. 33,940 32,076 13
Burnet, TX............................................... 50,850 30,482 32
Hays, KS................................................. 29,040 29,040 33
Casper, WY............................................... 31,242 28,625 13
Holdenville, OK.......................................... 48,575 28,378 33
Searcy, AR............................................... 76,935 27,337 33
Altus, OK................................................ 27,256 27,256 33
Emporia, KS.............................................. 26,295 17,148 20
Elk City, OK............................................. 26,010 12,738 25
--------- --------- -----
Total-Unconstructed Markets.................... 3,167,160 2,653,941 708
--------- --------- -----
Total-All Company Markets...................... 8,360,243 7,132,288 2,293
========= ========= =====
- ----------------------
(1) The number of channels expected includes MMDS, MDS and ITFS channels (i)
that are either licensed or leased to the Company from other license holders,
(ii) for which the Company has filed or by virtue of its BTA ownership has the
exclusive right to file license applications with the FCC which the Company
expects to be granted in 1999, or (iii) to which the Company otherwise expects
to acquire license or lease rights in 1999 through application grants by the
FCC. Channel applications undergo review by the FCC's engineering and legal
staff. Because the FCC's application review process does not lend itself to
complete certainty, no assurance can be given as to the exact number of
applications that will be granted.
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WCS SPECTRUM ACQUIRED FROM CS WIRELESS (1)
------------------------------------------
ESTIMATED
BANDWIDTH LINE-OF-SIGHT
MARKET (MHZ) HOUSEHOLDS
- --------- ------------ ----------
Abilene, TX 20 56,822
Amarillo, TX 20 111,278
Austin, TX 20 390,260
Gainesville, TX 20 12,399
Hamilton, TX 20 19,559
Longview/Marshall, TX 20 83,929
Lubbock, TX 20 63,191
Midland/Odessa, TX 20 118,372
Mt. Pleasant, TX 20 50,796
O'Donnell, TX 20 59,747
Olton, TX 20 20,355
Paris, TX 20 42,897
Sherman/Denison, TX 20 82,907
Shreveport, LA 20 160,163
Temple/Killeen, TX 20 103,336
Texarkana, TX 20 76,561
Tyler, TX 20 122,892
Waco, TX 20 96,118
Wichita Falls, TX 20 57,175
- --------------------
(1) CS Wireless and the Company are parties to an agreement under which CS
Wireless agreed to assign the WCS spectrum listed above to the Company.
The Company currently leases such spectrum under an exclusive lease
agreement with CS Wireless. Assignment of the WCS spectrum is subject
to FCC approval. See "Business Recent Transactions - Asset Exchange and
Sale of CS Wireless Interest."
COMPETITION
High-Speed Internet Competition. The Company will experience intense
competition for the provision of Internet access services from multiple service
providers, including traditional ISPs, inter-exchange carriers ("IXCs"),
incumbent local exchange carriers ("ILECS") such as Regional Bell Operating
Companies ("RBOCs"), and hard-wire cable television companies.
The Company believes that the competition for Internet access service
to small to mid-size businesses generally falls into three categories: national,
regional and local competitors. National competitors include IXCs such as AT&T,
MCI Worldcom and Sprint, and national ISPs such as Digex, PSINet and UUNet. The
services offered by national competitors generally range from dial-up 14.4 Kbps
to a dedicated DS-3 (45 Mbps) connection. Some competitors have added Digital
Subscriber Lines ("DSL") to their service offering. DSL can achieve higher data
speeds over existing copper wire infrastructure (640 Mbps to 8.4 Mbps) than
previously possible. Regional competitors include RBOCs and regional ISPs that
generally offer services that range from dial-up 14.4 Kbps to dedicated T-1 (1.5
Mbps) connections. Local competitors include ILECs, multi-system hard-wire cable
operators and local ISPs. The services offered by local competitors generally
range from dial-up 14.4 Kbps to a dedicated T-1 connection. Local providers
generally aggregate or over-subscribe local traffic onto access lines which are
connected to a regional or national provider. Accordingly, the Company believes
that these local providers typically target consumers, as opposed to businesses.
The Company also may face competition from other fixed wireless
services, including 24 GHz licensees such as Teligent, Inc., 28 GHz (LMDS)
licensees such as NEXTLINK Communications, Inc. and 38 GHz licensees such as
Winstar Communications, Inc. To the extent that such service providers provide
Internet access and other telecommunications services in geographic areas which
encompass or overlap the Company's markets, the Company could face intense price
and service competition from these and other fixed wireless-based technologies.
Data/Telephony Services. The Company also will face intense competition
from other providers of data and telephony transmission services if the Company
implements such services on a commercial basis. Such competition is increased
because MMDS spectrum traditionally has not been utilized to deliver such
alternative services, and consumer acceptance of such services delivered via
MMDS technology is unknown at this time. Many of the existing providers of data
transmission and telephony services, such as ILECs and RBOCs, have significantly
greater financial and other resources than the Company. In addition, there can
be no assurance that there will be consumer demand for
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alternative uses of the MMDS spectrum such as data transmission, including
Internet access services, and telephony delivery services, that the Company will
be able to compete successfully against other providers of such services, or
that the Company will be able to achieve profitability from such services in
future years.
Subscription Video Competition. The subscription television business is
highly competitive, and includes many operators with significantly greater
resources and channel capacity than the Company. The Company's principal
subscription video competitors in each market are traditional hard-wire or
franchised cable operators, direct to home ("DTH") satellite providers including
DBS, and private cable ("SMATV") operators. According to a report issued by the
FCC in January 1998 (the "FCC Competition Report"), approximately 73.6 million
households subscribed to MVPD services as of June 1997. According to the FCC
Competition Report, the Company's primary competitors had the following market
share at such time: traditional hard-wire cable systems - 87%; DTH/DBS - 9.8%;
and SMATV - 1.6%. Wireless MVPDs had a 1.5% share of national multichannel video
subscribers.
In addition to the above services, premium movie services offered by
the Company also have encountered significant competition from the video
cassette industry, which provides feature films similar to those distributed by
the Company on premium channels and through pay-per-view services. The FCC
Competition Report estimated that 88% of U.S. television households have a video
cassette recorder. Finally, local off-air VHF/UHF broadcast television stations
(such as ABC, NBC, CBS and Fox) continue to be a primary source of video
programming for the public, and the FCC Competition Report estimated that 23% of
all television households receive television programming entirely through
off-air reception.
New and advanced technologies for the subscription television industry,
such as digital compression, fiber optic networks, DBS transmission, video
dialtone, and LMDS at 28 GHz are in various stages of development of commercial
deployment. These technologies are being developed and supported by entities
such as hard-wire cable companies, RBOCs and/or other wireless broadband
providers that have significantly greater financial and other resources than the
Company. These technologies could have a material adverse effect on the demand
for MMDS subscription television services. There can be no assurance that the
Company will be able to compete successfully with existing competitors or new
entrants in the market for subscription television services.
EMPLOYEES
As of December 31, 1998, the Company had approximately 800 employees.
None of the Company's employees are subject to a collective bargaining
agreement. The Company has experienced no work stoppages and believes that it
generally has good relations with its employees. The Company also presently
utilizes the services of independent contractors to install certain components
of its operating systems.
NAME CHANGE/BUSINESS UNIT RESTRUCTURING
On April 1, 1999, the effective date of the Plan (the "Effective
Date"), the Company will change its name to Nucentrix Broadband Networks, Inc.
and restructure its business into the following four wholly-owned subsidiaries:
Nucentrix Internet Services, Inc. ("Nucentrix Internet"), Nucentrix Telecom
Services, Inc. ("Nucentrix Telecom"), Nucentrix Spectrum Resources, Inc.
("Nucentrix Spectrum") and Heartland Cable Television, Inc. ("Heartland Cable").
Nucentrix Internet will operate the Company's retail high-speed
Internet access business. Nucentrix Telecom will be formed to test, develop and
operate wireless broadband IP telephony services, including wireless local loop
voice services. Nucentrix Spectrum will own the Company's MMDS spectrum rights,
including BTA licenses, MMDS channel licenses and leases, and WCS spectrum
rights, as well as the Company's wireless transmission facilities and site
leases. Heartland Cable will operate the Company's existing subscription
television business, which will continue to operate under the name Heartland
Cable Television(TM).
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RECENT TRANSACTIONS
CS Wireless Transaction. Effective as of December 2, 1998, the Company,
CAI Wireless Systems, Inc. ("CAI") and CS Wireless signed a Master Agreement
pursuant to which CAI purchased the Company's 36% equity interest in CS Wireless
for $1.5 million. In addition, CS Wireless agreed to assign channel rights to
MDS-1 channels (2150 MHz-2156 MHz) in Austin, Corpus Christi, El Paso and
Killeen, Texas (the "MDS-1 Channels"), and WCS (2.3 GHz) frequencies in 19
markets (the "WCS Spectrum"), as well as an operating wireless cable system in
Radcliffe, Iowa with approximately 1,750 subscribers, and to assign certain
subscriber equipment to the Company. Also, the Company agreed to assign MMDS
channel rights and related equipment in Portsmouth, New Hampshire to CS
Wireless. The Company and CS Wireless have filed for FCC approval of the
assignment of the MDS-1 Channels, and have agreed to file for approval of the
assignment of the WCS Spectrum in connection with the execution of a
comprehensive two-way interference coordination agreement. Pending FCC approval
of these assignments, the Company and CS Wireless have executed a spectrum lease
under which the Company has the exclusive right to use the MDS-1 Channels
(subject to certain pre-existing leasehold interests) and WCS Spectrum. The
transfers and assignments will occur in a second closing following FCC approval,
at which time the Company has agreed to cancel a promissory note issued by CS
Wireless and held by the Company, the outstanding balance of which, prior to
December 2, 1998, was approximately $2.3 million. Following this transaction,
the Company retained no equity interest or corporate governance rights in CS
Wireless.
Wireless One Reorganization Proposal. Wireless One is the largest MMDS
multichannel video service provider in the southeastern United States, in terms
of subscribers, with operations in 38 markets serving approximately 104,000
multichannel video subscribers. Wireless One also operates high-speed wireless
Internet access businesses in Jackson, Mississippi, Baton Rouge, Louisiana and
Memphis, Tennessee, and, according to public filings, controls MMDS and WCS
channels rights and BTA authorizations in 80 total markets covering
approximately 7,000,000 LOSHH. As of March 31, 1999, the Company owned an
approximate 21% equity interest in Wireless One.
On February 11, 1999, Wireless One filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the District of Delaware (In re Wireless One, Inc., Case
No. 99-295). On the same day, Wireless One filed a Current Report on Form 8-K
describing Wireless One's Chapter 11 filing and attaching a Restructuring Term
Sheet, on which Wireless One reported an agreement had been reached with certain
holders of Wireless One's two series of unsecured senior notes.
On February 25, 1999, the Company transmitted a letter (the "Company
Letter") to the Chairman of the Board of Directors, the President and Chief
Executive Officer, and the Chairman of the Restructuring Committee of the Board
of Directors of Wireless One. In the letter, the Company requested consideration
of an alternative Plan of Reorganization for Wireless One to be co-proposed by
the Company, which would have the purpose and effect of changing or influencing
the control of Wireless One. The principal terms of this proposal were outlined
in a term sheet (the "Company Term Sheet") and included, among other things, a
merger of Wireless One with and into the Company and a material change in the
composition of the Board of Directors of Wireless One. Copies of the Company
Letter and the Company Term Sheet were filed on March 8, 1999 on Schedule 13D
pursuant to Rule 13d-101 of the 1934 Act.
ITEM 2. PROPERTIES
The Company leases approximately 24,000 square feet of office space, of
which approximately 2,200 square feet was subleased to CS Wireless at March 1,
1999, for the Company's executive offices in Plano, Texas under a lease that
expires April 10, 2003. The Company pays approximately $385,000 per annum rent
for such space. CS Wireless reimburses the Company a pro-rata percentage of this
amount, based on the amount of space remaining under sublease to CS Wireless.
At December 31, 1998, the Company leased approximately 30,000 square
feet of tower and warehouse space in Durant, Oklahoma from affiliates of Mr. L.
Allen Wheeler, a former director of the Company, and Mr. David E. Webb, a former
executive officer and director of the Company. The Company paid approximately
$35,000 rent for such space in 1998. At December 31, 1998, the Company leased
from an affiliate of Messrs. Webb, Wheeler and Robert R. Story, a former
executive officer of the Company, an additional 12,430 square feet of office
space in Durant, Oklahoma.
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The Company paid approximately $62,000 rent for such space in 1998. At December
31, 1998, the Company leased from affiliates of Messrs. Wheeler and Webb
approximately 20,000 square feet in several locations for certain of its
operations, executive and telemarketing functions in Durant, as well as office
space in Lindsay, Oklahoma. The Company paid a total of approximately $107,000
rent for such space 1n 1998.
In connection with its Restructuring, the Company terminated
approximately 56,000 square feet of the leases discussed above in Durant and
Lindsay, Oklahoma, effective March 31, 1999. Claims of the lessors for damages
will be treated as miscellaneous unsecured claims under the Restructuring. The
Company continues to lease approximately 3,170 square feet of space for
telemarketing and customer care operations in Durant from an affiliate of
Messrs. Wheeler and Webb, under leases that expire March 1, 2000. The Company
pays approximately $15,800 per year for such space. The Company also continues
to lease over 3,100 square feet of space for purchasing and computer operations
in Durant from an affiliate of Messrs. Wheeler and Webb, under leases that
expire May 31, 2000. The Company pays approximately $32,300 per year for such
space. The Company believes that the facilities described above are leased at
fair market value and are adequate for the foreseeable future.
The principal physical assets of the Company's operating systems
consist of satellite signal reception equipment, radio transmitters and
transmission antennae, as well as office space and transmission tower and
headend space. The Company leases office space for its existing markets and
will, in the future, purchase or lease additional office space in other
locations if it launches other systems. The Company also owns transmission
towers or leases space on transmission towers located in its markets. The
Company believes that office space and space on transmission towers currently is
available on acceptable terms in the markets where the Company intends to
operate.
ITEM 3. LEGAL PROCEEDINGS
CHAPTER 11 PROCEEDING
On December 4, 1998, the Company filed the Plan under Chapter 11 of
the Bankruptcy Code in the Bankruptcy Court. See "Business - Financial
Restructuring." On March 15, 1999, the Bankruptcy Court confirmed the Plan,
which was subject to certain conditions. All conditions to effectiveness of the
Plan have been satisfied or duly waived and the Company will emerge from Chapter
11 on April 1, 1999.
SECURITIES LITIGATION
The Company is a co-defendant in one shareholder action filed in
February 1998 and pending in federal court in the Northern District of Texas
styled Coates, et al. v. Heartland Wireless Communications, Inc., et al.
(3-98-CV-0452-D) (the "Coates Action"), and one purported class action lawsuit
originally filed in July 1998 in State District Court in Kleburg County, Texas
styled Thompson, et al. v. Heartland Wireless Communications, Inc., et al.
(98-371-D) (the "Thompson Action"). On December 11, 1998, Heartland removed the
Thompson Action to the United States District Court for the Southern District of
Texas (98-CV-567). In addition, 14 current and former Heartland directors,
officers and/or employees are defendants in a purported class action lawsuit
filed in federal court in November 1998 in the Northern District of Texas styled
Shehadi, et al. v. David E. Webb, et al. (3-98-CV-2660-H) (the "Shehadi
Action").
The Coates Action consists of federal securities claims brought by
two Heartland shareholders against the Company and six former officers and/or
directors. The complaint alleges that during a period beginning on November 14,
1996 and ending on March 20, 1997, defendants allegedly misrepresented the
Company's financial condition in various press releases and public filings. The
complaint asserts claims under Sections 10(b) and 20(a) of the 1934 Act. On
November 2, 1998, the court issued an opinion granting a Motion to Dismiss the
complaint filed by defendants. See Coates v. Heartland, 26 F. Supp. 2d 910 (N.D.
Tex. 1998). The court granted the plaintiffs permission to replead, and the
plaintiffs filed an amended complaint on January 4, 1999. A Motion to Dismiss
the amended complaint is pending.
The Thompson Action involves allegations of state securities law
violations, misrepresentation, and civil conspiracy claims against the Company
and three former officers and directors. The Thompson Action seeks to represent
a class consisting of anyone who acquired the securities of the Company between
November 15, 1995 and March 20, 1997. The petition asserts that during the
purported class period, the Company and certain former officers
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and directors allegedly misstated material facts concerning the Company's
subscriber base and allegedly omitted to disclose the need for a material
write-down of accounts receivable relating to the subscriber base. The Thompson
Action further claims that the Company violated generally accepted accounting
principles ("GAAP") by allegedly (1) failing to recognize revenue properly, (2)
failing to adequately reserve for doubtful accounts receivable, and (3) using
"unrealistic" amortization periods. As of March 31, 1999, the Thompson Action
was pending in the United States District Court for the Southern District of
Texas.
The Shehadi Action is a purported class action asserted on behalf of
all purchasers of the Company's securities on the open market from November 15,
1995 through August 14, 1998. The complaint asserts claims under Sections 10(b)
and 20(a) of the 1934 Act, and alleges that during the class period, the Company
and certain former and current directors and officers misstated material facts
concerning the Company's subscriber base and allegedly omitted to disclose the
need for a material write-down of accounts receivable relating to that
subscriber base. The complaint also alleges that the Company failed to write
down certain assets and investments in affiliates in accordance with GAAP and
over-estimated certain amortization periods relating to subscriber installation
costs. As of March 31, 1999, the Shehadi Action was pending in the United States
District Court for the Northern District of Texas.
The Company intends to vigorously defend the Coates, Thompson and
Shehadi Actions. The filing of the Plan and/or dispositive motions have stayed
discovery in these actions at least until the Effective Date. While it is not
feasible to predict or determine the final outcome of these proceedings or to
estimate the amounts or potential range of loss with respect to these matters,
management believes that an adverse outcome with respect to one or more of such
proceedings would have a material adverse effect on the financial condition,
results of operations and cash flows of the Company.
LATE FEE LITIGATION
The Company is a party to two purported class action lawsuits (together
with the Ysasi Action (defined below), the "Late Fee Actions") filed in May 1998
and pending in State District Court in Brooks and Grayson Counties, Texas,
respectively. The lawsuits are styled Garcia, et al. v. Heartland Wireless
Communications, Inc. d/b/a Heartland Cable Television (98-60898-1) and Warren,
et. al. v. Heartland Wireless Communications, Inc. (98-0715). The Late Fee
Actions allege that the administrative late fees charged by the Company are not
reasonably related to the costs incurred by the Company as a result of late
payment of accounts. The plaintiffs seek to certify a class to represent all
persons receiving cable service from the Company or who have been charged a late
fee in the past by the Company. The plaintiffs seek a declaration that any
contractual provisions for the Company's late fees are void or usurious, and
seek money damages, interest, attorneys' fees and costs.
The Company also is a party to a purported class action filed in
December 1998 in State District Court in Nueces County, Texas. The lawsuit is
styled Ysasi, et al. v. Heartland Wireless Communications, Inc. (98-6430-B) (the
"Ysasi Action"). The Ysasi Action alleges that certain liquidated damages
provisions of the Company's customer agreements are unconscionable, invalid and
illegal, and therefore unenforceable. The plaintiffs also allege the Company's
administrative late fees are "unreasonably large" and therefore unenforceable.
