<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------
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)
<TABLE>
<S> <C>
Delaware 73-1435149
- -------------------------------------------------------------- ------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
200 Chisholm Place, Suite 200, Plano, Texas 75075
------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (972) 423-9494
---------------------------
</TABLE>
N/A
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check [X] 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<S> <C>
Shares Outstanding
Class as of November 11, 1996
----------------------------- -----------------------
Common Stock, $.001 par value 19,541,520
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 15,144 $ 23,143
Restricted assets - investment in debt securities . . . . . . . . . 14,533 12,324
Subscriber receivables, net of allowance for doubtful accounts of
$1,475 in 1996 and $961 in 1995 . . . . . . . . . . . . . . . 6,035 2,544
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . 3,330 1,583
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . -- 2,200
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . 39,042 41,794
-------- --------
Investments in affiliates, at equity . . . . . . . . . . . . . . . . . . 98,538 14,077
Systems and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 128,043 60,649
License and leased license investment, net of accumulated amortization of
$3,912 in 1996 and $1,095 in 1995 . . . . . . . . . . . . . . . . . 131,605 60,421
Excess of cost over fair value of net assets acquired, net of accumulated
amortization of $1,458 in 1996 and $283 in 1995 . . . . . . . . . . 38,072 4,411
Restricted assets - investment in debt securities . . . . . . . . . . . . -- 6,415
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,541 17,638
-------- --------
$446,841 $205,405
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,853 $ 6,863
Accrued expenses and other liabilities . . . . . . . . . . . . . . 13,420 3,345
Current portion of long-term debt . . . . . . . . . . . . . . . . . 740 765
-------- --------
Total current liabilities . . . . . . . . . . . . . . . 20,013 10,973
-------- --------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . 177,858 140,887
Deferred income taxes and other long-term liabilities . . . . . . . . . . 28,756 1,628
Minority interests in subsidiaries . . . . . . . . . . . . . . . . . . . 239 229
Stockholders' equity:
Common stock, $.001 par value; authorized 50,000,000 shares, issued
19,541,520 shares in 1996 and 12,611,131 shares in 1995 . . . . . 20 13
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 263,810 71,165
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (43,581) (19,490)
Treasury stock, 10,252 shares in 1996, at cost . . . . . . . . . . (274) ---
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . 219,975 51,688
-------- --------
Commitments and contingencies
$446,841 $205,405
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-2-
<PAGE> 3
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
1996 1995 1996 1995
-------- ------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . $ 15,651 $ 4,177 $ 38,964 $ 9,293
-------- ------- -------- --------
Operating expenses:
Systems operations . . . . . . . . 4,731 1,326 13,179 2,894
Selling, general and administrative. 9,603 2,797 23,865 7,450
Depreciation and amortization . . . 8,493 1,979 18,150 3,966
-------- ------- -------- --------
Total operating expenses . . . . 22,827 6,102 55,194 14,310
-------- ------- -------- --------
Operating loss . . . . . . . . . (7,176) (1,925) (16,230) (5,017)
-------- ------- -------- --------
Other income (expense):
Interest income . . . . . . . . . . 1,427 1,034 2,913 2,044
Interest expense . . . . . . . . . (5,447) (4,516) (15,167) (8,908)
Equity in losses of affiliates . . (5,980) --- (12,702) (129)
Other income, net . . . . . . . . . 4,809 (487) 5,269 (475)
-------- ------- -------- --------
Total other income (expense) . . (5,191) (3,969) (19,687) (7,468)
-------- ------- -------- --------
Loss before income taxes . . . . (12,367) (5,894) (35,917) (12,485)
Income tax benefit . . . . . . . . . . . 6,924 443 11,826 1,307
-------- ------- -------- --------
Net loss . . . . . . . . (5,443) $(5,451) $(24,091) $(11,178)
======== ======= ======== ========
Net loss per common share . . . . . . . . $ (.28) $ (.44) $ (1.33) $ (.96)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 3 -
<PAGE> 4
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(24,091) $(11,178)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 18,150 3,966
Deferred income tax benefit . . . . . . . . . . . . . . . . (11,826) (1,307)
Debt accretion and debt issuance cost amortization . . . . 3,893 3,157
Equity in losses of affiliates . . . . . . . . . . . . . . 12,702 129
Gain on sale of assets . . . . . . . . . . . . . . . . . . (5,279) --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (689) 12
Changes in assets and liabilities, net of acquisitions:
Subscriber receivables . . . . . . . . . . . . . . . . (3,493) (1,160)
Prepaid expenses and other . . . . . . . . . . . . . . (1,924) (766)
Accounts payable, accrued expenses and other liabilities 2,498 4,789
-------- --------
Net cash used in operating activities . . . . . . . (10,059) (2,358)
-------- --------
Cash flows from investing activities:
Investment in affiliate . . . . . . . . . . . . . . . . . . . -- (5,427)
Distributions from affiliate . . . . . . . . . . . . . . . . 53,340 --
Proceeds from sale of assets . . . . . . . . . . . . . . . . 23,804 3,323
Purchases of systems and equipment . . . . . . . . . . . . . (62,123) (25,575)
Expenditures for license and lease license investment . . . . (2,971) (1,592)
Purchases of debt securities . . . . . . . . . . . . . . . . (1,879) (24,747)
Proceeds from sale of debt securities . . . . . . . . . . . . 6,775 --
Acquisitions, net of cash acquired . . . . . . . . . . . . . (15,869) (11,423)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (2,250)
-------- --------
Net cash provided by (used in) used in investing
activities . . . . . . . . . . . . . . . . . . . . 1,077 (67,691)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt . . . . . . . . . . . . . . . . 16,350 95,800
Payments on long-term debt . . . . . . . . . . . . . . . . . (11,125) --
Payment of debt issuance costs . . . . . . . . . . . . . . . (603) (4,784)
Proceeds from short-term borrowings and notes payable . . . . -- 3,070
Payments on short-term borrowings and notes payable . . . . . (3,775) (3,106)
Proceeds from issuance of warrants . . . . . . . . . . . . . -- 4,200
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 38
-------- --------
Net cash provided by financing activities . . . . . 983 95,218
-------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . (7,999) 25,169
Cash and cash equivalents at beginning of period . . . . . . . . . 23,143 11,986
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 15,144 $ 37,155
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 4 -
<PAGE> 5
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
(1) General
(a) Description of Business
Heartland Wireless Communications, Inc. (the "Company")
develops, owns and operates wireless cable television systems.
