<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, 1998
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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 Identification No.)
of 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
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Shares Outstanding
Class as of November 18, 1998
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Common Stock, $.001 par value 19,790,551
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $ 34,595 $ 42,821
Restricted assets - investment in debt securities .................... 946 9,818
Subscriber receivables, net of allowance for doubtful accounts of
$332 in 1998 and $340 in 1997 .................................. 2,345 2,198
Prepaid expenses and other ........................................... 1,684 1,390
--------- ---------
Total current assets ..................................... 39,570 56,227
Investments in affiliates, at equity ....................................... 3,541 34,167
Systems and equipment, net ................................................. 57,445 122,653
License and leased license investment, net ................................. 81,595 123,369
Excess of cost over fair value of net assets acquired, net ................. -- 26,226
Restricted assets - investment in debt securities .......................... 515 515
Note receivable from affiliate ............................................. 2,294 2,069
Other assets, net .......................................................... 9,275 6,908
--------- ---------
$ 194,235 $ 372,134
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................ $ 35,773 $ 17,381
Current portion of long-term debt .................................... 296,042 1,358
--------- ---------
Total current liabilities ................................ 331,815 18,739
Long-term debt, less current portion ....................................... 14,625 306,838
Minority interests in subsidiaries ......................................... 149 149
Stockholders' equity:
Common stock, $.001 par value; authorized 50,000,000 shares, issued
19,785,193 shares in 1998 and 19,670,135 shares in 1997 ............ 20 20
Additional paid-in capital ........................................... 261,961 261,880
Accumulated deficit .................................................. (413,977) (215,134)
Treasury stock, 13,396 shares, at cost ............................... (358) (358)
--------- ---------
Total stockholders' equity ............................... (152,354) 46,408
--------- ---------
$ 194,235 $ 372,134
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues ................................................... $ 18,213 $ 19,890 $ 55,934 $ 58,816
--------- --------- --------- ---------
Operating expenses:
Systems operations ................................... 8,787 10,686 27,071 29,923
Selling, general and administrative .................. 10,432 10,002 27,774 32,230
Depreciation and amortization ........................ 12,228 24,255 34,681 51,881
Reorganization costs .............................. 596 -- 1,242 --
Impairment of long-lived assets ................... 88,095 -- 105,791 --
--------- --------- --------- ---------
Total operating expenses ........................... 120,138 44,943 196,559 114,034
--------- --------- --------- ---------
Operating loss ..................................... (101,925) (25,053) (140,625) (55,218)
--------- --------- --------- ---------
Other income (expense):
Interest income ...................................... 646 1,370 2,137 4,641
Interest expense ..................................... (10,040) (9,956) (30,005) (29,866)
Equity in losses of affiliates ..................... (11,681) (8,172) (30,340) (24,746)
Other expense, net ................................... -- (36) (10) (22)
--------- --------- --------- ---------
Total other income (expense) ....................... (21,075) (16,794) (58,218) (49,993)
--------- --------- --------- ---------
Loss before income taxes ........................... (123,000) (41,847) (198,843) (105,211)
Income tax ................................................. -- -- -- --
--------- --------- --------- ---------
Net loss ................................. $(123,000) $ (41,847) $(198,843) $(105,211)
========= ========= ========= =========
Net loss per common share - basic and diluted .............. $ (6.23) $ (2.13) $ (10.09) $ (5.36)
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
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(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................................... $(198,843) $(105,211)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................................ 34,681 51,881
Debt accretion and debt issuance cost amortization ........................... 4,813 4,260
Equity in losses of affiliates ............................................... 30,340 24,746
Write down of assets due to impairment ................................... 105,791 --
Other ........................................................................ 81 --
Changes in assets and liabilities, net of acquisitions:
Subscriber receivables ................................................... (147) 2,654
Prepaid expenses and other ............................................... (763) (1,580)
Accounts payable, accrued expenses and other liabilities ................. 18,392 (4,850)
--------- ---------
Net cash used in operating activities ............................... (5,655) (28,100)
--------- ---------
Cash flows from investing activities:
Proceeds from note receivable ............................................... -- 18,783
Proceeds from sale of assets ................................................ 236 126
Purchases of systems and equipment ............................................. (10,438) (25,458)
Expenditures for license and leased licenses ................................... -- (479)
Proceeds from sale of debt securities ....................................... 8,731 11,869
Acquisitions, net of cash acquired ............................................. -- (1,622)
--------- ---------
Net cash provided by (used in) investing activities ................ (1,471) 3,219
--------- ---------
Cash flows from financing activities:
Payments on short-term borrowings and notes payable ......................... (1,100) (1,177)
Payment of debt issuance costs .............................................. -- (597)
Other ....................................................................... -- (90)
--------- ---------
Net cash used in financing activities ............................... (1,100) (1,864)
--------- ---------
Net decrease in cash and cash equivalents ............................................ (8,226) (26,745)
Cash and cash equivalents at beginning of period ..................................... 42,821 79,596
--------- ---------
Cash and cash equivalents at end of period ........................................... $ 34,595 $ 52,851
========= =========
Cash paid for interest ............................................................... $ 9,775 $ 26,569
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
(1) General
(a) Description of Business
The primary business objective of Heartland Wireless
Communications, Inc. (the "Company") is to develop, own and
operate single family unit ("SFU") and multiple-dwelling unit
("MDU") subscription video businesses and retail high-speed
Internet access businesses (on a developmental basis in 1998)
in markets in which the Company owns or leases sufficient
wireless cable channel rights that will allow the Company to
best utilize its spectrum and maximize its return on
investment. The Company holds wireless cable channel rights
primarily in small to mid-size markets located in the central
United States. At September 30, 1998, the Company had wireless
cable television systems in operation in 57 markets and a
developmental Internet access business in one of these
markets. The Company also offers programming packages from
DIRECTV, Inc. ("DIRECTV") in 50 markets.
(b) Liquidity and Capital Resources; Reorganization under
Chapter 11
Wireless cable television and high-speed Internet access
businesses are capital intensive. Since inception, the Company
has expended funds to lease or acquire channel rights and
operating subscription video systems in various markets, to
construct new subscription video systems and a developmental
Internet access business, and to finance system operating
losses. The Company's primary sources of capital have been
from subscription fees, debt financing, the sale of the
Company's common stock and the sale of wireless cable channel
rights that were not part of the Company's strategic plan. The
growth of the Company's businesses requires substantial
investment in capital expenditures for SFU and MDU video
subscriber growth, the development of alternative spectrum
usages such as high-speed Internet services and the launch of
additional markets. The recent approval by the Federal
Communications Commission ("FCC") of flexible two-way use of
the Company's spectrum could open new applications such as
high-speed two-way data and fixed wireless local-loop
telephony services that would require additional capital
resources to develop and implement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Events."
The Company does not expect to generate sufficient cash flows
to implement its business plan and service its existing
indebtedness. In January 1998, the Company retained
Wasserstein Perella & Co., Inc. ("Wasserstein") as its
financial advisor to assist the Company in evaluating the
options available to finance the Company's business plan and
recapitalize the Company. In June 1998, the Company began
discussions with an unofficial ad hoc committee (the "Ad Hoc
Committee") purporting to represent the holders of at least 66
2/3% of the principal amount of the Company's $115 million 13%
Senior Notes ("13% Notes") due 2003 and $125 million 14%
Senior Notes ("14% Notes") due 2004 (collectively, the "Senior
Notes") regarding a restructuring and/or recapitalization of
the Senior Notes. On October 6, 1998, the Company announced
that it had reached an agreement (the "Plan Support
Agreement") with the holders of a majority in principal amount
of the Senior Notes to support a plan of reorganization (the
"Plan of Reorganization"). This Plan of Reorganization, if
consummated, will convert the Senior Notes, the Company's
$40.2 million original principal amount of 9% Convertible
Subordinated Discount Notes due 2004 (the "Convertible
Notes"), certain litigation claims and existing common stock
into new common stock and warrants of the reorganized Company.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Going Concern;
Reorganization Under Chapter 11."
The Company intends to implement the Plan of Reorganization by
filing a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code ("Chapter 11") as soon as practical, and
seeking confirmation of the Plan of Reorganization as promptly
thereafter as possible. There can be no assurance that, if
filed, such Plan of Reorganization will be confirmed or
consummated. See
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"Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Going Concern; Reorganization
Under Chapter 11."
(c) Going Concern
The Company's condensed consolidated financial statements have
been presented on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has elected not to
make interest payments due on the Senior Notes in 1998
totaling $23.7 million. The trustee under the indentures
governing the 13% Notes notified the Company in May 1998 of an
event of default under such instruments. Also, the holders of
the Convertible Notes notified the Company in August 1998 of
an alleged event of default under the Convertible Notes for
failure to make an April 1998 interest payment on the Senior
Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Going Concern;
Reorganization Under Chapter 11," and "Defaults Upon Senior
Securities." These defaults raise doubt about the continuation
of the Company as a going concern without the consummation of
the Plan of Reorganization under Chapter 11 or other similar
arrangement. The condensed consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty and the principal amounts
outstanding under the Senior Notes and Convertible Notes have
been classified as short-term in the accompanying financial
statements in accordance with EITF 86-30. Management of the
Company believes that at September 30, 1998, the Company had
adequate working capital to sustain operations, excluding
interest and principal payments on the Senior Notes and
Convertible Notes, at least through 1999.
The Company believes that the Plan of Reorganization will be
consummated in the first quarter of 1999. However, no
assurance can be provided that the Plan of Reorganization will
be consummated in a timely manner or at all.
(d) Principles of Consolidation
The condensed consolidated 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. Investments in
20% to 50% owned affiliates are accounted for using the equity
method and investments less than 20% are accounted for using
the cost method.