The plaintiffs seek to represent a class consisting of all persons who first
signed a customer agreement with the Company after December 4, 1998 that
contained the above provisions. The plaintiffs seek a declaration that the
liquidated damage provisions of the Company's customer agreements are invalid
and illegal and an injunction enjoining the Company from enforcing such
provisions, and seek recovery of all amounts paid under such liquidated damages
provisions, attorneys' fees, prejudgment and post-judgment interest and costs.
The Company intends to vigorously defend the Late Fee Actions. The
filing of the Plan has stayed discovery in these actions at least until the
Effective Date. While it is not feasible to predict or determine the final
outcome of these proceedings or to estimate the amounts or potential range of
loss with respect to these matters, management believes that an adverse outcome
with respect to one or more of such proceedings would have a material adverse
effect on the financial condition, results of operations and cash flows of the
Company.
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OTHER
The Company is a party, from time to time, to routine litigation
incident to its business. It is the opinion of management that no other pending
litigation matter will have a material adverse effect on the Company's
consolidated financial position or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Old Common Stock began trading on The NASDAQ Stock
Market's National Market on April 22, 1994. On October 15, 1998, The Nasdaq
Stock Market, Inc. delisted the Old Common Stock. As of March 12, 1999, no
established public trading market existed for the Old Common Stock. Pursuant to
the Restructuring, the Old Common Stock will be canceled on the Effective Date.
The following table sets forth, on a per share basis, the high and low closing
sale prices of the Old Common Stock as reported on the NASDAQ Stock Market's
National Market for the fiscal year 1997 and first three fiscal quarters in
1998. For the fourth quarter of 1998, the range of reported high and low bid
quotations on the OTC Bulletin Board quotation system is presented, as derived
from The National Association of Securities Dealers. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
CLOSING SALE PRICE
------------------
HIGH LOW
---- ---
Fiscal Year Ended December 31, 1997:
First Quarter......................................................................... $ 12.38 $ 2.13
Second Quarter........................................................................ $ 3.06 $ 1.88
Third Quarter......................................................................... $ 3.25 $ 1.56
Fourth Quarter........................................................................ $ 3.56 $ 1.31
Fiscal Year Ending December 31, 1998:
First Quarter......................................................................... $ 1.91 $ 0.78
Second Quarter........................................................................ $ 1.00 $ 0.53
Third Quarter......................................................................... $ 0.81 $ 0.25
BID QUOTATIONS
--------------
HIGH LOW
---- ---
Fourth Quarter........................................................................ $ .28 $ .01
On March 12, 1999, the last reported bid price for the Old Common Stock
as reported on the OTC Bulletin Board was $ 0.035 per share. As of March 12,
1999, there were approximately 754 holders of record of the Old Common Stock.
Although the Company believes that the issuance and subsequent resale
of the New Common Stock will be exempt from the registration requirements of the
Securities Act of 1933, as amended (the "1933 Act") under section 1145 of the
Bankruptcy Code, trading of shares of New Common Stock held by entities or
individuals who may be deemed to be "affiliates" or "underwriters" under the
1933 Act will be restricted. Although the Company intends to file a Shelf
Registration Statement on Form S-1 with the SEC to register such shares, there
can be no assurance that an established public trading market will exist for any
shares of New Common Stock.
The Company has never declared or paid any cash dividends on the Old
Common Stock and does not presently intend to pay cash dividends on the Old
Common Stock or New Common Stock in the foreseeable future. The Company
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intends to retain any future earnings for reinvestment in its business. The
terms governing the preferred stock issued by one of the Company's
majority-owned subsidiaries include a preference as to dividend payments over
the Company, as a holder of common stock of such subsidiary. Future loan
facilities, if any, obtained by the Company or any of its subsidiaries also may
prohibit or restrict the payment of dividends or other distributions. Subject to
the waiver of such prohibitions and compliance with such limitations, the
payment of cash dividends on shares of New Common Stock will be within the
discretion of the Board and will depend upon the earnings of the Company, the
Company's capital requirements, applicable requirements of the Delaware General
Corporation Law and other factors that are considered relevant by the Board.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of December
31, 1998, 1997 and 1996 and for the years ended December 31, 1998, 1997 and 1996
were derived from the Consolidated Financial Statements of the Company, which
were audited by KPMG LLP, independent certified public accountants, and which
are included elsewhere in this Form 10-K. The selected historical financial data
presented below as of December 31, 1995 and 1994 and for the years ended
December 31, 1995 and 1994 were derived from Consolidated Financial Statements
of the Company, which were audited by KPMG LLP, but which are not included in
this Form 10-K. This selected consolidated financial data should be read in
conjunction with MD&A and the Company's Consolidated Financial Statements
(including the Notes thereto) included elsewhere in this Form 10-K.
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YEAR ENDED DECEMBER 31,
-----------------------
1998 (1) 1997 (2) 1996 (2) 1995 (3) 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues ............................... $ 73,989 $ 78,792 $ 56,017 $ 15,300 $ 2,229
Operating expenses:
Systems operations .................. 35,790 39,596 21,255 4,893 762
Selling, general and
administrative .................... 36,367 42,255 42,435 11,887 4,183
Depreciation and amortization ....... 39,550 65,112 39,323 6,234 1,098
Impairment of long-lived assets ..... 105,791 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses ....... 217,498 146,963 103,013 23,014 6,043
--------- --------- --------- --------- ---------
Operating loss ......................... (143,509) (68,171) (46,996) (7,714) (3,814)
Interest expense, net .................. (34,436) (34,321) (18,166) (10,857) (210)
Equity in losses of affiliates ......... (30,340) (32,037) (18,612) (1,369) (387)
Other income (expense) ................. (10) (54) 4,981 (247) (227)
--------- --------- --------- --------- ---------
Loss before reorganization costs, income
taxes and extraordinary item ........ (208,295) (134,583) (78,793) (20,187) (4,638)
Reorganization costs ................... 3,266 -- -- -- --
--------- --------- --------- --------- ---------
Loss before income taxes and
extraordinary item .................. (211,561) (134,583) (78,793) (20,187) (4,638)
Income tax benefit ..................... -- -- 28,156 4,285 1,595
--------- --------- --------- --------- ---------
Loss before extraordinary
item ............................... (211,561) (134,583) (50,637) (15,902) (3,043)
Extraordinary item, net of tax benefit .. -- -- (10,424) -- --
--------- --------- --------- --------- ---------
Net loss ............................... $(211,561) $(134,583) $ (61,061) $ (15,902) $ (3,043)
========= ========= ========= ========= =========
Loss per basic and dilutive share (4):
Loss before extraordinary item ......... $ (10.72) $ (6.85) $ (2.74) $ (1.34) $ (0.30)
Extraordinary item ...................... -- -- $ (0.57) -- --
--------- --------- --------- --------- ---------
Net loss ............................... $ (10.72) $ (6.85) $ (3.31) $ (1.34) $ (0.30)
========= ========= ========= ========= =========
Weighted average number of basic and
dilutive common shares outstanding ..... 19,735 19,649 18,473 11,866 10,011
AS OF DECEMBER 31,
------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents ............ $ 30,676 $ 42,821 $ 79,596 $ 23,143 $ 11,986
Total assets ......................... 186,032 372,134 515,364 205,405 77,921
Long-term debt, including current
portion .............................. 16,277 308,196 303,538 141,652 40,506
Liabilities Subject to Compromise .... 322,781 -- -- -- --
Total stockholders' equity (deficit) . (165,090) 46,408 180,847 51,688 30,081
- ----------
(1) The Company filed a voluntary petition to reorganize under Chapter 11
of the Bankruptcy Code in December 1998. In conjunction with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), the Company's
operating assets were written down to estimated fair market value
through a non-cash impairment charge to earnings. In addition, the
Company's Old Senior Notes and Convertible Notes, which are subject to
compromise in the restructuring, have been reclassified to "Liabilities
Subject to Compromise" at December 31, 1998 (see Notes 3 and 8 to the
Consolidated Financial Statements).
(2) The Company changed its useful lives for depreciating the
nonrecoverable portion of subscriber installation costs in 1997 and
1996 (see Note 1(g) to the Consolidated Financial Statements), and
license and leased license costs and excess of cost over fair value of
net assets acquired in 1996 (see Notes 1(h) and 1(i) to the
Consolidated Financial Statements).
(3) The Company changed its method of accounting for the direct costs and
installation fees related to subscriber installations in 1995.
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(4) Loss per basic and dilutive common share for each period presented has
been calculated using the provisions of SFAS No. 128, "Earnings per
Share," which is effective for periods ending after December 15, 1997
and requires restatement of all prior period loss per share data (see
Note 1(n) to the Consolidated Financial Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
The Company provides wireless broadband network and multichannel
subscription television services in the 2.1 GHz to 2.7 GHz range of the radio
spectrum, primarily in mid-size and small markets in the central United States.
To date, the Company's principal business has been as a wireless MVPD, using
radio spectrum allocated by the FCC as MMDS, MDS and ITFS spectrum.
As a wireless multichannel video programming distributor ("wireless
MVPD"), the Company provides an average of 25 analog channels of cable
television and local broadcast network programming to 57 operating markets in
the central United States. The Company also offers up to 185 channels of digital
DBS programming from DIRECTV and its distributors in 51 of its operating
markets, under cooperative marketing agreements with DIRECTV. In addition to its
57 operating markets, the Company owns the BTA authorization from the FCC, or
otherwise has aggregated MMDS and/or WCS channel rights in the 2.1 GHz to 2.7
GHz range, in 29 unconstructed markets. At December 31, 1998, the Company
provided wireless multichannel video service to approximately 160,000
subscribers. The Company is the largest wireless MVPD, in terms of subscribers,
in the United States.
The Company also provides two-way high-speed wireless digital
communications services in one operating market (Sherman/Denison, Texas) and is
constructing a similar system in Austin, Texas. The Company offers high-speed
Internet access in Sherman/Denison, Texas primarily to medium-sized businesses
and SOHOs. The Company, through national independent contractors, also offers
technical support, e-mail, Web design and hosting and domain name registration
and maintenance in connection with its high-speed Internet access business.
As used herein, "EBITDA" means earnings before interest, taxes,
depreciation and amortization. "System EBITDA" means net income (loss) plus
interest expense, income tax expense, depreciation and amortization expense and
all other non-cash charges, less any non-cash items which have the effect of
increasing net income or decreasing net loss, for a system. System EBITDA
includes all selling, general and administrative expenses attributable to
employees employed in that system and, to more accurately reflect operations at
the system level, the Company also allocates to each operating system expenses
related to billing, collections, telemarketing, the Company's call center and
information systems. EBITDA and System EBITDA are discussed because they are
widely accepted financial indicators of a company's ability to service and/or
incur indebtedness. However, EBITDA and System EBITDA are not financial measures
determined under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of operating results or
to cash flows as a measure of funds available for discretionary or other
liquidity purposes. EBITDA and System EBITDA may be calculated differently from
company to company.
Although the Company has recorded net losses of $426.7 million since
inception, 48 operating systems achieved positive System EBITDA during 1998. The
Company's nine remaining systems did not achieve positive System EBITDA for the
year ended December 31, 1998, primarily as a result of the lower number of
channels offered by such systems, insufficient LOSHH and high fixed channel
lease payment requirements in relation to the number of subscribers in such
markets.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998
Revenues. The Company's revenues consist of monthly fees paid by
multichannel video subscribers for basic programming, premium programming,
program guides, equipment rental and other miscellaneous fees. Unless the
context requires otherwise, all references in this MD&A to "subscribers" or
"systems" are to the Company's multichannel video subscribers and systems.
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The Company's revenues were $74.0 million in 1998, $78.8 million in
1997 and $56.0 million in 1996, representing a 6% decrease in 1998 from 1997 and
a 41% increase in 1997 from 1996. Although the Company believes it continues to
successfully attract a higher quality of subscribers, the number of subscribers
has declined since the first quarter of 1997. During the same time period,
however, average monthly revenue per subscriber increased to $33.95 in 1998,
from $33.52 in 1997 and $30.22 in 1996, due to a greater percentage of
subscribers purchasing premium packages and pay-per-view services and higher
average subscription rates as lower-priced packages are replaced with upgraded
offerings.
The decrease in revenues in 1998 was primarily due to a decrease in
average subscribers from 184,000 in 1997 to 170,000 in 1998. The decline in
subscribers was a result of (i) the Company's inability to hire and train a
qualified sales force as quickly as it had anticipated, (ii) the delayed launch
of the Company's marketing plan for its combined DIRECTV offerings until the
third quarter of 1998, (iii) an increase as of January 1, 1998 and November 1,
1998 in the Company's equivalent basic unit or "EBU" conversion rate for
calculating MDU subscribers (see "MD&A - Change in Method for Reporting
Subscribers"), (iv) the transfer of one operating system (and its associated
revenues) to CS Wireless in December 1997, and (v) stricter credit policies for
approving new customers which, although contributing to a decline in revenues,
has reduced churn and bad debt expense.
The increase in revenues in 1997 from 1996 was primarily due to the
acquisition or launch of 20 net new operating systems during 1996, which had a
full year impact on 1997. Also contributing to the increase in revenues was the
addition and retention by the Company in 1997 of subscribers at overall higher
subscription rates, and the receipt of increased revenues for premium services
from customers retained after the expiration of certain free-service promotions.
At December 31, 1998, the Company had approximately 160,000
subscribers versus approximately 187,000 at December 31, 1997 and approximately
181,000 at December 31, 1996. The Company had 57 operating systems at December
31, 1998 compared to 58 at December 31, 1997 and 54 at December 31, 1996.
The Company recognizes that long-term subscriber growth is necessary
for sustainable EBITDA growth from its subscription television business.
Although there can be no assurance that such long-term growth will be achieved,
the Company believes that with its enhanced programming offering from DIRECTV,
continuing improvement in other operational areas, and improved hiring and
retention efforts relating to a subscription video sales force, its subscription
television business can generate operating cash flow sufficient to fund the
ongoing operations of this business unit while the Company develops and expands
other wireless broadband businesses.
Effective November 1, 1998, the Company implemented a system-wide price
increase for its subscription television service offerings. The price increase
was implemented to partially offset the Company's increased programming costs.
This represents the Company's first system-wide programming price increase. In
conjunction with the price increase, the Company also revised its EBU conversion
rate as of November 1, 1998. See "MD&A Change in Method for Reporting
Subscribers."
System Operations. System operations expenses include programming
costs, channel lease payments, costs of service calls and disconnects,
transmitter site and tower rentals, and certain repairs and maintenance
expenditures. Programming costs (with the exception of minimum payments), and
channel lease payments (with the exception of certain fixed payments) are
variable based on the number of subscribers. Systems operations expenses were
$35.8 million, $39.6 million and $21.3 million for the years ended December 31,
1998, 1997 and 1996, respectively. As a percentage of revenues, systems
operations expenses were 48% in 1998, 50% in 1997 and 38% in 1996. The decrease
in systems operations expense in 1998 from 1997 was primarily due to lower
programming costs as a result of fewer subscribers. This decrease was slightly
offset by programming rate increases from certain providers. In addition,
compared to 1998, the Company experienced higher service call and disconnect
expense during 1997 due to (i) installation corrections at certain subscriber
households, (ii) recovery of equipment from disconnected subscribers and (iii)
higher churn in 1997. System operations expenses increased in 1997 from 1996
primarily due to increased programming costs resulting from expanded channel
offerings in certain markets, the promotion of special programming packages
which carried lower margins than the Company's basic programming package, higher
overall programming
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rates, increased service call expense related to installation corrections and a
significant increase in labor and overhead expense related to the Company's
attempts to recover equipment from disconnected subscribers.
Selling, General and Administrative ("SG&A"). SG&A was $36.4 million,
$42.3 million and $42.4 million for the three years ending December 31, 1998,
1997 and 1996, respectively. As a percent of revenues, SG&A expense was 49% for
1998, 54% for 1997 and 76% for 1996. The decrease in SG&A from 1996 to 1998 was
due to lower bad debt expense resulting from improved credit screening and
collections procedures and as a result of labor savings and efficiencies
realized from field operational improvements and consolidation of management and
staff in certain markets.
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of license and
leased license investment and amortization of the excess of cost over fair value
of net assets acquired. Depreciation and amortization expense was $39.6 million
in 1998, $65.1 million in 1997 and $39.3 million in 1996.
The substantially higher depreciation and amortization expense in 1997
compared to 1996 and 1998 is partially due to a nonrecurring charge to
depreciation expense of $9.0 million during the third quarter of 1997. This
charge was comprised of three components: $6.1 million related to the third
quarter 1997 write-off of equipment not recovered from subscriber homes; $1.7
million related to the write-off of obsolete subscriber equipment that was not
available for future use; and $1.2 million related to the effects of a reduction
in the estimated useful life by the Company of the nonrecoverable portion of
subscriber installation costs from four years in 1996 to three years in the
third quarter of 1997. Depreciation and amortization expense also increased in
1997 from 1996 as the Company began amortizing BTAs that were acquired in
December 1996.
In addition to the reasons outlined above, depreciation and
amortization decreased in 1998 compared to 1997 as the carrying value of certain
assets were reduced by (i) an impairment charge of $17.7 million of the
Company's undeveloped licenses during the second quarter of 1998, (ii) an
impairment charge of $6.8 million of the Company's excess basis in its 36%
equity interest in CS Wireless during the second quarter of 1998, (iii) an
impairment charge of $18.9 million of the Company's operating licenses and
leased license investments during the third quarter of 1998, (iv) an impairment
charge of $44.5 million of the Company's systems and equipment during the third
quarter of 1998 and (v) an impairment charge of $24.7 million of the Company's
excess of cost over fair value during the third quarter of 1998. See "MD&A -
Impairment of Long-Lived Assets."
The Company's policy is to capitalize the excess of direct costs of
subscriber installations over installation fees. These direct costs include
reception materials and equipment on subscriber premises, installation labor
and, prior to 1998, certain overhead charges, and direct commissions. These
direct costs are capitalized as systems and equipment in the accompanying
Consolidated Balance Sheets.
The amortization periods related to the nonrecoverable portion of
installation costs for new subscribers over the periods presented reflect the
Company's best estimates of the expected useful lives of such costs at the time
of implementation. The Company's original estimate of six years was based in
part on the assumption that a primarily rural operating strategy could
contribute to subscription terms that were significantly higher than the
hard-wire industry, because of a perceived higher degree of stability, lower
amounts of transiency and less competition for multichannel video programming
alternatives in a rural subscriber base. In the fourth quarter of 1996, the
Company reassessed its policy and determined, in light of increased disconnect
rates in 1996, to reduce its estimate of useful lives to four years. In the
third quarter of 1997, the Company again reassessed its estimate of useful lives
and reduced its estimate to three years. The Company based this reduction
primarily on cumulative results of operation through September 30, 1997 that
indicated a lower than anticipated retention rate of subscribers in markets
where the Company offered 20 channels or less and in markets where prior
promotional campaigns had begun to expire. A three-year useful life is the
equivalent of a 2.8% churn rate. The Company currently believes that a
consolidated monthly churn rate of 2.8% to 3.0% can be achieved and maintained
in the Company's existing markets.