The Company holds wireless cable channel rights primarily in
small to mid-size markets located in the central United
States. The Company had systems in operation in 48 markets at
September 30, 1996. Systems in other markets are currently
under construction and development by the Company.
(b) Principles of Consolidation
The consolidated condensed financial statements include the
accounts of the Company and its majority-owned subsidiaries.
Significant intercompany balances and transactions between the
entities have been eliminated in consolidation.
(c) Interim Financial Information
In the opinion of management, the accompanying unaudited
consolidated condensed financial information of the Company
contains all adjustments, consisting only of those of a
recurring nature, necessary to present fairly the Company's
financial position as of September 30, 1996, the results of
operations for the three and nine months ended September 30,
1996 and 1995 and cash flows for the nine months ended
September 30, 1996 and 1995. These results are not
necessarily indicative of the results to be expected for the
full fiscal year. The accompanying financial statements are
for interim periods and should be read in conjunction with the
audited consolidated financial statements of the Company for
the year ended December 31, 1995, included in the Company's
Annual Report to Stockholders for the year ended December 31,
1995.
(d) Net Loss Per Common Share
Net loss per common share is based on the net loss applicable
to the weighted average number of common shares outstanding of
approximately 19,540,000 and 12,272,000 for the three-month
periods ended September 30, 1996 and 1995, respectively, and
18,103,000 and 11,624,000 in the nine-month periods ended
September 30, 1996 and 1995.
Shares issuable upon exercise or conversion of outstanding
convertible debt, stock options and warrants are antidilutive
and have been excluded from the calculation. Fully-diluted
loss per common share is not presented as it would not
materially differ from primary loss per common share.
(2) CableMaxx, AWS and Technivision Acquisitions
Effective February 23, 1996, the Company, directly or through one or
more subsidiaries, acquired all the assets and liabilities and
succeeded to the businesses of American Wireless Systems, Inc. and
CableMaxx, Inc. and acquired substantially all of the assets and
certain of the liabilities and succeeded to all of the businesses of
Fort Worth Wireless Cable T.V. Associates, Wireless Cable TV
Associates #38 and Three Sixty Corp., the successor to Technivision,
Inc., for an aggregate of 6,757,000 shares of the Company's common
stock (the aforementioned five transactions are collectively referred
to herein as the "CableMaxx, AWS and Technivision Acquisitions").
- 5 -
<PAGE> 6
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The CableMaxx, AWS and Technivision Acquisitions were accounted for as
a purchase. The aggregate purchase price of approximately $190
million has been allocated to the net assets acquired on a preliminary
basis based on management's estimates of the fair values of assets
acquired and liabilities assumed. Excess purchase price over the fair
value of net assets acquired will be amortized on a straight-line
basis over a 20-year period.
(3) CS Wireless Transaction
Effective February 23, 1996, immediately following the closing of the
CableMaxx, AWS and Technivision Acquisitions, the Company, CAI
Wireless Systems, Inc. ("CAI") and CS Wireless Systems, Inc. ("CS
Wireless") consummated the CS Wireless Participation Agreement (the
"CS Wireless Participation Agreement" or "CS Wireless Transaction")
pursuant to which the Company (or certain of its subsidiaries)
contributed or sold a substantial portion of the assets received in
the CableMaxx, AWS and Technivision Acquisitions and certain other
assets to CS Wireless.
Simultaneously with the contribution and sale of such assets by the
Company to CS Wireless, CAI (or certain of its subsidiaries) also
contributed to CS Wireless (directly or by contribution of stock of
subsidiaries) certain wireless cable television assets which,
collectively with the Company's contributed assets, created a company
with approximately 5.7 million line-of-sight households and
approximately 58,500 subscribers as of February 29, 1996.
