<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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-23694
Heartland Wireless Communications, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 73-1435149
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Chisholm Place, Suite 200, Plano, Texas 75075
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (972) 423-9494
N/A
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(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>
<CAPTION>
Shares Outstanding
Class as of August 8, 1997
----- --------------------
<S> <C>
Common Stock, $.001 par value 19,673,478
</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>
June 30, December 31,
1997 1996
---------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 51,364 $ 79,596
Restricted assets - investment in debt securities . . . . . . . . . . 18,384 21,215
Subscriber receivables and other, net of allowance for doubtful
accounts of $1,111 in 1997 and $5,468 in 1996 . . . . . . . . . 3,951 5,382
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . 2,051 1,586
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . 75,750 107,779
-------- --------
Investments in affiliates, at equity . . . . . . . . . . . . . . . . . . . 51,066 68,095
Systems and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 145,872 145,797
License and leased license investment, net of accumulated amortization
of $8,808 in 1997 and $7,127 in 1996 . . . . . . . . . . . . . . . . 127,259 129,725
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $2,688 in 1997 and $1,691 in 1996 . . . . 27,223 28,220
Restricted assets - investment in debt securities . . . . . . . . . . . . . -- 8,792
Note receivable from affiliate . . . . . . . . . . . . . . . . . . . . . . 3,832 16,275
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,707 10,681
-------- --------
$441,709 $515,364
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . $ 17,950 $ 30,740
Current portion of long-term debt . . . . . . . . . . . . . . . . . . 1,413 1,188
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . 19,363 31,928
-------- --------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 304,688 302,350
Minority interests in subsidiaries . . . . . . . . . . . . . . . . . . . . 149 239
Stockholders' equity:
Common stock, $.001 par value; authorized 50,000,000 shares,
issued 19,670,135 shares in 1997 and 19,584,229 shares in 1996. . . 20 20
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 261,678 261,652
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (143,915) (80,551)
Treasury stock, at cost, 10,252 shares . . . . . . . . . . . . . . . (274) (274)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . 117,509 180,847
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . .
-------- --------
$441,709 $515,364
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 3
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . $ 19,741 $ 13,801 $ 38,926 $ 23,313
-------- -------- -------- --------
Operating expenses:
Systems operations . . . . . . . . . . . . . 11,252 5,026 20,113 8,448
Selling, general and administrative. . . . . 11,079 8,316 21,352 14,261
Depreciation and amortization . . . . . . . . 16,508 6,103 27,626 9,657
-------- -------- -------- --------
Total operating expenses . . . . . . . . . 38,839 19,445 69,091 32,366
-------- -------- -------- --------
Operating loss . . . . . . . . . . . . . . (19,098) (5,644) (30,165) (9,053)
-------- -------- -------- --------
Other income (expense):
Interest income . . . . . . . . . . . . . . . 1,539 778 3,271 1,486
Interest expense . . . . . . . . . . . . . . (9,977) (5,028) (19,910) (9,720)
Equity in losses of affiliates . . . . . . . (8,272) (4,321) (16,574) (6,722)
Other income, net . . . . . . . . . . . . . . 17 460 14 460
-------- -------- -------- --------
Total other income (expense) . . . . . . . (16,693) (8,111) (33,199) (14,496)
-------- -------- -------- --------
Loss before income taxes . . . . . . . . . (35,791) (13,755) (63,364) (23,549)
Income tax benefit . . . . . . . . . . . . . . . . -- 3,351 -- 4,902
-------- -------- -------- --------
Net loss . . . . . . . . . . . . . $(35,791) $(10,404) $(63,364) $(18,647)
========= ========= ========= =========
Net loss per common share . . . . . . . . . . . . . $ (1.82) $ (.54) $ (3.23) $ (1.07)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 4
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1997 1996
-------- --------
<S> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(63,364) $(18,647)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 27,626 9,657
Deferred income tax benefit . . . . . . . . . . . . . . . . . . --- (4,902)
Debt accretion and debt issuance cost amortization . . . . . . 2,760 2,556
Equity in losses of affiliates . . . . . . . . . . . . . . . . 16,574 6,722
Changes in assets and liabilities, net of acquisitions:
Subscriber receivables and other . . . . . . . . . . . . . 1,441 (2,917)
Prepaid expenses and other . . . . . . . . . . . . . . . . (1,210) 110
