<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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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
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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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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
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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
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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 November 11, 1997
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<S> <C>
Common Stock, $.001 par value 19,682,916
</TABLE>
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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,
1997 1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 52,851 $ 79,596
Restricted assets - investment in debt securities ..................... 18,950 21,215
Subscriber and other receivables, net of allowance for doubtful
accounts of $526 in 1997 and $5,468 in 1996 ..................... 2,738 5,382
Prepaid expenses and other ............................................ 1,941 1,586
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Total current assets ...................................... 76,480 107,779
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Investments in affiliates, at equity ........................................ 42,694 68,095
Systems and equipment, net .................................................. 128,205 145,797
License and leased license investment, net of accumulated amortization of
$10,465 in 1997 and $7,127 in 1996 .................................... 125,601 129,725
Excess of cost over fair value of net assets acquired, net of accumulated
amortization of $3,187 in 1997 and $1,691 in 1996 ..................... 26,725 28,220
Restricted assets - investment in debt securities ........................... -- 8,792
Note receivable from affiliate .............................................. 1,996 16,275
Other assets, net ........................................................... 6,903 10,681
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$ 408,604 $ 515,364
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .............................. $ 25,890 $ 30,740
Current portion of long-term debt ..................................... 1,413 1,188
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Total current liabilities ................................. 27,303 31,928
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Long-term debt, less current portion ........................................ 305,448 302,350
Minority interests in subsidiaries .......................................... 149 239
Stockholders' equity:
Common stock, $.001 par value; authorized 50,000,000 shares, issued
19,682,916 shares in 1997 and 19,584,229 shares in 1996 ............... 20 20
Additional paid-in capital ............................................ 261,720 261,652
Accumulated deficit ................................................... (185,762) (80,551)
Treasury stock, 10,252 shares, at cost ................................ (274) (274)
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Total stockholders' equity ................................ 75,704 180,847
Commitments and contingencies
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$ 408,604 $ 515,364
========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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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,
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1997 1996 1997 1996
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(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues ................................... $ 19,890 $ 15,651 $ 58,816 $ 38,964
-------- -------- --------- --------
Operating expenses:
Systems operations ....................... 10,686 4,516 29,923 12,638
Selling, general and administrative ...... 10,002 9,818 32,230 24,406
Depreciation and amortization ............ 24,255 8,493 51,881 18,150
-------- -------- --------- --------
Total operating expenses ............... 44,943 22,827 114,034 55,194
-------- -------- --------- --------
Operating loss ......................... (25,053) (7,176) (55,218) (16,230)
-------- -------- --------- --------
Other income (expense):
Interest income .......................... 1,370 1,427 4,641 2,913
Interest expense ......................... (9,956) (5,447) (29,866) (15,167)
Equity in losses of affiliates ........... (8,172) (5,980) (24,746) (12,702)
Other income (expense), net .............. (36) 4,809 (22) 5,269
-------- -------- --------- --------
Total other income (expense) ........... (16,794) (5,191) (49,993) (19,687)
-------- -------- --------- --------
Loss before income taxes ............... (41,847) (12,367) (105,211) (35,917)
Income tax benefit ......................... -- 6,924 -- 11,826
-------- -------- --------- --------
Net loss .......................... $(41,847) $ (5,443) $(105,211) $(24,091)
======== ======== ========= ========
Net loss per common share................... $ (2.13) $ (.28) $ (5.36) $ (1.33)
======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $(105,211) $(24,091)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................ 51,881 18,150
Deferred income tax benefit .................................. -- (11,826)
Debt accretion and debt issuance cost amortization ........... 4,260 3,893
Equity in losses of affiliates ............................... 24,746 12,702
Gain on sale of assets ....................................... -- (5,279)
Changes in assets and liabilities, net of acquisitions:
Subscriber receivables ................................. 2,654 (3,493)
Prepaid expenses and other ............................. (1,580) (2,613)
Accounts payable, accrued expenses and other liabilities (4,850) 2,498
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Net cash used in operating activities ............. (28,100) (10,059)
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Cash flows from investing activities:
Distributions from affiliate ................................. 18,783 53,340
Proceeds from sale of assets ................................. 126 23,804
Purchases of systems and equipment ........................... (25,458) (62,123)
Expenditures for license and lease license investment ........ (479) (2,971)
Purchases of debt securities ................................. -- (1,879)
Proceeds from sale of debt securities ........................ 11,869 6,775
Acquisitions, net of cash acquired ........................... (1,622) (15,869)
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Net cash provided by investing activities ......... 3,219 1,077
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Cash flows from financing activities:
Proceeds from long-term debt ................................. -- 16,350
Payments on long-term debt ................................... -- (11,125)
Payment of debt issuance costs ............................... (597) (603)
Payments on short-term borrowings and notes payable .......... (1,177) (3,775)
Other ........................................................ (90) 136
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Net cash provided by (used in) financing activities (1,864) 983
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Net decrease in cash and cash equivalents .......................... (26,745) (7,999)
Cash and cash equivalents at beginning of period ................... 79,596 23,143
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Cash and cash equivalents at end of period ......................... $ 52,851 $ 15,144
========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 midsize 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 September 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 September 30,
1997, the results of operations for the three and nine months ended
September 30, 1997 and 1996 and cash flows for the nine months ended
September 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 Annual Report to Stockholders and 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
19,677,000 and 19,540,000 for the three-month periods ended September
30, 1997 and 1996, respectively, and 19,636,000 and 18,103,000 in the
nine-month periods ended September 30, 1997 and 1996.
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.
(e) Reclassifications
With respect to the consolidated condensed financial statements,
certain reclassifications have been made to the prior interim periods
to conform to the current period's presentation.
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(2) Depreciation Expense
In the third quarter of 1997, the Company recorded a charge to
depreciation expense of $9.0 million. This charge was comprised of
three components: $6.1 million related to the write-off of installed
subscriber equipment for lost subscribers and is deemed to be
unrecoverable in the third quarter of 1997; $1.7 million related to
the write-off of obsolete subscriber equipment that is not available
for future use; and $1.2 million related to the effects of reduction
in the estimated useful life by the Company of the nonrecoverable
portion of subscriber installation costs.
Effective July 1, 1997, the Company revised its estimated useful life
from four years to three years for the nonrecoverable portion of newly
acquired subscriber installation costs to correspond to the Company's
current estimate of its average subscription term. In addition, for
the nonrecoverable portion of previously acquired subscriber
installation costs, the Company prospectively changed, effective July
1, 1997, the remaining estimated useful life for such equipment. The
effect of the above changes in estimated useful life resulted in an
incremental depreciation expense in the third quarter of $1.2 million.
(3) 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
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 all periods present in the consolidated
statement for the year-end December 31, 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. Although these statements do
not impact the accounting for certain transactions, the Company is
evaluating their impact on its disclosure.
(4) 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.
(5) Divestitures
In September 1997, the Company sold a 39% equity interest in
Television Interactiva del Norte, S.A. de C.V. ("Telinor") for U.S.
$0.9 million to CS Wireless Systems, Inc. ("CS Wireless"). In
addition, the Company sold
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to CS Wireless two promissory notes payable by Telinor for
approximately U.S. $2.56 million, representing principal and accrued
interest payable under such notes. Following this transaction, the
Company retained a 10% equity interest in Telinor.
(6) Other
In September 1997, the Company completed certain post-closing
adjustments with respect to relative accounts payable, accounts
receivable, working capital assets and subscribers relating to the
Participation Agreement dated as of February 23, 1996 (the
"Participation Agreement"), among the Company, CS Wireless and CAI
Wireless Systems, Inc. The Company received approximately 257,000
shares of newly issued common stock of CS Wireless in connection with
these adjustments.
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.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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 the receipt of regulatory approvals for alternative uses
of spectrum, and (vi) competitive products and services, including alternative
methods of distributing and receiving multi-channel video programming, 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.
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
historically high growth rate, system launches and acquisitions during the
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 method 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.
BALANCE SHEET AS OF SEPTEMBER 30, 1997 COMPARED TO THE BALANCE SHEET AS OF
DECEMBER 31, 1996
Allowance for Doubtful Accounts. The allowance for doubtful accounts was $0.5
million as of September 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
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.