(e) Interim Financial Information
In the opinion of management, the accompanying unaudited
condensed consolidated 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, 1998 and the results of
operations for the three and nine months ended September 30,
1998 and 1997 and cash flows for the nine months ended
September 30, 1998 and 1997. 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, 1997, included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
(f) Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128"). SFAS No. 128 revised
the previous calculation and presentation of earnings per
share under APB 15 and requires that all prior-period
earnings (loss) per share data be restated. The Company
adopted SFAS No. 128 in the fourth quarter of 1997 as required
and, accordingly, has presented basic loss per share, computed
on the
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basis of the weighted average number of common shares
outstanding during the period, and diluted loss per share,
computed on the basis of the weighted average number of common
shares and all dilutive potential common shares outstanding
during the period. All prior period loss per share amounts
have been restated in accordance with SFAS 128.
Net loss per basic and diluted common share is based on the
net loss applicable to the weighted average number of common
shares outstanding of approximately 19,749,000 and 19,677,000
for the three-month periods ended September 30, 1998 and 1997,
respectively, and 19,714,000 and 19,636,000 for the nine
months ended September 30, 1998 and 1997, respectively. The
dilutive effect of the Company's outstanding stock options and
warrants has not been considered in the computation of diluted
net loss per common share since their effect would be
antidilutive.
(2) Subsequent Events
On October 15, 1998, the Company did not make semiannual interest
payments due on that date of $7.5 million on the 13% Notes and $8.75
million on the 14% Notes. The Company previously had disclosed in its
public filings that it had elected not to make an interest payment of
$7.5 million due on the 13% Notes in April 1998. Failure to make these
interest payments could permit the trustee or the holders of 25% or
more in principal amount of the Senior Notes to accelerate payment of
the Senior Notes and all unpaid and accrued interest thereon. In
addition, the holders of the Convertible Notes notified the Company in
August 1998 of an alleged event of default under the Convertible Notes
for failure to make the April 1998 interest payment on the Senior
Notes. Accordingly, the principal amounts outstanding under the Senior
Notes and Convertible Notes have been classified as short-term in the
accompanying financial statements in accordance with EITF 86-30. The
Company currently does not have sufficient funds available to pay in
full the indebtedness outstanding under the Senior Notes or Convertible
Notes in the event that any of such indebtedness is accelerated.
(3) Impairment of Long-Lived Assets.
The Company continually reviews components of its business for possible
improvement of future operating strategies based on, among other
things, changes in technology, competition, consumer habits and
business climate. The Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121") effective
January 1, 1996. SFAS No. 121 addresses the accounting for impairment
of long-lived assets and long-lived assets to be disposed of, certain
indentifiable intangibles and goodwill related to those assets,
provides guidelines for recognizing and measuring impairment losses,
and requires that the carrying amount of impaired assets be reduced to
fair value.
During the second quarter of 1998, the Company reviewed the book value
of certain assets associated with certain undeveloped markets and
determined that (i) cash flows from operations would not be adequate to
fund the capital outlay required to build out such markets, and (ii)
because of the Company's default on its interest payment on the 13%
Notes in the second quarter of 1998, outside financing for the
build-out of these markets was not readily available prior to the
consummation of a financial restructuring. Therefore, in accordance
with SFAS No. 121, the wireless cable channel licenses and leases in
these undeveloped markets were individually evaluated and written down
to estimated fair value, resulting in a non-cash impairment charge of
$17.7 million in the second quarter of 1998. Additionally, based on the
depressed market condition of the wireless cable industry and the
continuing losses of CS Wireless Systems, Inc. ("CS Wireless"),
management re-evaluated the goodwill associated with its investment in
CS Wireless and recorded a non-cash impairment charge of $6.8 million
in the second quarter of 1998.
Throughout the second and third quarters of 1998, the Company analyzed
various recapitalization and restructuring alternatives with the
assistance of its financial advisors, including consensual,
out-of-court alternatives. In October 1998, the Company announced that
it intended to pursue a prenegotiated Plan of Reorganization and file a
voluntary petition under Chapter 11 (see note 1(b)). In connection with
this Plan of
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Reorganization, the Company retained the services of a third party to
assist the Company in performing a fair market valuation of
substantially all of the Company's assets. While obtaining a fair
market valuation of the Company's assets is not required in the normal
course of business, the event of the impending Chapter 11 filing
necessitated that a fair market valuation be performed on all the
Company's assets including all operating assets. This valuation
resulted in a non-cash impairment charge of $88.1 million for the
quarter ended September 30, 1998. The impairment included:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Description
Write-down of systems and equipment $ 44,512
Write-down of license and leased license investment 18,852
Write-down of excess of cost over fair value
of net assets acquired 24,731
--------
TOTAL $ 88,095
========
</TABLE>
Additionally, during the third quarter of 1998, the Company wrote off
$11.7 million of its investment in CS Wireless after learning in the
third quarter of 1998 that CS Wireless had recorded an asset impairment
charge on its financial statements of $46 million related to goodwill.
This write-off is reflected in equity in losses of affiliates in the
Company's September 30, 1998 statement of operations.
(4) Comprehensive Income (Loss)
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") was issued. SFAS No.
130 establishes standards for reporting and displaying comprehensive
income and its components in an annual financial statement that is
displayed with the same prominence as other annual financial
statements. Reclassification of financial statements for earlier
periods, provided for comparative purposes, is required. The statement
also requires the accumulated balance of other comprehensive income to
be displayed separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Comprehensive income (loss) for the Company does not differ from
net income (loss), which was $198.8 million and $105.2 million,
respectively, for the nine months ended September 30, 1998 and 1997.
(5) Contingencies
On November 10, 1998, a purported class action lawsuit was filed in
U.S. District Court for the Northern District of Texas, Dallas
Division, styled Frederick S. Shehadi, et al v. David E. Webb, et al
(3-98CV2660-H) (the "Shehadi Suit"). The Shehadi Suit alleges
violations of federal and state securities laws and state common law.
Among other things, the plaintiff alleges that certain former and
current officers and directors of the Company misrepresented or failed
to disclose material facts about the business prospects and financial
condition of the Company, and overstated the value of the Company's
assets and revenues and the number of total subscribers. The plaintiff
seeks to certify a class to represent all persons who acquired the
securities of the Company during the period from November 15, 1995
through August 14, 1998. The plaintiff seeks money damages, interest,
attorneys' fees and costs.
As previously disclosed in the Company's Quarterly Report on Form 10-Q
for the three months ended June 30, 1998, on July 15, 1998, a purported
class action lawsuit was filed in State District Court in Kleberg
County, Texas against the Company and certain former and current
directors and officers (the "Thompson Suit"). The Thompson Suit alleges
certain violations of state securities laws and common law. The
plaintiff seeks to certify a class to represent all persons who
acquired securities of the Company from November 15, 1995 through March
20, 1997 (the "Class Period"), including all persons who purchased or
acquired securities that were offered or sold by the Company during the
Class Period. The plaintiff seeks money damages, interest, attorneys'
fees and costs, as well as equitable and/or injunctive relief with
respect to any proceeds derived from defendants' stock sales.
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As previously disclosed in the Company's Quarterly Report on Form 10-Q
for the three months ended June 30, 1998, on May 27, 1998, a purported
class action lawsuit was filed in State District Court in Brooks
County, Texas against the Company (the "Garcia Suit"). The Garcia Suit
alleges that certain administrative late fees allegedly charged by the
Company are not reasonably related to the costs incurred by the Company
as a result of late payment of accounts. The plaintiff seeks to certify
a class to represent all persons currently receiving cable service from
the Company or who have been charged a late fee in the past by the
Company. The plaintiff seeks a declaration that the Company's late fees
are void or usurious, and seeks money damages, interest, attorneys'
fees and costs.
On May 14, 1998, a purported class action lawsuit was filed in State
District Court in Grayson County, Texas against the Company (the
"Warren Suit"). The Company received notice of the Warren Suit in
August 1998. The Warren Suit alleges that certain administrative late
fees allegedly charged by the Company are not reasonably related to the
costs incurred by the Company as a result of late payment of accounts.
The plaintiff seeks to certify a class to represent all current
subscribers in the state of Texas and all prior subscribers who made
late fee payments to the Company. The plaintiff seeks a declaration
that the Company's late fees are void or usurious, and seeks actual and
punitive damages, interest, attorneys' fees and costs.
Management of the Company believes that it is not currently feasible to
predict or determine the final outcome of the above proceedings or to
estimate the amounts or potential range of loss with respect to these
matters. However, management believes the Company has meritorious
defenses to all of the above lawsuits and is vigorously defending these
actions.
The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of business. Management
believes that the disposition of these other matters will not have a
material adverse effect on the Company's consolidated financial
condition or results of operations.
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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 Company's
condensed consolidated financial statements and notes thereto.
OVERVIEW
The Company develops, owns and operates wireless cable television systems and
channel rights in small to mid-size markets in the central United States. The
Company currently offers its subscribers local off-air VHF/UHF channels, as well
as premium and basic cable television programming channels such as HBO, HBO2,
Cinemax, Showtime, Disney, ESPN, CNN, USA, WGN, WTBS, TNT, Nickelodeon, Turner
Classic Movies, The Weather Channel, Fox Sports, Discovery, the Nashville
Network, A&E and other popular cable television networks. The Company also
offers DIRECTV programming packages in 50 markets, selling this offering in
combination with the Company's video programming and as a stand alone package.
In June 1998, the Company launched a developmental high-speed Internet access
business in Sherman, Texas.
At September 30, 1998, the Company had wireless cable channel rights in 90
markets, including 57 markets with subscription video systems in operation,
providing service to approximately 165,000 subscribers.