In connection with the CS Wireless Transaction, the Company (or its
contributing subsidiaries) received (i) shares of CS Wireless common
stock constituting approximately 35% of the outstanding shares of CS
Wireless common stock, (ii) approximately $28.3 million in cash paid at
closing, (iii) a promissory note in the principal sum of $25.0 million
payable on or before nine months from the closing and secured by
proceeds of a contemplated issuance by CS Wireless of senior discount
notes (which note has been prepaid) and (iv) a promissory note in the
sum of $15.0 million payable 10 years from closing and prepayable from
asset sales and certain other events. CS Wireless, CAI and the Company
are in the process of completing certain post-closing net working
capital calculations. Components of such calculations include the
relative accounts payable, accounts receivable and related working
capital assets of the contributed systems, the number of granted
channels represented and actually contributed to CS Wireless for each
market, the amount of any increase or decrease in the number of
subscribers in each contributed system from the number of subscribers
stated in the CS Wireless Participation Agreement and related factors.
On November 8, 1996, CS Wireless made an initial payment of $5 million
in cash to the Company that will be applied to the final amount owed to
the Company pursuant to the CS Wireless Transaction. Following the
completion of all calculations, additional payments of cash and/or
shares of CS Wireless common stock are expected to be made to the
Company by CS Wireless and/or CAI.
(4) Other Acquisitions and Divestitures
On January 16, 1996, the Company acquired an operating wireless cable
television system in Champaign, Illinois for approximately $2.1
million in cash (the "Champaign Acquisition").
- 6 -
<PAGE> 7
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
On January 16, 1996, the Company sold two non-operating wireless cable
markets for approximately $2.2 million in cash.
On April 26, 1996, the Company acquired a minority interest in one of
the Company's subsidiaries for 48,000 unregistered shares of the
Company's common stock.
On May 6, 1996, the Company consummated the sale of the Memphis and
Flippin, Tennessee wireless cable markets to TruVision Wireless, Inc.
("TruVision") for approximately $5.4 million in cash. Upon
consummation of the sale of the Memphis and Flippin, Tennessee markets
to TruVision, TruVision dismissed a lawsuit against the Company and
AWS without prejudice and each party entered into a settlement
agreement and release.
On June 21, 1996, the Company sold the wireless cable channel rights
in Los Angeles, California for $8.95 million in cash at closing and
$750,000 in notes and deferred payments. The notes and deferred
payments are payable on or before January 31, 1997.
On June 28, 1996, the Company acquired operating wireless cable
systems in George West and Kingsville, Texas for $350,000 in cash and
126,601 unregistered shares of the Company's common stock.
On July 10, 1996, the Company and American Telecasting, Inc. ("ATI")
entered into an Agreement for Exchange of Assets (the "Exchange
Agreement") in which the Company and ATI agreed to exchange certain
wireless cable channel rights and related assets in South Dakota,
Florida, Michigan and Illinois. Consummation of this exchange is
expected to occur by December 31, 1996; however, the Exchange
Agreement is subject to customary closing conditions. No assurance
can be given that such conditions will be satisfied.
On July 17, 1996, the Company consummated the sale of wireless cable
channel rights in Adairsville, Powers Crossroads and Rutledge, Georgia
to CS Wireless for total consideration of approximately $7.2 million
in cash, resulting in a gain of $4.8 million.
On August 15, 1996, the Company acquired an operating wireless cable
system in Gainesville/Rosston, Texas for approximately $1 million in
cash and $1.4 million in notes secured by the assets acquired.
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.
Summarized below is the unaudited pro forma information for the nine
months ended September 30, 1996 and 1995 as if the CableMaxx, AWS and
Technivision Acquisitions, the CS Wireless Transaction, the Champaign
Acquisition, the Falfurrias and George West acquisitions and the
Company's investment in Wireless One, Inc. had been consummated as of
the beginning of 1996 and 1995. 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.
- 7 -
<PAGE> 8
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues $ 41,300 $ 19,474
Net loss (25,853) (12,269)
Net loss per common share $ (1.32) $ (0.66)
</TABLE>
(5) BTA Auction
In March 1996, the Federal Communications Commission (the "FCC")
concluded an auction for the award of initial commercial wireless
cable licenses for 487 basic trading areas or "BTAs" and six
additional BTA-like geographic areas around the country (the "BTA
Auction"). 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 a $1.0 million deposit at the
commencement of the BTA Auction and, because the Company qualified as
a "small business" for purposes of the BTA Auction, subsequently has
been required to remit only 20% of the total committed amount (less
the $1.0 million deposit), or approximately $3.0 million. The
remaining 80% of the committed amount, or approximately $15.8 million,
will be paid over a 10-year period commencing in the fourth quarter of
1996. The Company will be required to make quarterly interest-only
payments for the first two years and quarterly payments of principal
and interest over the remaining eight years. The interest rate
related to this installment plan is equal to the 10-year U.S. Treasury
rate at the time of the BTA authorization plus 2.5%.