Accounts payable, accrued expenses and other (12,790) (11,072)
-------- --------
liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in operating activities . . . . . . . . . (28,963) (18,493)
-------- --------
Cash flows from investing activities:
Distributions from affiliate . . . . . . . . . . . . . . . . . . --- 58,340
Proceeds from note receivable . . . . . . . . . . . . . . . . . . 13,300 ---
Proceeds from assets held for sale . . . . . . . . . . . . . . . --- 16,705
Purchases of systems and equipment . . . . . . . . . . . . . . . (21,598) (32,554)
Expenditures for license and leased licenses . . . . . . . . . . (448) (2,419)
Purchases of debt securities . . . . . . . . . . . . . . . . . . --- (2,170)
Proceeds from maturities of debt securities . . . . . . . . . . . 11,869 6,500
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . (1,622) (14,300)
-------- --------
Net cash provided by investing activities . . . . . . . 1,501 30,102
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . --- 16,350
Payments on long-term debt . . . . . . . . . . . . . . . . . . . --- (11,125)
Payment of debt issuance costs . . . . . . . . . . . . . . . . . --- (603)
Payments on short-term borrowings and notes payable . . . . . . . (680) (1,485)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90) 136
-------- --------
Net cash provided by (used in) financing activities . . (770) 3,273
-------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . (28,232) 14,882
Cash and cash equivalents at beginning of period . . . . . . . . . . . 79,596 23,143
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 51,364 $ 38,025
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 5
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
(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. Including one operating system managed by the Company,
the Company had systems in operation in 58 markets at June 30,
1997.
(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 June 30, 1997 and the results of
operations for the three and six months ended June 30, 1997
and 1996 and cash flows for the six months ended June 30, 1997
and 1996. 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, 1996, included in the Company's Form 10-K/A for
the year ended December 31, 1996.
(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 19,645,000 and 19,400,000 for the three-month
periods ended June 30, 1997 and 1996, respectively, and
19,615,000 and 17,376,00 in the six-month periods ended June
30, 1997 and 1996, respectively.
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) Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share," which supersedes APB Opinion No. 15, "Earnings
per Share," was issued in February 1997. SFAS 128 requires dual
presentation of basic and diluted earnings per share ("EPS") for
complex capital structures on the face of the statement of operations.
Basic EPS is computed by dividing income (loss) by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options.
SFAS 128 is required to be adopted for year-end 1997; earlier
application is not permitted. After adoption, all prior period data
presented will be restated to conform with SFAS 128. The Company does
not expect that basic and diluted EPS measured under SFAS 128 will be
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<PAGE> 6
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
materially different from the current presentation of primary and
fully-diluted loss per common share measured under APB Opinion No. 15.
The Company will present both EPS measures on the face of the
statement of operations for the year-end 1997.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," was issued in February 1997. The
Company does not expect the statement to result in any substantive
change in its disclosure.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997. The Company is evaluating
these statements to determine the impact on its disclosure.
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<PAGE> 7
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.
OVERVIEW
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 high subscriber growth rate, system launches and acquisitions during
the prior periods presented.
Effective December 31, 1996, the Company revised its methodology for reporting
subscribers in multiple dwelling units ("MDUs"). As a result of the methodology
change, the Company's reported subscriber base decreased, while average monthly
revenue per subscriber increased. For the year ended December 31, 1996 and in
future periods, the Company will report its subscriber base and average revenue
per subscriber based upon the new methodology (the "new method"). However, the
Company is unable to retroactively apply the new methodology to the prior
periods. Therefore, the information set forth below will contain information
with subscriber data calculated using the old methodology (the "old method")
solely for the purposes of comparison with prior periods.