Impairment of Long-Lived Assets. The Company continually reviews
components of its business for possible improvement of future operating
strategies based on, among other things, changes in technology, competition,
consumer habits and business climate. The Company adopted SFAS No. 121 effective
January 1, 1996. SFAS No. 121 addresses
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the accounting for impairment of long-lived assets to be disposed of, certain
identifiable intangibles and goodwill related to those assets, provides
guidelines for recognizing and measuring impairment losses, and requires that
the carrying amount of impaired assets be reduced to estimated fair value.
During the second quarter of 1998, the Company reviewed the assets
associated with certain undeveloped markets (including certain of the markets
listed in the table on page 15 of this Form 10-K) and determined that (i) cash
flows from operations would not be adequate to fund the capital outlay required
to build out such markets, and (ii) because of the Company's default on its
interest payment on the Old 13% Notes in the second quarter of 1998, outside
financing for the build-out of these markets was not readily available prior to
the consummation of a financial restructuring. Therefore, in accordance with
SFAS No. 121, the channel licenses and leases in these undeveloped markets were
individually evaluated and written down to estimated fair value, resulting in a
non-cash impairment charge of $17.7 million in the second quarter of 1998.
Throughout the second and third quarters of 1998, the Company analyzed
various recapitalization and restructuring alternatives with the assistance of
WP&Co., including consensual, out-of-court alternatives. In October 1998, the
Company announced that it intended to pursue a prenegotiated plan of
reorganization by filing a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code. This event caused the Company to evaluate all of its long-lived
assets for impairment (according to the requirements of SFAS No. 121). The
Company retained the services of a third party to assist in performing a fair
market valuation of substantially all of the Company's assets. This valuation
resulted in a non-cash impairment charge of $88.1 million for the third quarter
of 1998. The impairment included write-downs of systems and equipment ($44.5
million), license and leased license investment ($18.9 million) and the excess
of cost over fair value ($24.7 million).
Operating Loss. The Company generated operating losses of $143.5
million, $68.2 million, and $47.0 million for the years ended December 31, 1998,
1997 and 1996, respectively. EBITDA was $1.8 million for 1998, negative $3.1
million for 1997 and negative $7.7 million in 1996. Despite the decreases in
revenues from 1997 to 1998 resulting from fewer subscribers, EBITDA increased
due primarily to lower total programming costs due to fewer subscribers and
operational improvements and efficiencies in its 57 operating markets. Bad debt
expense decreased from $3.5 million in 1997 to $1.7 million in 1998 and the
Company's monthly churn rate decreased from 4.6% in 1997 to 3.6% in 1998. This
improvement is attributed to a higher quality subscriber base resulting from
improved credit screening and collection procedures.
The improvement in EBITDA from 1996 to 1997 resulted from a 41% growth
in revenues combined with lower corporate overhead. EBITDA consistently
increased during 1997, improving from negative $2.6 million in the second
quarter, to negative $798,000 in the third quarter to a positive $279,000 in the
fourth quarter. The Company attributed this increase in EBITDA to operational
improvements implemented during the year in the Company's 58 operating systems
(including one operating system managed by the Company for CS Wireless), as well
as cost savings and efficiencies through consolidation of management and staff
in certain markets and reductions in executive and corporate staff. In addition,
bad debt expense decreased from $7.3 million in 1996 to $3.5 million in 1997,
primarily as a result of improved credit screening procedures and collection
policies. The Company believes that these improvements resulted in a higher
quality subscriber base at year-end. The Company's monthly churn rate decreased
from 9.6% for the year ended December 31, 1996 (including the year-end
subscriber write-off and change in methodology for reporting MDU subscribers) to
4.6% for the year ended December 31, 1997. Excluding the 1996 year-end
subscriber write-off and methodology change, the Company's average monthly churn
for 1996 was 4.1%. The increase in overall churn in 1997 is primarily
attributable to the enforcement of more aggressive collections and disconnect
procedures during 1997. The Company's monthly churn for the fourth quarter ended
December 31, 1997 was 4.3%.
Interest Income. Interest income was $2.7 million in 1998, $5.5 million
in 1997 and $3.8 million in 1996. The increase in interest income from 1996 to
1997 was due to higher interest earned on notes receivable and average cash and
cash equivalents subsequent to the receipt of approximately $53.3 million in
cash related to the formation of CS Wireless in February 1996 and the issuance
of $125.0 million of the Old 14% Notes in December 1996.
Interest income decreased from 1997 to 1998 due to higher interest
earnings during 1997 on larger escrowed balances segregated for the payment of
interest on the Old Senior Notes and higher interest earnings on a note
receivable that was partially repaid during the second and third quarters of
1997.
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Interest Expense. The Company incurred interest expense of $37.1
million in 1998, $39.9 million in 1997 and $22.0 million in 1996. The increase
in interest expense from 1996 to 1997 is due to increases in borrowed funds.
Average borrowings increased from $176.0 million during 1996 to $307.0 million
during 1997. Interest expense during the periods presented consisted primarily
of (i) non-cash interest related to the Convertible Notes, (ii) interest on the
Company's Old 13% Notes, (iii) interest on the Company's Old 14% Notes since
December 20, 1996, (iv) interest related to a short-term senior secured credit
facility repaid in December 1996 and (v) interest on debt incurred in
conjunction with the BTA auction. The slight decrease in interest expense from
1997 to 1998 resulted from the Company's Chapter 11 filing on December 4, 1998,
at which time interest ceased to accrue on the impaired debt (the Convertible
Notes and the Old Senior Notes).
Equity in Losses of Affiliates. During 1996, 1997 and part of 1998, the
Company owned approximately 36% of the outstanding common stock of CS Wireless,
which it acquired on February 23, 1996, and 20% of the outstanding common stock
of Wireless One, which it acquired in October 1995. The Company had equity in
losses of affiliates of $30.3 million in 1998, $32.0 million in 1997 and $18.6
million in 1996. The increase in losses from affiliates from 1996 to 1997
reflects actual higher net losses incurred by CS Wireless and Wireless One
during 1997. Losses recorded for Wireless One reduced the Company's investment
balance to zero in November 1997. During the second quarter of 1998, the Company
wrote off $6.8 million of its excess basis in CS Wireless and during the third
quarter of 1998, the Company wrote off $11.7 million of its remaining investment
in CS Wireless after learning in the third quarter of 1998 that CS Wireless had
recorded an asset impairment charge on its financial statements of $46 million
related to goodwill. In December 1998 the Company sold its 36% equity interest
in CS Wireless to CAI. See "Business - Recent Transactions."
Income Tax Benefit. At December 31, 1998, the Company had an estimated
$324 million net operating loss carryforward for income tax purposes. No income
tax benefit was recorded for the years ended December 31, 1997 and 1998. As
discussed more fully in Note 11 of the Notes to the Consolidated Financial
Statements, the Company recognized income tax benefits related to the Company's
losses before income taxes and extraordinary items of $28.2 million for 1996.
Reorganization Costs. During 1998, the Company incurred $3.3 million in
expenses related to the Plan filed under Chapter 11 of the U.S. Bankruptcy Code.
These costs are for services of financial and legal advisors, accountants and
other consultants as well as printing and mailing costs for Plan documents.
Extraordinary Item. In December 1996, the Company recognized an
extraordinary loss of $11.5 million, net of tax of $1.1 million. This
extraordinary loss resulted from a substantive modification of the terms of the
Old 13% Notes due to the amount of consent fees paid ($6.9 million) for the
issuance of the Old 14% Notes. For financial reporting purposes, the Old 13%
Notes have been treated as having been extinguished and reissued upon the sale
of the Old 14% Notes, and recorded at their estimated fair value as of such
date. The extraordinary loss consists of the associated write-off of debt
issuance costs related to the Old 13% Notes of $5.3 million, the consent
payments of $6.9 million, the decrease in the Old 13% Notes of $1.1 million to
reflect their estimated fair value and other costs of $400,000.
Net Loss. The Company has recorded net losses since its inception. The
Company incurred net losses of $211.6 million or $10.72 per basic and diluted
common share during 1998, $134.6 million or $6.85 per basic and diluted common
share during 1997and $61.1 million or $3.31 per basic and diluted common share
during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The wireless broadband network business is capital-intensive. Since
inception, the Company has expended funds to lease or otherwise acquire MMDS
channel rights in various markets and systems in operation, to construct
operating systems and to finance initial system operating losses. The Company's
primary sources of capital have been from subscription fees, debt financing, the
sale of common stock and the sale of MMDS channel rights that were not part of
the Company's strategic plan. The growth of the Company's business will require
substantial investment in
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capital expenditures for the development and launch of wireless broadband
services such as high-speed Internet services and IP telephony services. The
recent approval by the FCC of flexible two-way use of the Company's spectrum has
opened new applications such as high-speed two-way data and fixed wireless
local-loop telephony services that the Company believes are necessary to
maximize the value of its broadband spectrum but that will require additional
capital resources to develop and implement. See "Business - Government
Regulation" and "Business - Wireless Broadband Business Strategy".
The Company estimates that a launch of a new wireless broadband network
system providing high-speed Internet access and multichannel video services in a
typical market will involve the initial expenditure of approximately $850,000 to
$1 million for transmission equipment and tower construction, depending upon the
type and sophistication of the equipment and whether the Company is required to
construct a transmission tower. The Company believes that incremental headend
costs to launch an Internet service business in one of the Company's existing
systems will be $200,000 to $400,000. In addition, incremental costs of
approximately $465 per SFU MMDS video subscriber, $343 per DTV-MMDS combo video
subscriber and $1,100 per medium-sized business Internet subscriber (up to 20
PCs) (which may be partially offset by installation and/or other up-front
charges) for equipment, labor, overhead charges and direct commission are
required. Other launch costs include the cost of securing adequate space for
marketing and warehouse facilities, as well as costs related to employees. As a
result of these costs, operating losses are likely to be incurred by a system
during the start-up period.
Cash used in operations by the Company was $8.4 million in 1998, $41.6
million in 1997 and $22.8 million in 1996. The reduction in cash used in
operations in 1998 compared to 1997 was primarily due to nonpayment in the
current year of accrued interest on the Old Senior Notes, as well as lower
programming costs as a result of fewer subscribers, improved subscriber
receivable collection experience and labor savings and efficiencies at the
market level, partially offset by lower revenues. The increase in cash used by
operations in 1997 compared to 1996 was primarily due to increased systems
operations expense due to increased subscribers and interest expense, partially
offset by a 41% increase in revenues.
Cash used in investing activities was $2.0 million in 1998 and $34.2
million in 1996. Cash provided by investing activities was $6.8 million in 1997.
Cash provided by/used in investing activities principally relates to the
construction of additional operating systems, the acquisition and installation
of subscriber receive-site equipment, the upgrade of transmission equipment in
certain markets and the acquisition of wireless cable channel rights and
operating systems, partially offset by the sale of wireless cable channel rights
that are not a part of the Company's strategic plan. During 1998 cash used by
investing activities included the sale of debt securities held in the Company's
escrow account for payment of interest on the Old 14% Notes, the sale of the
Company's equity interest in CS Wireless for $1.5 million, purchases of
subscriber equipment, the upgrade of transmission equipment and purchases of new
equipment for additional channels authorized by the FCC in certain markets.
During 1997, investing activities included receipt of approximately $15.0
million in cash for payment on a note receivable from CS Wireless, $3.5 million
in cash from the sale of a partial interest in the Company's investment in a
Mexican MMDS company, sales of debt securities totaling $19.9 million, and the
acquisition of two operating systems in Oklahoma for $1.6 million. The Company's
purchases of systems and equipment decreased from 1996 to 1997 due to the launch
of 16 systems during 1996 compared to two systems in 1997.
Cash used in investing activities during 1996 also included the
Company's acquisition of the Champaign, Illinois and Gainesville, Texas
operating systems, payments related to the BTA Auction and out-of-pocket
expenses related to the acquisition of the businesses of CableMaxx, Inc. and
American Wireless Systems, Inc., assets of Fort Worth Wireless Cable TV
Associates, Wireless Cable T.V. Associates #38 and certain of the wireless cable
television assets of Three Sixty Corp., formerly Technivision, Inc.
(collectively, the "CableMaxx Acquisitions"). These uses of cash were partially
offset by the receipt of approximately $58.3 million in cash from CS Wireless in
connection with the Company's contribution of wireless cable assets to CS
Wireless, and sale of wireless cable channel rights in Tennessee, California,
Texas, Illinois and Georgia for total proceeds of approximately $23.8 million.
Net cash used in financing activities was $1.7 million in 1998 and $2.0
million in 1997. Net cash provided by financing activities was $113.4 million in
1996. Cash used during 1998 and 1997 was primarily for principal payments on
obligations related to capital leases and various prior period cable system
acquisitions. As discussed more
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fully in Notes 7 and 9 of the Notes to the Consolidated Financial Statements,
cash provided by financing activities during 1996 includes the net proceeds from
the sale of $125 million of the Old 14% Notes and $15.0 million of the Old 13%
Notes, partially offset by payments on long-term debt assumed in the CableMaxx
Acquisitions and the repayment of certain short-term borrowings.
At March 12,1999, the Company had approximately $30.1 million of
unrestricted cash and cash equivalents and $1.0 million in restricted cash
representing collateral securing various outstanding letters of credit to
certain vendors of the Company.
FUTURE CASH REQUIREMENTS
During 1999, the Company intends to implement a new business plan,
subject to obtaining timely financing on acceptable terms and conditions, that
it believes will provide the greatest opportunity to improve the profitability
of the Company and capitalize on its existing assets. This projected plan
consists of (1) moderately growing the subscriber base in the Company's
multichannel video business, which coupled with anticipated improvements in
operating costs would provide revenues sufficient to cover substantially all
operating costs of this business (excluding certain unallocated corporate
overhead) while the Company develops and expands other wireless broadband
businesses, (2) launching high-speed Internet access service to small and
mid-size businesses in up to 20 markets by the end of 2001, (3) increasing the
Company's geographic scope for wireless broadband network service by
acquisitions or business combinations and (4) pursuing financing alternatives to
allow the Company to develop and launch high-speed Internet access and other
wireless broadband network services in 1999 and beyond. See "Business - Wireless
Broadband Business Strategy."
Despite the Company's efforts to conserve capital and the improvement
in its EBITDA during the second half of 1997 and 1998 (excluding Restructuring
costs), the Company does not expect to generate sufficient cash flow to fully
implement its business strategy without raising additional capital. Accordingly,
the growth of the Company's revenue base and the implementation of its business
strategy is subject to and dependent upon obtaining additional capital on terms
and conditions acceptable to the Company and in a timely manner. Options for
obtaining such capital include the sale or exchange of debt or equity
securities, borrowings under secured or unsecured loan arrangements and sales of
assets including MMDS subscription systems and channel rights.
There can be no assurance that the Company will be able to obtain
capital in a timely manner and on terms satisfactory to the Company that will be
necessary to implement its business strategy and grow the Company's revenue
base. If the Company is unable to obtain financing in a timely manner and on
acceptable terms, management has developed and intends to fully implement a plan
that would allow the Company to continue operating in the normal course of
business at least into 2000. More specifically, this plan would include
delaying, reducing or eliminating the launch of new broadband network systems
(including high-speed Internet systems), reducing or eliminating new video
subscriber installations and related marketing expenditures and reducing or
eliminating other discretionary expenditures.
Although the impact of the Reorganization on various Federal tax
attributes has not been fully determined, some portion of the Company's net
operating loss carryforwards likely will be reduced and may be completely
eliminated pursuant to its bankruptcy discharge. Furthermore, the deductibility
of net operating loss carryforwards arising before discharge in bankruptcy will
be limited by the product of the long-term tax exempt rate times the fair market
value of the Company after discharge of debt.
The Company will adopt Fresh Start Reporting on the Effective Date of
its reorganization (in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7). Fresh Start Reporting results in a new
reporting entity with assets and liabilities adjusted to fair value and
beginning retained earnings set to zero. Liabilities subject to compromise also
will be adjusted to zero in the debt discharge portion of the Fresh Start entry.
In addition, on the Effective Date the Old Common Stock will be canceled and New
Common Stock of the reorganized Company will be issued. The balance sheet of the
reorganized Company is expected to reflect approximately $36 million in current
assets, $58.0 million in systems and equipment, $88.0 million in other assets,
$15.0 million current liabilities, $15.0 million in long-term debt and $152.0
million in stockholders' equity.
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BALANCE SHEET AS OF DECEMBER 31, 1998 COMPARED TO THE BALANCE SHEET AS OF
DECEMBER 31, 1997
Investment in Affiliates. As discussed above, the Company wrote off
$18.5 million of its investment in CS Wireless during the second and third
quarters of 1998, including $6.8 million of goodwill representing its basis in
excess of its equity in the net assets of CS Wireless, and $11.7 million of its
share of asset impairment charges recorded by CS Wireless, thus reducing its
investment balance to zero. In December 1998, the Company sold its investment in
CS Wireless to CAI. See "Business - Recent Transactions," and "MD&A - Equity in
Losses of Affiliates."
Long-Lived Assets (Systems & Equipment, License and Leased License
Investment and Excess of Cost Over Fair Value of Net Assets Acquired). As
previously discussed, in accordance with the requirements of SFAS No. 121, the
Company evaluated all of its long-lived assets for impairment during the second
and third quarters of 1998. Based upon the results of a fair market valuation
performed by a third party, a non-cash impairment charge of $105.8 million was
recorded during 1998. The impairment included write-downs of systems and
equipment ($44.5 million), license and leased license investment ($36.6 million)
and the excess of cost over fair value of net assets acquired ($24.7 million).
CHANGES IN METHOD FOR REPORTING SUBSCRIBERS
Periodically, the Company may implement price increases or create new
program offerings that upgrade its basic program price structure. Upon such
occurrence the Company also may update its methodology for reporting subscribers
in MDUs who are billed in bulk to the MDU owner. These "bulk" MDU subscribers
are converted to SFU subscribers for reporting purposes using an equivalent
basic unit ("EBU") rate that corresponds to the Company's most utilized current
pricing tier for basic programming for SFU subscribers. This rate is divided
into the total revenue from bulk subscribers to get an "equivalent" number of
subscribers for reporting purposes. Consequently, when this rate is increased,
the number of equivalent subscribers will change and normally decrease. The
following EBU rate revisions occurred during the periods presented herein.
At December 31, 1996, the Company's EBU rate of $9.05 was increased to
$17.95. This resulted in a decrease of 26,300 reported subscribers. Effective
March 31, 1998, the Company's EBU rate was increased to $24.99, resulting in a
decrease of approximately 4,000 reported subscribers. On November 1, 1998, in
conjunction with the Company's first system-wide price increase, the EBU rate
was increased to $26.99, resulting in a decrease of approximately 600 reported
subscribers.
INCOME TAX MATTERS
The Company and certain of its subsidiaries file a consolidated Federal
income tax return. Subsidiaries in which the Company owns less than 80% of the
voting stock will file separate Federal income tax returns. The Company has had
no material state or Federal income tax expense since inception. As of December
31, 1998, the Company had approximately $324 million in net operating losses for
U.S. Federal income tax purposes, expiring in years 2013 through 2018. The
Company estimates that approximately $38.0 million of the above losses relate to
various acquisitions and as such are subject to certain limitations. (See also
MD&A - "Future Cash Requirements").