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RESULTS OF OPERATIONS FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30,
1997 COMPARED TO THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 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 third quarter of 1997
were $19.9 million, compared to $15.7 million for the third quarter of 1996, an
increase of 26.8%. Revenues for the nine months ended September 30, 1997 were
$58.8 million, versus $39.0 million for the comparable prior-year period, an
increase of 50.8%. The increase in revenues for the third quarter and nine
months ended September 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 187,365 and 149,706 in the third quarter and nine
months ended September 30, 1996 to 225,000 and 227,600 for the third quarter and
nine months ended September 30, 1997, respectively. Under the new method, the
Company's average subscribers during the third quarter and nine months ended
September 30, 1997 were 195,700 and 196,200. Under the old method, average
monthly revenue per subscriber was $27.90 and $28.44 during the third quarter
and nine months ended September 30, 1997, compared to $28.08 and $28.92 for the
third quarter and nine months ended September 30, 1996. Under the new method,
average monthly revenue per subscriber during the third quarter and nine months
ended September 30, 1997 was $32.07 and $31.48. The decrease in average monthly
revenue per subscriber from the third quarter and nine months ended September
30, 1996 to the third quarter and nine months ended September 30, 1997,
calculated under the old method, was primarily due to an increase in MDU
subscribers, which typically generate lower revenue per subscriber than
single-family units, partially offset by price increases under certain
programming packages. At September 30, 1997, including one operating system
managed by the Company, the Company had 223,560 subscribers under the old method
(194,160 subscribers under the new method) versus 207,295 subscribers at
September 30, 1996. Including one operating system managed by the Company, the
Company had 58 systems in operation at September 30, 1997 compared to 48 systems
in operation at September 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 operation expenses were $10.7 million for the
third quarter of 1997, versus $4.5 million for the third quarter of 1996. For
the nine months ended September 30, 1997, system operations expense was $29.9
million, compared to $12.6 million for the comparable prior-year period. As a
percentage of revenues, systems operations expenses were 53.7% and 50.9% for the
third quarter and nine months ended September 30, 1997, compared to 28.8% and
32.4% 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, increased service call expense related to installation
corrections at certain subscriber households and a significant increase in labor
and overhead expenses related to the Company's attempts to recover equipment
from disconnected subscribers.
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 $10.0 million and
$32.2 million for the third quarter and nine months ended September 30, 1997,
compared to $9.8 million and $24.4 million for the third quarter and nine months
ended September 30, 1996. The increase in SG&A for the nine-month period ended
September 30, 1997 is primarily due to an increase in the number of operating
systems and increased advertising and bad debt expense. SG&A remained
substantially the same for the third quarter ended September 30, 1997 compared
to the third quarter ended September 30, 1996, primarily as a result of the
increase in number of operating systems being offset by decreases in the
Company's corporate and executive overhead. As a percentage of revenues, SG&A
was 50.3% and 54.8% during the third quarter and nine months ended September 30,
1997 versus 62.7% and 62.6% in the third quarter and nine months ended September
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
larger subscriber and revenue base.
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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 $24.3 million for the third
quarter of 1997, compared to $8.5 million for the third quarter of 1996.
Depreciation and amortization expense was $51.9 million for the nine months
ended September 30, 1997, versus $18.2 million for the comparable prior-year
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 during the periods
presented was due to additional systems and equipment in connection with the
launch of eight systems from September 30, 1996 to September 30, 1997,
provisions for subscriber equipment not recovered of $6.1 million, a write-off
of obsolete subscriber equipment of $1.7 million, 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 two operating systems from September 30, 1996
to September 30, 1997 and changes in the estimates of certain useful lives. In
the third quarter of 1997 and the fourth quarter of 1996, the Company reduced
its estimates of the useful lives of the nonrecoverable portion of subscriber
installation costs. The amortization period related to the nonrecoverable
portion of subscriber installation costs was reduced from six years to four
years in 1996 and from four years to three years in the third quarter of 1997 to
correspond to the Company's estimate of its average subscription term.