Certain 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 (i) business conditions and subscriber
growth and churn in the Company's existing markets, (ii) the successful launch
of systems in new and existing markets, (iii) the Company's existing
indebtedness and the need for additional financing to fund subscriber growth,
system development and debt service, (iv) the successful integration of new
systems processes and management personnel, (v) regulatory and interference
issues, including the grant of pending licenses and license modification
applications that have not yet been filed with the Federal Communications
Commission ("FCC"), and (vi) competitive products and services, as well as
those matters discussed specifically elsewhere herein. As a result, the actual
results by the Company could differ materially from the statements made herein.
Readers are cautioned not to place undue reliance on the forward looking
statements made in this report.
BALANCE SHEET AS OF JUNE 30, 1997 COMPARED TO THE BALANCE SHEET AS OF DECEMBER
31, 1996
Allowance for Doubtful Accounts. The allowance for doubtful accounts was $1.1
million as of June 30, 1997, compared to $5.5 million as of December 31, 1996.
The decrease in this account over the periods presented is due to the write-off
of certain delinquent subscriber balances, principally consisting of the 33,000
subscribers that were identified as of December 31, 1996 as delinquent.
Management of the Company writes-off delinquent subscriber balances when the
Company no longer provides programming services and future collection efforts
are not warranted.
RESULTS OF OPERATIONS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
COMPARED TO THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
Revenues. The Company's revenues consist of monthly fees paid by subscribers
for basic programming, premium programming, program guides, equipment rental
and other miscellaneous fees. The Company's revenues for the second quarter of
1997 were $19.7 million, compared to $13.8 million for the second quarter of
1996, an increase of 42.8%. Revenues for the six months ended June 30, 1997
were $38.9 million, versus $23.3 million for the comparable prior-year period,
an increase of 67%. The increase in revenues for the second quarter and six
months ended June 30, 1997 over the comparable prior-year periods was primarily
due to the increase in the number of average subscribers, calculated under the
old method, from 153,100 and 132,100 in the second quarter and six months ended
June 30, 1996 to 228,900 and 224,500 for the second quarter and six months
ended June 30, 1997. Under the new method, the Company's average subscribers
during the second quarter and six months ended June 30, 1997 were 200,500 and
196,500. Under the old method, average monthly revenue per subscriber was
$28.65 and $28.74 during the second quarter and six months ended June 30, 1997,
compared to $28.98 and $29.09 for the second quarter and six months ended June
30, 1996. Under the new method, average monthly revenue per subscriber during
the second quarter and six months ended June 30, 1997 was
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<PAGE> 8
$31.84 and $31.19. The decrease in average monthly revenue per subscriber from
the second quarter and six months ended June 30, 1996 to the second quarter and
six months ended June 30, 1997, calculated under the old method, was primarily
due to an increase in MDU subscribers, which typically generate lower per
subscriber revenue than single-family units, partially offset by price
increases under certain programming packages. At June 30, 1997, including one
operating system managed by the Company, the Company had 227,600 subscribers
under the old method (197,400 subscribers under the new method) versus 167,430
subscribers at June 30, 1996. Including one operating system managed by the
Company, the Company had 58 systems in operation at June 30, 1997 compared to
43 systems in operation at June 30, 1996.