THE YEAR 2000
The Company has established an employee team to identify and correct
Year 2000 compliance issues. Information technology ("IT") systems with
non-compliant code are expected to be identified and modified or replaced with
systems that are Year 2000 compliant. Similar actions are being taken with
respect to non-IT systems, primarily systems embedded in office, communications
and other facilities. Progress of the team's efforts is being monitored by
senior management and periodically will be reported to the Board.
The Company recognizes the need to remediate and test its
mission-critical systems to ensure that individually the systems are Year 2000
compliant and that collectively they inter-operate in a manner that ensures Year
2000 functionality.
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The Company evaluated its systems and has identified the following
systems and functions as mission critical:
o Headend equipment/addressable systems (related to receipt and
transmission of programming)
o Billing and collection systems
o Telecommunications systems in customer service facility
Headend Equipment/Addressable Systems. The Company has completed the
evaluation of these systems and has identified certain non-compliant features
which are being remediated through software and hardware upgrades, including all
hardware related to satellite relays which are date sensitive. Upgrade
installation and testing is expected to be substantially complete by June 30,
1999.
Billing and Collection Systems. The Company has verified Year 2000
compliance with its billing and collections software vendor and will perform
additional testing as needed, to be substantially complete by June 30, 1999.
Telecommunications System in Customer Care Facility. The Company is
upgrading its system software to be Year 2000 compliant and has obtained
documentation from the software supplier verifying Year 2000 compliance.
Testing in this area is expected to be substantially complete by July 31, 1999.
The Company's most reasonably likely worst case scenario is a
temporary inability to produce and send invoices and transmit video programming.
The Company's Year 2000 efforts are ongoing and its overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available.
Management does not believe the costs related to the Year 2000
compliance project will be material to its financial position or results of
operations. Currently, the Company has budgeted approximately $185,000 for Year
2000 compliance initiatives during 1999. Costs and the date by which the Company
plans to complete Year 2000 modifications are based on management's current best
estimates, which were derived using assumptions of future events including the
continuing availability of certain resources, third party compliance plans and
other factors. Unanticipated failures by critical vendors, as well as the
failure by the Company to execute its own identification and remediation
efforts, could have a material adverse effect on the success and cost of the
project, as well as its estimated completion date. As a result, there can be no
assurance that these forward-looking results will be achieved, and the actual
cost and vendor compliance could differ materially from these estimates.
INFLATION
Management does not believe that inflation has had or is likely to have
any significant impact on the Company's operations. Management believes that the
Company will be able to increase subscriber rates, if necessary, to keep pace
with inflationary increases in costs.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net income and
currency translation adjustments and is presented in the Consolidated Statements
of Stockholders' Equity. This Statement requires changes in disclosure only and
it does not affect results of operations or financial position.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 is effective for fiscal years beginning
after December 31, 1997. This statement establishes standards for the way that
public companies report information about segments in annual and interim
financial statements. The effective adoption of SFAS 131 is not expected to have
a material impact on the Company's Consolidated Financial Statements and related
disclosures.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity" ("SFAS 133") which requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. The adoption of SFAS 133 will not have an impact on the
Company's results of operations, financial position or cash flow.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, "Reporting the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998. The adoption of SOP 98-5 will not have
an impact on the Company's results of operations, financial position or cash
flows.
VENDORS
The supplier of the modems for the Company's high-speed Internet
service has notified its customers, including the Company, that due to excess
demand and cash flow difficulties of the supplier, the modems have been "placed
on allocation" and would be shipped only for cash or an irrevocable letter of
credit. The Company has made arrangements with the supplier for the shipment of
sufficient modems to meet the Company's needs through July 1999. The Company
intends to work with the supplier and/or to pursue other ways to resolve
long-term supply needs. The Company currently believes that it will be able to
enter into alternate supply arrangements for Internet equipment that will
satisfy its needs for 1999; however, there can be no assurance that such supply
arrangements will exist or can be completed timely or on terms acceptable to the
Company.
Pacific Monolithics, Inc. ("Pac Mono"), a supplier of wireless cable
subscriber and headend equipment, filed for protection under Chapter 11 of the
Bankruptcy Code on October 13, 1998. The Company utilizes certain Pac Mono
subscriber and headend equipment in 22 of the Company's 57 operating markets.
Pac Mono has indicated that it intends to discontinue production and service of
such equipment. In response, the Company, along with 10 other MMDS wireless
cable providers, has negotiated an agreement with an alternative supplier to
provide the equipment, software and technical assistance necessary to support
the Pac Mono systems. The Company expects to finalize this agreement by April
30, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt. A majority of the
Company's long-term debt at December 31, 1998, which includes the Old Senior
Notes and the Convertible Notes, are considered to be eligible for compromise
under the Company's recently confirmed Plan, and have been reclassified from
Long-term Debt to Liabilities Subject to Compromise on the Company's
consolidated balance sheet. The Company's remaining long-term debt, which
consists primarily of $15.1 million relating to the acquisition of certain BTAs
in March 1996, bears a fixed interest rate. To date, the Company has not entered
into any derivative financial instruments to manage interest rate risk and is
currently not evaluating the future use of any such financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the Three Years Ended December 31, 1998 F-3
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1998 F-4
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998 F-5
Notes to Consolidated Financial Statements F-7
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
MARCH 31, 1999 BOARD OF DIRECTORS
The following paragraphs set forth certain information concerning the
Company's directors at March 31, 1999, including any positions or offices held
with the Company, directorships in other public companies, their ages and the
date each became a director of the Company:
Carroll D. McHenry, 56, joined the Company as Chairman of the Board,
President, Chief Executive Officer and Acting Chief Financial Officer in April
1997. Mr. McHenry currently serves as Chairman of the Board, President and Chief
Executive Officer. Prior to assuming his positions at the Company, Mr. McHenry
was a senior executive at Alltel, Inc., a national communications holding
company, most recently serving as President of Alltel's Communications Services
Group, and serving as President of Alltel Mobile Communications, Inc. from July
1992 to May 1995. From 1991 to 1992, Mr. McHenry was Vice President of Cellular
Business Development at Qualcomm, Inc. From 1989 to 1991, Mr. McHenry was
President, Chief Executive Officer and Chairman of the Board of Celluland, Inc.,
a franchisor of cellular telephone stores. From 1980 to 1989, Mr. McHenry served
in various capacities with Mobile Communications Corporation of America ("MCCA")
and as President and Chief Executive Officer of American Cellular
Communications, a joint venture between MCCA and BellSouth. Mr. McHenry
currently is a director of Wireless One.
Terry S. Parker, 54, became a director of the Company in April 1998.
Mr. Parker currently is an independent consultant in the telecommunications
industry. From March 1995 to July 1996, Mr. Parker was President and Chief
Operating Officer for CellStar Corporation, a domestic cellular
telecommunications distributor. From October 1993 to March 1995, Mr. Parker was
Senior Vice President of GTE Personal Communications Services, GTE's cellular
telecommunications division, and Senior Vice President of GTE Corporation. From
August 1990 to October 1993, Mr. Parker was President of GTE Telecommunications
Products and Services, a diversified telecommunications services and systems
division of GTE. Mr. Parker currently is a director of CellStar Corporation,
Illinois Super Conductor, Inc., a superconductor technology firm for the
wireless telecommunications industry, and Highway Master Corporation, which
sells mobile, data and voice technology products to long-haul trucking
companies.
Richard T. Weatherholt, 49, became a director of the Company in June
1998. Mr. Weatherholt is a member of the Audit Committee of the Board of
Directors. Mr. Weatherholt is the Chairman and President of Capital Planning
Group, Inc., a financing concern which provides consulting, investing and
financing services to small and financially troubled enterprises. From 1989 to
1993, Mr. Weatherholt was Chairman and President of Southern Capital Holdings,
Inc., a satellite and microwave telecommunications developer. From 1981 to 1989,
Mr. Weatherholt was Vice President of Finance and Chief Financial Officer for
MCCA.
POST-RESTRUCTURING BOARD OF DIRECTORS
As of the Effective Date, the initial Board of Directors of the
Reorganized Company will consist of six members. Each of the members of the
initial Board of Directors will serve until the first annual meeting of
stockholders of the Reorganized Company or their earlier resignation or removal
in accordance with the certificate of incorporation or bylaws of the Reorganized
Company. Set forth below is certain information concerning each member of the
initial Board of Directors of the Reorganized Company.
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35
Carroll McHenry. See above for a description of the business experience
of Mr. McHenry.
Richard B. Gold, 44, has been the President and Chief Executive Officer
of GenOA Corporation, a privately-held optical communications equipment company,
since January 1999. Between November 1991 and December 1998, Mr. Gold held
various senior-level executive positions with Pacific Monolithics, Inc. ("Pac
Mono"), the general manager of a venture-backed supplier of wireless
communications equipment, including Vice President-Engineering, Chief Operating
Officer, and from January 1997 through December 1998, President and Chief
Executive Officer. From 1987 through 1991, Mr. Gold was Executive Director of
Massachusetts Microelectronics Center, the general manager of a non-profit,
university-industry-state education and research consortium with 11 member
schools. On October 13, 1998, Pac Mono filed a voluntary petition under Chapter
11 of the U.S. Bankruptcy Code.
Terry S. Parker. See above for a description of the business experience
of Mr. Parker.
Mark G. Schoeppner, 38, has been president of Quaker Capital Management
Corp., an investment management firm, since 1985. Mr. Schoeppner is a chartered
financial analyst, a member of the Pittsburgh Society of Financial Analysts and
a member of the Wireless Communications Association International.
Neil Subin, 34, founded and has been the Managing Director of Trendex
Capital Management ("Trendex") since 1991. Trendex is a private hedge fund
focusing primarily on financially distressed companies. Prior to forming
Trendex, Mr. Subin was a private investor from 1988 to 1991 and was an associate
with Oppehheimer & Co. from 1986 to 1988.
R. Ted Weschler, 37, has been an executive officer of Quad-C, Inc.
("Quad-C") since its formation in 1989. Quad-C is a Charlottesville,
Virginia-based investment firm that primarily engages in the acquisition of
businesses in partnership with company management. Mr. Weschler is currently a
member of the Board of Directors of WSFS Financial Corporation, a thrift holding
company based in Wilmington, Delaware; Deerfield Healthcare Corporation, a
provider of adult day care; Collins & Aikman Floorcoverings, a manufacturer of
commercial carpeting; and Virginia National Bank, a national banking
association. Prior to the formation of Quad-C, Mr. Weschler was employed by W.
R. Grace & Co. as a special projects assistant to both the Vice Chairman and
Chief Executive Officer of Grace, focusing on acquisition and divestiture
activities associated with Grace's restaurant, retailing, healthcare, natural
resources and chemical operations.
IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the executive officers of the Company as
of March 30, 1999. See "Identification of Directors" for a description of the
business experience of Mr. McHenry.
NAME AGE POSITION
---- --- --------
Carroll D. McHenry................................... 56 Chairman of the Board, President, Chief Executive
Officer
Marjean Henderson.................................... 48 Senior Vice President, Chief Financial Officer,
Assistant Secretary
Alex R. Padilla...................................... 56 Senior Vice President - Business Development
J. Curtis Henderson.................................. 36 Senior Vice President, General Counsel and
Secretary
Frank H. Hosea....................................... 49 Senior Vice President - Video Operations
Marjean Henderson joined the Company in August 1997 as Senior Vice
President and Chief Financial Officer. Ms. Henderson was appointed Assistant
Secretary in December 1997. From April 1996 to April 1997, Ms. Henderson served
as Senior Vice President and Chief Financial Officer for Panda Energy
International, Inc., a global energy concern. From December 1993 to October
1995, Ms.
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36
Henderson served as Senior Vice President and Chief Financial Officer for Nest
Entertainment, Inc., a home video and movies concern. From October 1987 to
December 1993, Ms. Henderson served as Vice President, Chief Financial Officer
and Treasurer for RCL Enterprises, the Lyons Group, Lyrick Studios and Big Feet
Productions.
Alex R. Padilla joined the Company in July 1998 as Senior Vice
President - Business Development. From January 1997 to July 1998, Mr. Padilla
was Manager of Business Development for KPMG LLP's Enterprise Integration
Services Group. From February 1995 to December 1996, Mr. Padilla was Director of
Sales for Pinpoint Communications, a start-up wireless communications concern.
From October 1989 to December 1994, Mr. Padilla was District Manager of Network
Equipment Technologies, a manufacturer of wide area network telecommunications
products.
J. Curtis Henderson joined the Company in May 1996 as Vice President,
General Counsel and Secretary. In September 1998, Mr. Henderson was appointed
Senior Vice President. From July 1994 to April 1996, Mr. Henderson was Senior
Vice President, General Counsel and Secretary of ZuZu, Inc., a restaurant and
franchising company in Dallas, Texas. Prior to his employment at ZuZu, Mr.
Henderson was an associate with the Dallas law firm of Locke Purnell Rain
Harrell.
Frank H. Hosea joined the Company in November 1998 as Senior Vice
President - Video Operations. From June 1996 to November 1998, Mr. Hosea was
Senior Vice President and Chief Operating Officer for CS Wireless. From July
1995 to June 1996, Mr. Hosea was a marketing and operations consultant for Time
Warner. From February 1990 to July 1995, Mr. Hosea was Vice President of Sales
Field Marketing for KBLCOM, Inc., a division of Time Warner and Houston
Industries.
Executive officers of the Company are appointed by the Board of
Directors and serve at the discretion of the Board. Employment agreements with
the executive officers are described in "Executive Compensation and Related
Information." There are no family relationships between members of the Board of
Directors or any executive officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the Company's officers and
directors, and persons who are beneficial owners of 10% or more of the Company's
Old Common Stock, to file reports of ownership and changes in ownership of the
Company's securities with the SEC. Officers, directors and greater than 10%
beneficial owners are required by applicable regulations to furnish the Company
with copies of all forms they file pursuant to Section 16(a).
Based solely upon a review of the copies of the forms furnished to the
Company, and written representations from certain reporting persons that no Form
5's were required, the Company believes that during the fiscal year ended
December 31, 1998, all filing requirements applicable to its officers, directors
and 10% beneficial owners were satisfied on a timely basis, except that an
Initial Statement of Beneficial Ownership on Form 3 for Mr. Hosea was not
timely filed.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of the
Company's Chief Executive Officer and the Company's four most highly compensated
executive officers (other than the Chief Executive Officer) who were serving as
executive officers at the end of the Company's last completed fiscal year
(collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company during the Company's fiscal years ended December 31,
1998, 1997 and 1996.
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37
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------------------- -----------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPENSA- STOCK OPTIONS/ COMPENSA-
BONUS TION AWARD(S) SARS TION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($) ($) ($) (#) ($)(1)
--------------------------------- ------- ---------- ------- -------- ------- ------- -------
Carroll D. McHenry 1998 300,000 -- -- -- 100,000 $ 4,384
Chairman, President and Chief 1997 205,768(2) 204,326 53,347(3) 154,688(4) 350,000 990
Executive Officer
Marjean Henderson 1998 195,385 -- -- -- -- 2,000
Senior Vice President and Chief 1997 60,923(5) 20,000 -- 14,375(6) 100,000 --
Financial Officer
J. Curtis Henderson 1998 146,892 -- -- -- -- --
Senior Vice President, General 1997 105,992 24,469 8,400(7) -- 40,000 --
Counsel and Secretary
Alex R. Padilla 1998 80,769(8) -- -- -- -- --
Senior Vice President, Business
Development
Frank H. Hosea 1998 22,500(9) -- -- -- -- --
Senior Vice President, Video
Operations
(1) Represents Company 401(k) Retirement Plan contributions.
(2) Mr. McHenry was hired April 25, 1997 at an annual base salary of
$300,000.
(3) Relocation expenses paid in 1997 in connection with Mr. McHenry's
hiring.
(4) Restricted stock grant of 75,000 shares of Old Common Stock granted to
Mr. McHenry in connection with his hiring. The closing price of the Old
Common Stock on the Nasdaq National Market on April 23, 1997 (the day
before hiring) was $2.0625. Pursuant to the terms of the Plan, all
shares of Old Common Stock will be canceled on the Effective Date in
exchange for warrants to purchase up to 2.5% of the New Common Stock of
the Reorganized Company.
(5) Ms. Henderson was hired August 27, 1997 at an annual base salary of
$180,000.
(6) Restricted stock grant of 10,000 shares of Old Common Stock granted to
Ms. Henderson. The closing price of the Old Common Stock on the Nasdaq
Stock Market's National Market on January 22, 1998 (the date of grant)
was $1.4375. Pursuant to the terms of the Plan, all shares of Old
Common Stock will be canceled on the Effective Date in exchange for
warrants to purchase up to 2.5% of the New Common Stock of the
Reorganized Company on a diluted basis.
(7) Automobile allowance.
(8) Mr. Padilla was hired July 13, 1998 at an annual base salary of
$175,000.
(9) Mr. Hosea was hired November 2, 1998 at an annual base salary of
$150,000.
The following table sets forth, for the fiscal year ended December 31,
1998, the number of individual grants of stock options made during such fiscal
year to each of the Named Executive Officers. All options granted during the
last fiscal year were granted pursuant to the Old Employee Stock Option Plan at
an exercise price equal to the fair market value on the date of grant. Pursuant
to the terms of the Plan, the Old Employee Stock Option Plan will be terminated
on the Effective Date, and all options granted thereunder will be canceled.
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38
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
----------------- --------------
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL
OPTIONS/ OPTIONS/
SARS SARS EXERCISE
GRANTED GRANTED TO OR BASE
NAME (#) EMPLOYEES IN PRICE EXPIRATION
FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
------------------------ ------------ ------------- ------------- ------------- --------------- ---------------
Carroll D. McHenry 100,000 76.92 1.4375 1/20/2005 58,520.69 136,378.08
(1) Potential realizable value is based on the assumption that the price of
the Old Common Stock appreciates at the annual rate shown, compounded
annually, from the date of grant until the end of the five-year option
term. The values are calculated in accordance with rules promulgated by
the SEC and do not reflect the Company's estimate of future stock price
appreciation.
The following table sets forth information with respect to each
exercise of stock options during the fiscal year ended December 31, 1998 by each
of the Named Executive Officers and the number of options held at fiscal year
end and the aggregate value of in-the-money options held at fiscal year end.
Pursuant to the terms of the Plan, the Old Stock Option Plans will be terminated
on the Effective Date, and all options granted thereunder will be canceled.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING OPTIONS/SARS AT FISCAL YEAR-END ($)
AT FISCAL YEAR-END (#) EXERCISABLE/
NAME EXERCISABLE/ UNEXERCISABLE UNEXERCISABLE
---- -------------------------- -------------
Carroll D. McHenry 70,000/380,000 $0/$0
Marjean Henderson 20,000/80,000 $0/$0
J. Curtis Henderson 13,000/39,500 $0/$0
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Carroll D.