FORWARD LOOKING STATEMENTS
In addition to the matters noted elsewhere in this Quarterly Report on Form
10-Q, the statements contained in this report relating to the Company's
operating results and plans and objectives of management for future operations,
including plans or objectives relating to the Company's Plan of Reorganization,
business strategy, and financing issues, are forward looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements are based on an assessment of a variety of factors,
contingencies and uncertainties deemed relevant by management, including (i) the
Company's ability to (x) consummate its Plan of Reorganization and (y) access
additional capital to finance its current business plan, (ii) business and
economic conditions in the Company's existing markets, (iii) the Company's
ability to implement a successful marketing plan and competitive price structure
to produce subscriber growth, (iv) the successful implementation of the
Company's alliances for DIRECTV programming, (v) regulatory and interference
issues, including the grant of applications for two-way transmission authority
and pending applications for new licenses or for modification of existing
licenses and the grant of applications for new licenses and license modification
applications that have not yet been filed with the FCC, (vi) the successful
launch and marketing of the Company's high-speed Internet access business, and
(vii) other competitive products and services, as well as those matters
discussed specifically elsewhere herein. Consequently, the actual future results
realized by the Company could differ materially from the statements made herein.
Investors are cautioned not to place undue reliance on the forward looking
statements made in this report.
GOING CONCERN; REORGANIZATION UNDER CHAPTER 11
In conjunction with an ongoing evaluation of the Company's capital structure and
in consultation with the Company's financial advisor, in April and October 1998,
the Company elected not to make interest payments on the Senior Notes totaling
$23.7 million. Failure to make these interest payments permits the trustee or
the holders of 25% or more in principal amount of the Senior Notes to accelerate
payment of the Senior Notes and all unpaid and accrued interest. Additionally,
in August 1998, the holders of the Convertible Notes notified the Company of an
alleged event of default under the Convertible Notes for failure to make the
April 1998 interest payment on the Senior Notes. Accordingly, the principal
amounts outstanding under the Senior Notes and Convertible Notes have been
classified as short term in accordance with EITF 86-30. See "Default Upon Senior
Securities." The Company currently does not have sufficient funds available to
pay in full the indebtedness outstanding under the Senior Notes or the
Convertible Notes in the event that any of such indebtedness is accelerated.
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<PAGE> 11
These defaults raise doubt about the continuation of the Company as a going
concern without the consummation of the Plan of Reorganization under Chapter 11
or other similar arrangement.
On October 6, 1998, the Company announced that it had executed an agreement with
the holders of a majority in principal amount of the Senior Notes to support the
Plan of Reorganization to be filed under Chapter 11. Under the Plan of
Reorganization, all currently issued and outstanding common stock and other
equity interests of the Company (the "Old Common Stock") will be canceled.
Holders of the Senior Notes will receive 97% of the outstanding common stock of
the reorganized Company (the "New Common Stock"). Holders of the Convertible
Notes, Old Common Stock and certain litigation claimants will receive the
remaining 3% of the New Common Stock, plus warrants to purchase up to 10% of the
New Common Stock on a diluted basis. The Company intends to implement the Plan
of Reorganization by filing a voluntary petition under Chapter 11 as soon as
practical. The Plan Support Agreement, which originally expired on November 13,
1998, has been extended through December 4, 1998, or such later date as the
parties may agree. There can be no assurance that the Plan of Reorganization
will be consummated in a timely manner or at all.
LIQUIDITY AND CAPITAL RESOURCES
Wireless cable television and high-speed Internet access businesses are capital
intensive. Since inception, the Company has expended funds to lease or acquire
channel rights and operating subscription video systems in various markets, to
construct new subscription video systems and a developmental Internet access
business, and to finance system operating losses. The Company's primary sources
of capital have been from subscription fees, debt financing, the sale of the
Company's common stock, and the sale of wireless cable channel rights that were
not part of the Company's strategic plan. The growth of the Company's business
requires substantial investment in capital expenditures for SFU and MDU video
subscriber growth, the development of alternative spectrum usages such as
high-speed Internet services and the launch of additional markets. The approval
by the FCC of flexible two-way use of the Company's spectrum could open new
applications such as high-speed two-way data and fixed wireless local-loop
telephony services that would require additional capital resources to develop
and implement. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Events."
Operating losses are likely to be incurred by a video, data, and telephony
service business during any start-up period. Pending the consummation of the
Plan of Reorganization, the Company has determined to delay the launch of
service offerings in any new markets.
Cash used in operations of the Company was $5.7 million for the nine months
ended September 30, 1998, compared to $28.1 million for the same period in 1997.
The increase in cash from operations during 1998 was primarily due to nonpayment
in the current year of accrued interest on the Senior Notes, as well as lower
programming costs as a result of fewer subscribers and lower selling, general
and administrative expenses related to labor savings and efficiencies at the
market level, partially offset by lower revenues.
Cash used in investing activities was $1.5 million during the first nine months
of 1998, compared to cash provided by investing activities of $3.2 million in
the same period last year. Cash provided by/used in investing activities
principally relates to the acquisition and installation of subscriber
receive-site equipment, the upgrade of transmission equipment in certain markets
and the acquisition of wireless cable channel rights and operating systems,
partially offset by the sale of wireless cable channel rights that are not a
part of the Company's strategic plan. During the nine months ended September 30,
1998, cash used in investing activities included the sale of debt securities
held in the Company's escrow account for payment of interest on the 14% Notes,
purchases of subscriber equipment, the upgrade of transmission equipment and
purchases of new equipment for additional channels authorized by the FCC in
certain markets. Cash provided by investing activities during the first nine
months of 1997 included receipt of $13.3 million in cash for partial payment on
a note receivable and sales of debt securities totaling $11.9 million, offset by
the Company's acquisition of operating systems in Woodward and Watonga, Oklahoma
for $1.6 million.
Net cash used in financing activities was $1.1 million for the nine months ended
September 30, 1998, compared to $1.9 million during the same period of 1997.
Expenditures in both periods primarily relate to principal payments on
obligations related to capital leases and various prior period acquisitions.
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At September 30, 1998, the Company had approximately $34.6 million of cash and
cash equivalents, and $946,000 of restricted cash.
FUTURE CASH REQUIREMENTS
As of September 30, 1998, the Company had $240.0 million principal amount of
Senior Notes outstanding, approximately $56.3 million in accreted principal
amount of Convertible Notes outstanding and approximately $15.8 million
principal amount of installment notes outstanding payable to the FCC for the
Company's basic trading area ("BTA") authorizations. The BTA amount includes
$3.5 million to be paid to the Company by CS Wireless pursuant to a BTA Lease
and Option Agreement, under which the Company leases to CS Wireless all or part
of 14 BTAs. This amount is included on the Company's balance sheet at September
30, 1998 as investments in affiliates. In April 1998, the Company disbursed all
of the funds in the escrow account established in connection with the 14% Notes.
Cash interest obligations on the Senior Notes total approximately $16.2 million
every six months or $32.4 million per year (excluding any interest payable as a
result of delinquent interest payments). Beginning in November 1998, the Company
will be required to make quarterly principal payments (in addition to interest)
on its debt incurred in connection with the 1996 BTA auction, with amortized
principal payments ranging from $250,000 in November 1998 to $525,000 in May
2006 and quarterly interest payments of $292,500 (net of BTA lease payments from
CS Wireless). The Company is obligated to pay approximately $554,000 in
principal and interest on installment notes for its BTAs, and $340,000 in
operating leases and other notes payable, during the fourth quarter of 1998.
As discussed above, pending the outcome of its reorganization, the Company has
suspended the launch of service offerings in any new markets. The Company
remains committed to its long-term business plan, subject to the reorganization
and financing issues discussed herein. This business plan consists of (1)
achieving moderate SFU subscriber growth through traditional analog video
service in selected markets, (2) pursuing SFU and MDU subscriber and revenue
growth through cooperative marketing alliances for DIRECTV programming, (3)
developing and testing high-speed Internet access service to small and mid-size
businesses in several markets, (4) launching several new markets that offer MDU,
Internet and SFU subscriber growth opportunities, and (5) pursuing financing
alternatives to allow the Company to implement its business plan.
Assuming the consummation of the Plan of Reorganization in the first quarter of
1999, the Company still does not expect to generate sufficient cash flows to
implement its business strategy. As a result, the implementation of the
above-described business strategy is subject to and dependent upon the
consummation of the Plan of Reorganization and the ability of the Company to
obtain additional capital on terms and conditions acceptable to the Company and
in a timely manner. This may include the sale of debt or equity securities,
borrowings under secured or unsecured loan arrangements and/or sales of assets
including wireless cable systems and channel rights.
There can be no assurance that the Company will be able to consummate the Plan
of Reorganization or enter into new financing arrangements in a timely manner
and on terms satisfactory to the Company that will enable the Company to
implement the above-described business strategy. Management of the Company
believes that at September 30, 1998, the Company had adequate working capital to
sustain operations, excluding interest and principal payments on the Senior
Notes and Convertible Notes, at least through 1999.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues; Subscribers. 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 1998 were $18.2 million, compared to $19.9 million for the
third quarter of 1997. Revenues for the nine months ended September 30, 1998
were $55.9 million compared to $58.8 million for the same period last year.
Revenues decreased for both periods primarily due to a decrease in average
subscribers from 195,700 for the quarter ended September 30, 1997 to 167,800 for
the quarter ended September 30, 1998, and from 196,200 for the nine months ended
September 30, 1997 to 174,930 for the same period of 1998. The decrease in
average subscribers is primarily due to (i) the Company's inability to hire and
train a qualified sales force as quickly as it had anticipated, (ii) the delayed
launch of the Company's marketing plan for its combined DIRECTV offerings until
the third quarter of 1998, (iii) an
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increase as of January 1, 1998 in the Company's equivalent basic unit or "EBU"
conversion rate for calculating MDU subscribers (discussed in the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998), (iv) the
transfer of one operating system (and its associated revenues) to CS Wireless in
December 1997 and (v) stricter credit policies for approving new customers.
The number of subscribers has decreased since the first quarter of 1997.