Systems Operations. Systems operations expenses include programming costs,
channel lease payments, labor and overhead costs of service calls and churn,
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 increases. Systems operations expenses were $11.3
million for the second quarter of 1997, versus $5.0 million for the second
quarter of 1996. For the six months ended June 30, 1997, system operations
expense was $20.1 million, compared to $8.4 million for the comparable
prior-year period. As a percentage of revenues, systems operations expenses
were 57.0% and 51.7% for the second quarter and six months ended June 30, 1997,
compared to 36.4% and 36.2% for the comparable prior year period. As a
percentage of revenues, systems operations expenses increased over the periods
presented, primarily due to increased programming costs resulting from expanded
channel offerings in certain markets, the promotion of a special programming
package which carried lower margins than the Company's basic programming
package and higher overall programming rates. In addition, the Company
experienced increased service call expense during the second quarter and six
months ended June 30, 1997 versus the second quarter and six months ended June
30, 1996, due to installation corrections at certain subscriber households and
a significant increase in expenses related to the recovery of equipment from
disconnected subscribers. The Company expects that expenses related to the
recovery of equipment from disconnected subscribers will be higher than
historical averages at least through the third quarter of 1997. Equipment
recovered from disconnected subscribers significantly increased during the
quarter due to the write-off of 33,000 subscribers as of December 31, 1996.
Selling, General and Administrative ("SG&A"). The Company has experienced
increasing SG&A over the periods presented 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 $11.1 million
and $21.4 million for the second quarter and six months ended June 30, 1997,
compared to $8.3 million and $14.3 million for the second quarter and six
months ended June 30, 1996. The increase in SG&A from the periods presented is
primarily due to an increase in the Company's corporate and executive staff to
support the Company's overall growth and increased advertising and bad debt
expense. As a percentage of revenues, SG&A was 56.1% and 54.9% during the
second quarter and six months ended June 30, 1997 versus 60.3% and 61.2% in the
second quarter and six months ended June 30, 1996. 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 $16.5 million for the
second quarter of 1997, compared to $6.1 million for the second quarter of
1996. Depreciation and amortization expense was $27.6 million for the six
months ended June 30, 1997, versus $9.7 million for the comparable prior
period. 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 certain overhead charges, and direct commissions. These direct costs are
capitalized as systems and equipment in the accompanying consolidated balance
sheet. The increase in depreciation and amortization expense over the periods
presented was due to additional systems and equipment in connection with the
launch of 12 systems from June 30, 1996 to June 30, 1997, 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, the acquisition of three
operating wireless cable systems from June 30, 1996 to June 30,
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<PAGE> 9
1997 and the acquisition of minority interests in certain subsidiaries of the
Company and changes in the estimates of useful lives. In the fourth quarter of
1996, the Company reduced its estimates of the useful lives of the non-
recoverable portion of subscriber installation costs and license and leased
license investment and excess of cost over fair value of assets acquired. The
amortization period related to the nonrecoverable portion of subscriber
installation costs was reduced from six years to four years to correspond to
the Company's estimate of its average subscription term. The estimated useful
life of license and lease license investment and excess of cost over fair value
of net assets acquired was reduced from 20 years to 15 years.
Operating Loss. The Company generated operating losses of $19.1 million and
$30.2 million for the second quarter and six months ended June 30, 1997,
compared to $5.6 million and $9.1 million for the comparable prior periods.
Consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") was negative $2.6 million for the second quarter of 1997, versus
positive $0.5 million for the second quarter of 1996. Consolidated EBITDA for
the six months ended June 30, 1997 was negative $2.5 million, compared to
positive $0.6 million for the six months ended June 30, 1996. As previously
discussed, the increase in the Company's operating loss was primarily due to
increased systems operations, SG&A and depreciation and amortization expense,
partially offset by increases in revenues. The decrease in EBITDA over the
periods presented is attributable to the aforementioned increase in systems
operations expense and SG&A, partially offset by increases in revenues. EBITDA
is presented because it is a widely accepted financial indicator of a company's
ability to service and/or incur indebtedness. However, EBITDA is not a
financial measure 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.