McHenry for a term of three years, beginning on March 6, 1998. Under the
employment agreement, the Company has agreed to pay Mr. McHenry an annual base
salary of not less than $300,000. On each anniversary of the effective date, the
term is automatically extended for one additional year; provided, that either
the Company or Mr. McHenry may terminate any such extension by giving notice to
the other party at least 90 days before the applicable anniversary of the
effective date. Additionally, if Mr. McHenry's employment is terminated by the
Company other than for cause (as defined in the employment agreement) or on
account of Mr. McHenry's death or permanent disability, or if Mr. McHenry
resigns for good reason (as defined in the employment agreement), then the
Company has agreed to pay Mr. McHenry a severance payment
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39
equal to his then-current annual base salary (excluding any bonuses) for the
balance of the term of his employment agreement.
In addition, the Company entered into employment agreements with
Marjean Henderson, Alex R. Padilla, J. Curtis Henderson and Frank H. Hosea. Ms.
Henderson's and Mr. Henderson's employment agreements became effective on April
8, 1998. Mr. Padilla's employment agreement became effective on July 13, 1998.
Mr. Hosea's employment agreement became effective on November 3, 1998. These
employment agreements each are for a term of two years. Under the employment
agreements, the Company has agreed to pay each officer an annual base salary of
not less than his or her current annual base salary (Ms. Henderson - $200,000;
Mr. Padilla - $175,000; Mr. Henderson - $158,000; Mr. Hosea - $150,000).
On each anniversary of the effective date of each employment agreement,
the term is automatically extended for one additional year; provided, however,
that either the Company or the respective officer may terminate any such
one-year extension by giving notice to the other party at least 90 days before
such anniversary of the effective date. Additionally, if an officer's employment
is terminated by the Company other than for cause (as defined in each employment
agreement) or on account of the officer's death or permanent disability, or if
the officer resigns for good reason (as defined in each employment agreement),
then the Company is required to pay the officer a severance payment equal to his
or her then-current annual base salary (excluding any bonuses) for the balance
of the term of the applicable employment agreement.
None of the employment agreements discussed above provide for a bonus
payment in addition to the officer's annual base salary. The officers are
eligible, independent of the employment agreements, to participate in and
receive bonuses or awards under the Company's Performance Incentive Compensation
Plan, New Stock Option Plan and Employee Retention Program (except for Mr.
McHenry, who is not eligible to receive a bonus under the Employee Retention
Program).
NEW STOCK OPTION PLAN
The Plan provides for the cancellation of the Company's Old Stock
Option Plans and the adoption of the New Stock Option Plan. The purpose of the
New Stock Option Plan is to provide incentives to attract, retain and motivate
highly competent persons such as non-employee directors, officers and key
employees of, and consultants to, the Reorganized Company by providing such
persons with options ("Options") to acquire shares of New Common Stock of the
Reorganized Company. The New Stock Option Plan also is intended to assist in
further aligning the interests of the Reorganized Company's directors, officers,
key employees and consultants to those of its stockholders.
The New Stock Option Plan will be administered by a committee (the
"Committee") appointed by the Board of Directors of the Reorganized Company from
among its members and shall be comprised, unless otherwise determined by the
Board of Directors, of not less than two members who shall be (i) "Non-Employee
Directors" within the meaning of Rule 16b-3(b)(3) (or any successor rule)
promulgated under the 1934 Act and (ii) "outside directors" within the meaning
of Treasury Regulation Section 1.162-27(e)(3) under Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code").
Under the New Stock Option Plan, a total of 900,000 shares of New
Common Stock will be reserved for issuance. The New Stock Option Plan may be
adopted before the Effective Date by the Board of Directors of the Company, but
no Options will be granted before the Effective Date.
The exercise price of Options granted as of the Effective Date will be
$12.50 per share of New Common Stock. Options granted under the New Stock Option
Plan after the Effective Date will be exercisable at a minimum of 100% of the
fair market value of the New Common Stock of the Reorganized Company on the date
of grant. Options granted under the New Stock Option Plan will be exercisable at
such time(s) and subject to such terms and conditions as shall be determined by
the Committee.
The Options will immediately vest and become exercisable upon a Change
in Control. A "Change in Control" will be deemed to have occurred upon any of
the following events:
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(i) any "person" (as used in Section 13(d) and 14(d)(2) of the 1934 Act
but excluding any employee benefit plan of the Company) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 of the 1934 Act) directly or
indirectly, of securities of the Company representing more than 50% of the
combined voting power of the Company's outstanding securities then entitled to
vote for the election of directors;
(ii) during any period of two consecutive years, the individuals who at
the beginning of such period constitute the Reorganized Company's Board of
Directors or any individuals who would be "Continuing Directors" (as defined
below) cease for any reason to constitute at least a majority of the Board;
(iii) the Reorganized Company's stockholders shall approve a sale of
all or substantially all of the assets of the Reorganized Company; or
(iv) the Reorganized Company's stockholders shall approve any merger,
consolidation, or like business combination or reorganization of the Reorganized
Company, the consummation of which would result in the occurrence of any event
described in clauses (i) or (ii) above, and such transaction shall have been
consummated.
"Continuing Directors" shall mean (x) the directors of the Reorganized
Company in office on the Effective Date and (y) any successor to any such
director and any additional director who after the Effective Date was nominated
or selected by a majority of the Continuing Directors in office at the time of
his or her nomination or selection.
The Committee, in its discretion, may determine that, upon the
occurrence of a Change in Control of the Company, each Option outstanding under
the New Stock Option Plan shall terminate within a specified number of days
after notice to the holder, and such holder shall receive with respect to each
share of New Common Stock that is subject to an Option an amount equal to the
excess of the fair market value of such share of New Common Stock immediately
prior to the occurrence of such Change in Control over the exercise price per
share of such Option. These provisions shall not apply to an Option or other
benefit granted within six months before the occurrence of a Change in Control
if the holder of such option or other benefit is subject to the reporting
requirements of section 16(a) of the 1934 Act and no exception from liability
under section 16(b) of the 1934 Act is otherwise available to such holder.
OTHER COMPENSATION PLANS
Performance Incentive Compensation Plan. Effective January 1, 1998, the
Company adopted a Performance Incentive Compensation Plan (the "ICP"). The ICP
provides incentive compensation opportunities to the Company's executive
officers and other key employees based solely on achievement of predetermined
financial goals (such as EBITDA) as well as quantitative individual objectives,
such as improvements in churn, collections and service calls. Not more than 50%
of a target award may be based on individual objectives. Under the ICP, target
awards for the Chief Executive Officer may range from 25% to 75% of his or her
annual salary, and between 12.5% and 52.5% of other participants' salaries. ICP
bonuses are in addition to any amounts paid under the employee retention program
described below.
Employee Retention Program. Effective April 8, 1998, the Board approved
an employee retention program (the "ERP") for executive officers and other key
employees as designated by the Chief Executive Officer. Under the ERP, the
Company has offered a retention bonus of between 15% and 25% of a participant's
annual base salary if such individual remained in the Company's employment
through March 31, 1999.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the following individuals served on the Compensation
Committee of the Board: Max E. Bobbit, Jack R. Crosby, John A. Sprague and L.
Allen Wheeler. Mr. Bobbit resigned from the Board and Compensation Committee on
March 6, 1998. Mr. Crosby resigned from the Board and Compensation Committee on
June 25, 1998. Mr. Sprague is the managing partner of Jupiter Partners L.P.,
holder of substantially all of the Convertible Notes. Mr. Sprague resigned from
the Board and Compensation Committee on February 22, 1999. Mr. Wheeler
co-founded the Company, is a 10% owner of the Old Common Stock, and was a member
of the Board until November 24, 1998, when he resigned.
Mr. McHenry is a member of the Compensation Committee of the Board of
Directors of Wireless One.
At December 31, 1998, the Company leased an aggregate of 62,267 square
feet for its operations, billing, purchasing, warehouse, administrative,
telemarketing and customer call center in Durant, OK and for office space in
Lindsay, OK from affiliates of Mr. Wheeler at an annual rent of approximately
$205,000. The Company believes that such rents are at or below market rates and
the terms of such leases are at least as favorable as those the Company would be
able to otherwise obtain through arms-length negotiation with an unaffiliated
third party. Effective March 31, 1999, the Company terminated approximately
56,000 square feet of these leases in connection with the Restructuring.
REPORT ON EXECUTIVE COMPENSATION
General Compensation Philosophy
The Company's compensation philosophy is to link executive pay to
Company performance and to provide an incentive to manage the business with a
principal view of enhancing the enterprise value of the Company. Compensation
criteria are evaluated annually to ensure that they are appropriate and
consistent with the Company's business and strategic objectives. The Company's
policies and programs are intended to (i) provide rewards contingent upon
Company and individual performance, (ii) link executive compensation to
sustainable increases in and the preservation of enterprise value, (iii) retain
a strong management team and (iv) encourage personal and professional
development and growth.
The Company intends to use stock options as a significant element of
its compensation philosophy.
Executive Officer Compensation
Total cash compensation for executive officers for fiscal 1998 was
comprised principally of base salary. Executive officers may be eligible for
some amount of bonus under the ICP. Compensation levels for 1998 were based on a
variety of factors, including the executive's then current responsibilities,
specific experience and performance, competitive compensation practices at other
similarly situated companies and the Compensation Committee's assessment of the
executive's overall contribution to the business and strategic objectives of the
Company.
The Company entered into employment agreements with its executive
officers that provide for minimum annual salaries equal to such officers'
then-current respective salaries. See "Executive Compensation Employment
Agreements."
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Chief Executive Officer Compensation
Effective March 6, 1998, Mr. McHenry signed a three-year employment
agreement with the Company that provides for a minimum annual salary of $300,000
(his starting annual salary). Such compensation was based on a number of
factors, including Mr. McHenry's responsibilities, experience and performance,
competitive compensation practices at other similarly situated companies, and
the Board's assessment of his overall contribution to the business and strategic
objectives of the Company.
Carroll D. McHenry
Terry Parker
Richard T. Weatherholt
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PERFORMANCE GRAPH
The following performance graph compares the cumulative total
stockholder returns for (1) the Old Common Stock, (2) the Nasdaq Stock Market -
U.S. Companies Index ("Nasdaq-U.S. Index"), (3) the Nasdaq Telecommunications
Stocks Index ("Nasdaq-Telecom Index") and (4) a Company-Determined Peer Group
Index (the "Peer Index") over the period of April 29, 1994 to December 31, 1998.
The Peer Index includes the following four companies, each of which operates
multiple wireless cable television systems: American Telecasting, Inc., CAI,
People's Choice TV Corp. and Wireless One. The returns for each of the members
of the Peer Index have been weighted according to each member's stock market
capitalization. The graph and table assume the investment of $100 in each of the
Old Common Stock, the Nasdaq-U.S. Index, the Nasdaq-Telecom Index and the Peer
Index on April 29, 1994 (the Old Common Stock commenced public trading on April
22, 1994, and April 29, 1994 represents the first month-end date that the Old
Common Stock was publicly traded) and the reinvestment of all dividends. Total
stockholder returns for prior periods are not an indication of future
performance.
[CHART]
29-Apr-94 30-Dec-94 29-Dec-95 31-Dec-96 31-Dec-97 31-Dec-98
--------- --------- --------- --------- --------- ----------
Heartland Wireless Communications, Inc. 100 115.91 270.45 119.32 15.91 0.19
Nasdaq-U.S. Index 100 103.38 146.2 179.84 220.67 310.96
Nasdaq-Telecom Index 100 100.12 131.1 134.01 197.98 326.27
Peer Index 100 62.48 97.64 33.90 11.98 1.38261951
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APRIL DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
29, 1994 30, 1994 29,1995 31, 1996 31, 1997 31, 1998
-------- -------- ------- -------- -------- --------
Heartland Wireless
Communications, Inc. $100.00 $115.91 $270.45 $119.32 $ 15.91 $ 0.19
Nasdaq-U.S. Index $100.00 $103.38 $146.20 $179.84 $220.67 $310.90
Nasdaq-Telecom Index $100.00 $100.12 $131.10 $134.01 $197.98 $326.27
Peer Index $100.00 $ 62.48 $ 97.64 $ 33.90 $ 11.98 $ 1.38
As of March 12, 1999, the closing bid price for the Old Common Stock as
reported on the OTC Bulletin Board was $.035 per share. The Old Common Stock
will be canceled on the Effective Date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of Old Common Stock with respect to (i) each person known by the
Company to own beneficially more than 5% of the outstanding shares of Old Common
Stock, (ii) each of the Company's directors, (iii) the Named Executive Officers
and (iv) all directors and executive officers as a group, in each case, as of
March 12, 1999. Except as otherwise indicated, each of the stockholders has sole
voting and investment power with respect to the shares beneficially owned.
Unless otherwise indicated, the address for each stockholder is c/o the Company,
200 Chisholm Place, Suite 200, Plano, Texas 75075.
BENEFICIAL OWNERSHIP
--------------------
SHARES PERCENT(1)
------ ----------
Hunt Capital Group, L.L.C.(2) ........................................ 4,000,000 20.3%
L. Allen Wheeler (3) ................................................. 2,000,000 10.1%
David E. Webb (4) .................................................... 1,150,810 5.8%
Jupiter Partners L.P.(5) ............................................. 3,710,907 18.8%
Carroll D. McHenry ................................................... 178,333 *
Marjean Henderson .................................................... 30,000 *
J. Curtis Henderson .................................................. 13,000 *
Alex R. Padilla ...................................................... 0 *
Frank H. Hosea ....................................................... 0 *
All executive officers and directors as a group (seven persons) (6) .. 221,333 1.1%
- ----------
* Less than 1%.
(1) Based on 19,790,551 shares of Old Common Stock outstanding on March 12,
1999. The information contained in this table with respect to
beneficial ownership reflects "beneficial ownership" as defined in Rule
13d-3 under the 1934 Act, which generally includes any person who
directly or indirectly shares voting or investment power with respect
to a security.
(2) Share ownership as reported in a Schedule 13D filed with the SEC on
December 2, 1998 (the "13D"). Address is 4000 Thanksgiving Tower, 1601
Elm Street, Dallas, Texas 75201.
(3) Share ownership as reported in the 13D. Address is 401 W. Evergreen,
Durant, OK 74701.
(4) Share ownership as reported in the 13D. The 13D lists Mr. Webb's
business address as 1101 Summit Ave., Plano, TX 75074.
(5) Address is 30 Rockefeller Plaza, Suite 4525, New York, N.Y. 10112.
Jupiter Partners L.P. is the holder of $40.0 million gross proceeds of
the Convertible Notes. Each Convertible Note is convertible into the
number of shares of Old Common Stock computed by dividing (i) the
principal amount of the Convertible Note (after
44
45
taking into account accretions in value) by (ii) the Conversion Price
then in effect. The current Conversion Price is $15.34 per share.
Pursuant to the terms of the Plan, the Convertible Notes will be
canceled in exchange for 3% of the outstanding shares of New Common
Stock and warrants to purchase 7.5% of the New Common Stock on a
diluted basis. See "Business - Financial Restructuring."
(6) Includes 221,333 shares that seven directors and executive officers
have the right to acquire beneficial ownership of upon the exercise of
stock options exercisable within 60 days under the terms of the Old
Stock Option Plans. Pursuant to the terms of the Plan, all options
granted under the Old Stock Option Plans will be canceled on the
Effective Date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1998, the Company leased an aggregate of approximately
62,267 square feet for its operations, billing, purchasing, warehouse,
administrative, telemarketing and customer call center in Durant, Oklahoma and
for office space in Lindsay, Oklahoma from affiliates of Mr. Wheeler. The per
annum rent for such space was approximately $205,000. The Company believes that
such rents were at or below market rates and the terms of such leases were at
least as favorable as those the Company would be able to otherwise obtain
through arms-length negotiation with an unaffiliated third party. In connection
with its Restructuring, the Company terminated approximately 56,000 square feet
of the leases in Durant and Lindsay, Oklahoma, effective March 31, 1999. Claims
of the lessors for damages will be treated as miscellaneous unsecured claims
under the Restructuring. The Company continues to lease approximately 3,170
square feet of space for telemarketing operations in Durant from an affiliate of
Messrs. Wheeler and Webb, under leases that expire March 1, 2000. The Company
continues to pay approximately $15,800 per annum for such space. The Company
also continues to lease over 3,100 square feet of space for purchasing and
computer operations in Durant from an affiliate of Messrs. Wheeler and Webb,
under leases that expire May 31, 2000. The Company pays approximately $32,300
per year for such space.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report
1. Financial Statements
The following financial statements are filed as part of this Form
10-K:
PAGE
----
Independent Auditors' Report...................................................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997..................................... F-2
Consolidated Statements of Operations for the three years ended December 31, 1998................. F-3
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1998....... F-4
Consolidated Statements of Cash Flows for the three years ended December 31, 1998................. F-5
Notes to Consolidated Financial Statements........................................................ F-7
2. Financial Statement Schedules
The following financial statement schedule is filed as part of
this Form 10-K:
PAGE
----
Schedule II -- Valuation and Qualifying Accounts......................................... S-1
45
46
Schedules other than the above have been omitted because they
are either not applicable or the required information has been
disclosed in the financial statements or notes thereto.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 -- Letter Agreement regarding formation of the Registrant (filed
as Exhibit 2.1 to the Registrant's Registration Statement on
Form S-1, File No. 33-74244 (the "Form S-1"), and incorporated
herein by reference)
2.2 -- Supplement to Letter Agreement regarding formation of the
Registrant (filed as Exhibit 2.2 to the Form S-1 and
incorporated herein by reference)
2.3 -- Registrant's Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed February 9, 1999
and incorporated herein by reference)
3.1 -- Restated Certificate of Incorporation of the Registrant (filed
as Exhibit 3.1 to the Form S-1 and herein by reference)
3.2 -- Restated By-laws of the Registrant (filed as Exhibit 3.2 to
the Form S-1 and incorporated herein by reference)
4.1 -- Indenture between the Registrant and First Trust of New York,
National Association, as Trustee (the "Trustee") (filed as
Exhibit 4.20 to the Registrant's Registration Statement on
Form S-4, File No. 333-12577 (the "December 1996 Form S-4")
and incorporated herein by reference)
4.2 -- Supplemental Indenture dated as of December 9, 1996, between
the Registrant and the Trustee (filed as Exhibit 4.21 to the
December 1996 Form S-4 and incorporated herein by reference)
10.1 -- Heartland Wireless Communications, Inc. 401(k) Plan (filed as
Exhibit 4.3 to the Registrant's Registration Statement on Form
S-8 (File No. 333-05943) and incorporated herein by reference)
10.2 -- 1994 Employee Stock Option Plan of the Registrant (filed as
Exhibit 4.1 to the Registrant's Registration Statement on Form
S-8 (File No. 333-04263) and incorporated herein by
reference).
10.3 -- Revised Form of Nontransferable Incentive Stock Option
Agreement under the 1994 Employee Stock Option Plan of the
Registrant (filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-4, File No. 33-91930 (the
"February 1996 Form S-4") and incorporated herein by
reference)
10.4 -- Revised Form of Nontransferable Non-Qualified Stock Option
Agreement under the 1994 Employee Stock Option Plan of the
Registrant (filed as Exhibit 4.3 to the February 1996 Form S-4
and incorporated herein by reference)
10.5 -- 1994 Stock Option Plan for Non-Employee Directors of the
Registrant (filed as Exhibit 4.4 to the Form S-1 and
incorporated herein by reference)
10.6 -- Form of Stock Option Agreement under the 1994 Stock Option
Plan for Non-Employee Directors of the Registrant (filed as
Exhibit 4.5 to the Form S-1 and incorporated herein by
reference)
46
47
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.7 -- Noncompetition Agreement between the Registrant and J.R.