Although the Company has successfully attracted higher quality subscribers, as
measured by the Company's decreasing bad debt expense, the overall number of
subscribers has declined and has resulted in a corresponding decrease in
revenue. The Company recognizes that long-term subscriber growth is critical for
sustainable EBITDA growth and the ongoing viability of its subscription video
business. Although there can be no assurance that such long-term growth will be
achieved, the Company believes that with its enhanced programming offering from
DIRECTV, continuing improvement in other operational areas, and improved hiring
and retention efforts relating to a subscription video sales force, it can
achieve and maintain such long-term subscriber growth if it successfully
consummates the Plan of Reorganization. Although the number of subscribers to
its video service has decreased since the first quarter of 1997, average
recurring revenue per subscriber increased 7.1% for the third quarter ended
September 30, 1998 to $34.33 from $32.07 for the same period last year, and 7.6%
for the nine months ended September 30, 1998 to $33.86 from $31.48 for the same
period last year. This increase reflects overall higher average subscription
rates, as lower priced packages are replaced with upgraded offerings.
The Company launched SFU DIRECTV programming in 41 markets in August 1998 and
currently offers DIRECTV programming to SFU and MDU subscribers in 50 markets.
This launch involved reorganizing individual market channel line-ups to
accommodate and avoid redundancies with DIRECTV's programming line-ups. In the
short-term, the number of subscribers in these markets may decline and cause a
temporary increase in the Company's churn rate, as some existing subscribers may
not wish to purchase DIRECTV services and might be dissatisfied with the revised
channel lineups that the Company will provide in those markets. The Company
believes that any temporary decline caused by this reorganization will be more
than offset by new subscribers and additional revenues that the Company will
generate through its alliance with DIRECTV.
Effective November 1, 1998, the Company implemented a system-wide price increase
for its subscription video service offerings. The price increase was implemented
to partially offset programming costs, which have continued to increase. The
price increase excludes certain promotional subscribers until 2000. This
represents the Company's first system-wide programming price increase. The
Company expects that the price increase may result in a short-term increase in
churn which could negatively impact EBITDA for the fourth quarter of 1998 and
beyond. However, management currently believes that increased revenues generated
from the price increase likely will more than offset any loss of revenues from
increased churn. Additionally, the Company intends to increase its EBU
conversion rate for calculating MDU subscribers as a result of the price
increase, which will cause a one-time reduction in the number of overall
subscribers reported by the Company.
Systems Operations. Systems operations expenses include programming costs,
channel lease payments, costs of service calls and disconnect expense,
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 based on the number of
subscribers. Systems operations expense was $8.8 million for the third quarter
of 1998, versus $10.7 million for the third quarter of 1997. As a percentage of
revenue, systems operations expense was 48.2% for the third quarter of 1998,
compared to 53.7% for the third quarter of 1997. For the nine months ended
September 30, 1998, systems operations expense was $27.1 million or 48.4% of
revenue, compared to $29.9 million or 50.9% of revenue for the first nine months
of 1997. The decrease in systems operations expense was primarily due to lower
programming costs as a result of fewer subscribers. This decrease was slightly
offset by programming rate increases from certain providers. In addition, the
Company experienced higher service call and disconnect expense during the third
quarter and first nine months of 1997 due to (i) installation corrections at
certain subscriber households, (ii) recovery of equipment from disconnected
subscribers and (iii) higher churn in 1997.
Selling, General and Administrative ("SG&A"). SG&A expense for the third quarter
of 1998 increased 4.3% to $10.4 million from $10.0 million during the same
period in 1997. As a percentage of revenues, SG&A was 57.3% in the third quarter
of 1998 compared with 50.3% for the third quarter of 1997. SG&A expense for the
first nine months of 1998
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decreased 13.8% to $27.8 million from $32.2 million for the same period last
year. As a percentage of revenues, SG&A was 49.7% for the first three quarters
of 1998 compared to 54.8% for the same period last year. SG&A increased over the
three-month periods presented due to increased advertising expenditures related
to the Company's launch of its DIRECTV offering in August 1998. SG&A decreased
over the nine-month periods presented due to lower bad debt expense resulting
from improved credit screening and collection procedures and as a result of
labor savings and efficiencies realized from consolidation of management and
staff in certain markets.
Depreciation and Amortization. Depreciation and amortization expense includes
depreciation of systems and equipment, amortization of license and leased
license investment and the excess of cost over fair value of net assets
acquired. 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 and installation labor.
These direct costs are capitalized as systems and equipment in the accompanying
condensed consolidated balance sheet. Depreciation and amortization expense was
$12.2 million and $34.7 million for the quarter and nine months ended September
30, 1998, respectively, compared to $24.3 million and $51.9 million for the
quarter and nine months ended September 30, 1997, respectively. The decrease in
depreciation and amortization expense primarily was due to a one-time $7.8
million write-off of subscriber equipment during the third quarter of 1997
related to obsolete equipment and disconnected equipment not recovered from
subscribers' homes. This decrease was slightly offset by a change in the
amortization period of the nonrecoverable portion of subscriber installation
costs from four years to three years in the third quarter of 1997 and additional
amortization expense on the costs of BTA channel rights that began in the fourth
quarter of 1997.
Reorganization Costs. The Company intends to implement the Plan of
Reorganization by filing a voluntary petition under Chapter 11 as soon as
practical. During 1998, the Company has incurred $1.2 million in expenses
related to the Plan of Reorganization such as accounting fees and costs for
services of financial and legal advisors for the Company and the Ad Hoc
Committee. These costs are reflected as a component of operating expenses on the
Company's statement of operations.
Impairment of Long-Lived Assets. The Company continually reviews components of
its business for possible improvement of future operating strategies based on,
among other things, changes in technology, competition, consumer habits and
business climate. The Company adopted SFAS No. 121 effective January 1, 1996.
SFAS No. 121 addresses the accounting for impairment of long-lived assets and
long-lived assets to be disposed of, certain indentifiable intangibles and
goodwill related to those assets, provides guidelines for recognizing and
measuring impairment losses, and requires that the carrying amount of impaired
assets be reduced to fair value.
During the second quarter of 1998, the Company reviewed the book value of
certain assets associated with certain undeveloped markets and determined that
(i) cash flows from operations would not be adequate to fund the capital outlay
required to build out such markets, and (ii) because of the Company's default on
its interest payment on the 13% Notes in the second quarter of 1998, outside
financing for the build-out of these markets was not readily available prior to
the consummation of a financial restructuring. Therefore, in accordance with
SFAS No. 121, the wireless cable channel licenses and leases in these
undeveloped markets were individually evaluated and written down to estimated
fair value, resulting in a non-cash impairment charge of $17.7 million in the
second quarter of 1998. Additionally, based on the depressed market condition of
the wireless cable industry and the continuing losses of CS Wireless, management
reevaluated the goodwill associated with its investment in CS Wireless and
recorded a non-cash impairment charge of $6.8 million in the second quarter of
1998.
Throughout the second and third quarters of 1998, the Company analyzed various
recapitalization and restructuring alternatives with the assistance of its
financial advisors, including consensual, out-of-court alternatives. In October
1998, the Company announced that it intended to pursue a prenegotiated Plan of
Reorganization and file a voluntary petition under Chapter 11. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, Going Concern; Reorganization Under Chapter 11." In connection with
this Plan of Reorganization, the Company retained the services of a third party
to assist the Company in performing a fair market valuation of substantially
all of the Company's assets. While obtaining a fair market valuation of the
Company's assets is not required in the normal course of business, the event of
the impending Chapter 11 filing necessitated that a fair market valuation be
performed on all the Company's assets including all operating assets. This
valuation resulted in a non-cash impairment charge of $88.1 million for the
quarter ended September 30, 1998. The impairment included write-downs of
systems and equipment ($44.5 million), license and leased license investment
($18.9 million) and the excess of cost over fair value ($24.7 million).
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Operating Loss. The Company generated operating losses of $101.9 million for the
third quarter of 1998, compared to $25.1 million for the third quarter of 1997.
Operating losses for the nine months ended September 30, 1998 were $140.6
million compared to $55.2 million for the same period last year. Excluding
reorganization costs and the write-down of the Company's long-lived assets in
the second and third quarters of 1998, operating loss for the nine months ended
September 30, 1998 improved $21.6 million from the prior year.
EBITDA for the third quarter of 1998 decreased $800,000 from a negative $800,000
in the third quarter of 1997 to a negative $1.6 million in the third quarter of
1998 . Year-to-date EBITDA increased $3.2 million from a negative $3.3 million
in 1997 to a negative $153,000 in 1998. Excluding reorganization costs, EBITDA
for the third quarter of 1998 decreased $200,000 from the same three-month
period in 1997 and increased $4.4 million during the nine months ended September
30, 1998 over the same period last year. 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 as an alternative
to cash flows as a measure of funds available for discretionary or other
liquidity purposes.
The Company expects that it will be required to continue to incur expenses
associated with the Plan of Reorganization as well as increased advertising
expenditures which will negatively impact EBITDA at least through the first
quarter of 1999.
Interest Income. Interest income was $646,000 and $2.1 million for the quarter
and nine months ended September 30, 1998, respectively, compared to $1.4 million
and $4.6 million for the quarter and nine months ended September 30, 1997
respectively. The decrease in interest income is due to higher interest earnings
during 1997 on larger escrowed balances segregated for the payment of interest
on the Senior Notes and higher interest earnings on a note receivable that was
partially repaid during the second and third quarters of 1997.
Interest Expense. Interest expense was $10.0 million for the third quarter of
1998 and 1997 and $30.0 million for the nine months ended September 30, 1998,
compared to $29.9 million for the nine months ended September 30, 1997. Interest
expense remained stable even though average borrowings for the nine months ended
September 30, 1998 increased compared to the same prior year period. However,
this increase was due to the accretion of interest to the principal balance of
the Company's Convertible Notes.