Pursuant to the CS Wireless Transaction, CS Wireless will reimburse
the Company for all amounts paid in the BTA Auction relating to 12
BTAs awarded to the Company at a total cost of approximately $5.3
million. As of November 12, 1996, CS Wireless had reimbursed the
Company approximately $1.1 million, representing all amounts paid by
the Company in connection with the award of the 12 BTAs.
(6) Subsequent Events
On September 24, 1996, the Company filed with the Securities and
Exchange Commission a registration statement on Form S-4 (Registration
No. 333-12577) registering $15 million of 13% Series D Senior Notes
due 2003 to be exchanged for $15 million of outstanding 13% Series C
Senior Notes due 2003.
(7) Contingencies
The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a
material adverse effect on the Company's consolidated financial
position or operating results.
- 8 -
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
consolidated condensed financial statements and notes thereto of Heartland
Wireless Communications, Inc.
RESULTS OF OPERATIONS FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30,
1996 COMPARED TO THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1995
Management believes that period-to-period comparisons of the Company's
consolidated financial results to date are not necessarily meaningful and
should not be relied upon as an indication of future performance due to the
Company's historically high growth rate, system launches and acquisitions
during the periods presented.
Revenues. The Company's revenues consist of monthly fees paid by subscribers
for basic programming, premium programming and equipment rental and, to a
lesser extent, sales of receive-site equipment and towers to certain
subscribers and service income. The Company's revenues for the third quarter
of 1996 were $15.7 million, compared to $4.2 million for the third quarter of
1995, an increase of 274%. Revenues for the nine months ended September 30,
1996 were $39.0 million, versus $9.3 million for the comparable prior-year
period, an increase of 319%. The increase in revenues for the third quarter
and nine months ended September 30, 1996 over the comparable prior-year periods
was primarily due to average subscribers increasing from 54,398 and 34,700
subscribers for the third quarter and nine months ended September 30, 1995 to
187,365 and 149,706 subscribers for the third quarter and nine months ended
September 30, 1996. Average monthly revenues per subscriber were $28.08 and
$28.92 for the third quarter and nine months ended September 30, 1996, compared
to $30.07 and $29.75 for the comparable prior-year periods. The decrease in
average monthly revenues per subscriber between the third quarter and nine
months ended September 30, 1996 and the comparable prior-year periods was
primarily due to an increase in multiple dwelling unit ("MDU") subscribers as a
percentage of total subscribers. MDU subscribers typically generate lower
average monthly revenue per subscriber than subscribers in single-family homes.
At September 30, 1996, the Company had 207,295 subscribers versus 64,350
subscribers at September 30, 1995 and 167,430 subscribers at June 30, 1996.
Approximately 96% of the subscriber increase from June 30, 1996 to September
30, 1996 was attributable to same-system growth during the period (net
subscriber additions in the Company's systems in operation at June 30, 1996),
4% was attributable to three new systems launched during the period and less
than one 1% was attributable to one operating system acquired during the
period. The Company had 48 systems in operation at September 30, 1996 compared
to 30 systems in operation at September 30, 1995. On August 15, 1996 the
Company acquired the Gainesville, Texas operating system. This acquisition did
not materially contribute to revenues during the third quarter of 1996. During
the first and second quarters of 1996, the Company acquired the Champaign,
Illinois and the Austin, Corpus Christi, Falfurrias/Kingsville, George West,
Temple/Killeen and Waco, Texas operating systems, which contributed $9.7
million to revenues for the nine months ended September 30, 1996.
Systems Operations. Systems operations include programming costs, channel
lease payments, transmitter site and tower rentals, cost of program guides and
certain repairs and maintenance expenditures. Programming costs (with the
exception of minimum payments), cost of program guides and channel lease
payments (with the exception of certain fixed payments) are variable expenses
which increase as the number of subscribers increase. Systems operations
expense was $4.7 million for the third quarter of 1996, versus $ 1.3 million
for the third quarter of 1995. For the nine months ended September 30, 1996,
systems operations expense was $13.2 million, compared to $2.9 million for the
comparable prior-year period. As a percentage of revenues, systems operations
expense was 30% and 34% for the third quarter and nine months ended September
30, 1996 compared to 32% and 31% for the third quarter and nine months ended
September 30, 1995. Systems operations expense as a percentage of revenues
declined from the third quarter of 1995 to the third quarter of 1996, primarily
due to lower programming costs as a percentage of revenues during the third
quarter of 1996. The increase in systems operations expense as a percentage of
revenues from the nine months ended September 30, 1995 to the nine months ended
September 30, 1996 was due to increased programming costs and channel lease
expense.