Additionally, in the fourth quarter of 1996, the Company reduced its estimate of
the useful lives of license and leased license investment and excess of cost
over fair value of assets acquired. The estimated useful lives of license and
lease license investment and excess of cost over fair value of net assets
acquired were reduced from 20 years to 15 years.
Operating Loss. The Company generated operating losses of $25.1 million and
$55.2 million for the third quarter and nine months ended September 30, 1997,
compared to $7.2 million and $16.2 million for the comparable prior-year
periods. Consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") was negative $0.8 million for the third quarter of 1997,
versus a positive $1.3 million for the third quarter of 1996. Consolidated
EBITDA for the nine months ended September 30, 1997 was negative $3.3 million,
compared to a positive $1.9 million for nine months ended September 30, 1996.
The decrease in EBITDA over the periods presented is attributable to the
aforementioned increase in systems operations expense and SG&A expense,
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 $1.4 million and $4.6 million for the third
quarter and nine months ended September 30, 1997, versus $1.4 million and $2.9
million for the comparable prior-year periods. The increased interest income for
the nine month period 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.
Interest Expense. The Company incurred interest expense of $10.0 million during
the third quarter of 1997, compared to $5.4 million during the third quarter of
1996. Interest expense was $29.9 million for the nine months ended September 30,
1997, versus $15.2 million for the comparable prior-year period. The increase in
interest expense over the periods presented 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
BTA auction. Interest expense for the third quarter and nine months ended
September 30, 1997 included non-cash interest of $1.2 million and $3.4 million
compared to $1.1 million and $3.2 million during the third quarter and nine
months ended September 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").
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<PAGE> 10
Equity in Losses of Affiliates. The Company had equity in losses of affiliates
of $8.2 million and $24.7 million for the third quarter and nine months ended
September 30, 1997, versus $6.0 million and $12.7 million for the comparable
prior-year 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 36% interest.
Other Income (Expense). Other income (expense) is comprised of gain on the sale
of assets and other non-operating income, dividends on preferred stock of
certain subsidiaries and other non-operating expenses. The Company had other
expense of $36,000 and $22,000 during the third quarter and nine months ended
September 30, 1997, versus other income of $4.8 million and $5.3 million for the
third quarter and nine months ended September 30, 1996. Other income during the
third quarter and nine months ended September 30, 1996 represents a $5.3 million
gain on the sale of the Flippin, Tennessee market in May 1996 and the sale of
three Georgia markets in July 1996. Offsetting this income, the Company incurred
$0.4 million of other expenses, primarily non-operational settlement charges
between the Company and an unaffiliated party.
Income Tax Benefit. The Company did not recognize income tax benefits related to
the Company's net losses during the third quarter and nine months ended
September 30, 1997. The Company recognized income tax benefits related to the
Company's net losses during the third quarter and nine months ended September
30, 1996 totaling $6.9 million and $11.8 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 three and nine month periods
ended September 30, 1997.
Net Loss. The Company has recorded net losses since inception. The Company
incurred net losses of $41.8 million, or $2.13 per share, during the third
quarter of 1997, versus $5.4 million, or $0.28 per share, during the third
quarter of 1996. For the nine months ended September 30, 1997, the Company
incurred net losses of $105.2 million, or $5.36 per share, compared to $24.1
million, or $1.33 per share, for the comparable prior-year period. As previously
discussed, although the Company's total revenue increased 26.2% from the third
quarter of 1996 to the third quarter of 1997 and 50.8% from the nine months
ended September 30, 1996 to the nine months ended September 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 financings 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 $0.9 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 utilized
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 is continuing to review 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.
- 10 -
<PAGE> 11
Net cash used in operations during the nine months ended September 30, 1997 was
$28.1 million, versus $10.1 million for the nine months ended September 30,
1996. The increase in cash consumed by operations during the nine months ended
September 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 50.8% increase in
revenues for the nine months ended September 30, 1997 as compared to the
comparable prior-year period.