Equity in Losses of Affiliates. The Company owns approximately 36% of the
outstanding common stock of CS Wireless and 20% of the outstanding common stock
of Wireless One, Inc. ("Wireless One"). The Company recognized $11.7 million in
losses from its 36% interest in CS Wireless during the third quarter of 1998
compared to $8.1 million in the same period last year. For the nine-month period
ending September 30, 1998, the Company recognized $30.3 million in losses from
CS Wireless compared to $24.7 million for the same period last year. During the
third quarter of 1998 the Company wrote off $11.7 million of its investment in
CS Wireless after learning in the third quarter of 1998 that CS Wireless had
recorded an asset impairment charge on its financial statements of $46 million
related to goodwill. In addition, the Company previously had written off $6.8
million of its excess basis in CS Wireless during the second quarter of 1998.
The remaining balance of the Company's investment in affiliates reflected on its
balance sheet represents a receivable from CS Wireless related to debt of the
Company for BTA licenses leased to CS Wireless. The Company also holds a note
receivable from CS Wireless in the amount of $2.3 million.
Net Loss. The Company has recorded net losses since inception. The Company
incurred net losses of $123.0 million, or $6.23 per basic and diluted common
share, during the third quarter of 1998, versus $41.8 million, or $2.13 per
basic and diluted common share, during the third quarter of 1997. During the
nine months ended September 30, 1998, the Company incurred net losses of $198.8
million or $10.09 per basic and diluted common share, compared to $105.2 million
or $5.36 per basic and diluted common share for the nine months ended September
30, 1997. The increase in net losses is primarily due to the write-down of $17.7
million of the Company's undeveloped licenses and $6.8 million of goodwill
associated with the Company's investment in CS Wireless during the second
quarter of 1998, the write-down of $44.5 million of systems and equipment, $18.9
million of license and leased license investment and $24.7 million of goodwill
in the third quarter of 1998, as well as year-to-date reorganization costs of
$1.2 million. Excluding these items,
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net losses from operations were reduced during the periods presented due to
decreases in systems operations expense, SG&A and depreciation and amortization
expense.
BALANCE SHEET
Investments in Affiliates. As discussed above, the Company wrote off $18.5
million of its investment in CS Wireless during the second and third quarters of
1998, including $6.8 million of goodwill representing its basis in excess of its
equity in the net assets of CS Wireless and $11.7 million of its share of asset
impairment charges recorded by CS Wireless. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Equity in Losses of
Affiliates." The remaining balance of the Company's investments in affiliates
represents a receivable from CS Wireless related to debt held by the Company for
BTA licenses leased to CS Wireless. The Company also holds a note receivable
from CS Wireless in the amount of $2.3 million. During November 1997, the
Company reduced its investment in Wireless One to zero as a result of recording
equity in losses up to the book value of its investment.
Current Liabilities. Accounts payable and accrued expenses increased from $17.4
million at December 31, 1997, to $35.8 million at September 30, 1998. This
increase was primarily due to additions to accrued interest on the Company's
Senior Notes as a result of the Company's election in April 1998 not to make an
interest payment of approximately $7.5 million on the 13% Notes, partially
offset by decreases in accounts payable and accrued expenses. At September 30,
1998, accrued interest payable amounted to approximately $22.5 million. In
addition, as a result of the Company's default on the 13% Notes and the right of
the holders of the Senior Notes to accelerate all principal amounts due under
the Senior Notes, and the alleged default under the Convertible Notes, the
principal balances of the Senior Notes and Convertible Notes have been reflected
as short-term on the Company's condensed consolidated balance sheet as of
September 30, 1998. See "Default Upon Senior Securities."
THE YEAR 2000
The Company has established an employee team to identify and correct Year 2000
compliance issues. Information technology ("IT") systems with non-compliant code
are expected to be identified and modified or replaced with systems that are
Year 2000 compliant. Similar actions are being taken with respect to non-IT
systems, primarily systems embedded in office, communications and other
facilities. Progress of the team's efforts is being monitored by senior
management and periodically will be reported to the Company's Board of
Directors.
The Company anticipates that substantially all Year 2000 identification and
remediation efforts will be complete by the end of the second quarter of 1999,
which management believes will allow adequate time for testing and
implementation before January 1, 2000. To date, confirmations have been received
from the Company's primary information processing vendors that the Company's
principal IT systems are Year 2000 compliant. Additionally, the Company is in
the process of obtaining assurances from its principal technology and equipment
vendors that plans are being implemented to address the Year 2000 issue. To the
extent that vendors do not provide the Company with satisfactory evidence of
their readiness to handle Year 2000 issues, management intends to develop
contingency plans by the end of the third quarter of 1999. The Company intends
to make every reasonable effort to assess the Year 2000 readiness of its
principal vendors and to create action plans to address identified risks.
The Company's most reasonably likely potential worst case scenario is a
temporary inability to send invoices and transmit video programming. The
Company's Year 2000 efforts are ongoing and its overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available.
Management does not believe the costs related to the Year 2000 compliance
project will be material to its financial position or results of operations.
However, costs and the date by which the Company plans to complete Year 2000
modifications are based on management's current best estimates, which were
derived using assumptions of future events including the continuing availability
of certain resources, third party compliance plans and other factors.
Unanticipated failures by critical vendors, as well as the failure by the
Company to execute its own identification and remediation efforts, could have a
material adverse effect on the success and cost of the project, as well as its
estimated completion
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date. As a result, there can be no assurance that these forward-looking results
will be achieved, and the actual cost and vendor compliance could differ
materially from these estimates.
FUTURE OPERATING RESULTS
The Company's future revenues and profitability are difficult to predict due to
a variety of risks and uncertainties, including those described under "Forward
Looking Statements" above.
The rate of future growth of the Company's subscription video and other
subscribers cannot be estimated with precision or certainty. Successful
implementation of the Company's business strategy and the Company's ability to
consummate its Plan of Reorganization and obtain timely financing on acceptable
terms will have a significant impact on the Company's operating and financial
performance in 1998 and beyond.
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.
Pacific Monolithics, Inc. ("Pac Mono"), a supplier to the Company of wireless
cable subscriber and transmission (headend) equipment, has filed for protection
under Chapter 11. The Company utilizes certain Pac Mono subscriber and headend
equipment in 22 of the Company's 57 operating markets. Certain components of
this equipment are proprietary to Pac Mono or other manufacturer(s). Pac Mono
has indicated that it intends to discontinue production and service of such
equipment. The Company currently is exploring supply and service alternatives
for such equipment (which the Company currently believes exist), including
purchasing additional equipment held in stock by Pac Mono, investigating the
equipment manufacturing and service capabilities of other companies, and/or
hiring in-house production managers to service such equipment. The Company
expects to incur certain costs relating to equipment purchases and/or hiring and
training of personnel as a result of Pac Mono's filing; however, the Company
does not expect this action to have a material adverse effect on the Company's
long-term financial condition.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 is effective for fiscal years beginning after December 31,
1997. This statement establishes standards for the way that public companies
report information about segments in annual and interim financial statements.
The impact of SFAS No. 131, when adopted in 1999, is not expected to have a
material impact on the Company's consolidated financial statements and related
disclosures.
RECENT EVENTS
In September 1998, the FCC issued a Report and Order (the "Two-Way Order"),
which amended the FCC's existing rules to allow for the use of wireless cable
frequencies (MMDS, MDS and ITFS, collectively referred to as "MMDS") for fixed,
two-way digital voice, video and data communications. Under the proposed
regulatory scheme, the FCC will (a) permit MMDS licensees to provide two-way
services on a regular basis, (b) permit the use of cellularized design systems,
(c) allow increased flexibility in spectrum use and channelization, including
combining multiple channels to accommodate wider bandwidths, dividing 6 MHZ
channels into smaller bandwidths, and channel swapping, (d) provide a number of
technical parameters to mitigate the potential of interference among MMDS
service providers and to ensure interference protection for existing services,
and (e) simplify and streamline the licensing process.
In July 1998, the Company entered its first test market in Sherman, Texas as a
business retail Internet service provider ("ISP"). The Company currently offers
a variety of one-way Internet services in this market for small to mid-size
businesses and home offices. These services include downstream Internet access
at speeds from 768 kbps burstable to 1.544 mbps for multiple business users, and
from 56 kbps burstable to 1.544 mbps for less data-intensive users.
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With the issuance of the FCC's recent Two-Way Order, the Company currently
intends to offer high-speed two-way ISP services in the Sherman market utilizing
existing 4 MHZ or 6 MHZ channels for both upstream and downstream transmissions.
The Company currently is unable to predict the exact impact that two-way
transmission capacity will have on its business strategy, including capital
expenditures required to take advantage of such ruling, but expects any
long-term material financial impact to be positive.
Except as discussed above, the Company has not conducted one-way or two-way
Internet access or service trials in any of its markets, and there can be no
assurance that the Company will successfully launch such systems on a commercial
basis in 1998 or thereafter.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 10, 1998, a purported class action lawsuit was filed in U.S.
District Court for the Northern District of Texas, Dallas Division, styled
Frederick S. Shehadi, et al v. David E. Webb, et al (3-98CV2660-H). The Shehadi
Suit alleges violations of federal and state securities laws and state common
law. Among other things, the plaintiff alleges that certain former and current
officers and directors of the Company misrepresented or failed to disclose
material facts about the business prospects and financial condition of the
Company, and overstated the value of the Company's assets and revenues and the
total number of subscribers. The plaintiff seeks to certify a class to represent
all persons who acquired the securities of the Company during the period from
November 15, 1995 through August 14, 1998. The plaintiff seeks money damages,
interest, attorneys' fees and costs.