- 9 -
<PAGE> 10
Selling, General and Administrative. The Company has experienced increasing
selling, general and administrative expenses ("SG&A") since its inception as a
result of its increasing wireless cable activities and associated
administrative costs, including costs related to opening and maintaining
additional offices, additional accounting and support costs and additional
compensation expense. SG&A was $9.6 million and $23.9 million for the third
quarter and nine months ended September 30, 1996, compared to $2.8 million and
$7.5 million for the comparable prior-year periods. The increases in SG&A
during the periods presented are principally due to an increase in the
Company's corporate and executive staff to support the Company's overall
growth, including acquisitions and the development of new markets, increased
advertising costs to support the Company's subscriber growth and, to a lesser
extent, increased costs associated with property and casualty insurance, group
health insurance and property taxes. As a percentage of revenues, SG&A was 61%
for the third quarter and nine months ended September 30, 1996 compared to 67%
and 80% for the third quarter and nine months ended September 30, 1995. SG&A
expense as a percentage of revenues declined over the periods presented,
primarily due to economies of scale resulting from SG&A covering a
significantly larger subscriber and revenue base.
Depreciation and Amortization. Depreciation and amortization expense includes
depreciation of systems and equipment and amortization of license and leased
license investment and the excess of cost over fair value of net assets
acquired. Depreciation and amortization expense was $8.5 million for the third
quarter of 1996, compared to $2.0 million for the third quarter of 1995.
Depreciation and amortization expense was $18.2 million for the nine months
ended September 30, 1996, versus $4.0 million for the comparable prior-year
period. The increase in depreciation and amortization expense during the
periods presented was due to additional systems and equipment in connection
with the launch of 13 systems (net of systems launched and subsequently
disposed) from September 30, 1995 to September 30, 1996, increased amortization
expense on license and leased license investment of systems in operation and
excess of cost over fair value of net assets acquired related to the
acquisition of wireless cable channel rights and the acquisition of eight
operating systems (net of systems acquired and subsequently disposed) from
September 30, 1995 to September 30, 1996.
Operating Loss. The Company generated operating losses of $7.2 million and
$16.2 million for the third quarter and nine months ended September 30, 1996,
compared to $1.9 million and $5.0 million for the comparable prior-year
periods. Consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") was $1.3 million for the third quarter of 1996, versus
$54,000 for the third quarter of 1995. Consolidated EBITDA for the nine months
ended September 30, 1996 was $1.9 million, compared to negative $1.1 million
for nine months ended September 30, 1995. System-level EBITDA (earnings before
interest, taxes, depreciation and amortization and corporate general and
administrative expense) was $4.2 million for the third quarter of 1996,
compared to $1.5 million for the third quarter of 1995, an increase of 180%.
System-level EBITDA for the nine months ended September 30, 1996 was $10.2
million, versus $3.4 million for the comparable prior-year period, an increase
of 200%. The increase in system-level EBITDA during the third quarter of 1996
was principally due to the Company having 40 EBITDA-positive systems for the
third quarter of 1996, versus 15 EBITDA-positive systems for the third quarter
of 1995. The increase in system-level EBITDA for the nine months ended
September 30, 1996 was primarily due to the Company having 37 EBITDA-positive
systems for the nine months ended September 30, 1996, compared to 14
EBITDA-positive systems for the comparable prior-year period. The increase in
consolidated EBITDA over the periods presented was primarily attributable to
the aforementioned increases in system-level EBITDA, partially offset by
increases in SG&A. The increase in the Company's operating loss during the
periods presented was primarily due to increased depreciation and amortization
expense and SG&A, partially offset by increases in revenues.
Interest Income. Interest income was $1.4 million and $2.9 million for the
third quarter and nine months ended September 30, 1996, versus $1.0 million and
$2.0 million for the comparable prior-year periods. The increased interest
income over the periods presented is due to higher average cash and cash
equivalents and interest income on the $15.0 million note receivable from CS
Wireless Systems, Inc. ("CS Wireless").
- 10 -
<PAGE> 11
Interest Expense. The Company incurred interest expense of $5.4 million during
the third quarter of 1996, compared to $4.5 million during the third quarter of
1995. Interest expense was $15.2 million for the nine months ended September
30, 1996, versus $8.9 million for the comparable prior-year period. The
increase in interest expense over the periods presented is due to the Company's
issuance of senior notes in April 1995 and March 1996. Interest expense for
the third quarter and nine months ended September 30, 1996 included non-cash
interest of $1.1 million and $3.2 million, related to interest on the Company's
9% Convertible Subordinated Discount Notes. Interest expense for the third
quarter and nine months ended September 30, 1995 included non-cash interest of
$0.9 million and $2.7 million, related to interest on the Company's 9%
Convertible Subordinated Discount Notes.
Equity in Losses of Affiliates. The Company had equity in losses of affiliates
of $6.0 million for the third quarter of 1996. For the nine months ended
September 30, 1996, the Company had equity in losses of affiliates of $12.7
million, versus $0.1 million for the comparable prior-year period. Equity in
losses of affiliates for the third quarter and nine months ended September 30,
1996 represent losses from Wireless One, Inc., in which the Company holds an
approximate 21% interest, and CS Wireless, in which the Company holds an
approximate 35% interest. The Company acquired its equity interest in CS
Wireless on February 23, 1996. Equity in losses of affiliates for the nine
months ended September 30, 1995 represent losses from RuralVision Joint Venture
in which the Company held a 50% interest. The Company ceased to be a joint
venturer in RuralVision Joint Venture during May 1995.