Interest Income. Interest income was $1.5 million and $3.3 million during the
second quarter and six months ended June 30, 1997, versus $0.8 million and $1.5
million for the comparable prior year periods. The increased interest income
over the periods presented is due to higher average cash and cash equivalents
subsequent to the Company's issuance of $125 million of 14% Senior Notes due
2004 (the "14% Notes") in December 1996 and interest income on a $15.0 million
note receivable from CS Wireless Systems, Inc. ("CS Wireless").
Interest Expense. The Company incurred interest expense of $10.0 million during
the second quarter of 1997, compared to $5.0 million during the second quarter
of 1996. Interest expense was $19.9 million for the six months ended June 30,
1997, versus $9.7 million for the comparable prior-year period. The increase in
interest expense is due to the Company's issuance of the 14% Notes in December
1996 and $15 million of 13% Senior Notes due 2003 in March 1996, as well as
interest on debt incurred in conjunction with the FCC's Basic Trading Area
("BTA") auction. Interest expense for the second quarter and six months ended
June 30, 1997 included non-cash interest of $1.1 million and $2.2 million
compared to $1.0 million and $2.1 million during the second quarter and six
months ended June 30, 1996. Non-cash interest expense during the periods
presented relates to interest on the Company's 9% Convertible Subordinated
Discount Notes due 2004 (the "Convertible Notes").
Equity in Losses of Affiliates. The Company had equity in losses of affiliates
of $8.3 million and $16.6 million for the second quarter and six months ended
June 30, 1997, versus $4.3 million and $6.7 million for the comparable prior
periods. Equity in losses of affiliates for the periods presented represent
losses from Wireless One, Inc., in which the Company holds an approximate 20%
interest, and CS Wireless, in which the Company holds an approximate 34%
interest. The Company acquired its equity interest in CS Wireless on February
23, 1996.
Income Tax Benefit. The Company did not recognize income tax benefits related
to the Company's net losses during the second quarter and six months ended June
30, 1997. The Company recognized income tax benefits related to the Company's
net losses during the second quarter and six months ended June 30, 1996
totaling $3.4 million and $4.9 million. The Company recognizes income tax
benefits to the extent of future reversals of existing taxable temporary
differences, none of which were available for the second quarter and six months
ended June 30, 1997.
Net Loss. The Company has recorded net losses since inception. The Company
incurred net losses of $35.8 million, or $1.82 per share, during the second
quarter of 1997, versus $10.4 million, or $0.54 per share, during the second
quarter
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<PAGE> 10
of 1996. For the six months ended June 30, 1997, the Company incurred net
losses of $63.4 million, or $3.23 per share, compared to $18.6 million, or
$1.07 per share, for the comparable prior-year period. As previously discussed,
although the Company's total revenue increased 42.8% from the second quarter of
1996 to the second quarter of 1997 and 67% from the six months ended June 30,
1996 to the six months ended June 30, 1997, due to increased systems
operations, SG&A, depreciation and amortization and interest expense and
increased equity in losses of affiliates, the Company's net losses increased
over the periods presented. The Company expects to continue to incur net losses
throughout 1997 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 financing and the sale of wireless cable channel rights that
are not part of the Company's strategic plan.
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, 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 $465 per single family
household subscriber for equipment, labor, overhead charges and direct
commission. The Company recently has launched systems in some markets using a
more sophisticated type of equipment that will cost approximately $65 less per
installation, and therefore it believes that the average cost of materials will
continue to decrease as subscribers are added in systems that utilize such
equipment. The Company currently is reviewing its installation cost structure
in an effort to improve operational efficiency. As a result, the Company's
incremental installation costs may vary from those presented above. 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 operations during the six months ended June 30, 1997 was $29.0
million, versus $18.5 million for the six months ended June 30, 1996. The
increase in cash consumed by operations during the six months ended June 30,
1997 was primarily due to increased systems operations expense, SG&A and
interest expense and a decrease in accounts payable and accrued expenses. These
uses of cash were partially offset by a 67% increase in revenues for the six
months ended June 30, 1997 as compared to the comparable prior-year period.