Net cash provided by investing activities was $3.2 million during the nine
months ended September 30, 1997, versus $1.1 million during the nine months
ended September 30, 1996. During the nine months ended September 30, 1997, cash
provided by investing activities included receipt of $15.3 million in cash
(including accrued interest income) from CS Wireless for partial payment on the
$15.0 million note receivable, $3.5 in cash from sale of a partial interest in
the Company's investment in Telinor, 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 nine months
ended September 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 nine months ended September 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").
Net cash used in financing activities was $1.9 million for the nine months ended
September 30, 1997, versus net cash provided by financing activities of $1.0
million for the nine months ended September 30, 1996. Cash used in financing
activities during the nine months ended September 30, 1997 primarily represents
miscellaneous payments on short-term borrowings and notes payable. Cash provided
by financing activities during the nine months ended September 30, 1996
principally represents the net proceeds from the sale of $15 million of 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 September 30, 1997, the Company had $52.9
million of unrestricted cash, compared to $15.1 million at September 30, 1996.
In addition, at September 30, 1997, the Company had investments in debt
securities totaling $17.2 million representing proceeds from the sale of the
Company's 14% Notes placed in escrow for the semi-annual payment of interest and
$1.7 million representing collateral securing various outstanding letters of
credit to certain vendors of the Company.
In an effort to conserve capital resources, the Company has continued to suspend
new system launches and reduce marketing efforts directed at the acquisition of
net new subscribers. 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
third quarter of 1998.
As a result of the offering of the 13% Notes, the 14% Notes and the Convertible
Notes, and the possible incurrence 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, in October 1997, the Company began to make
- 11 -
<PAGE> 12
semi-annual cash interest payments on the 13% Notes from its existing
cash-on-hand, 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 from its existing
cash-on-hand, 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 and
competitive 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 third
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 any subscriber
growth and new system development plans.
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
multi-channel video programming.
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.
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.
- 12 -
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company ("Annual Meeting") was held on
August 6, 1997. Each of the following persons, who constituted all of the
Company's nominees for director, were elected at the Annual Meeting to serve on
the Board of Directors of the Company:
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstained Non-Votes
---------- ------- --------- ---------
<S> <C> <C> <C> <C>
Carroll D. McHenry 17,554,169 -0- 119,227 -0-
Max E. Bobbitt 17,546,982 -0- 126,414 -0-
Robert S. Cecil 17,545,499 -0- 127,897 -0-
J.R. Holland, Jr. 17,544,247 -0- 129,149 -0-
John A. Sprague 17,547,521 -0- 125,875 -0-
L. Allen Wheeler 17,530,446 -0- 142,950 -0-
</TABLE>
At the Annual Meeting, the stockholders also voted to ratify the selection of
KPMG Peat Marwick LLP as independent auditors for the Company for the fiscal
year ending December 31, 1997:
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstained Non-Votes
---------- ------- --------- ---------
<S> <C> <C> <C> <C>
17,585,609 48,146 39,641 -0-
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
* 27 Financial Data Schedule
- ---------------------
*Filed herewith.
(b) REPORTS ON FORM 8-K
None.
- 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: November 14, 1997 HEARTLAND WIRELESS COMMUNICATIONS, INC.
By:/s/ CARROLL D. MCHENRY
-----------------------------------------
Carroll D. McHenry
President, Chairman of the Board and
Chief Executive Officer
By:/s/ MARJEAN HENDERSON
-----------------------------------------
Marjean Henderson
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
- 14 -
<PAGE> 15
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<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> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 52,851
<SECURITIES> 18,950
<RECEIVABLES> 3,264
<ALLOWANCES> 526
<INVENTORY> 0
<CURRENT-ASSETS> 76,480
<PP&E> 177,701
<DEPRECIATION> (49,496)
<TOTAL-ASSETS> 408,604
<CURRENT-LIABILITIES> 27,303
<BONDS> 306,861
0
0
<COMMON> 20
<OTHER-SE> 75,704
<TOTAL-LIABILITY-AND-EQUITY> 408,604
<SALES> 19,890
<TOTAL-REVENUES> 19,890
<CGS> 0
<TOTAL-COSTS> 44,943
<OTHER-EXPENSES> (6,838)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (9,956)
<INCOME-PRETAX> (41,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (41,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,847)
<EPS-PRIMARY> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