As previously disclosed in the Company's Quarterly Report on Form 10-Q for the
three months ended June 30, 1998, on July 15, 1998, a purported class action
lawsuit was filed in State District Court in Kleberg County, Texas, styled
Richard H. Thompson, et al v. Heartland Wireless Communications, Inc., et al
(98-371-d). The Thompson Suit alleges violations of state securities laws and
common law. The plaintiff alleges that defendants misrepresented or failed to
disclose material facts about the business prospects and financial condition of
the Company, and overstated revenues, EBITDA and subscriber numbers. The
plaintiff seeks to certify a class to represent all persons who acquired the
securities of the Company during the Class Period, including all persons who
purchased or acquired securities that were offered or sold by the Company during
the Class Period. The plaintiff seeks money damages, interest, attorneys' fees
and costs, as well as equitable and/or injunctive relief with respect to any
proceeds derived from defendants' stock sales.
As previously disclosed in the Company's Quarterly Report on Form 10-Q for the
three months ended June 30, 1998, on May 27, 1998, a purported class action
lawsuit was filed in State District Court in Brooks County, Texas, styled Azalia
Garcia, et al. v. Heartland Wireless Communications, Inc. d/b/a Heartland Cable
Television (98-60898-1). The Garcia Suit alleges that certain administrative
late fees allegedly charged by the Company are not reasonably related to the
costs incurred by the Company as a result of late payment of accounts. The
plaintiff seeks to certify a class to represent all persons currently receiving
cable service from the Company or who have been charged a late fee in the past
by the Company. The plaintiff seeks a declaration that the Company's late fees
are void or usurious, and seeks money damages, interest, attorneys' fees and
costs.
On May 14, 1998, a purported class action lawsuit was filed in State District
Court in Grayson County, Texas, styled Jeannie Warren, et al. v. Heartland
Wireless Communications, Inc. (98-0715). The Company received notice of the
Warren Suit in August 1998. The Warren Suit alleges that certain administrative
late fees allegedly charged by the Company are not reasonably related to the
costs incurred by the Company as a result of late payment of accounts. The
plaintiff seeks to certify a class to represent all current subscribers in the
state of Texas and all prior subscribers who made late fee payments to the
Company. The plaintiff seeks a declaration that the Company's late fees are void
or usurious, and seeks actual and punitive damages, interest, attorneys' fees
and costs.
Management of the Company believes that it is not currently feasible to predict
or determine the final outcome of the above proceedings or to estimate the
amounts or potential range of loss with respect to these matters. However,
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<PAGE> 19
management believes the Company has meritorious defenses to all of the above
lawsuits and is vigorously defending these actions.
The Company is a party to various other claims, legal actions and complaints
arising in the ordinary course of business. Management believes that the
disposition of these other matters will not have a material adverse effect on
the Company's consolidated financial condition or results of operations.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
On August 25, 1998, Jupiter Partners L.P. and Mr. Thomas Haack (collectively,
"Jupiter"), holders of the Convertible Notes, notified the Company of an event
of default under the Note Purchase Agreement between the Company and Jupiter,
dated as November 30, 1994, as amended (the "Note Purchase Agreement"). Jupiter
asserted that the Company's failure to make an April 1998 interest payment on
the 13% Notes constituted an event of default under the Note Purchase Agreement.
The Note Purchase Agreement provides that upon the occurrence of an event of
default that is not cured or waived 30 days after the Company first becomes
aware of such event of default, Jupiter may declare the principal amount plus
accrued and unpaid interest immediately due and payable. The Convertible Notes
bear additional interest at the rate of 4% per annum until the event of default
is cured. The Company currently does not have sufficient funds available to pay
in full the indebtedness outstanding under the Convertible Notes in the event
that any of such indebtedness may be accelerated. The Convertible Notes are
subordinate in right of payment to the Senior Notes and all other indebtedness
except indebtedness that is expressly subordinate to the Convertible Notes.
On October 15, 1998, the Company did not make semiannual interest payments due
on that date of $16.2 million on the Senior Notes. The indentures governing the
Senior Notes provide that if an interest payment is not made within 30 days of
an interest payment due date, the failure to make such a payment will constitute
an event of default under such indentures. Upon the occurrence of such an event
of default, the trustee under the indentures or the holders of 25% or more in
principal amount of the Senior Notes may accelerate payment of the Senior Notes
and all unpaid and accrued interest thereon. The Company currently does not have
sufficient funds available to pay in full the indebtedness outstanding under the
Senior Notes in the event that any of such indebtedness is accelerated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
*10.1 Employment Agreement between Heartland Wireless
Communications, Inc. and Alexander R. Padilla dated
as of July 13, 1998.
*27 Financial Data Schedule
- -----------------------
*Filed herewith.
(b) REPORTS ON FORM 8-K
None.
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<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: November 23, 1998 HEARTLAND WIRELESS COMMUNICATIONS, INC.
By: /s/ Carroll D. McHenry
------------------------------------
Carroll D. McHenry
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Marjean Henderson
------------------------------------
Marjean Henderson
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
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<PAGE> 21
Index to Exhibits
Exhibit
Number Description
- ------- -----------
10.1 Employment Agreement between Heartland Wireless Communications,
Inc. and Alexander R. Padilla dated as of July 13, 1998.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into
as of the 13th day of July, 1998, between Heartland Wireless Communications,
Inc., a Delaware corporation ("Heartland"), and Alexander R. Padilla
("Executive").
WHEREAS, it is the desire of the Board of Directors of Heartland (the
"Board of Directors") to retain the services of Executive by directly engaging
Executive as an officer of Heartland and, as provided herein, its subsidiaries
and affiliates; and
WHEREAS, Executive desires to commit himself to serve Heartland on the
terms herein provided.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement, the following
definitions apply:
(a) Affiliate: shall mean, with respect to any Person,
any other Person that directly or indirectly controls, is controlled by, or is
under common control with the Person in question. As used in this definition of
"Affiliate," the term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person.
(b) Cause: shall mean,
(i) a finding by a majority of the directors of
Heartland that Executive has acted with gross negligence or willful misconduct
in connection with the performance of Executive's duties as an officer of
Heartland;
(ii) a finding by a majority of the directors of
Heartland that Executive has engaged in a material act of insubordination or of
common law fraud against Heartland or its employees;
(iii) a finding by a majority of the directors of
Heartland that Executive has acted against the best interests of Heartland in a
manner that has or could have a material adverse affect on the financial
condition of Heartland;
(iv) a finding by a majority of the directors of
Heartland of criminal conduct by Executive (other than minor infractions and
traffic violations) or the conviction of Executive, by a court of competent
jurisdiction, of any felony (or plea of nolo contendere thereto);
<PAGE> 2
(v) a finding by a majority of the directors of
Heartland of a material violation by Executive of his duty of loyalty to
Heartland which results or may reasonably be expected to result in material
injury to Heartland or any Subsidiary;
(vi) a finding by a majority of the directors of
Heartland of a willful violation by Executive of Executive's covenants and
obligations under Sections 5 (Non-Competition), 6 (Confidentiality), or 7
(Intellectual Property) of this Agreement; or
(vii) a finding by a majority of the directors of
Heartland of chronic alcohol or drug abuse by Executive.
For purposes of the foregoing definition, if Executive is a director of
Heartland at the time in question, then Executive shall absent himself from any
portion of any meeting of the Board of Directors at which matters of, or
allegations of, Cause are discussed or deliberated, and he shall also abstain
from any vote thereon (or, if he should so vote, then his vote shall not be
considered for purposes of this Agreement) and, in all cases, his status as a
director shall not be considered as such for purposes of the constitution of a
majority.
(c) Competing Business: Any Person, other than Heartland
or any Subsidiary of Heartland, which engages in the Wireless Cable Business.
(d) Confidential Information: shall mean all of
Heartland's or any Subsidiary's trade secrets, know-how, financial information,
intellectual property and other proprietary rights, including without limitation
manufacturing and marketing information, formulae, knowledge, data, budgets,
products, subscriber and other customer lists, computer programs, software,
telephone numbers, prices, costs, personnel, suppliers, developments and
techniques concerning Heartland or its Subsidiaries and the Business (as defined
below) and all of Heartland's books, files, records, documents, plans, drawings,
designs, renderings, estimates, specifications, operating manuals, manuals, user
documentation, product literature, catalogues, marketing materials and similar
items relating to the Business or Heartland.
(e) Geographical Area: shall mean all counties, Basic
Trading Areas, or "BTAs" (as defined by Rand McNally in its 1992 Commercial
Atlas and Marketing Guide and used in the Federal Communications Commission's
November 1995 auction of MMDS and MDS authorizations for such BTAs), and other
defined provinces or governmental subdivisions (domestic or international),
considered collectively, in which Heartland or any Subsidiary of Heartland
engages in the Wireless Cable Business at the time of the termination of
Executive's employment with Heartland, or in which Heartland or any Subsidiary
of Heartland evidenced in writing, at any time during the six month period prior
to termination of Executive's employment, its intention to engage in the
Wireless Cable Business.
(f) Good Reason: a resignation for Good Reason shall mean
the resignation by Executive from employment by Heartland after:
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<PAGE> 3
(i) any material reduction of Executive's
compensation or benefits to which Executive was entitled immediately before the
reduction; or
(ii) any other material adverse change to the terms
and conditions of Executive's employment or benefits as in effect immediately
before the change;
provided, that, (A) if Executive consents in writing to any event described in
clauses (i) or (ii) of this Subsection 1(f), then Executive's subsequent
resignation shall not be treated as a resignation for Good Reason unless a
subsequent event described in such clauses to which Executive did not consent
occurs and (B) any changes in Executive's discretionary bonus, if any, as from
time to time may be determined by the Board of Directors of Heartland shall not
constitute Good Reason. Notwithstanding the foregoing, Executive shall be
entitled to resign for Good Reason only if any occurrence referred to in clauses
(i) or (ii) of this Subsection 1(f) is not remedied within 30 calendar days
after receipt by Heartland of written notice from Executive setting forth in
reasonable detail the facts and circumstances giving rise to such Good Reason.
(g) Person: shall mean any individual, group,
partnership, corporation, association, trust or other entity or organization.