Holland, Jr. (filed as Exhibit 10.4 to the Form S-1 and
incorporated herein by reference)
10.8 -- Noncompetition Agreement between the Registrant and L. Allen
Wheeler (filed as Exhibit 10.9 to the Form S-1 and
incorporated herein by reference)
10.9 -- Building Lease Agreement dated May 1, 1994, between Wireless
Communications, Inc. and The Federal Building, Inc. (filed as
Exhibit 10.15 to the 1994 Form 10-K and incorporated herein by
reference)
10.10 -- Office Lease dated April 10, 1996 between Merit Office
Portfolio Limited Partnership and the Registrant for the
Registrant's Plano, Texas office (filed as Exhibit 10.1 to the
Form 10-Q Quarterly Report for the quarter ended June 30, 1996
("June 1996 Form 10-Q") and incorporated herein by reference)
10.11 -- Sublease Agreement dated June 14, 1996 between the Registrant
and CS Wireless (filed as Exhibit 10.2 to the June 1996 Form
10-Q and incorporated herein by reference)
10.12 -- Cooperative Marketing Agreement between the Registrant and
DIRECTV dated November 12, 1997, and the following related
agreements between the Registrant and DIRECTV: Transport
Agreement, DSS Receiver Support Agreement and Subscriber
Payment Agreement (filed as Exhibit 10.16 to the Registrant's
Form 10-K Annual Report for the fiscal year ended December 31,
1997 (the "1997 Form 10-K") and incorporated herein by
reference)
10.13 -- Heartland Wireless Communications, Inc. Performance Incentive
Compensation Plan (filed as Exhibit 10.17 to the 1997 Form
10-K and incorporated herein by reference)
10.14 -- Employment Agreement between the Registrant and Carroll D.
McHenry dated as of March 6, 1998 (filed as Exhibit 10.18 to
the 1997 Form 10-K and incorporated herein by reference)
10.15 -- Employment Agreement between the Registrant and J. Curtis
Henderson dated as of April 8, 1998 (filed as Exhibit 10.4 to
the Registrant's Form 10-Q Quarterly Report for the Quarter
ended June 3, 1998 (the "June 1998 Form 10-Q") and
incorporated herein by reference)
10.16 -- Employment Agreement between the Registrant and Marjean
Henderson dated as of April 8, 1998 (filed as Exhibit 10.5 to
the June 1998 Form 10-Q and incorporated herein by reference)
10.17 -- Employment Agreement between the Registrant and Alexander R.
Padilla dated as of July 13, 1998 (filed as Exhibit 10.1 to
the Registrant's Form 10-Q Quarterly Report for the quarter
ended September 30, 1998 and incorporated herein by reference)
*10.18 -- Employment Agreement between the Registrant and Frank H. Hosea
dated as of November 2, 1998
10.19 -- Non-Qualified Stock Option Agreement between the Registrant
and Carroll D. McHenry dated as of January 20, 1998 (filed as
Exhibit 10.1 to the March 1998 Form 10-Q and incorporated
herein by reference)
10.20 -- Agreement between DIRECTV and the Registrant dated April 5,
1998 (filed as Exhibit 10.1 to the June 1998 Form 10-Q and
incorporated herein by reference)
*21 -- List of Subsidiaries
47
48
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*27 -- Financial Data Schedule
- -----------
* Filed herewith
(b) Reports on Form 8-K
During the fourth quarter of the fiscal year ended December 31, 1998,
the Company filed the following reports on Form 8-K:
(1) Current Report on Form 8-K dated October 6, 1998 with respect to an
agreement among the Company and certain holders of the Old Senior Notes
regarding a proposed Plan of Reorganization to be filed by the Company under
Chapter 11 of the U.S. Bankruptcy Code.
(2) Current Report on Form 8-K dated December 4, 1998 with respect to
the Company's filing of a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of
Delaware.
48
49
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Heartland Wireless Communications, Inc. (Debtor-in-Possession):
We have audited the accompanying consolidated balance sheets of Heartland
Wireless Communications, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998. In connection with our audits of the consolidated financial statements, we
also have audited the accompanying financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Heartland Wireless
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Dallas, Texas
March 31, 1999
F-1
50
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1998 1997
--------- ---------
Current assets:
Cash and cash equivalents $ 30,676 $ 42,821
Restricted assets - investment in debt and other securities 1,011 10,333
Subscriber receivables, net of allowance for doubtful accounts
of $348 and $340, respectively 2,872 2,198
Prepaid expenses and other 1,563 1,390
--------- ---------
Total current assets 36,122 56,742
--------- ---------
Investments in affiliates, at equity (Notes 2 and 9) -- 34,167
Systems and equipment, net (Notes 3 and 4) 61,037 122,653
License and leased license investment, net of accumulated
amortization of $1,893 and $12,929, respectively (Notes 3 and 5) 79,703 123,369
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $3,685 in 1997
(Notes 3 and 9) -- 26,226
Note receivable from affiliate (Note 9) 3,901 2,069
Other assets, net 5,269 6,908
--------- ---------
TOTAL ASSETS $ 186,032 $ 372,134
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
Current liabilities:
Accounts payable and accrued liabilities (Note 6) $ 11,915 $ 17,381
Current portion of long-term debt (Note 7) 2,019 1,358
--------- ---------
Total current liabilities 13,934 18,739
--------- ---------
Long-term debt, less current portion (Note 7) 14,258 306,838
Minority interests in subsidiaries (Note 17) 149 149
LIABILITIES SUBJECT TO COMPROMISE (NOTE 8) 322,781 --
Stockholders' equity (Note 10):
Common stock, $.001 par value; authorized 50,000,000
shares, issued 19,795,521 and 19,688,527
shares, respectively 20 20
Additional paid-in capital 261,943 261,880
Accumulated deficit (426,695) (215,134)
Treasury stock at cost, 13,396 shares (358) (358)
--------- ---------
Total stockholders' equity (deficit) (165,090) 46,408
--------- ---------
Commitments and contingencies (Notes 5 and 13)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 186,032 $ 372,134
========= =========
See accompanying Notes to Consolidated Financial Statements.
F-2
51
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1998 1997 1996
------------ ------------ ------------
Revenues $ 73,989 $ 78,792 $ 56,017
Operating expenses:
System operations 35,790 39,596 21,255
Selling, general and administrative 36,367 42,255 42,435
Depreciation and amortization 39,550 65,112 39,323
Impairment of long-lived assets (Note 3) 105,791 -- --
------------ ------------ ------------
Total operating expenses 217,498 146,963 103,013
------------ ------------ ------------
(143,509) (68,171) (46,996)
Operating loss
Other income (expense):
Interest income 2,659 5,546 3,811
Interest expense (37,095) (39,867) (21,977)
Equity in losses of affiliates (Notes 2 and 9) (30,340) (32,037) (18,612)
Other income (expense), net (Note 9) (10) (54) 4,981
------------ ------------ ------------
Total other income (expense) (64,786) (66,412) (31,797)
------------ ------------ ------------
Loss before reorganization
costs, income taxes and
extraordinary item (208,295) (134,583) (78,793)
Reorganization costs (Note 1) (3,266) -- --
------------ ------------ ------------
Loss before income taxes and
extraordinary item (211,561) (134,583) (78,793)
Income tax benefit (Note 11) -- -- 28,156
------------ ------------ ------------
Loss before extraordinary item (211,561) (134,583) (50,637)
Extraordinary item - loss on extinguishment
of debt, net of tax (Note 7) -- -- (10,424)
------------ ------------ ------------
Net loss $ (211,561) $ (134,583) $ (61,061)
============ ============ ============
Loss per common share - basic and diluted:
Loss before extraordinary item $ (10.72) $ (6.85) $ (2.74)
Extraordinary item -- -- (.57)
------------ ------------ ------------
Net loss $ (10.72) $ (6.85) $ (3.31)
============ ============ ============
Average Shares Outstanding 19,735,000 19,649,000 18,473,000
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
F-3
52
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL
COMMON STOCK PAID-IN TREASURY STOCK
----------------------- ACCUMULATED ------------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 12,611,131 $ 13 $ 71,165 $ (19,490) -- $ -- $ 51,688
Issuance of common stock
for acquisitions (Note 9) 6,934,040 7 184,840 -- (10,252) (274) 184,573
Exercise of stock options,
warrants and other,
including tax benefit 49,310 -- 658 -- -- -- 658
Gain on equity investment,
net of taxes of $2,931 (Note 9) -- -- 4,989 -- -- -- 4,989
Net loss -- -- -- (61,061) -- -- (61,061)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 19,594,481 20 261,652 (80,551) (10,252) (274) 180,847
Issuance of common stock
to officer (Note 10) 75,000 -- 159 -- -- -- 159
Issuance of common stock
for 401(k) Plan 19,046 -- 69 -- -- -- 69
Acquired shares from escrow -- -- -- -- (3,144) (84) (84)
Net loss -- -- -- (134,583) -- -- (134,583)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 19,688,527 20 261,880 (215,134) (13,396) (358) 46,408
Issuance of common stock
to officer (Note 10) 10,000 -- 14 -- -- -- 14
Issuance of common stock
for 401(k) Plan 96,994 -- 49 -- -- -- 49
Net loss -- -- -- (211,561) -- -- (211,561)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 19,795,521 $ 20 $ 261,943 $ (426,695) (13,396) $ (358) $ (165,090)
========== ========== ========== ========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-4
53
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net loss $(211,561) $(134,583) $ (61,061)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 39,550 65,112 39,323
Deferred income tax benefit -- -- (29,240)
Debt accretion and debt issuance cost amortization 5,686 4,985 4,331
Equity in losses of affiliates 30,340 32,037 18,612
Compensation expense related to issuance of common stock 63 228 --
Gain on sale of assets -- -- (5,279)
Write-down of assets due to impairment 105,791 -- --
Extraordinary item - debt extinguishment -- -- 4,253
Changes in operating assets and liabilities, net of acquisitions:
Subscriber receivables (674) 3,194 (2,568)
Prepaid expenses and other (132) 830 (414)
Accounts payable, accrued expenses and other liabilities 22,560 (13,449) 9,289
--------- --------- ---------
Net cash used in operating activities (8,377) (41,646) (22,754)
--------- --------- ---------
Cash flows from investing activities:
Investments and advances to affiliates -- -- (3,050)
Proceeds from note receivable - affiliate 366 18,749 58,340
Proceeds from sale of investment in affiliate 1,534 -- --
Proceeds from sale of assets 236 126 24,139
Purchases of systems and equipment (13,473) (29,402) (93,298)
Expenditures for licenses and leased licenses -- (310) (2,382)
Purchases of other investments -- (900) --
Purchases of debt securities (69) -- (24,550)
Proceeds from sale of debt securities 9,368 19,935 14,250
Acquisitions, net of cash acquired -- (1,622) (7,618)
Collection of note receivable -- 250 --
--------- --------- ---------
Net cash provided by (used in) investing activities $ (2,038) $ 6,826 $ (34,169)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt -- -- 141,350
Payment of debt issuance costs and consent fees -- (597) (12,973)
Payments on long-term debt (327) -- (13,017)
Proceeds from other notes payable -- -- 6,700
Payments on short-term borrowings and other notes payable (1,403) (1,358) (9,233)
Other -- -- 549
--------- --------- ---------
Net cash provided by (used in) financing activities (1,730) (1,955) 113,376
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (12,145) (36,775) 56,453
Cash and cash equivalents at beginning of year 42,821 79,596 23,143
--------- --------- ---------
Cash and cash equivalents at end of year $ 30,676 $ 42,821 $ 79,596
========= ========= =========
Cash paid for interest $ 10,416 $ 31,017 $ 14,434
========= ========= =========
Cash paid for reorganization costs $ 2,921 $ -- $ --
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-5
54
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Heartland Wireless Communications, Inc. (the "Company") provides
wireless broadband network and multichannel subscription
television services in the 2.1 gigahertz ("GHz") to 2.7 GHz range
of the radio spectrum, primarily in mid-size and small markets in
the central United States. The Company owns the basic trading area
("BTA") authorization, or otherwise licenses or leases
MDS/MMDS/ITFS ("MMDS") spectrum, in over 80 markets.
Currently, the Company provides multichannel subscription
television service in 57 markets, including an offering of up to
185 digital channels from DIRECTV, Inc. ("DIRECTV") and its
distributors in 51 of the 57 markets in combination with the
Company's service or as a stand-alone offering. The Company also
provides two-way high-speed Internet access services primarily to
businesses and small offices/home offices ("SOHOs") in
Sherman/Denison, Texas and is constructing a similar system in
Austin, Texas. The Company, through national independent
contractors, also offers technical support, e-mail, Web design and
hosting, and domain name registration and maintenance in
connection with its high-speed Internet access business.
(b) Financial Restructuring
The Company retained Wasserstein Perella & Co. ("WP&Co.") to
assist in evaluating options to finance the Company's business
plan and service its debt. In consultation with WP&Co., the
Company did not make the April 15, 1998 interest payment on its
13% Senior Notes ("Old 13% Notes" - See Note 7). Subsequently, the
Company began negotiating with holders of the Old 13% Notes and
holders of the Company's 14% Senior Notes ("Old 14% Notes" - See
Note 7) (collectively, "the Old Senior Notes") to restructure its
debt. The Company did not make the October 15, 1998 interest
payments on the Old Senior Notes. On December 4, 1998, the Company
filed a voluntary, prenegotiated Plan of Reorganization (the
"Plan") under Chapter 11 of the U.S. Bankruptcy Code, with the
prepetition support from holders of more than 70% in principal
amount of the Old Senior Notes.
Under the Plan, the Company will cancel all issued and outstanding
common stock, stock options, and warrants (collectively, the "Old
Common Stock") and will issue new common stock ("New Common
Stock") and warrants in the reorganized Company. Holders of the
Old Senior Notes and holders of the Company's 9% Convertible Notes
("Convertible Notes" - See Note 7) will receive 97% and 3% of the
New Common Stock, respectively. The holders of the Convertible
Notes and the Company's Old Common Stock will receive warrants to
purchase up to 7.5% and 2.5% of New Common Stock on a diluted
basis, respectively. The warrants proposed to be issued to holders
of Old Common Stock are subject to certain securities litigation
claims as set forth in the Plan.
The Company continues business operations as debtor-in-possession
until the Plan is fully consummated. The obligations of the
Company that will be eligible for compromise under the Plan have
been classified as Liabilities Subject to Compromise on the
Company's Consolidated Balance Sheet as of December 31, 1998 (See
Note 8). As of December 4, 1998, the Company discontinued the
accrual of interest and
F-6
55
amortization of deferred debt issuance costs and discounts to
notes payable related to Liabilities Subject to Compromise.
The impact of the bankruptcy reorganization on various Federal tax
attributes has not been fully determined; however, some portion of
the Company's net operating loss carryforwards likely will be
reduced and may be completely eliminated pursuant to its
bankruptcy discharge. Furthermore, the deductibility of net
operating loss carryforwards arising prior to discharge in
bankruptcy will be limited by the product of the long-term tax
exempt rate times the fair market value of Heartland after
discharge of debt.
On March 15, 1999, the U.S. Bankruptcy Court for the District of
Delaware confirmed the Plan, which is subject to certain
conditions. All conditions to effectiveness of the Plan have been
satisfied or duly waived, and the Company will consummate the Plan
on April 1, 1999, at which time the reorganized Company will
emerge from bankruptcy. The reorganized Company will adopt Fresh
Start Reporting in accordance with American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7"). Fresh Start Reporting results in a new reporting
entity with assets and liabilities adjusted to fair value and
beginning retained earnings set to zero. Liabilities Subject to
Compromise will also be adjusted to zero in the debt discharge
portion of the Fresh Start entry.
(c) Liquidity
The Company's Consolidated Financial Statements have been
presented on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business.
The Company anticipates that additional sources of capital will be
required to fully implement its long-term business strategy, which
encompasses exploiting and expanding the use of its spectrum
through the delivery of broadband network services such as
high-speed Internet access and Internet Protocol (IP), telephony
services as well as the consolidation of additional spectrum in
other medium-sized markets in the United States for such use.
Accordingly, the Company is evaluating and will continue to
evaluate additional sources of capital, including the sale or
exchange of debt or equity securities, borrowings under secured or
unsecured loan arrangements and sales of assets, including MMDS
subscription systems and channel rights.
There can be no assurance that the Company will be able to obtain
additional capital in a timely manner and on terms satisfactory to
the Company that will be necessary to implement its business
strategy. If the Company is unable to obtain financing in a timely
manner and on acceptable terms, management has developed and
intends to implement a plan that allows the Company to continue to
operate in the normal course of business at least into 2000. More
specifically, this plan would include delaying, reducing or
eliminating the launch of new broadband network systems (including
high-speed Internet systems), reducing or eliminating new video
subscriber installations and related marketing expenditures and
reducing or eliminating other discretionary expenditures.
(d) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Investments in 20% to
50% owned affiliates are accounted for on the equity method and
investments in less than 20% owned affiliates are accounted for on
the cost method. All significant intercompany balances and
transactions have been eliminated in consolidation.
F-7
56
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash
equivalents. Cash and cash equivalents consist of money market
funds, certificates of deposit, overnight repurchase agreements
and other investment securities.
(f) Investments in Securities
Investments in debt and other securities are widely diversified
and principally consist of certificates of deposit, money market
deposits, U.S. government agency securities and rated commercial
paper with an original maturity of less than one year. These
investments are considered held to maturity and are stated at
amortized cost which approximates fair value.
(g) Systems and Equipment
Systems and equipment are recorded at cost and include the cost of
transmission equipment as well as the excess of direct costs of
subscriber installations over installation fees (See Note 4). Upon
installation, depreciation and amortization of systems and
equipment is recorded on a straight-line basis over the estimated
useful lives, from three to twenty years. Equipment awaiting
installation consists primarily of accessories, parts and supplies
for subscriber installations and is stated at the lower of average
cost or market.
The direct costs of subscriber installations include reception
materials and equipment on subscriber premises, installation labor
and overhead charges which are amortized over the useful life of
the asset (presently seven years) for the recoverable portion and
the estimated average subscription term (presently three years)
for the nonrecoverable portion of such costs. The nonrecoverable
portion of the cost of a subscriber installation becomes fully
depreciated upon subscriber disconnect. The amortization period of
the nonrecoverable portion of subscriber installation costs was
reduced from six years to four years and from four to three years
in the fourth quarter of 1996 and in the third quarter of 1997,
respectively, to correspond to the Company's estimate of average
subscription term. The effects of these changes in estimate were
to increase 1997 and 1996 depreciation expense by $1.2 million and
$2.9 million, respectively, and increase 1997 and 1996 net loss by
$1.2 million and $1.9 million ($.04 and $.10 per basic common
share), respectively. In the third quarter of 1997, the Company
charged operations for $6.1 million for the write-off of installed
subscriber equipment which was deemed unrecoverable from lost
subscribers and $1.7 million for the write-off of obsolete
subscriber equipment.