Other Income (Expense). Other income (expense) is comprised of gain on the
sale of assets and other non-operating income, offset by minority interests in
the net earnings of subsidiaries, dividends on preferred stock of certain
subsidiaries and other non-operating expenses. The Company had other income of
$4.8 million and $5.3 during the third quarter and nine months ended September
30, 1996, versus other expense of $0.5 million for the third quarter and nine
months ended September 30, 1995. Other income during the third quarter and
nine months ended September 30, 1996 represents gain on the sale of the
Flippin, Tennessee market in May 1996 and the sale of three Georgia markets in
July 1996. Other expense during the third quarter and nine months ended
September 30, 1996 primarily represents non-operational settlement charges
between the Company and an unaffiliated party.
Income Tax Benefit. The Company recognized income tax benefits related to the
Company's net losses for the third quarter and nine months ended September 30,
1996 of $6.9 million and $11.8 million, versus $0.4 million and $1.3 million
for the third quarter and nine months ended September 30, 1995. The Company
recognizes income tax benefits to the extent of future reversals of existing
taxable temporary differences.
Net Loss. The Company has recorded net losses since inception. The Company
incurred net losses of $5.4 million, or $0.28 per share, during the third
quarter of 1996, versus $5.5 million, or $0.44 per share, during the third
quarter of 1995. For the nine months ended September 30, 1996, the Company
incurred net losses of $24.1 million, or $1.33 per share, compared to $11.2
million, or $0.96 per share, for the comparable prior-year period. Although
the Company's total revenues and system-level EBITDA significantly increased
during the third quarter and nine months ended September 30, 1996 over the
comparable prior-year periods, due to increased SG&A, depreciation and
amortization expense, equity in losses of affiliates and interest expense, the
Company's net losses increased over the periods presented. The Company expects
to continue to incur net losses throughout 1996 and beyond.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television business is a capital intensive business. Since
inception, the Company has expended funds to lease or otherwise acquire channel
rights in various markets and systems in operation, to construct operating
systems and to finance initial system operating losses. To date, the primary
sources of capital for the Company have been from the sale of the Company's
common stock, debt financings and the sale of wireless cable channel rights
that are not part of the Company's strategic plan. The Company intends to
expand its 48 existing systems, continue to launch additional wireless cable
systems and lease or otherwise acquire channel rights in various markets.
The Company estimates that a launch of a wireless cable system in a typical
market will involve the initial expenditure of approximately $0.5 million to
$0.9 million for wireless cable system transmission equipment and tower
construction,
- 11 -
<PAGE> 12
depending upon the type and sophistication of the equipment and whether the
Company is required to construct a transmission tower, and incremental
installation costs of approximately $400 per subscriber for equipment, labor,
overhead charges and direct commission. 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.
Net cash used in operating activities during the nine months ended September
30, 1996 was $10.1 million, versus $2.4 million for the comparable prior-year
period. The increase in cash consumed by operations for the nine months ended
September 30, 1996 was primarily due to increased systems operations expense,
SG&A and interest expense. These uses of cash were partially offset by a 319%
increase in revenues for the nine months ended September 30, 1996, as compared
to the comparable prior-year period.
Net cash provided by investing activities was $1.1 million during the nine
months ended September 30, 1996, versus net cash used in investing activities
of $67.7 million during the nine months ended September 30, 1995. Cash 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, partially offset by the sale of
wireless cable channel rights that are not part of the Company's strategic
plan. In addition, cash provided by/used in investing activities includes
purchases and sales of debt securities which represent proceeds from the sale
of 13% Series B Senior Notes due 2003 and 13% Series C Senior Notes due 2003
placed in escrow for the semi-annual payment of interest. During the nine
months ended September 30, 1996, cash provided by investing activities included
the receipt of approximately $53.3 million in cash from CS Wireless in
connection with the Company's contribution of wireless cable assets to CS
Wireless, and $23.8 million from the sale of wireless cable channel rights,
including the Memphis and Flippin, Tennessee, Los Angeles, California and
Adairsville, Powers Crossroads and Rutledge, Georgia markets. These sources of
cash were partially offset by Company's acquisition of the Champaign, Illinois
and Gainesville, Texas operating systems, payments related to the Federal
Communications Commission's "Basic Trading Area" auction and out-of-pocket
expenses related to the acquisition of the businesses of CableMaxx, Inc.,
assets of Fort Worth Wireless Cable T.V. Associates, Wireless Cable TV
Associated #38 and certain of the wireless cable television assets of Three
Sixty Corp., formerly Technivision, Inc. (collectively the "CableMaxx, AWS and
Technivision Acquisitions"). During the nine months ended September 30, 1995,
cash used in investing activities also included the Company's investments in
RuralVision Joint Venture, the acquisition of the Lubbock, Texas operating
system and the acquisition of the Tulsa, Oklahoma market. These uses of cash
were partially offset by the sale of wireless cable channel rights in five
markets.