(h) Permanent Disability: shall mean any physical or
mental disability which renders Executive unable to perform the essential
functions of his job as an employee of Heartland on a full-time basis with or
without reasonable accommodation for 180 calendar days whether or not
consecutive, within any period of 12 consecutive months; provided, however, that
during any period of Executive's disability Heartland may assign Executive's
duties to any other employee of Heartland or any Affiliate of Heartland or may
engage or hire a third party to perform such duties and any such action shall
not be deemed "Good Reason" for Executive to terminate his employment.
(i) Subsidiary: shall mean any non-individual Person of
which a majority of the combined voting power of the outstanding voting
securities (or other voting interests) is owned, directly or indirectly, by
Heartland.
(j) Wireless Cable Business: shall mean the installing,
licensing, sale and/or marketing of wireless video or wireless data
communication services utilizing MMDS, MDS or ITFS frequencies (as defined at 47
C.F.R. 21.901 and 47 C.F.R. 74.902 or any successor regulation or statute),
including, without limitation, wireless cable television and direct broadcast
satellite businesses or any other installing, licensing, selling or marketing
services in which Heartland, directly or indirectly through one or more
Subsidiaries, engages.
2. Employment and Term.
(a) Heartland hereby agrees to employ Executive as its
Senior Vice President-Business Development, and Executive hereby agrees to
accept such employment, on the terms and conditions set forth herein, for the
period commencing on the date hereof (the "Effective Date") and
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<PAGE> 4
expiring as of 11:59 p.m. on the second anniversary of the Effective Date
(unless sooner terminated as hereinafter set forth) (the "Term"); provided,
however, that on each anniversary of the Effective Date the Term shall
automatically be extended for one additional year. Provided, further, however,
that no such extension shall result on such anniversary, or on any subsequent
anniversary, if, at least ninety (90) days prior to such anniversary, Heartland
or Executive shall have given notice to the other party that it or he, as
applicable, does not wish to extend this Agreement.
(b) Executive affirms and represents that he (i) is under
no obligation to any former employer or other party which is in any way
inconsistent with, or which imposes any restriction upon, Executive's employment
hereunder by Heartland or Executive's undertakings under this Agreement and (ii)
has read, understands and will comply with the terms and conditions of the
policies and procedures (the "Policies") relating to the conduct of the business
of Heartland (the "Business").
3. Compensation and Related Matters.
(a) Base Salary. Executive shall receive a base salary
paid by Heartland ("Base Salary") at the annual rate of not less than One
Hundred Seventy-Five Thousand Dollars ($175,000), payable in such increments as
executives of Heartland normally are paid.
(b) Bonus Payments. Executive shall be eligible to
receive, in addition to the Base Salary: (i) compensation under Heartland's
Performance Incentive Compensation Plan (provided that the performance
requirements in such plan are achieved by Executive); and (ii) compensation
under such other bonus plan, if any, as the Board of Directors or the Option and
Compensation Committee of the Board of Directors may specify (provided that the
performance requirements in such plan are achieved by Executive).
(c) Option Grants. Executive shall be eligible to receive
such stock options, if any, as the Board of Directors or Compensation Committee
may specify, all on the terms and conditions more fully described in the option
agreement(s) pursuant to which such grant(s) is made.
(d) Expenses. During the Term, Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
him (in accordance with the policies and procedures established by the Board of
Directors for its senior executive officers) in performing services hereunder,
provided that Executive properly accounts therefor in accordance with the
Policies.
(e) Vacations. Executive shall be entitled to three (3)
weeks paid vacation in each calendar year commencing on or after January 1,
1998, or such additional number as may be determined by the Board of Directors
from time to time. For purposes of this Subsection 3(e), weekend days shall not
count as vacation days. In addition, Executive shall also be entitled to all
paid holidays given by Heartland to its senior executive officers.
4
<PAGE> 5
(f) Taxes. All compensation payable to Executive
hereunder is stated in gross amounts and shall be subject to all applicable
withholding taxes, other normal payroll deductions and any other amounts
required by law to be withheld.
4. Duties and Restrictions.
(a) Duties as Employee of Heartland. Executive shall
serve as Heartland's Senior Vice President-Business Development, with all such
powers and duties as may be set forth in Heartland's Bylaws with respect to,
and/or are reasonably incident to, such office. Executive shall report to
Heartland's Chief Executive Officer.
Executive hereby agrees faithfully and conscientiously to
serve Heartland, to devote his full professional time, skill, attention and
energy to the Business and ancillary affairs of Heartland and to perform his
duties hereunder competently, diligently, and to the best of his abilities.
During the Term, Executive shall not be engaged in any other business activity
pursued for gain, profit or other pecuniary advantage and shall render his
professional services exclusively to Heartland or its Subsidiaries, devoting his
full time during normal business hours throughout the Term to the services
required of him hereunder. The foregoing limitation shall not be construed as
prohibiting Executive from making personal investments in such form or manner as
shall not require his services in the operation or affairs of the companies or
enterprises in which such investments are made.
(b) Other Duties. Executive agrees to serve as requested
by the Chief Executive Officer in one or more executive offices of any of
Heartland's Subsidiaries and Affiliates. Executive agrees that he shall not be
entitled to receive any compensation from Heartland for serving in any
capacities of Heartland's Subsidiaries and Affiliates other than the
compensation to be paid to Executive by Heartland pursuant to this Agreement
(except that Executive shall be entitled to retain any director's fees or
similar compensation payable as a result of his service on boards of directors
of companies at the request of Heartland). Executive shall also perform and
discharge such other executive employment duties and responsibilities as the
Chief Executive Officer shall from time to time reasonably prescribe.
5. Non-Competition.
(a) Covenant. Executive acknowledges that during the
course of Executive's engagement by Heartland, Executive will have gained access
to Confidential Information, and may have acquired, developed and/or refined
skills that could be used by Executive to compete against Heartland to the
unfair detriment of Heartland and its future operations. Executive also
acknowledges that Heartland has a legitimate business interest in reasonably
limiting the ability of Executive to use such information and skills to compete
directly or indirectly against Heartland. Accordingly, Executive covenants and
agrees that he will not, directly or indirectly (personally, through any other
Person, or as principal, director, officer, employee, consultant, partner,
5
<PAGE> 6
stockholder, trustee, manager or otherwise), during the Term hereof and for a
period of two (2) years following the termination of his employment with
Heartland:
(i) engage in the Wireless Cable Business in the
Geographical Area;
(ii) perform, for any Competing Business which
operates a Wireless Cable Business in the Geographical Area, any duties
substantially similar to those duties performed by Executive or his subordinates
during the Term;
(iii) employ or engage the services of any Person who
was a salaried employee of or a consultant to Heartland during the six (6)
months preceding such termination, or induce, request, advise, attempt to
influence or solicit, any Person who was a salaried employee of or consultant to
Heartland during the six (6) months preceding such termination, to terminate his
or her employment or consulting arrangement with Heartland;
(iv) lend credit, money or reputation for the
purpose of establishing or operating a business substantially similar to the
Wireless Cable Business in the Geographical Area;
(v) do any act that Executive knows or should know
might injure Heartland or that might divert subscribers or other customers,
suppliers or employees from the Business; or
(vi) without limiting the generality of the
foregoing provisions, conduct a business substantially similar to the Business
under the name "Heartland Wireless Communications," or any other trade names,
trademarks or service marks used by Heartland within the Geographical Area;
For purposes of this Section 5 only, the term "Heartland" shall include
Heartland and all Subsidiaries at the time the covenants in this Section 5 are
in force or are to be enforced.
(b) Tolling of Non-Competition Term. If, during any
calendar month after the termination of Executive's employment by Heartland in
which the provisions of Subsection 5(a) are applicable, Executive is not in
compliance with the terms of Subsection 5(a), Heartland shall be entitled to,
among other remedies, demand compliance by Executive with the terms of
Subsection 5(a) for an additional number of calendar months that equals the
number of calendar months during which such noncompliance occurred.
(c) Reasonableness of Restrictions. Executive
acknowledges that the geographic boundaries, scope of prohibited activities, and
time duration of the provisions of Subsection 5(a) are reasonable and are no
broader than are necessary to maintain and to protect the legitimate business
interests of Heartland.
(d) Separate Covenants. The parties hereto intend that
the covenants contained in Subsection 5(a) of this Agreement be construed as a
series of separate covenants, one for each
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<PAGE> 7
county, BTA or other defined province or governmental subdivision in each
Geographical Area in which Heartland conducts business. Except for geographic
coverage, each such separate covenant shall be deemed identical in terms to the
applicable covenant contained in Subsection 5(a) hereof. Furthermore, each of
the covenants in Subsection 5(a) hereof shall be deemed a separate and
independent covenant, each being enforceable irrespective of the enforceability
(with or without reformation) of the other covenants contained in Subsection
5(a) hereof.
6. Confidentiality.
(a) Executive shall not, except as otherwise provided in
this Agreement, directly or indirectly, at any time during or, for a two (2)
year period after the Term hereof, reveal, divulge or make known to any Person
or use for Executive's personal benefit (including without limitation for the
purpose of soliciting business, whether or not competitive with any business of
Heartland or any Subsidiary, or employees of Heartland or any Subsidiary), or
for the benefit of any Person in a Competing Business, any Confidential
Information acquired by Executive during the course of employment by Heartland.
The following information shall not be restricted under this Section 6:
(i) information already in the public domain;
(ii) information that Executive can demonstrate was
already in his possession before the time of disclosure without breach of
agreement or violation of law; or
(iii) information that Executive is required to
disclose under the following circumstances: (A) at the express direction of any
authorized governmental authority; (B) pursuant to a valid subpoena or other
court process; (C) as otherwise required by law or the rules, regulations, or
orders of any applicable regulatory body; or (D) as otherwise necessary, in the
written opinion of counsel for Executive, to be disclosed by Executive in
connection with any legal action or proceeding involving Executive and Heartland
or any Subsidiary in his capacity as an employee, officer, director, or
stockholder of Heartland or any Subsidiary; provided that, in the event of any
required disclosure, Executive shall, as soon as reasonably possible, provide
prior written notice of such required disclosure to Heartland and provide
Heartland the opportunity to defend against, limit or ensure confidential
treatment of such information required to be disclosed, and such disclosure
shall be permitted only to the extent so required.