(h) License and Leased License Investment
License and leased license investment includes costs incurred to
acquire and/or develop wireless broadband channel rights and are
amortized over 15 years beginning with inception of service in
each market.
In the fourth quarter of 1996, the Company reduced its estimated
useful life of license and leased license investment from 20 years
to 15 years. The effect of this change increased 1996 amortization
expense by $400,000 and increased 1996 net loss by $260,000 ($.01
per basic common share). During the third quarter of 1998, the
Company wrote down the value of its operating licenses to
estimated fair market value in accordance with SFAS No. 121 (See
Note 3). The re-valued licenses are being amortized over the
average remaining life of 12.5 years.
(i) Excess of Cost over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is
amortized on a straight-line basis, generally over 15 years. The
Company assesses the recoverability of this asset by determining
whether the
F-8
57
amortization of the balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured
based on projected discounted future operating cash flows. The
assessment for the recoverability of excess of cost over fair
value of net assets acquired will be impacted if estimated future
operating cash flows are not achieved. (See Note 3). In the fourth
quarter of 1996, the Company reduced its estimate of the useful
life of its excess of cost over fair value of net assets acquired
from 20 years to 15 years. The effect of this change in estimate
was to increase 1996 amortization expense by $100,000 and increase
1996 net loss by $65,000 (no material effect on a per basic common
share basis).
(j) Impairment of Long Lived Assets
In January, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and
certain intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to the future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the net asset exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. (See Note 3).
(k) Investments in Affiliated Companies
Investments in affiliated companies are accounted for by the
equity method. The excess cost of the affiliates' stock over the
Company's share of their net assets at the acquisition date is
amortized on a straight-line basis over 15 years.
(l) Revenue Recognition
Revenues from subscribers are recognized as service is provided.
Amounts paid in advance are recorded as deferred revenue.
(m) Income Taxes
The Company utilizes the asset and liability method for accounting
for deferred income taxes. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period
that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized. Based on the foregoing policy,
deferred tax assets net of deferred tax liabilities have been
fully reserved.
(n) Net Loss Per Common Share - Basic and Diluted
The Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS No. 128") in the fourth
quarter of 1997 as required by this Statement. Accordingly, the
Company has presented basic loss per share, computed on the basis
of the weighted average number of common shares outstanding during
the year, and diluted loss per share, computed on the basis of the
weighted average number of common shares and all dilutive
potential common shares outstanding during the year. All prior
period loss per share amounts have been restated in accordance
with this Statement.
F-9
58
(o) Use of Estimates
Preparation of Consolidated 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 Consolidated Financial Statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(p) Concentrations of Credit Risk and Accounts Receivable
The Company's subscribers and the related accounts receivable are
primarily residential subscribers that are concentrated in eight
states in the central United States. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the
credit risk of specific subscribers, historical trends and other
information. In the opinion of management , the allowance for
doubtful accounts is adequate and subscriber receivables are
presented at net realizable value.
(q) Other Assets
Other assets consists principally of debt issuance costs related
to the issuance of the Company's long-term debt. These costs are
amortized, straight-line, over the term of the related
indebtedness. The Company discontinued the amortization of
deferred debt issuance costs upon filing the Plan on December 4,
1998. The carrying value of these costs will be adjusted to zero
when the Company adopts Fresh Start Reporting on April 1, 1999.
(r) Reclassifications
Certain prior year balances have been reclassified to conform to
the current year presentation.
(s) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and display of
comprehensive income in a full set of general-purpose financial
statements. Comprehensive income includes net income and other
comprehensive income which is generally comprised of changes in
the fair value of available-for-sale marketable securities,
foreign currency translation adjustments and adjustments to
recognize additional minimum pension liabilities. For each period
presented in the accompanying consolidated statements of
operations, comprehensive income and net income are the same
amount.
(t) Segment Reporting
In January 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS 131
requires that public companies report operating segments based
upon how management allocates resources and assesses performance.
Based on the criteria outlined in SFAS No. 131, the Company is
comprised of a single reportable segment -- distribution of
wireless multichannel video programming. No additional disclosure
is required by the Company to conform to the requirements of SFAS
No. 131.
(2) INVESTMENTS IN AFFILIATES
Investments in affiliates was $0 and $34.2 million at December 31, 1998
and 1997, respectively. At December 31, 1997, Investments in affiliates
consisted of approximately 20% of the outstanding common stock of
Wireless One, Inc. ("Wireless One") and 36% of the outstanding common
stock of CS Wireless Systems, Inc. ("CS Wireless"). During 1997, the
Company recorded its equity interest in losses from Wireless One to the
F-10
59
extent that its investment balance was reduced to zero. During 1998,
the Company recorded its equity interest in losses from CS Wireless,
wrote off $6.8 million of its excess basis in CS Wireless in the second
quarter, and wrote off its remaining investment balance of $11.7
million during the third quarter based on impairment charges recorded
by CS Wireless related to its goodwill. In December 1998, the Company
sold its 36% equity interest in CS Wireless to CAI Wireless Systems,
Inc. ("CAI"). (See Note 9.)
(3) IMPAIRMENT OF LONG-LIVED ASSETS
During the second quarter of 1998, the Company reviewed the assets
associated with certain undeveloped markets and determined that (i)
cash flows from operations would not be adequate to fund the capital
outlay required to build out such markets, and (ii) because of the
Company's default on its interest payment on the Old 13% Notes in the
second quarter of 1998, outside financing for the build-out of these
markets was not readily available prior to the consummation of a
financial restructuring. Therefore, in accordance with SFAS No. 121,
the channel licenses and leases in these undeveloped markets were
individually evaluated and written down to estimated fair value,
resulting in a non-cash impairment charge of $17.7 million in the
second quarter of 1998.
Throughout the second and third quarters of 1998, the Company analyzed
various recapitalization and restructuring alternatives with the
assistance of WP&Co., including consensual, out-of-court alternatives.
In October 1998, the Company announced that it intended to file a
voluntary prenegotiated plan of reorganization under Chapter 11 of the
U.S. Bankruptcy Code (See Note 1). This event caused the Company to
evaluate all of its long-lived assets for impairment (according to the
requirements of SFAS No. 121). The Company retained the services of a
third party to assist in performing a fair market valuation of
substantially all of the Company's assets. This valuation, along with
the $17.7 million impairment charge discussed above, resulted in a
non-cash impairment charge during 1998 of $105.8 million, as follows:
Description of Write-Downs
--------------------------
Systems and equipment $ 44,510
License and leased license investment 36,550
Excess of cost over fair value of net assets acquired 24,731
------------
Total $ 105,791
============
The Company's estimates of future gross revenues and operating cash
flows, the remaining estimated lives of long-lived assets, or both
could be reduced in the future due to changes in, among other things,
technology, government regulation, available financing, interference
issues or competition. As a result, the carrying amounts of long-lived
assets could be reduced by additional amounts which would be material
to the Company's financial position and results of operations.
F-11
60
(4) SYSTEMS AND EQUIPMENT
Systems and equipment consists of the following at December 31,
1998 and 1997:
1998 1997
-------- --------
Equipment awaiting installation $ 4,233 $ 5,812
Subscriber premises equipment and installation costs 26,309 102,892
Transmission equipment and system construction costs 31,170 45,961
Office furniture and equipment 1,813 8,811
Buildings and leasehold improvements 461 1,786
-------- --------
63,986 165,262
Accumulated depreciation and amortization 2,949 42,609
-------- --------
$ 61,037 $122,653
======== ========
(See Note 3 for discussion of systems and equipment written down in
September 1998.)
(5) OPERATING LEASES AND FCC LICENSES
The Company depends on leases with third parties for most of its channel
rights. Under FCC rules, the base term of each lease cannot exceed the
term of the underlying FCC license. FCC licenses generally must be
renewed every ten years, and there is no automatic renewal of such
licenses. The remaining initial terms of most of the Company's operating
channel leases range from 2 to 6 years, although substantially all of
these leases renew automatically or upon notice from the Company. Channel
lease agreements generally require payments based on the greater of
specified minimums or amounts based upon various subscriber levels or
revenues.
Channel lease payments generally begin upon the completion of
construction of transmission equipment and facilities and upon approval
for operation under FCC rules. For certain leases, payments begin upon
grant of the channel rights. Channel lease expense was $3.0 million, $3.6
million and $3.3 million for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company also has other operating leases for office space, equipment
and transmission tower space. Rent expense incurred in connection with
these leases was $4.2 million, $3.4 million and $3.5 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Future minimum lease payments due under noncancellable leases at December
31, 1998 are as follows:
YEAR ENDING CHANNEL OPERATING
DECEMBER 31 LEASES LEASES
----------- ------ ------
1999 $2,855 $3,206
2000 2,990 1,478
2001 2,950 1,136
2002 2,387 945
2003 1,854 692
F-12
61
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consists of the following at
December 31, 1998 and 1997:
1998 1997
------- -------
Accounts payable $ 319 $ 261
Accrued interest 112 6,873
Accrued programming 2,798 2,937
Subscriber deposits 730 386
Deferred income 1,041 943
Accrued sales, property and franchise taxes 2,260 2,166
Accrued compensation 681 1,011
Other accrued expenses and other liabilities 3,974 2,804
------- -------
$11,915 $17,381
======= =======
As of December 31, 1998, accrued interest on the Old Senior Notes and
Convertible Notes has been reclassified to Liabilities Subject to
Compromise. (See Notes 1 and 8).
(7) LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consists of the following:
1998 1997
-------- --------
Subordinated Convertible Notes due 2004 $ -- $ 52,678
13% Senior Notes due 2003 -- 112,111
14% Senior Notes due 2004 -- 125,000
Other notes payable 16,277 18,407
-------- --------
16,277 308,196
Less current portion 2,019 1,358
-------- --------
$ 14,258 $306,838
======== ========
DEBT CANCELLATION UNDER THE PLAN
Under the terms of the Plan, holders of the Old Senior Notes and
Convertible Notes will receive 97% and 3%, respectively, of the New
Common Stock in exchange for cancellation of their debt. The holders of
the Convertible Notes also will receive warrants to purchase up to 7.5%
of New Common Stock on a diluted basis. Accordingly, the Old Senior Notes
and Convertible Notes are considered eligible for compromise and have
been reclassified from Long Term Debt to Liabilities Subject to
Compromise on the Consolidated Balance Sheet at December 31, 1998. (See
Note 8). As of December 4, 1998, the Company discontinued the accrual of
interest and amortization of deferred debt issue costs and discounts on
notes payable related to Liabilities Subject to Compromise.
The following discussion of the Old Senior Notes and Convertible Notes
relates to the balances at December 31, 1997 and to amounts outstanding
during 1998 prior to filing the Plan.
F-13
62
CONVERTIBLE NOTES
On November 30, 1994, the Company consummated the $40.1 million private
placement of Convertible Notes. The Convertible Notes accrete at a rate
of 9%, compounded semiannually, to an aggregate principal amount of $62.4
million at November 30, 1999, with interest accruing and payable
thereafter.
OLD 13% NOTES
In April 1995, the Company consummated a private placement of $100.0
million of Old 13% Notes and 600,000 warrants to purchase an equal number
of shares of Old Common Stock at an exercise price of $19.525 per share.
For financial reporting purposes, the warrants were valued at $4.2
million. In March 1996, the Company consummated a private placement of an
additional $15.0 million of Old 13% Notes. Interest on the notes is
payable semiannually on April 15 and October 15.
In October 1996, by consent of a portion of the holders of the Old 13%
Notes, certain covenants and definitions were amended to provide for the
issuance of the Old 14% Notes. As a result of a substantive modification
of the terms of the debt, the Old 13% Notes were treated as extinguished
and reissued (at their estimated fair value) upon the consummation of the
offering of the Old 14% Notes. The write-off of debt issuance costs of
$5.3 million, consent payments and certain other costs of $7.3 million,
and a fair value adjustment of $1.1 million related to the Old 13% Notes
have been recorded as an extraordinary loss in 1996 of $11.5 million, net
of tax of $1.1 million.
OLD 14% NOTES
In December 1996, the Company consummated a private placement of $125.0
million of Old 14% Notes. The Company placed $22.0 million of the net
proceeds from the sale into an escrow account to fund the first three
interest payments. As of December 31, 1997, the escrow account amounted
to $8.0 million, and was used to make the April 15, 1998 interest
payment.
In April 1997, the Company consummated an exchange of $125.0 million of
Old 14% Notes for a new series containing identical terms, except that
the Old 14% Notes were registered under the Securities Act of 1933, as
amended.
OTHER NOTES PAYABLE
Other notes payable at December 31, 1998 and 1997 includes $15.1 million
and $15.8 million, respectively, relating to the acquisition of certain
basic trading areas ("BTAs") from the FCC. The note payable to the FCC
bears interest at 9.5%, payable quarterly over ten years beginning
November 1996. Quarterly principal payments are payable over the
remaining eight years beginning November 1998.
The Company and CS Wireless entered into a lease and purchase option
agreement for certain of the BTAs (collectively, the "Leased BTAs")
awarded to the Company at a total cost of approximately $5.2 million.
Under this agreement, CS Wireless reimburses the Company for principal
and interest paid to the FCC for the Leased BTAs. As of December 31,
1998, the amount of FCC debt related to the CS Wireless Leased BTAs
totaled $3.5 million and has been recorded as a receivable.
In September 1997, the Company entered into lease and purchase option
agreements with People's Choice TV Corp. ("PCTV") for two BTAs. Under
these agreements, PCTV has reimbursed the Company for all amounts paid to
the FCC for the two BTAs. In September 1998, PCTV assumed the FCC debt
related to the two BTAs, the lease agreement was terminated, and the
receivable and related debt were removed from the Company's financial
records.
F-14
63
Aggregate maturities of long-term debt as of December 31, 1998 that are
not subject to compromise for the five years ending December 31, 2003 are
as follows: 1999 - $2.0 million; 2000 - $1.8 million; 2001 - $1.9
million; 2002 - $2.0 million; and 2003 - $2.0 million.
(8) LIABILITIES SUBJECT TO COMPROMISE
As more fully discussed in Note 7, holders of the Old Senior Notes will
receive New Common Stock and the holders of the Convertible Notes will
receive New Common Stock and Warrants in exchange for cancellation of
their debt. These amounts are considered eligible for compromise under
the Plan and have been reclassified as Liabilities Subject to Compromise
on the Company's Consolidated Balance Sheet at December 31, 1998.
Liabilities Subject to Compromise are comprised of the following:
Old 13% Notes: Principal Balance $ 115,000
Accrued Interest 16,943
Unamortized Discount (2,384)
Old 14% Notes: Principal Balance 125,000
Accrued Interest 11,083
Old Convertible Notes: Principal Balance &
Accreted Interest 57,139
----------
$ 322,781
==========
(9) ACQUISITIONS/DISPOSITIONS
(a) CableMaxx, AWS and Technivision Acquisitions
Effective February 23, 1996, the Company acquired all the assets
and liabilities of American Wireless Systems, Inc. and CableMaxx,
Inc. and acquired substantially all of the assets and certain of
the liabilities of Fort Worth Wireless Cable T.V. Associates,
Wireless Cable TV Associates #38 and Three Sixty Corp. for an
aggregate of 6,757,000 shares of the Company's Old Common Stock
(the above five transactions are collectively referred to as the
"CableMaxx Acquisitions").
(b) CS Wireless Transaction
Immediately following the closing of the CableMaxx Acquisitions,
the Company, CAI and CS Wireless consummated an agreement in which
the Company contributed a substantial portion of the assets
received in the CableMaxx Acquisitions and certain other assets to
CS Wireless and CAI contributed certain wireless cable television
assets to CS Wireless.
In exchange for the contributed assets, the Company received (i)
36% of the outstanding shares of CS Wireless common stock, (ii)
approximately $28.3 million in cash, (iii) a $25 million
promissory note (which has been repaid) and (iv) a $15 million
promissory note payable ten years from closing and prepayable from
asset sales (the "Long Note").
Effective December 2, 1998, the Company, CAI and CS Wireless
signed a Master Agreement, pursuant to which CAI purchased the
Company's 36% equity interest in CS Wireless for $1.5 million. In
addition, CS Wireless agreed to assign certain MDS-1 channel
rights, 20 MHz of Wireless Communications Service ("WCS")
frequencies and an MMDS subscription television operating system
in Radcliffe, Iowa to the Company. The Company agreed to assign
channel rights and related equipment in Portsmouth, New Hampshire
to CS Wireless. The transfers and assignments will occur following
FCC approval, at which time the Company will cancel the Long Note
issued by CS Wireless to the Company. The carrying value of this
Long Note on the Company's Consolidated Balance Sheet at December
31, 1998 was $435,000. No gain or loss was recorded on this
transaction.
F-15
64
(c) Other Acquisitions/Dispositions
During 1996, the Company acquired four MMDS subscription
television operating systems in three separate purchase
transactions for $2.1 million; $350,000 plus 126,601 shares of Old
Commons Stock; and $1.0 million plus $1.4 million in notes,
respectively. Also in 1996, the Company sold two operating and two
non-operating systems for $5.4 million and $2.2 million,
respectively. The Company also sold channel rights in two
transactions for $9.0 million plus $750,000 in notes and deferred
payments in one transaction and $7.2 million in the other. The
deferred payments were made after December 31, 1996. The total
gain recognized on these sales transactions was $5.2 million.
In September 1997, the Company sold a 39% equity interest in
Television Interactiva del Norte, S.A. de C.V. ("Telinor") for
approximately $915,000 to CS Wireless. In addition, the Company
sold to CS Wireless two promissory notes payable by Telinor for
approximately $2.6 million representing principal and accrued
interest payable under such notes. Following this transaction, the
Company retained a 10% equity interest in Telinor.
All acquisitions have been accounted for as purchases, and
operations of the companies and businesses acquired have been
included in the accompanying Consolidated Financial Statements
from their respective dates of acquisition. There were no material
acquisitions by the Company in 1998.
The Company allocated the purchase prices of the acquisitions
consummated in 1997 and 1996 discussed above to the assets
acquired and liabilities assumed based on estimated fair values of
such assets and liabilities as follows:
1997 1996
-------- --------
Working capital (deficit) $ 10 $(19,790)
Assets held for sale -- 11,819
Systems and equipment 1,241 19,489
License and leased license investment
and goodwill 371 88,292
Deferred income taxes -- (24,851)
-------- --------
Total purchase price $ 1,622 $ 74,959
======== ========
(d) Pro Forma Information (Unaudited)
Pro forma disclosure relating to the 1997
acquisitions/transactions discussed in (c) above is not presented,
as the impact on the Company's financial position or results of
operations is immaterial.
Summarized below is the unaudited pro forma information for the
year ended December 31, 1996 as if the acquisitions/transactions
discussed above had been consummated as of the beginning of 1996,
after giving effect to certain adjustments, including amortization
of intangibles and selected income tax effects. The pro forma
information does not purport to represent what the Company's
results of operations actually would have been had such
transactions or events occurred on the dates specified, or to
project the Company's results of operations for any future period.