Net cash provided by financing activities was $1.0 million for the nine months
ended September 30, 1996, versus $95.2 million for the comparable prior-year
period. Cash provided by financing activities during the nine months ended
September 30, 1996 primarily represents the net proceeds from the Company's
sale of 13% Series C Senior Notes due 2003, partially offset by payments on
long-term debt assumed in the CableMaxx, AWS and Technivision Acquisitions.
Cash provided by financing activities during the nine months ended September
30, 1995 principally represents the net proceeds from the sale of 13% Series B
Senior Notes due 2003.
Due to the above-discussed factors, at September 30, 1996, the Company had
$15.1 million of cash-on-hand, compared to $23.1 million at December 31, 1995.
On November 8, 1996, CS Wireless made an initial payment of $5.0 million in
cash to the Company that will be applied to the final amount owed to the
Company associated with certain post-closing net working capital calculations
under the CS Wireless Participation Agreement. In addition, on November 14,
1996, a subsidiary of the Company entered into a letter agreement with two
lending institutions for a $25.0 million senior secured revolving credit
facility (the "Bank Facility"). Outstanding borrowings under the Bank Facility
will bear interest, payable quarterly, at the banks' base rate plus 2% per
annum or at the reserve adjusted Euro-Dollar rate plus 3% per annum. The Bank
Facility will be on a fully revolving basis for one year with all outstanding
borrowings due and payable in November 1997. The Company will pay an annual
commitment fee of 0.50% per annum on the unused portion of the Bank Facility.
The total amount of the Bank Facility will be subject to certain limitations.
Borrowings under the Bank Facility will be secured by substantially all of the
Company's assets and stock in the Company's subsidiaries, and will be
guaranteed by the Company. The Bank Facility will contain certain restrictive
covenants that,
- 12 -
<PAGE> 13
among other things, will require the Company to satisfy certain financial
ratios and limit the ability of the Company and its subsidiaries to pay
dividends, repurchase Company capital stock and incur additional indebtedness.
Although the Company expects to consummate the Bank Facility by November 30,
1996, the Bank Facility is subject to the execution of a definitive agreement
and customary closing conditions. No assurance can be given that such
definitive agreement will be executed or that such conditions will be
satisfied.
On October 29, 1996, the Company initiated a solicitation of consents (the
"Consent Solicitation") from the holders of the $115 million principal
aggregate amount of 13% Series B Notes due 2003 and 13% Series C Notes due 2003
(collectively, the "Original Notes") to amend certain provisions of the
indentures governing the Original Notes (the "Indentures") to permit the
Company to issue debt securities in an aggregate principal amount of up to
$125.0 million and expected to mature in 2004 (the "New Notes") and to amend
certain definitions and covenants in the Indentures, which imposed restrictions
on the Company's ability to pursue certain additional financing and investment
opportunities. The aforementioned amendments to the Indentures are referred to
herein as the "Proposed Amendments."
On November 13, 1996 (the original expiration date of the Consent
Solicitation), the Company extended the Consent Solicitation. Although the
Company anticipates that the Proposed Amendments will be approved by at least a
majority in aggregate principal amount of the Original Notes, which will enable
the Company to issue the New Notes, there can be no assurance that the Proposed
Amendments will be approved by the holders of the Original Notes or that the
Company will be successful in consummating the issuance of the New Notes. In
the event that the Proposed Amendments are not approved or the issuance of the
New Notes is not consummated, the Company plans to immediately pursue
alternative debt, preferred stock or equity financings, or a combination
thereof, that will not require consent from the holders of the Original Notes.
Although the Company recently has experienced positive consolidated EBITDA, it
does not expect that cash-on-hand combined with operating cash flow will be
sufficient to fund system development and expansion of existing and future
operating markets at least through the end of 1997. Until sufficient cash flow
is generated from operations, the Company will be required to utilize its
current capital resources or external resources of funding to satisfy its
capital needs. Under its current plans, the Company expects that it will incur
capital expenditures of approximately $110.0 million for the remainder of 1996
and 1997 for system construction, development, launch and expansion activities.
The Company currently expects to launch an aggregate of approximately 23 to 28
systems for the remainder of 1996 and 1997. Notwithstanding potential
acquisitions, the Company believes that its cash-on-hand, together with cash
flow from operations, the availability of funds under the Bank Facility and the
aggregate net proceeds from the New Notes offering or, in lieu of the New Notes
offering, other debt, preferred stock or equity financings, or a combination
thereof, will be sufficient to meet its expected capital needs at least through
the end of 1997.
As a result of the Original Notes offering, the Bank Facility and the possible
incurrence of additional indebtedness, including the New Notes offering, or
alternative financing, the Company will be required to satisfy certain debt
service requirements. Following the disbursement in April 1997 of all of the
funds in the escrow account established in connection with the Indentures, a
substantial portion of the Company's cash flow will be devoted to debt service
on the Original Notes and on the New Notes, if consummated. The ability of the
Company to make payments of principal and interest will be largely dependent
upon its future performance. Many factors, some of which will be beyond the
Company's control (such as prevailing economic conditions), may affect its
performance. There can be no assurance that the Company will be able to
generate sufficient cash flow to cover required interest and principal payments
then due on the Original Notes or any other existing or future indebtedness of
the Company, including indebtedness incurred to the FCC in connection with the
BTA Auction, the Bank Facility and the New Notes, if consummated. If the
Company is unable to make interest and principal payments in the future, it
may, depending upon the circumstances which then exist, seek additional equity
or debt financing, attempt to refinance its existing indebtedness or sell all
or part of its business or assets to raise funds to repay its indebtedness.