(b) Executive shall, at the termination of his employment
with Heartland or at any time requested by Heartland (either during or within
two (2) years after the termination of Executive's employment with Heartland),
promptly deliver to Heartland all materials containing Confidential Information
which Executive may then possess or have under his control.
7. Intellectual Property. Executive shall disclose promptly to
Heartland any and all significant conceptions and ideas for innovations,
inventions, improvements and valuable discoveries, whether patentable or not,
which are conceived or made by Executive, solely or jointly with another, during
the Term or within one (1) year thereafter, which are directly related to the
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<PAGE> 8
Business or other activities of Heartland and which Executive conceives as a
result of his employment by Heartland or any Subsidiary or other Affiliate (the
"Intellectual Property"). Executive hereby assigns and agrees to assign all his
interests in the Intellectual Property to Heartland or its nominee. Whenever
requested to do so by Heartland, Executive shall execute any and all
applications, assignments or other instruments that Heartland shall deem
necessary to apply for and obtain letters patent of the United States or any
foreign country or to otherwise protect under relevant law Heartland's exclusive
proprietary interest in the Intellectual Property.
8. Termination. Executive's employment hereunder may be
terminated by Heartland or Executive, as applicable, without any breach of this
Agreement, only under the following circumstances:
(a) Death. Executive's employment hereunder shall
terminate upon his death.
(b) Disability. Executive's employment hereunder shall
terminate upon his Permanent Disability.
(c) Cause. Heartland may terminate Executive's employment
hereunder for Cause.
(d) Good Reason. Executive may terminate his employment
hereunder for Good Reason.
9. Compensation Upon Termination. Executive shall be entitled to
the following compensation from Heartland upon the termination of his
employment:
(a) Death. If Executive's employment shall be terminated
by reason of his death, Heartland shall pay to such Person as shall have been
designated in a notice filed with Heartland prior to Executive's death, or, if
no such Person shall be designated, to his estate as a death benefit, his Base
Salary to the date of his death in addition to any payments Executive's spouse,
beneficiaries, or estate may be entitled to receive pursuant to any Plan
maintained by Heartland.
(b) Disability. During any period that Executive fails to
perform his material executive duties and responsibilities hereunder as a result
of incapacity due to physical or mental illness, Executive shall continue to
receive his Base Salary and bonus payments, if any, until Executive's employment
is terminated pursuant to expiration of the Term, pursuant to Subsection 8(b)
hereof. After such termination, Heartland shall pay to Executive, on or before
the fifth day following the Date of Termination (as hereinafter defined) his
Base Salary to the Date of Termination.
(c) Cause. If Executive's employment shall be terminated
for Cause, Heartland shall pay Executive his Base Salary through the Date of
Termination at the rate in effect at the time
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<PAGE> 9
Notice of Termination (as defined below) is given. Such payments shall fully
discharge Heartland's obligations hereunder.
(d) Severance Benefit. If, prior to the expiration of the
Term, either (i) Executive's employment with Heartland is terminated by
Heartland other than (A) for Cause or (B) on account of Executive's death or
Permanent Disability, or (ii) Executive resigns from Heartland for Good Reason,
then Heartland shall pay to Executive, in a single lump sum which shall be paid
within 30 days after the termination of employment or resignation, a severance
payment in an amount equal to Executive's Base Salary (excluding all bonuses, if
any) at the rate then in effect, for the balance of the stated Term (determined
without regard to such termination or resignation, and also without regard to an
extension thereof that might result but for (and after) such termination or
resignation); provided that Heartland shall be permitted to make all such
payments net of any legally required tax withholdings.
10. Other Provisions Relating to Termination.
(a) Notice of Termination. Any termination of Executive's
employment by Heartland or by Executive (other than termination because of the
death of Executive) shall be communicated by written Notice of Termination to
the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated.
(b) Date of Termination. For purposes of this Agreement,
"Date of Termination" shall mean: (1) if Executive's employment is terminated by
his death, the date of his death; (2) if Executive's employment is terminated
because of a Permanent Disability pursuant to Subsection 8(b), then thirty (30)
days after Notice of Termination is given (provided that Executive shall not
have returned to the performance of his duties on a full-time basis during such
thirty (30) day period); (3) if Executive's employment is terminated by
Heartland for Cause, then, subject to Subsection 9(c), the date specified in the
Notice of Termination; or (4) if Executive's employment is terminated for any
other reason, the date on which a Notice of Termination is given.
(c) Cause. In the case of any termination of Executive
for Cause, Heartland will give Executive a Notice of Termination describing in
reasonable detail the facts or circumstances giving rise to Executive's
termination (and, if curable, the action required to cure same) and will permit
Executive thirty (30) days to cure such failure to comply or perform and an
opportunity to discuss the facts and circumstances regarding the Notice of
Termination with the Board of Directors. Executive's termination for Cause shall
be effective as of the date specified in the Notice of Termination or, if
Executive's failure to comply is curable, shall be effective within thirty (30)
days following Executive's receipt of a Notice of Termination for Cause unless
Executive has cured the facts or circumstances giving rise to Executive's
termination for Cause.
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11. Successors; Binding Agreement. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto, Executive's heirs and
legal representatives and Heartland's successors and assigns. This Agreement is
assignable by Heartland in connection with a reorganization, merger or
consolidation in which Heartland is not the surviving entity, or a sale of all
or substantially all of the assets of Heartland (a "Transaction"). In connection
with any such Transaction, Heartland shall, as a condition to consummation of
the Transaction, require the surviving or acquiring entity or Person to assume
in writing the obligations of Heartland under this Agreement. Upon any such
assumption, Heartland shall be released from all liability hereunder.
Executive's rights and obligations under this Agreement are personal in nature
and shall not be assignable by Executive.
12. Certain Payments. If Executive should die while any amounts
would still be payable to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to Executive's devisee, legatee, or other designee or,
if there be no such designee, to Executive's estate.
13. Notice. For purposes of this Agreement, all notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when (a) delivered personally, (b) sent
by facsimile or similar electronic device and confirmed, (c) delivered by
overnight express, or (d) if sent by any other means, upon receipt. Notices and
all other communications provided for in this Agreement shall be addressed as
follows:
If to Executive:
Alexander R. Padilla
6419 LaManga
Dallas, TX 75248
If to Heartland:
200 Chisholm Place, Suite 200
Plano, Texas 75075
Facsimile: (972) 633-0074
Attention: General Counsel
or to such other address as either party may have furnished to the other in
writing in accordance herewith.
14. Injunctive Relief. Executive acknowledges and agrees that a
remedy at law for any breach or threatened breach of the provisions of Sections
5, 6, and 7 hereof would be inadequate and, therefore, agrees that Heartland
shall be entitled to injunctive relief in addition to any other available rights
and remedies in cases of any such breach or threatened breach; provided,
however, that
10
<PAGE> 11
nothing contained herein shall be construed as prohibiting Heartland from
pursuing any other rights and remedies available for any such breach or
threatened breach.
15. Arbitration. Subject to Section 14 above, any unresolved
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted before a panel of three (3)
arbitrators (each with experience in the area of senior executive employment) in
Dallas, Texas, in accordance with the rules of the American Arbitration
Association then in effect. The arbitrators shall not have the authority to add
to, detract from, or modify any provision hereof or to award punitive damages to
any injured party. A decision by a majority of the arbitration panel shall be
final and binding. Judgment may be entered on the arbitrators' award in any
court having jurisdiction. The direct expense of any arbitration proceeding
shall be shared equally by the parties.
16. Miscellaneous. This Agreement constitutes the entire and final
expression of the agreement of the parties with respect to the subject matter
hereof and supersedes all prior agreements, oral and written, between the
parties hereto with respect to the subject matter hereof. No provision of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in a written instrument signed by Executive and
Heartland. No waiver by either party hereto of, or compliance with, any
condition or provision of the Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. The validity, interpretation, construction, enforceability and
performance of this Agreement shall be governed by the laws of the State of
Texas, excluding any conflicts of law principles thereof. Neither this Agreement
nor any right or interest hereunder shall be assignable by Executive or his
beneficiaries or legal representatives without Heartland's prior written
consent; provided, however, that nothing in this Section 16 shall preclude
Executive from designating a beneficiary to receive any benefit payable
hereunder upon his death or incapacity.
17. Validity. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect. Executive agrees that in the event that any court of competent
jurisdiction shall finally hold that any provision of Section 5, 6, or 7 hereof
is void or constitutes an unreasonable restriction against Executive, the
provisions of such Section 5, 6, or 7, as applicable, shall not be rendered void
but shall apply with respect to such reasonable restriction under the
circumstances.
18. Survival. The representations, warranties or covenants
contained in Sections 2(b)(i) and 7 of this Agreement shall survive indefinitely
any termination of this Agreement. The foregoing is without prejudice to express
time periods set forth in other sections of this Agreement.
11
<PAGE> 12
19. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same agreement.
20. Legal Fees and Expenses. The prevailing party in any dispute
or controversy under or in connection with this Agreement (whether in
arbitration or otherwise) shall be entitled to reimbursement from the
non-prevailing party for all costs and reasonable legal fees incurred by such
prevailing party. If such dispute or controversy is resolved through
arbitration, then the arbitrators shall have the authority to determine the
identity of the prevailing party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HEARTLAND WIRELESS ALEXANDER R. PADILLA
COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Carroll D. McHenry /s/ Alexander R. Padilla
---------------------------- --------------------------
Name: Carroll D. McHenry Signature
Title: Chairman, President & CEO
12
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