Revenues $ 58,353
Net loss $(82,594)
Net loss per basic and diluted common share $ (4.17)
F-16
65
(10) STOCKHOLDERS' EQUITY
(a) Stock Options
The 1994 Employee Stock Option and Non-Employee Director Plans
(collectively, the "Old Stock Option Plans") provide for the
granting of options to purchase a maximum of 1,950,000 and 50,000
shares of Old Common Stock, respectively. Options are granted at
exercise prices of not less than 100% of the fair market value of
the Old Common Stock on the date of grant. Options typically vest
over a five-year period.
At December 31, 1998, there were 469,217 additional shares
available for grant under the Old Stock Option Plans. The per
share weighted average fair value of stock options granted during
fiscal years 1998, 1997 and 1996 was $1.16, $1.70 and $10.82,
respectively, on the dates of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
1998 1997 1996
---- ---- ----
Expected dividend yield 0% 0% 0%
Stock price volatility 131% 80% 36%
Risk-free interest rate 5.5% 6.0% 6.5%
Expected option term 5 years 5 years 5 years
The Company applies APB Opinion No. 25 in accounting for its stock
option plans and, accordingly, no compensation cost has been
recorded for its stock options in the Consolidated Financial
Statements. Had the Company determined compensation based on the
fair value at the grant date for its stock options under SFAS No.
123, net loss and loss per share would have been increased as
indicated below:
1998 1997 1996
---- ---- ----
Net loss attributable to Common Stockholders:
As reported $ (211,561) $ (134,583) $ (61,061)
Pro forma SFAS No. 123 $ (213,077) $ (137,126) $ (64,349)
Net loss per share - Basic and Diluted:
As reported $ (10.72) $ (6.85) $ (3.31)
Pro forma for SFAS No. 123 $ (10.80) $ (6.98) $ (3.48)
Pro forma net loss reflects only options granted in 1998, 1997,
1996 and 1995. Compensation cost is reflected over the options'
vesting period of three to five years.
F-17
66
A summary of option activity during 1996, 1997 and 1998 follows:
NUMBER WEIGHTED AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
Outstanding at December 31, 1995 743,000 $ 13.64
Granted 514,000 $ 25.09
Exercised (40,000) $ 10.50
Canceled (16,000) $ 24.41
----------
Outstanding at December 31, 1996 1,201,000 $ 18.50
Granted 867,000 $ 2.49
Canceled (711,000) $ 22.03
----------
Outstanding at December 31, 1997 1,357,000 $ 6.42
Granted 165,000 $ 3.33
Canceled (72,000) $ 7.19
----------
Outstanding at December 31, 1998 $ 6.03
1,450,000
==========
The following table summarizes information about stock options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER WEIGHTED-
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 EXERCISE PRICE
--------------- ----------- ---- ----- ----------- --------------
$1.125 to $3.1875 892,000 5.3 years $ 2.05 184,000 $ 2.15
$9.375 to $14.25 541,000 2.4 years 12.07 519,000 12.02
$22.125 to $29.25 17,000 2.2 years 22.96 16,000 22.57
--------- -------
$1.125 to $29.25 1,450,000 4.2 years $ 6.03 719,000 $ 9.73
========= =======
At December 31, 1997 and 1996, the number of options exercisable
and the weighted average exercise prices of those options were
552,000 and 396,200 and $11.27 and $12.51, respectively.
At the effective date of the Plan, the Old Stock Option Plans will
be canceled and a new share incentive plan will be adopted.
(b) Old Common Stock to Officers
In April 1998 and April 1997, the Company issued 10,000 shares and
75,000 shares, respectively, to officers of the Company. The
quoted market price of the shares on the grant date has been
expensed in the accompanying Consolidated Financial Statements.
F-18
67
(11) INCOME TAXES
In addition to the income tax benefit related to continuing operations of
$28.2 million for the year ended December 31, 1996, a deferred income tax
benefit of $1.1 million was allocated to the extraordinary item for the
year ended December 31, 1996.
Income tax benefit for the years ended December 31, 1998, 1997 and 1996
differed from the amount computed by applying the U.S. federal income tax
rate of 35% to loss before income taxes as a result of the following:
1998 1997 1996
---- ---- ----
Computed "expected" tax benefit $(73,890) $(47,104) $(27,578)
Amortization and write-down of goodwill 9,300 738 521
Loss for which no tax benefit
was recognized 68,812 49,058 --
State income tax (4,222) (2,692) (1,099)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
1998 1997
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 119,709 $ 61,555
Investments in affiliates -- 9,303
Subscriber receivables 129 96
Debt restructuring 906 1,172
Asset impairment 29,992 3,543
Systems and equipment 4,779 -
Other 1,247 1,091
--------- ---------
Total gross deferred tax assets 156,762 76,760
Less valuation allowance (151,253) (68,697)
--------- ---------
Net deferred tax assets 5,509 8,063
Deferred tax liabilities:
License and leased license investment (5,509) (8,063)
--------- ---------
Net deferred tax liability $ -- $ --
========= =========
The net changes in the total valuation allowance for the years ended
December 31, 1998, 1997 and 1996 were increases of $82.6 million, $48.6
million and $16.0 million, respectively. In assessing the realizability
of deferred tax assets, the Company considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets depends on the
generation of future taxable income during the periods in which those
temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
these considerations, the Company has fully reserved all deferred tax
assets to the extent such assets exceed deferred tax liabilities.
As of December 31, 1998, the Company has approximately $324 million of
federal income tax loss carryforwards which expire in years 2013 through
2018. The Company estimates that approximately $38.0 million of the above
carryforwards relate to various acquisitions and are subject to certain
limitations.
F-19
68
(see Note 1).
(12) RELATED PARTY TRANSACTIONS
At December 31, 1998, the Company leased office space from entities owned
by certain current and former officers and directors of the Company for
which the expense amounted to approximately $205,000 in 1998, $171,000 in
1997 and $187,000 in 1996. In connection with its Restructuring, the
Company terminated approximately 56,000 square feet of such leases. The
Company continues to lease approximately 6,300 square feet of space for
telemarketing and customer care operations, for which the Company pays
approximately $48,000 per year.
The Company paid and/or accrued $181,000 in 1997 and $97,000 in 1996 to
an affiliate of a former officer and director of the Company for certain
administrative services.
In 1997, the Company, CS Wireless, Wireless One and CAI formed Wireless
Enterprises, LLC ("Wireless Enterprises"). Wireless Enterprises is a
programming cooperative that negotiates programming and marketing
services with suppliers of programming. In 1998 and 1997, the Company
paid approximately $24.5 million and $15.5 million, respectively, to
Wireless Enterprises as reimbursement of programming expenses and for
other administrative services.
In 1996, in exchange for the delivery of certain equipment and receipt of
a promissory note in the principal amount of $400,000, the Company
acquired a 10% interest in a limited liability company formed to acquire
and operate channel rights and operating systems in Chile. An affiliate
of a former employee of the company holds a 22% interest in such limited
liability company.
(13) COMMITMENTS AND CONTINGENCIES
The Company is a co-defendant in two securities actions (one of which is
a purported class action). In addition, 14 current and former directors,
officers and/or employees of the Company are defendants in a purported
securities class action lawsuit. These actions allege, among other
things, various violations of federal and state securities laws.
The Company also is a party to three purported class action lawsuits
alleging that the Company overcharged its customers for administrative
late fees.
The Company intends to vigorously defend the above matters. The filing of
the Plan/or dispositive motions have stayed discovery in these actions,
at least until the Effective Date. While it is not feasible to predict or
determine the final outcome of these proceedings or to estimate the
amounts or potential range of loss with respect to these matters,
management believes that an adverse outcome with respect to one or more
of such proceedings would have a material adverse effect on the financial
condition, results of operations and cash flows of the Company.
The Company also is a party to other legal proceedings, a majority of
which are incidental to its business. In the opinion of management, and
after consideration for amounts recorded in the accompanying Consolidated
Financial Statements, the ultimate effects of such other matters are not
expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire
through 2000. The agreements generally require monthly payments based
upon the number of subscribers to the Company's systems, subject to
certain minimums.
F-20
69
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1998 and
1997. The fair value of a financial instrument is defined as the amount
at which the instrument could be exchanged in a current transaction
between willing parties:
1998 1997
----------------------------- ----------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- ----------- --------------- --------------
Restricted assets - investments
in U.S. Treasury securities $ 1,011 $ 1,011 $ 10,333 $ 10,194
Note receivable from affiliate 3,901 3,901 2,069 2,069
Old Senior Notes (237,616) (57,616) (237,111) (83,250)
Convertible Notes and other
Notes payable (73,416) (18,354) (71,085) (23,500)
The fair value of cash and cash equivalents, accounts receivable and
accounts payable approximate the carrying amounts of these assets and
liabilities because of the short maturity of these instruments.
The fair value of U.S. Treasury securities are based on quoted market
prices at the reporting date for those investments. The carrying amount
of note receivable from affiliate approximates fair value since the
interest rate equates to the market rate of interest. The fair values of
the Old Senior Notes are based on market quotes obtained from WP&Co. The
fair values of the Convertible Notes and other notes payable are based on
management's estimate derived from market quotes obtained from WP&Co.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited financial data of the Company for
each quarter of fiscal years 1998 and 1997.
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Year ended December 31, 1998:
Revenues $ 19,099 $18,622 $ 18,213 $ 18,055
Operating loss (10,642) (27,412) (101,329) (4,126)
Net loss (25,202) (50,641) (123,000) (12,718)
Net loss per common share
basic and diluted (1.28) (2.57) (6.23) (.64)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Year ended December 31, 1997:
Revenues $ 19,185 $ 19,741 $ 19,890 $ 19,976
Operating loss (11,067) (19,098) (25,053) (12,953)
Net loss (27,573) (35,791) (41,847) (29,372)
Net loss per common share -
Basic and diluted (1.41) (1.82) (2.13) (1.49)
During the second quarter of 1998, the Company recorded an impairment
charge of $17.7 million to write down the value of its non-operating
licenses to fair market value and wrote off $6.8 million of its excess
basis in its investment in CS Wireless. During the third quarter of 1998,
the Company recorded an impairment of charge of $88 million related to
the write down of its operating assets to estimated fair market value and
wrote off $11.7 million of its remaining investment in CS Wireless.
During the fourth quarter of 1998, the Company recorded $2.1 million in
reorganization costs related to its restructuring and Chapter 11 filing.
F-21
70
(16) SUBSEQUENT EVENTS
On the consummation of the Plan, the Company will change its name to
Nucentrix Broadband Networks, Inc. and restructure its business into four
wholly-owned subsidiaries: Nucentrix Internet Services, Inc., Nucentrix
Telecom Services, Inc., Nucentrix Spectrum Resources, Inc., and Heartland
Cable Television, Inc.
On February 11, 1999, Wireless One, a 20% owned affiliate of the Company
(see Note 2), filed a voluntary petition for reorganization under Chapter
11 of the U.S. Bankruptcy Code. On February 25, 1999, the Company
requested that Wireless One consider an alternative plan of
reorganization to be co-proposed by the Company. The principal terms of
the proposal included, among other things, a merger of Wireless One with
and into the Company and a material change in the composition of the
Board of Directors of Wireless One. On March 8, 1999, the Company filed
the proposal on Schedule 13D pursuant to rule 13d-101 of the Securities
Exchange Act of 1934. As of March 31, 1999, the Company was continuing
discussions regarding such proposal with Wireless One and/or its
representatives.
(17) MINORITY INTERESTS
In connection with the development of certain wireless cable television
markets, the Company sold stock in certain of its subsidiary companies
principally for cash. In addition to providing a portion of the cash
necessary for market development, the sales of subsidiary stock were
intended to provide local community involvement and ownership.
F-22
71
SCHEDULE II
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
-------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
----------- --------- -------- ----- ---------- ------
Year ended December 31, 1998:
Allowance for doubtful accounts $ 340 1,649 -- (1,641)(a) 348
======= ========== ========== ========== =======
Valuation allowance for deferred tax assets $68,697 -- 73,828(b) -- 142,525
======= ========== ========== ========== =======
Year ended December 31, 1997:
Allowance for doubtful accounts $ 5,468 3,465 -- (8,593)(a) 340
======= ========== ========== ========== =======
Valuation allowance for deferred tax assets $20,011 -- 48,686(b) -- 68,697
======= ========== ========== ========== =======
Year ended December 31, 1996:
Allowance for doubtful accounts $ 961 7,295 169(c) (2,957)(a) 5,468
======= ========== ========== ========== =======
Valuation allowance for deferred tax assets $ 3,981 -- 16,030(b) -- 20,011
======= ========== ========== ========== =======
(a) Accounts written off.
(b) Recognized as a component of deferred tax assets.
(c) Allocation of assets from the CableMaxx Acquisitions.
S-1
72
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 on its behalf by the
undersigned, thereunto duly authorized, on the 31st day of March, 1999.
HEARTLAND WIRELESS COMMUNICATIONS, INC.
By: /s/ C.D. McHenry
-------------------------------------
Carroll D. McHenry
Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on the 31st day of March, 1999, by the following persons in the
capacities indicated:
SIGNATURE TITLE
/s/ C.D. McHenry Chairman of the Board, President and Chief
- ---------------------------------------- Executive Officer (Principal Executive Officer)
Carroll D. McHenry
/s/ Marjean Henderson Senior Vice President and Chief Financial
- ---------------------------------------- Officer (Principal Financial Officer)
Marjean Henderson
/s/ Amy E. Manning Controller (Principal Accounting Officer)
- ----------------------------------------
Amy E. Manning
/s/ Terry S. Parker Director
- ----------------------------------------
Terry S. Parker
/s/ Richard T. Weatherholt Director
- ----------------------------------------
Richard T. Weatherholt
73
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 -- Letter Agreement regarding formation of the Registrant (filed
as Exhibit 2.1 to the Registrant's Registration Statement on
Form S-1, File No. 33-74244 (the "Form S-1"), and incorporated
herein by reference)
2.2 -- Supplement to Letter Agreement regarding formation of the
Registrant (filed as Exhibit 2.2 to the Form S-1 and
incorporated herein by reference)
2.3 -- Registrant's Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed February 9, 1999
and incorporated herein by reference)
3.1 -- Restated Certificate of Incorporation of the Registrant (filed
as Exhibit 3.1 to the Form S-1 and herein by reference)
3.2 -- Restated By-laws of the Registrant (filed as Exhibit 3.2 to
the Form S-1 and incorporated herein by reference)
4.1 -- Indenture between the Registrant and First Trust of New York,
National Association, as Trustee (the "Trustee") (filed as
Exhibit 4.20 to the Registrant's Registration Statement on
Form S-4, File No. 333-12577 (the "December 1996 Form S-4")
and incorporated herein by reference)
4.2 -- Supplemental Indenture dated as of December 9, 1996, between
Registrant and the Trustee (filed as Exhibit 4.21 to the
December 1996 Form S-4 and incorporated herein by reference)
10.1 -- Heartland Wireless Communications, Inc. 401(k) Plan (filed as
Exhibit 4.3 to the Registrant's Registration Statement on Form
S-8 (File No. 333-05943) and incorporated herein by reference)
10.2 -- 1994 Employee Stock Option Plan of the Registrant (filed as
Exhibit 4.1 to the Registrant's Registration Statement on Form
S-8 (File No. 333-04263) and incorporated herein by
reference).
10.3 -- Revised Form of Nontransferable Incentive Stock Option
Agreement under the 1994 Employee Stock Option Plan of the
Registrant (filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-4, File No. 33-91930 (the
"February 1996 Form S-4") and incorporated herein by
reference)
10.4 -- Revised Form of Nontransferable Non-Qualified Stock Option
Agreement under the 1994 Employee Stock Option Plan of the
Registrant (filed as Exhibit 4.3 to the February 1996 Form S-4
and incorporated herein by reference)
10.5 -- 1994 Stock Option Plan for Non-Employee Directors of the
Registrant (filed as Exhibit 4.4 to the Form S-1 and
incorporated herein by reference)
10.6 -- Form of Stock Option Agreement under the 1994 Stock Option
Plan for Non-Employee Directors of the Registrant (filed as
Exhibit 4.5 to the Form S-1 and incorporated herein by
reference)
10.7 -- Noncompetition Agreement between the Registrant and J.R.
Holland, Jr. (filed as Exhibit 10.4 to the Form S-1 and
incorporated herein by reference)
74
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.8 -- Noncompetition Agreement between the Registrant and L. Allen
Wheeler (filed as Exhibit 10.9 to the Form S-1 and
incorporated herein by reference)
10.9 -- Building Lease Agreement dated May 1, 1994, between Wireless
Communications, Inc. and The Federal Building, Inc. (filed as
Exhibit 10.15 to the 1994 Form 10-K and incorporated herein by
reference)
10.10 -- Office Lease dated April 10, 1996 between Merit Office
Portfolio Limited Partnership and the Registrant for the
Registrant's Plano, Texas office (filed as Exhibit 10.1 to the
Form 10-Q Quarterly Report for the quarter ended June 30, 1996
("June 1996 Form 10-Q") and incorporated herein by reference)
10.11 -- Sublease Agreement dated June 14, 1996 between the Registrant
and CS Wireless (filed as Exhibit 10.2 to the June 1996 Form
10-Q and incorporated herein by reference)
10.12 -- Cooperative Marketing Agreement between the Registrant and
DIRECTV dated November 12, 1997, and the following related
agreements between the Registrant and DIRECTV: Transport
Agreement, DSS Receiver Support Agreement and Subscriber
Payment Agreement (filed as Exhibit 10.16 to the Registrant's
Form 10-K Annual Report for the fiscal year ended December 31,
1997 (the "1997 Form 10-K") and incorporated herein by
reference)
10.13 -- Heartland Wireless Communications, Inc. Performance Incentive
Compensation Plan (filed as Exhibit 10.17 to the 1997 Form
10-K and incorporated herein by reference)
10.14 -- Employment Agreement between the Registrant and Carroll D.
McHenry dated as of March 6, 1998 (filed as Exhibit 10.18 to
the 1997 Form 10-K and incorporated herein by reference)
10.15 -- Employment Agreement between the Registrant and J. Curtis
Henderson dated as of April 8, 1998 (filed as Exhibit 10.4 to
the Registrant's Form 10-Q Quarterly Report for the Quarter
ended June 3, 1998 (the "June 1998 Form 10-Q") and
incorporated herein by reference)
10.16 -- Employment Agreement between the Registrant and Marjean
Henderson dated as of April 8, 1998 (filed as Exhibit 10.5 to
the June 1998 Form 10-Q and incorporated herein by reference)
10.17 -- Employment Agreement between the Registrant and Alexander R.
Padilla dated as of July 13, 1998 (filed as Exhibit 10.1 to
the Registrant's Form 10-Q Quarterly Report for the quarter
ended September 30, 1998 and incorporated herein by reference)
*10.18 -- Employment Agreement between the Registrant and Frank H. Hosea
dated as of November 2, 1998
10.19 -- Non-Qualified Stock Option Agreement between the Registrant
and Carroll D. McHenry dated as of January 20, 1998 (filed as
Exhibit 10.1 to the March 1998 Form 10-Q and incorporated
herein by reference)
10.20 -- Agreement between DIRECTV and the Registrant dated April 5,
1998 (filed as Exhibit 10.1 to the June 1998 Form 10-Q and
incorporated herein by reference)
75
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*21 -- List of Subsidiaries
*27 -- Financial Data Schedule
- ------------
* Filed herewith