The Company expects to continue to incur significant capital expenditures in
1998 and beyond in connection with its system construction, development, launch
and expansion activities. These activities may be financed in whole or in part
directly by the Company and/or by its existing or future subsidiaries, through
debt or equity financings, joint ventures
- 13 -
<PAGE> 14
or other arrangements. As in the past, the Company may also finance its system
construction, development, launch and expansion activities or the acquisition
of additional markets through the sale and/or exchange of its existing
portfolio of wireless cable channel rights. Although the Company believes that
cash provided by operating activities, the sale of wireless cable channel
rights that are not a part of the Company's current strategic plan and proceeds
from additional public or private debt or equity offerings will be sufficient
for the Company to complete its planned system construction, development,
launch and expansion activities in 1998 and beyond, there can be no assurance
that the Company will achieve positive cash flow from operations, that the
Company will consummate the sale of certain wireless cable channel rights or
that sufficient debt or equity financing will be available on satisfactory
terms and conditions, if at all. Failure to obtain such additional funds could
adversely affect the growth and cash flow of the Company.
FUTURE OPERATING RESULTS; FORWARD LOOKING STATEMENTS
The Company's future revenues and profitability are difficult to predict due to
a variety of risks and uncertainties, including (i) business conditions and
growth in the Company's existing markets, (ii) the successful launch of systems
in new markets, (iii) the Company's existing indebtedness and the need for
additional financing to fund subscriber growth and system development, (iv)
government regulation, including FCC regulations, (v) the Company's dependence
on channel leases, (vi) the successful integration of future acquisitions and
(vii) numerous competitive factors, including alternative methods of
distributing and receiving video transmissions.
The Company expects to continue its subscriber growth and launch additional
systems. Increases in revenues and subscribers are anticipated for the
remainder of 1996 and 1997; however, the rate of increase cannot be estimated
with precision or certainty. Heartland believes that SG&A and depreciation and
amortization expense will continue to increase to support overall growth.
Because of the foregoing uncertainties affecting the Company's future operating
results, past performance should not be considered to be a reliable indicator
of future performance, and investors should not use historical trends to
anticipate results or trends in future periods. In addition, the Company's
participation in a highly dynamic industry often results in significant
volatility in the price of the Company's common stock.
In addition to the matters noted above, certain other statements made in this
report are forward looking. Such statements are based on an assessment of a
variety of factors, contingencies and uncertainties deemed relevant by
management, including technological changes, competitive products and services,
management issues 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. Readers of this report are
cautioned not to place undue reliance on the forward looking statements made in
this report.
- 14 -
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part II, Item 1 of the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 filed with the Securities and
Exchange Commission for a discussion of certain legal proceedings involving the
Company's wholly-owned subsidiary American Wireless Systems, Inc. ("AWS") and
certain current and former directors, officers and principals of AWS.
ITEM 5. OTHER INFORMATION
The Company has executed a letter of intent to acquire two operating wireless
cable operating systems in Oklahoma. In addition, the Company has reached an
agreement in principle to acquire one operating wireless cable system in Iowa
and wireless cable assets in Nebraska, Minnesota and Montana. In addition, the
Company has entered into a definitive agreement to sell wireless cable assets
in one market in New Hampshire. Each agreement for the markets to be acquired
and divested are subject to customary closing conditions. The Company
anticipates that these agreements will be consummated on or before January 31,
1997, although there can be no assurance that any of these transactions will be
consummated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
* 27 Financial Data Schedule
- ---------
*Filed herewith.
(B) REPORTS ON FORM 8-K
None.
- 15 -
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1996 HEARTLAND WIRELESS COMMUNICATIONS, INC.
By: /s/ John R. Bailey
----------------------------------------
John R. Bailey
Senior Vice President-Finance and Chief
Financial Officer
(Principal Financial Officer)
- 16 -
<PAGE> 17
Index to Exhibits
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,144
<SECURITIES> 14,533
<RECEIVABLES> 6,035
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,042
<PP&E> 128,043
<DEPRECIATION> 0
<TOTAL-ASSETS> 446,841
<CURRENT-LIABILITIES> 20,013
<BONDS> 177,858
0
0
<COMMON> 20
<OTHER-SE> 219,955
<TOTAL-LIABILITY-AND-EQUITY> 446,841
<SALES> 15,651
<TOTAL-REVENUES> 15,651
<CGS> 0
<TOTAL-COSTS> 22,827
<OTHER-EXPENSES> (256)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,447
<INCOME-PRETAX> (12,367)
<INCOME-TAX> (6,924)
<INCOME-CONTINUING> (5,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,843)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