Net cash provided by investing activities was $1.5 million during the six
months ended June 30, 1997, versus net cash provided by investing activities of
$30.1 million during the six months ended June 30, 1996. During the six months
ended June 30, 1997, cash provided by investing activities included receipt of
$13.3 million in cash from CS Wireless for partial payment on the $15.0 million
note receivable and sales of debt securities totaling $11.9 million, offset by
the Company's acquisition of the Woodward and Watonga, Oklahoma operating
systems for $1.6 million in cash in the first quarter of 1997. 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 and operating systems.
In addition, cash provided by/used in investing activities for the six months
ended June 30, 1996 includes purchases and sales of debt securities,
representing proceeds from the sale of $100 million and $15 million of 13%
Senior Notes due 2003 (collectively the "13% Notes") placed in escrow for the
semi-annual payment of interest. During the six months ended June 30, 1996,
cash provided by investing activities included 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 the sale of wireless
cable channel rights that are not part of the Company's strategic plan, in
which the Company received approximately $16.7 million in cash. These sources
of cash were partially offset by the Company's acquisition of the Champaign,
Illinois operating system and out-of-pocket expenses related to the acquisition
of CableMaxx, Inc. and American Wireless Systems, Inc., together with
substantially all of the assets of Fort Worth Wireless Cable T.V. Associates,
Wireless Cable TV Associates #38 and certain of the wireless cable television
assets of Three Sixty Corp., formerly Technivision, Inc. (collectively the
"CableMaxx, AWS and Technivision Acquisitions").
- 10 -
<PAGE> 11
Net cash used in financing activities was $0.8 million for the six months ended
June 30, 1997, versus net cash provided by financing activities of $3.3 million
for the six months ended June 30, 1996. Cash used in financing activities
during the six months ended June 30, 1997 primarily represents miscellaneous
payments on short-term borrowings and notes payable. Cash provided by financing
activities during the six months ended June 30, 1996 principally represents the
net proceeds from the sale of $15 million 13% Senior Notes due 2003, partially
offset by payments on indebtedness assumed by the Company in the CableMaxx, AWS
and Technivision Acquisitions.
Due to the above-discussed factors, at June 30, 1997, the Company had $51.4
million of unrestricted cash, compared to $38.0 million at June 30, 1996. In
addition, at June 30, 1997, the Company had investments in debt securities
totaling $18.4 million representing proceeds from the sale of the Company's 14%
Notes placed in escrow for the semi-annual payment of interest.
In an effort to conserve capital resources, the Company has suspended new
system launches and reduced marketing efforts directed at the acquisition of
net new subscribers at least for the next three months. Prior to the end of
1997, the Company intends to finalize an appropriate launch schedule and
marketing plan based upon multiple factors including, but not limited to, the
availability of capital resources and the number of wireless cable channels for
which the Company has obtained FCC licenses in such markets. The Company
estimates that its cash-on-hand will be sufficient to fund its operations and
debt service requirements through the second quarter of 1998.
As a result of the offering of the 13% Notes, the 14% Notes and the Convertible
Notes, and the possible incurrance of additional indebtedness, or alternative
financing, the Company will be required to satisfy certain debt service
requirements. In April 1997, the Company disbursed all of the remaining funds
in the escrow account established in connection with the indentures governing
the 13% Notes. As a result, beginning in October 1997, the Company will be
required to make semi-annual cash interest payments on the 13% Notes, with each
such payment totaling approximately $7.5 million. Beginning in October 1998,
following the disbursement in April 1998 of all of the funds in the escrow
account established in connection with the indenture governing the 14% Notes,
the Company will be required to make semi-annual cash interest payments on the
13% Notes and the 14% Notes, with each such payment totaling approximately
$16.2 million. In addition, if the holders of the Convertible Notes have not
exercised their conversion rights, beginning in November 1999 (or earlier upon
a material default) the Company will be required to make semi-annual cash
interest payments on the Convertible Notes, with each such payment totaling
approximately $2.8 million. The ability of the Company to make such semi-annual
interest payments 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 when due on the 13% Notes, the 14%
Notes, the Convertible Notes, or any other indebtedness of the Company,
including indebtedness incurred to the FCC in connection with the BTA auction.
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.
Despite the Company's efforts to conserve capital resources and to maximize
cash flow, the Company does not expect that sufficient cash flow will be
generated to fund subscriber growth, new system development and debt service
beyond the second quarter of 1998. As a result, in order to continue growing
the Company's subscriber base and to launch future operating systems, the
Company will be required to seek external sources of funding to satisfy its
capital needs. Such sources of funding 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 or other arrangements. As in the
past, the Company may also seek capital through the sale of its existing
portfolio wireless cable channel rights. There can be no assurance that the
sale of the Company's existing portfolio of wireless cable channel rights or
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 and would require the Company to
suspend its subscriber growth and new system development plans.
- 11 -
<PAGE> 12
FUTURE OPERATING RESULTS
The Company's future revenues and profitability are difficult to predict due to
a variety of risks and uncertainties, including, (i) business conditions and
subscriber growth and churn in the Company's existing markets, (ii) the
successful launch of systems in new and existing markets, (iii) the Company's
existing indebtedness and the need for additional financing to fund subscriber
growth, system development and debt service, (iv) the successful integration of
new systems processes and management personnel, (v) government regulation,
including FCC regulations, and interference issues, and (vi) numerous
competitive factors, including alternative methods of distributing and
receiving video transmissions.
The Company is continuing to review and evaluate all of its business
operations, processes and systems, and the Company has engaged Arthur Andersen
L.L.P. and others to assist the Company in this effort. While the Company plans
to increase its subscriber base during the second half of 1997, the rate of
increase cannot be estimated with precision or certainty. In addition, the
Company cannot quantify the potential impact on its 1997 financial performance
resulting from the implementation of expense reductions, new business processes
and management information systems. Furthermore, successful marketing and
operating of the Company's existing systems will have a significant impact on
the Company's 1997 operating and financial performance.
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 and debt instruments.
- 12 -
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
* 27 Financial Data Schedule
- ----------------------
*Filed herewith.
(b) REPORTS ON FORM 8-K
1. On April 4, 1997 the Company filed a Current Report on Form 8-K dated
April 1, 1997 regarding the resignation of John A. Fanning as a
Director of the Company.
2. On April 10, 1997 the Company filed a Current Report on Form 8-K dated
March 25, 1997 regarding additional changes in the Company's Board of
Directors.
- 13 -
<PAGE> 14
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: August 14, 1997 HEARTLAND WIRELESS COMMUNICATIONS, INC.
By: /s/ C.D. McHenry
------------------------------------
Carroll D. McHenry
Chairman of the Board, Chief Executive
Officer, President and Acting
Chief Financial Officer
(Principal Financial Officer)
- 14 -
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 51,364
<SECURITIES> 18,384
<RECEIVABLES> 5,062
<ALLOWANCES> 1,111
<INVENTORY> 0
<CURRENT-ASSETS> 75,750
<PP&E> 187,309
<DEPRECIATION> 41,437
<TOTAL-ASSETS> 441,709
<CURRENT-LIABILITIES> 19,363
<BONDS> 304,688
0
0
<COMMON> 20
<OTHER-SE> 117,489
<TOTAL-LIABILITY-AND-EQUITY> 441,709
<SALES> 19,741
<TOTAL-REVENUES> 19,741
<CGS> 0
<TOTAL-COSTS> 38,839
<OTHER-EXPENSES> (6,716)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (9,977)
<INCOME-PRETAX> (35,791)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,791)
<EPS-PRIMARY> (1.82)
<EPS-DILUTED> (1.82)
</TABLE>
